American Banker has a great slideshow on catchphrases that evolved during the financial crisis. Check it out. Some of my favorites are:
Structured By Cows – “We rate every deal. It could be structured by cows and we would rate it,” said an S&P analyst discussing a questionable securitization that a colleague called “ridiculous.”
High Speed Swim Lane, or HSSL Countrywide’s way of describing the way they stripped QC of loans going to Fannie Mae and Freddie Mac.
Friends of Angelo Named for Countrywide’s CEO Angelo Mozilo in which government officials like Chris Dodd (ie Dodd-Frank) got better mortgage terms than they should have.
Close More University Subprime lender New Century (out of business) brought together mortgage brokers to encourage them to throw away any standards to bring more volume.
Jingle Mail When borrowers mailed their keys to the bank if they were hopelessly underwater.
Liar’s Loans Standard mortgage industry practice that encouraged borrowers to exaggerate their qualifications in order to get the loan.
Incredible and hard to conceive of now but this was common practice only a mere 5 years ago.
Very much enjoyed my conversation with Tom Keene and Scarlet Fu on Bloomberg Television’s Surveillance.
Scratch notes before my appearance:
Some thoughts about the Fed’s QE3 as it relates to housing (Einstein defines insanity as doing something for a 3rd time hoping it works).
-Focus of QE3 seems to be housing, but it shows how little Fed understands housing since this seems to be an effort to press borrowing costs lower.
-Falling rates until now have increased affordability 15% this year but reaction in sales is less. A diminishing return for this action. Yes it temporarily helps but is more akin to the 2010 tax credit – remove it and consumers stop buying.
-Fed must believe recent “happy housing news” isn’t sustainable. Prices and sale generally showing improvement.
-Banks prob won’t drop rates all that much-could even see a slight increase in short term: admin backlog from existing business, guarantee fees by Fannie Mae to kick in a few months and spreads already low. This action provides little traction.
-QE3 doesn’t address THE REAL PROBLEM – mortgage underwriting remains irrationally tight. Smaller universe qualifies for mortgaged and a large number of contracts fall through – approx 15%.
-Telegraphing low rates through 2015 eliminates any urgency for consumers to take action. National volume up YOY but 2011 was the aftermath of 2010 tax credit so comparing against low.
Bernanke’s Speech on QE3 [MarketPlace.org]
Benanke Statement on QE3 [Federal Reserve]
QE3: What is quantitative easing? And will it help the economy? [WaPo Wonk Blog]
Fed’s Evans Says QE3 Will Make Economy More Resilient [Bloomberg]
Low Rates Not Improving Housing Market, Miller Says [Bloomberg Surveillance TV]
He is the co-author of Improving U.S. Housing Finance through Reform of Fannie Mae and Freddie Mac: Assessing the Options along with Ingrid Gould Ellen and John Napier Tye. This white paper was completed as part of the What Works Collaborative, a foundation-supported partnership that conducts timely research and analysis to help federal, state and local housing policy-makers frame and implement evidence-based housing and urban policy agendas.
The paper is essential reading as we go through a period of financial reform. The report is described as a timely assessment of alternative proposals for the future of Fannie Mae and Freddie Mac, ranging from nationalization to dissolution. The paper explains the role Fannie and Freddie have played, explores the goals a healthy secondary market for both single- and multifamily housing should serve, and develops a framework to help understand and evaluate the various proposals for reform.
Check out the podcast.
The NYU Furman Center for Real Estate released a white paper: Improving U.S. Housing Finance through Reform of Fannie Mae and Freddie Mac: Assessing the Options by Ingrid Gould Ellen, John Napier Tye and Mark A. Willis that lays out possible paths to take. They also lay out the functions they serve and were intended to serve.
A great primer on Fannie and Freddie.
After facing insolvency one year ago, Fannie Mae and Freddie Mac were placed in government conservatorship in September 2008. The Obama Administration’s recently released report on financial regulatory reform calls for a “wide-ranging process” to explore options for the future of the GSEs. The Furman Center, in cooperation with the What Works Collaborative, has conducted research to better understand six primary options for the future of the enterprises, ranging from nationalization to dissolution. This white paper provides an overview of the U.S. housing finance system and the basic operations of Fannie Mae and Freddie Mac before conservatorship. It then discusses the basic goals of a healthy secondary market for both the single- and multifamily market, and offers a framework to help to describe and understand the different proposals for reform. Finally, it looks in detail at some of the specific proposals now emerging for reform of the housing finance system. As the federal government contemplates the future of these two entities, we hope that this paper offers a useful framework to evaluate the alternative proposals.
