Dilemmas of Appraising and Mortgaging Land Separate from Improvements


Copyright © 15 November 2014 by Bob Hurt.  All rights reserved.  chimera_328Distribute intact freely.

Traditional Lending

In this modern age where every smart phone out-computes office computers of the early 1980’s, why do Americans suffer mortgages with the same terms on the land as on the improvements?  Surely, investors’ computers and MBA finance specialists can figure out ways of securing home loans with different terms for the land and the improvement.  That could provide a good return on investment for both the borrower and the lender.

Residential realty consists of

  1. The raw land;
  2. General amenities (roads, sidewalks, water, sewer, electricity, cable for phone/internet/tv, HOA deed restrictions, zoning restrictions);
  3. Specific improvements (the house, landscaping, garage and other outbuildings, sport facilities, pool, patio, etc);
  4. Community amenities (location, recreation facility, common area, economic stratum and quality of residents).

The lending process for such realty these days typically results in at least one note and one security instrument.  The lender assigns an interest rate based on numerous factors, principally the conjectured ability and reliability of the borrower to repay, the volatility of the market, term of the loan, the Federal Reserve prime rate, and the likelihood that a foreclosure sale will equitably compensate the lender.  In most loans, the lender lumps together all of the above-enumerated components in the mortgage, and the borrower pays the same interest rate over the same term for the land as for the improvements.

Innovative Bifurcated Loan Products

But, what if the lender charged a different interest rate for the land than for its improvements?  After all, the house and grounds can fall into disrepair, and that will diminish the value in an emergency foreclosure sale.  The raw land stays the same, and its value won’t diminish unless a sink hole opens up under the house or the entire community value diminishes because of fracking or a massive demographic change.  In other words, the raw land has much more stable and predictable value than the improvements to the property.

Lenders could break the loan apart into two amounts, one for the land and the other for the house and other improvements.  Lenders could charge a lower interest rate on the land, and finance it for a different amount of time, than the improvements.  This would allow borrowers to retire the debt early, reduce lender risk, and give the lender a fair return on investment.

SCOTUS Throws a Wrench in the Works

Finance specialists might develop such bifurcated loan products, but it seems doubtful that they will introduce any in the near future because of the US Supreme Court ruling in Alice v CLS Bank on 19 June 2014 (see arguments here).  In the opinion, the SCOTUS invalidated hundreds of patents for financial products or business methods, claiming patent laws do not apply to them because they fit within the exception categories of “Laws of nature, natural phenomena, and abstract ideas” within the scope of 35 USC §101, in other words, “building blocks of human ingenuity.”  Simply put, the idea itself is not patentable.  Justice Sotomayor summarized the principle nicely:

“I adhere to the view that any “claim that merely describes a method of doing business does not qualify as a ‘process’ under §101.” Bilski v. Kappos, 561 U. S. 593, 614 (2010) (Stevens, J., concurring in judgment); see also In re Bilski, 545 F. 3d 943, 972 (CA Fed. 2008) (Dyk, J., concurring) (“There is no suggestion in any of th[e] early [English] consideration of process patents that processes for organizing human activity were or ever had been patentable”). As in Bilski, however, I further believe that the method claims at issue are drawn to an abstract idea. Cf. 561 U. S., at 619 (opinion of Stevens, J.). I therefore join the opinion of the Court. ”

How the Lenders Guarantee the Loan Benefits Them

Let us ever bear in mind the cogent reality that lenders do not care about the borrower’s return on investment whatsoever.  Lenders and their agents and associates do everything lawfully possible to maximize their own return on investment and minimize their cost.  The note, the mortgage or deed of trust, the appraisal, the HUD1 report, the TILA disclosures and every other document related to the loan has but one purpose, from the lender’s perspective – to make money.  Therefore, they design NOTHING to benefit the borrower except as required by government.   The lender wants the seller to sell the house for top dollar, the appraiser to value the collateral property for that same top dollar, the mortgage broker to qualify the borrower for repayment of a loan for that top dollar.  All the legal forms are engineered to benefit the lender first and foremost.

