Hagens Berman represented former home appraisal manager Kyle W. Lagow, who blew the whistle on alleged widespread fraud at Countrywide Financial. Mr. Lagow filed a whistleblower lawsuit that sparked an investigation culminating in the historic $1 billion settlement between the Department of Justice and Bank of America (NYSE: BAC), a settlement that was itself part of the larger global bank settlement announced last year, the second largest government civil settlement in history.
Lagow worked at LandSafe, Inc., an appraisal company owned by Countrywide Financial and ultimately acquired by Bank of America, from 2004-2008. According to his unsealed complaint, Mr. Lagow observed widespread disregard for laws that regulate Federal Housing Administration (FHA) underwriting and home appraisals.
Specifically, he claimed that Countrywide conspired with LandSafe and homebuilder KB Homes to inflate the appraised value of homes, boosting the size of the lending giant’s loans to homebuyers. In order to accomplish this, the lending giant allegedly used a number of strong-arm tactics to pressure appraisers to report favorable home values.
The law requires that appraisers act neutrally and without regard to the lender’s interests, a safeguard meant to protect the government, which insures low- and moderate-income loans.
Lagow hired Hagens Berman to represent him as a whistleblower under the False Claims Act, a law that provides rewards for whistleblowers who disclose original information leading to a successful recovery of taxpayer funds lost due to fraud. His inside information led to an expanded investigation that culminated in the $1 billion settlement between Bank of America and the U.S. Government, of which Lagow received over $14.5 million as a reward.
Mr. Lagow became suspicious shortly after he was hired, when in early 2005 he met with LandSafe’s President Todd Baur. According to Lagow, Baur said that LandSafe’s role was to facilitate closing of home sales, a role that was in stark contrast to LandSafe’s legal responsibility; to provide accurate and safe home appraisals.
The second warning sign came a few months later, when Lagow learned of a joint venture between home developer KB Homes and Countrywide. Lagow hired staff appraisers, who were sent to homes to perform inspections only to be turned away, told by KB Homes sales representatives that the homebuilder would alone decide who would perform appraisals on its properties.
Disturbed by the potential for a conflict of interest which could allow KB Homes to assign an inflated value to a home and then cherry-pick appraisers who would agree with its judgment, Lagow claimed he did additional research.
However, as he dug deeper, he found that KB Homes had hired one person to handle all appraisals in Houston, an impossible task for one person. Yet, the appraiser turned in more than 400 appraisal orders per month. Lagow was further shocked to find that the appraiser was paid an inflated rate of nearly $450 per report.
Lagow also claimed that his appraisers were denied access to key documents that contained final sale prices for similar properties, an essential data point for appraisals. Instead, his team had to rely on the Multiple Listing Service (MLS) sales price, which he believes KB Homes manipulated by reducing the sale price of homes at the last minute while reporting the original, higher price.
Appraisers were also subjected to intimidation and even blacklisting, according to the lawsuit, for failing to appraise homes at the inflated values demanded by KB Homes and Countrywide. The companies established an audit process that Lagow believes was solely designed to intimidate appraisers who bucked the system.
Lagow repeatedly raised these and other concerns with his superiors, but his claims were disregarded, according to the lawsuit. His employment was terminated in 2008.
According to the lawsuit, KB Homes, Countrywide and LandSafe’s behavior contributed to the financial crisis of 2008. The overvalued homes quickly lost their value and homeowners found themselves underwater with no ability to refinance their loans.
Taxpayers also allegedly suffered millions in losses because the government, through the Federal Housing Administration (FHA), offers mortgage insurance to lenders who provide loans to lower- and middle-class homebuyers. Under the program, if a home goes into foreclosure, the government pays the lender for the remaining balance due on the loan and takes ownership of the property. When Countrywide’s loans went bad, it made claims under the insurance program, costing the government millions and potentially billions.
The government investigated Lagow’s claims of widespread origination and appraisal fraud at Bank of America, and ultimately brokered a settlement. That settlement ultimately became part of last year’s $26 billion global bank settlement between the U.S. government and the nation’s largest banks.
Hagens Berman praises the \ Department of Justice for its efforts in the case, particularly Assistant United States Attorneys Richard Hayes and Kenneth Abel who were responsible for investigation and settlement of the case.
Hagens Berman takes whistleblower cases brought under the False Claims Act as well as more recently adopted programs at the Internal Revenue Service (IRS), the Securities and Exchange Commission (SEC)and the Commodities Futures Trading Commission (CFTC).