The GSEs were fundamentally flawed institutions because they were accountable to two parties: shareholders and taxpayers – shareholders as privatized institutions and taxpayers because of the assumed federal backstop. Both parties ended up being crushed by bias favoring shareholders and scramble for market share during the housing boom.
They serve an essential function of creating liquidity for lenders by freeing up their capital to lend more through buying mortgage securities, stabilizing mortgage rates and establishing standardization for the secondary mortgage market. But they are hemorrhaging now with no concrete solution in sight.
There are a lot of good ideas in the paper (I’ve read it twice, and will look at a few more times).
Not to go all regulatory crazy here, but I like the concept of regulating underwriting:
The industry needs to be regulated as to its underwriting standards, the quality of the underwriting process, operational risk, the level of capital/reserves, and even the quality of its servicing of the mortgage loans and the rating of its securities.37 The ability to regulate these entities effectively would be facilitated by requiring, for example, that all securitizers be licensed or chartered. Such a regulatory system/environment would help guard against the proliferation of toxic products, poor quality controls, and unfair and deceptive marketing practices, and thereby prevent the kind of race to the bottom that we have just witnessed, in which safer products are driven out of the market place.
It’s going to be a work in progress, I’m afraid.
“Williams is a 15-year veteran of the IT industry, having served stints with Cisco Systems and PolyServe, a software startup acquired by HP. At one time he was co-owner of Carolina Appraisers, a real estate appraisal firm based in Raleigh.”
AIMS stands for “appraisal independence management system,” and “dashboard” is a software term meaning a control panel housing two or more applications.
His venture was enabled by introduction of the May 1, 2009 agreement between Fannie Mae and NY Attorney General Andrew Cuomo known as the Home Valuation Code of Conduct.
AIMSdashboard is intended to help financial institutions take back control of the mortgage process through a software solution. Chris was very quick to point out that his company is a software company, NOT an appraisal management company.
Check out the podcast
I was provided an interesting solution to the AMC appraisal issue from Tony Pistilli, a certified residential appraiser who has been employed for over 25 years in the appraisal area, at governmental agencies, mortgage companies, banks and has been self employed.
He wants appraisers to get the word out. His solution is compelling.
Anyone who reads Matrix knows what I think of the Appraisal Management Company and the Home Valuation Code of Conduct (HVCC) problem in today’s mortgage lending world.
Here’s a summary of the his article before you read it:
AMC/HVCC appears to violate RESPA (Real Estate Settlement Procedures Act) since a large portion of the appraisal fee is actually going for something else coming off the market rate fee of the appraiser.
(RESPA) was created because various companies associated with the buying and selling of real estate, such as lenders, realtors, construction companies and title insurance companies were often engaging in providing undisclosed Kickbacks to each other, inflating the costs of real estate transactions and obscuring price competition by facilitating bait-and-switch tactics.
by Tony Pistilli, Certified Residential Appraiser and Vice-Chair, Minnesota Department of Commerce, Real Estate Appraiser Advisory Board, Minneapolis, Minnesota
Since the inception of the Home Valuation Code of Conduct (HVCC) in May 2009, there has been much discussion, and misinformation, about the benefits and harm caused by the controversial agreement with the New York Attorney Generals office and the Federal Housing Finance Agency. This agreement, originally made with the Office of Federal Housing Enterprise Oversight, requires Fannie Mae and Freddie Mac to only accept appraisals ordered from parties independent to the loan production process. Essentially, this means, anyone that may get paid by a successful closing of the loan cannot order the appraisal.
In the past 6 months while the Realtors© and Mortgage Brokers associations point fingers at appraisal management companies for their use of incompetent appraisers who don’t understand the local markets, appraisers are complaining that banks are abdicating their regulatory requirements to obtain credible appraisals by forcing them to go through appraisal management companies at half of their normal fee.