How Appraisals Benefit the Lender, not the Borrower

I mentioned at the beginning of this essay the idea of separate loans for the land and for the improvements.  Naturally, that implies separate appraisals.  In speaking with a seasoned real estate professional and former appraiser on this very subject today, I began to see a significance of appraisals that I had not previously considered.  The appraiser works for the lender, not for the borrower.  The lender pays the appraiser and gives the appraiser an assignment.  That assignment tells the appraiser how to focus the valuation.  It normally seeks to justify the selling price, not the actual value of the property.  Of course, the comparable sales constitute biggest indicator of price justification.  The appraiser focuses mostly on whether similar properties have sold for an amount similar to the target property asking price.

This does not at all benefit the borrower.  The borrower wants to know whether the property has the worth of the asking price, not whether other buyers have paid a similar price.  The appraiser never answers that question because the borrower does not pay the appraiser or give the appraiser that assignment.

Yet, borrowers nearly universally believe that the appraised value of the realty constitutes its actual worth.  It does not.  And that means the lending and appraisal industry basically runs a scam of deception to fool the borrower into thinking the realty has a value at least as high as the selling price, or in the case of refinances, that the house has the worth of the appraised value.

Legislative Intervention Warranted

I believe the legislatures should intervene in this deception by mandating that appraisers must give equal balance to replacement cost, income capitalization, and market value approaches to property valuation, and estimate the actual worth of the property, not to estimate whether the selling price is justified.  Ultimately, the borrower pays the cost of that appraisal, even if the lender orders it.  Therefore, it should serve the borrower’s interest at least as much as it serves the lender’s.

Today, appraisers ignore income capitalization altogether, give scant weight to replacement cost, and focus mostly on market value – what people seem willing to pay for similar properties.

The main problem with market value lies in the vagaries of markets.  If the FED lowers the interest rate, people will rush to refinance or buy realty on credit so as to get the most property possible for their monthly payments.  This will create an artificial demand, and force up the market value through competition of many buyers for few houses.  Ultimately, that will cause replacement cost to rise as builders seek to benefit from the windfall.

Additionally, as we saw in the financial crisis, widespread job loss causes widespread foreclosure which collapses housing prices, and consequently leaves other home loan borrowers with underwater loan balances – they owe more than the value of the house, and therefore they have lost their equity in the home and must sell it at a loss if they sell it at all.  This means they cannot sell it to avert the foreclosure, and the deficiency leads many to seek bankruptcy protection. It has become a gargantuan disaster over the past decade.  This provides further insight into the scam of market valuation method of appraisal.

Dramatic Importance of Income Capitalization Valuation

In reality, all real estate constitutes a business investment.  The owner might use it as a residence or rent it out or convert it into a business site, zoning and deed restrictions permitting.    As an investment, borrowers have good reason to look for a return. This makes the income capitalization approach to valuation intensely important to borrowers.  Appraisers should always ask “How much money could this property produce if turned to business use?”  Obviously, renting it out constitutes the most common such use.  So the appraiser should evaluate the rental income of similar properties similarly situated.

Borrowers should consider this valuation carefully before agreeing to borrow the money.  Why?  Well, what if the borrower suffered a stroke and the family needed to rent out the house to pay for a care-giver?  The rent and maintenance should exceed the monthly debt service, shouldn’t it?  If it doesn’t, that means the property was overpriced or overvalued.  That makes the typical appraised value a lie, from the borrower’s viewpoint.   Doesn’t it?

Challenge to Financial Innovators

If inventors concoct some slick loan products with different interest rates and terms for land and improvements, then they should also concoct some new USPAP (Uniform Standards of Professional Appraisal Practice) guidelines in order to support the borrower’s interest as well as the lender’s.  Of course, the lenders will never support such appraisal guidelines.  But if they did, they would have far more secure collateral for their investments, and in the end everyone would win.

Bob Hurt            Blog 1 2   f  t
2460 Persian Drive #70
Clearwater, FL 33763
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Public Access to Law; Discipline for Foreclosure Pretender Defenders


Professor Dale A. Whitman, Dean Emeritus
University of Missouri-Columbia Law School

Dear Professor Whitman:

I saw your article “Learning from the Mortgage Crisis” in a friend’s magazine.  I thought I’d write and ask you to send me a copy of the pdf file.  Will you send it to me, please, by return email?  Why haven’t you posted that article on your site?

