...
When savings and loans started dropping like flies
beginning in 1985, and it became apparent that these
were not random occurrences but something systematic,
those who owned the failed S&Ls trotted out an economic
explanation: A falling real estate market triggered
by economic factors, such as dropping oil prices, did
them in. This explanation seemed to satisfy many people
as long as most of the failures were concentrated in
Texas, but it soon lost all credibility as S&Ls in
Florida, California, Kansas, Illinois, Pennsylvania
and New York also began to topple.
After that, the big lie the S&L owners put forward
was that the losses were the result of bad business
deals, that they were simply exercising their legitimate
business judgments and just guessed wrong. Although
any detailed investigations of these "bad business
deals" usually revealed business relationships and
interconnections between the lenders and the borrowers,
as well as criminality in the form of fraudulent,
falsified, or non-existent loan documents, those who
were charged with S&L crimes continued to use the above
excuse at their criminal trials. This kind of business
rationalization leads us to the single most important
document in the looting of America's savings and loans,
and a major protective layer for those who were
responsible: the little old innocuous appraisal report.
Every time a savings and loan lends money with a piece
of property as security (collateral), it must obtain an
appraisal of the property. This appraisal, by the way,
is not a public document. The appraisal is an estimate,
based on certain time-honored techniques, by a
professional appraiser of the fair market value of the
property. "Fair market value" is an elastic hole big
enough to drive an armored truck through. And that's
exactly what happened. It worked like this:
A savings and loan would obtain an inflated appraisal of
the property, in cahoots with the borrower and sometimes
the property owner. The S&L would pay the appraiser a
fee of $5000 for a job whose standard fee might be $1000.
The borrower might then pay off any prior liens on the
property, pocket the remaining money and walk off, leaving
the S&L to foreclose on the property. If any questions
were raised, the appraiser would simply swear that the
inflated value was his best professional estimate at the
time.
This is a very simplified version of the basic S&L scam:
lending more money than the property is worth. The
complications arise when the S&L and the borrower engage
in various gyrations to jack up, muddle or hide the value
of the property.
One of the most popular ways was through acquisition,
development and construction loans (called ADC loans), in
which the borrower would buy a piece of vacant land with
grandiose plans for development. The S&L would lend the
money to buy the land and also the money for the development
and construction. The borrower would make a few "cosmetic"
plans and maybe do a little construction and then walk off
with the rest of the money. The S&L was left the vacant
land worth far less than the amount borrowed against it,
but the S&L owner was happy because had collected big
up-front fees from the loan (via loan-origination fees, etc.),
and, if need be, he could later sell the property to another
crooked S&L for a profit. The original land owner was happy
because he had gotten more than his land was worth, and the
borrower was happy because he had gotten the development
money. And if, by unlikely chance, the government came
after the borrower, he could put the money in an offshore
trust for his children and declare bankruptcy. Such a "bad"
business deal was "good" for everybody except the
American taxpayers, who guaranteed the S&L's deposits.
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