Banking regulations allow banks to utilize the services of third party providers like appraisal management companies, but ultimately hold the bank accountable for the quality of the appraisal. Unfortunately, the banking regulators have yet to express a concern that there is a problem with the current situation.
I need to state that appraisal management companies can provide a valuable service to the lending industry by ordering appraisals, managing a panel of appraisers, performing quality reviews of the appraisals, etc. However, banks have been enticed by appraisal management companies to turn over their responsibility for ordering appraisals with arrangements that ultimately do not cost them anything.
The arrangement works like this, the bank collects a fee for the appraisal from the borrower; orders an appraisal from the appraisal management company who in turn assigns the appraisal to be done by an independent appraiser or appraisal company. During this process the appraisal fee paid by the borrower gets paid to the appraisal management company who retains approximately 40% to 50% and pays the appraiser the remainder. So for the $400 appraisal fee being charged to the borrower, the appraiser is actually being paid $160-$200 for the appraisal. Absent an appraisal management company the reasonable and customary fee for the appraisers service would be $400, not the $160 to $200 currently being paid to appraisers.
Rules within the Real Estate Settlement Procedures Act (RESPA) have allowed this situation to occur, despite prohibitions against receiving unearned fees, kickbacks and the marking up of third party services, like appraisals. RESPA clearly states, “Payments in excess of the reasonable value of goods provided or services rendered are considered kickbacks”.
Banks are allowed to collect a loan origination fee. This fee is intended to cover the costs of the bank related to underwriting and approving a loan. Ordering and reviewing an appraisal is certainly a part of that process. Understanding that banks ultimately have the regulatory requirement to obtain the appraisal for their lending functions, why is it that borrowers and appraisers are paying for these services that are outsourced to appraisal management companies? Does the borrower benefit from a bank hiring an appraisal management company? Does an appraiser benefit from a bank hiring an appraisal management company? The answer to those two questions is a very resounding, no! Clearly the only one in the equation that benefits is the bank, so why shouldn’t the banks be required to pay for the outsourcing of the appraisal ordering and review process?
It is here where I believe the solution for the appraisal industry exists. Since banks are the obvious benefactor from the appraisal management company services, the regulators should require that the banks, not the borrowers or appraisers, pay for the services received. This one small change in the current business model would allow appraisers to receive a reasonable fee for their services and in turn they should be held more accountable for the quality and credibility of the appraisals they perform. Appraisal fees would be competitive among appraisers in their local markets, much like the professional fees charged by accountants, attorneys, dentists and doctors. Appraisal management companies would suddenly be thrust into a more competitive situation where their services can be itemized and their quality and price be compared to those of competing providers. This will ultimately lead to lower fees and improved quality of services to the banks. The banks will then have a very quantifiable choice, do they continue to outsource their obligations to an appraisal management company and pay for those services or do they create an internal structure to manage the appraisal ordering and review process? Either way, the banking regulators need to hold the banks more accountable at the end of the process.
When all of the previously discussed elements are present, I believe the appraisal industry will be functioning the way it was intended. Appraisal independence will be enhanced and borrowers will be rewarded with greater quality and reliability in the appraisal process. This is exactly the change that is needed, in addition to the HVCC, to stop the current finger pointing and address the poor quality and non-independent appraisals that have been and are still rampant in the industry.
authorizes a loan officer or mortgage investor to get electronic transcripts from the Internal Revenue Service covering multiple years of your federal income tax filings.
A transcript is pulled at mortgage application and at closing as an attempt by Fannie Mae to reduce mortgage fraud.
One has to ask themselves, why should this be a new process? I remember during the credit boom, no one seemed to care whether someone had the income they claimed they did, after all, real estate always went up and defaults would not be a problem.
Of course with other issues, like toxic mortgage titles, a petty thing like actually proving borrower income [sarcasm] now seems kind of important.
At issue is proof of ownership at the time of a foreclosure sale. During the housing boom, millions of mortgages were bundled into bonds and sold to investors, a process that resulted in lengthy and twisted paper trails that can obscure ownership. Many lenders believed they could complete foreclosure transactions and later produce formal proof they held the mortgage.
Its a lesson learned – problems at the end of the mortgage process (foreclosure) make it imperative and obvious to reduce the probability of later default at the beginning of the mortgage process. Hence a credit crunch.