In reading your UCC law journal article (April 2013) recommending a proper nationwide standard of electronic registration for mortgages and notes, I noted several issues which I believe warrant comment.

1.  I fully agree with you.  I don’t blame banks for creating MERS in order to reduce their costs related to recording loan security instruments with county clerks.  But the problems related to the musical chairs game with notes, the robosigning, the securitization, the phony bond ratings, the questionable assignments, the foreclosure plaintiffs who lack standing, and the note assignment after suing all beg for a standardized solution.  That system you recommend should also mandate notice from the court clerk of any lis pendens regarding a registered mortgage or deed of trust, and of any foreclosure complaint and of any related final judgment encumbering or freeing the mortgage.

2.  I doubt seriously that anyone but an idiot would destroy the note, and I believe none of the banks did.  I believe they stashed those notes in their warehouse file cabinets and did not want to risk their lost by giving handing them to the courts; furthermore, they wanted the freedom to use them commercially by assigning or handing them to others without the fetter of the court’s having possessions, SIMPLY BECAUSE of the UCC requirement that possession alone entitles enforcement.

From your footnote 16 about the article Naked Capitalism, FUBAR Mortgage Behavior; Florida Banks Destroyed Notes;  Others Never Transferred Them, Sept. 27, 2010, available at http://www.nakedcapitalism.com/2010/09/more-evidence-of-bank-fubar-mortgage-behavior-orida-banks-destroyed-notes-others-never-transferred-them.html.
3. I don’t believe the destroyed note allegation of the article because, in spite of Florida Statute 673.3091 permitting enforcement of the lost or destroyed note, we have the issue of admission of evidence in Florida courts.  I hope you will address it in a future commentary.

From Florida’s Evidence Code in Florida Statute 90.953:

90.953 Admissibility of duplicates.—A duplicate is admissible to the same extent as an original, unless:
(1) The document or writing is a negotiable instrument as defined in s. 673.1041, a security as defined in s. 678.1021, or any other writing that evidences a right to the payment of money, is not itself a security agreement or lease, and is of a type that is transferred by delivery in the ordinary course of business with any necessary endorsement or assignment.
(2) A genuine question is raised about the authenticity of the original or any other document or writing.
(3) It is unfair, under the circumstance, to admit the duplicate in lieu of the original.

4.  If the court cannot admit the copy of the lost note into evidence, how does the note become a fact before the court so that the court can enforce it?  Well, how about this handy statute that allows re-establishment?

71.011 Reestablishment of papers, records, and files.—All papers, written or printed, of any kind whatsoever, and the records and files of any official, court or public office, may be reestablished in the manner hereinafter provided.
(1) WHO MAY REESTABLISH.—Any person interested in the paper, file or record to be reestablished may reestablish it.
(2) VENUE.—If reestablishment is sought of a record or file, venue is in the county where the record or file existed before its loss or destruction. If it is a private paper, venue is in the county where any person affected thereby lives or if such persons are nonresidents of the state, then in any county in which the person seeking the reestablishment desires.
(3) REMEDY CONCURRENT.—Nothing herein shall prevent the reestablishment of lost papers, records and files at common law or in equity in the usual manner.
(4) EFFECT.—
(a) Any paper, record or file reestablished has the effect of the original. A private paper has such effect immediately on recording the judgment reestablishing it, but a reestablished record does not have that effect until recorded and a reestablished paper or file of any official, court or public officer does not have that effect until a certified copy is filed with the official or in the court or public office where the original belonged. A certified copy of any reestablished paper, the original of which is required or authorized by law to be recorded, may be recorded.
(b) When any deed forming a link in a chain of title to land in this state has been placed on the proper record without having been acknowledged or proven for record and has thereafter been lost or destroyed, certified copies of the record of the deed as so recorded may be received as evidence to reestablish the deed if the deed has been so recorded for 20 years.
(5) COMPLAINT.—A person desiring to establish any paper, record or file, except when otherwise provided, shall file a complaint in chancery setting forth that the paper, record or file has been lost or destroyed and is not in the custody or control of the petitioner, the time and manner of loss or destruction, that a copy attached is a substantial copy of that lost or destroyed, that the persons named in the complaint are the only persons known to plaintiff who are interested for or against such reestablishment.

