Residential Real Estate and Banking & Finance and Home Sales and Real Estate & Retail

Lender suffers own painful loss after homeowner's death

April 17, 2010

A prominent Indianapolis dentist died three years ago under odd circumstances, just as a seven-figure expansion of his Allisonville Road home was getting under way.

The tragic turn of events has turned into a nightmare for the lender on the project and for the two appraisers who estimated the property would be worth $3.6 million when construction was complete.

The very same property, with many of those plans still on the drawing board, was in a state of disrepair in December when it sold for a mere $370,000—$1.2 million less than it fetched in 2005.
 

Schmidt Schmidt

Now, the Federal Deposit Insurance Corp., receiver for California’s failed IndyMac Bank, is suing the appraisers for $2 million, the amount of the loan that’s in default. The FDIC alleges they used the wrong comps and provided “grossly inaccurate and overinflated” opinions of market value.

The spat playing out in U.S. District Court in Indianapolis involving the former home of Dr. K. Douglas Schmidt is an extreme example of the growing tensions between lenders and appraisers in the wake of the great housing crash.

In the go-go years, many appraisers say lenders pushed them to inflate home value to justify higher mortgages. But now lenders are sometimes pursuing legal action against appraisers who, through fraud or negligence, have left them on the hook for large losses on foreclosed properties.

Schmidt, an avid runner who founded the Indiana All-Star Running Club and Indiana Middle School Cross Country Championship, won community awards for championing the sport as part of a healthy lifestyle. He died accidentally in June 2007 from intoxication from a combination of drugs, according to the Marion County Coroner’s Office. He was 59.

A $3.6 million home value would have been extraordinary for the area, where residences rarely top $1 million. But the property also featured an unusually large, eight-acre lot. The expansion was to transform the ranch at 7474 Allisonville Road into a two-story home and add a carriage house, boosting square footage to 10,000.

Given that the improvements were only partly built, drawing negative conclusions about the performance of appraisers in this case is misguided, according to appraisers involved and their attorneys.

“I think my client’s appraisal is a very good appraisal, from what I have seen,” said Don Foley, an attorney for appraiser Vicki Lickliter, one of the defendants.

The lawsuit alleges professional negligence and misrepresentation. Attorneys for the other appraiser, J. Zachary Johns, did not return calls.

Whether or not the suit has merit, the lender appears to have left itself unnecessarily exposed on the loan. For starters, it turned over the entire $2 million, rather than releasing money in stages as work was completed, as banks typically do.

And as is all too common in these kinds of cases, the lender let the property deteriorate as it sat vacant, hurting its resale value. Oversight of the property might have been even more lax than usual, given the turmoil surrounding the bank after Schmidt’s death. Government regulators seized IndyMac in July 2008 in the midst of the financial crisis.

The real estate agent who sold the home last year had to step up his salesmanship, given the disheveled appearance of the property and that roofing and other construction work had been left in limbo.

“This is a must-see property for anyone that is ready to put in TLC to get the home of the century!” agent Joel Wilmoth said in the listing.

An attorney representing the FDIC declined to comment. But in the lawsuit, the agency says its predicament goes back to pie-in-the-sky appraisals.

The appraisers “either knew their representations were false, made the representations without knowledge of their truth or falsity, or should have known the representations were false,” the suit said.

Emmis forced to add directors

The seemingly clubby board of Emmis Communications Corp. is poised to get two new members who could turn out to be rabble-rousers.

Emmis announced April 15 that it has again decided not to pay a preferred stock dividend. It’s the sixth consecutive quarter it hasn’t paid the dividend, a move that’s allowed it to save $13 million during a tough time for the broadcasting industry.

Failure to pay isn’t a default under the terms of the preferred shares. However, the suspension of payments comes with a price. After six quarters of nonpayment, holders of the preferred stock get to elect two of their own directors.

Emmis has given those investors until April 26 to put forth nominees for election at the company’s July 14 annual meeting. The additional directors will expand the board to 10 members.•

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