Apparently, a Plaintiff can re-establish the lost note and then enforce it so long as he indemnifies the Defendant against some other party’s effort to enforce the original note.  Unfortunately, not many plaintiffs claiming to have lost the note have reestablished it in order to admit it into evidence.  In fact, I don’t know of any, but I have imperfect access to court records for conducting a research into the question.

FYI, I am not an attorney and have not attended law school.  I’d love to attend, but it isn’t likely to produce any benefit at this stage of my life except to satisfy my curiosity.  I study law issues as an avocation.

Since 2007 I have focused on Mortgage issues.  I started by inquiring into the means to beat foreclosures.  Eventually I abandoned that interest in favor of a principle I call “Mortgage Attack.”  I have fleshed out the principle in my web site http://MortgageAttack.com.  As I see it, a borrower who breached a valid note cannot defeat a mortgage foreclosure generally.  However, a colossal foreclosure defense legal industry has arisen by which attorneys deceive foreclosure victims with a contrary suggestion.   In actuality, they bilk their clients out of, for example, $2500 retainer plus $500 per month “for as long as we can keep you in the house.”  In my opinion, all those attorneys belong in prison for fraud.  To begin with, they KNOW the client will lose the house unless they con the client into a loan modification or short sale.  And then they continue using the same tired and frivolous arguments in the foreclosure pretense defense which they know will fail – complaining about statute of limitation tolling, robosigning, vapor money, no original note, conditions precedent, etc. They use copy-machine pleadings and motions in a dilatory effort to make it seem that they earn their fees.  And worst of all they NEVER bother examining the mortgage transaction documents for evidence of borrower injury by the lender and lender’s agents and associates.

If I came to you and said “Professor, I just got accused of breaching the note, and now they want to take my house.  Will you help me please?” what would you suggest?  Wouldn’t you say something like this:

Well did you take out a loan?  Did you sign the papers?  Did you breach the note by failing to pay timely?  Let me see those papers, and tell me a little about the events surrounding that loan.  Let me see the appraisal and original loan application, and HUD-1 report, and your TILA notices.?”

Wouldn’t you interview the supplicant to determine whether any shady activities happened?  Wouldn’t you verify that the appraiser, mortgage broker, and lender had proper licenses and operated from offices registered with the Secretary of State? Wouldn’t you ascertain whether the broker promised one set of terms, but hoodwinked the borrower into signing papers with a different set of terms.  Wouldn’t you look for broker lies on the loan application that made the borrower seem more than actually qualified?  Wouldn’t you look at the interest rates and origination fees to determine whether they exceeded standards?  Wouldn’t you look for patterns of misbehavior that might justify offsets even in the event the statute of limitations had tolled on the behaviors? Wouldn’t you look for evidence of violations of the FCRA, FDCPA, TILA, RESPA, HOEPA, ECOA, etc? Wouldn’t you look for contract breaches, fraud and other tortious conduct, legal errors, and regulatory violations that injured the borrower?

Normal foreclosure pretender defender attorneys might give those efforts lip service, but virtually never do them. They don’t do them because they don’t know how, a byproduct of lack of intimate familiarity with the regulations and tort/contract/mortgage law, and because of laziness and greed.  A competent mortgage examination team might spend 40 to 60 hours on such a project.  A typical. lawyer would want to charge a broke foreclosure victim $12,000 to $18,000 for the service.  As a result, the lawyer would have to get out of the business of foreclosure defense.

But, that is exactly what it will take for lawyers actually to give their foreclosure victim clients any hope of convincing the lender to modify the loan to the borrower’s benefit, or of convincing the court to order set-offs from the debt or compensatory and punitive damages to salve the borrower’s injuries.

Such winning awards do happen, but they are exceedingly rare.  And we shall never know how many such cases settle out of court because the borrower managed to convince the lender to avoid the related litigation.

Here’s an anomalous case for your reference:


In that small article, I provided a link to all of the case documents I could find on the web.  You might find more using your WestLaw resources.  I have expected a final resolution of the case for several days.  The appraiser settled for $700K, and the trial court ordered Quicken Loans to pay nearly $5 million in damages, fees, and costs.  Quicken appealed.  Maybe you can find out when the West Virginia Supreme Court will issue its final opinion.

I consider Brown v Quicken Loans the “Poster Child” Mortgage Attack methodology case from which all pretender defender lawyers should learn.  But I estimate that lenders and their agents and associates have injured or cheated at least 80%, and upwards of 95% of mortgage borrowers in the past 15 years.  Precious few attorneys hold them accountable for that maleficent behavior.  And let’s face reality.  Brown’s lawyer took the case on contingency because he knew the judge and his sentiments well and knew his client had suffered extraordinary injuries, and he knew the client as decent person.  Few lawyers will take any foreclosure case on contingency until after having made it ready for trial.  That means the injured borrower must handle the case personally, if anyone handles it at all.

And this brings me to my final point.

You have wisely suggested a dramatic and electronic improvement to the loan registration problem.  But we have two far worse problems:

  1. Bad ethics in the foreclosure “Pretense Defense” attorney business model – it should be outlawed.
  2. Lack of availability of online resources for pro se litigants who should not need a lawyer for “mortgage attack,” coupled with the exorbitant cost imposed by the legal services monopoly.

I know of no cure for the bad ethics other than widespread class actions against foreclosure pretender defenders and State Attorneys attacking them for fraud.  Any attorney commits fraud by re-using frivolous legal arguments that he knows will lose.  Obviously, judges will not punish them, or they already would have.  And just as obviously, law school ethics professors have had little impact on the greed factor that drives attorneys to cheat their clients .

People would find it easier to prevail against crooked banks if they could afford an aggressive, competent attorney. But people cannot afford them generally because the attorneys enjoy a monopoly on legal services. Unauthorized Practice of Law statutes (UPL is a felony in Florida) have made possible that legal services monopoly.   But the law does not protect people against incompetent, lazy, or crooked attorneys. Legal writers have recognized this as an outrage for decades:

And of course many people would fare well in court on their own if they only learned the basics of litigation, civil procedure, and evidence code in high school.  Unfortunately, it has become exceedingly difficult to obtain a decent legal education in high school, college, or on one’s own because of the practice of hiding the law or making it inordinately expensive to discover.  Yes, we have the laws.  But government has posted them on a sign 20 feet in the air, and only attorneys have the ladder needed to read that sign.  By this I mean the actual law has become out of reach, not because people cannot find it, but because of the skill they need to locate the relevant part – court rulings.

Good attorneys support their legal arguments in their court filings with case law.  They generally find that case law using a legal search engine to which they subscribe for a monthly fee.  But the filings that resulted in that case law sit in a clerk’s file cabinet in courts across America, or in law books in law libraries that most people simply cannot access.

And that law which people can access suffers from exiguity or poor organization. In Florida only parties to the case and their lawyers can access the electronic filings in the case.  This seem more than a little strange in light of the reality that the constitution mandates that nearly all proceedings remain open to the public.

Thank God for Google Scholar and Google Books.  Google has made many old law books available, and many if not most of the appellate opinions across America available to the public without requiring that people browse the court sites.  Google has done the job that rightly belongs to government, particularly the courts, of making the law available and visible to, and through the search engine somewhat well-organized for, the masses.

I realize that you personally can do nothing about the terrible ethics in the mortgage foreclosure and foreclosure defense industry.

But perhaps you can propose an electronic means of solving the problem of relative unavailability of the law to non-attorneys.  Some federally coordinated electronic repository should exist akin to PACER, but free, and fully searchable by topic, party, judge, attorney, clerk, and bailiff, nationwide, making all court dockets and filings, from traffic and all other administrative courts, county and other trial courts, and appellate courts, available to the public, particularly to Americans and students in public and private schools.  And that access should cost the public nothing, for the law and the documents leading up to it, should become and remain free for all to read at home through internet access.

And need only one good reason for this.  People can easily commit a vast array of “infractions” and crimes without ever leaving home, and become most susceptible to harassment and arrest for alleged infractions and criminal acts upon setting foot outside the home.  It seems only fair that people should have the benefit of finding, reading, learning, and knowing the law before venturing out of the privacy of one’s home, if any such privacy remains.


Bob Hurt