I am hopeful that the severe losses announced by Fannie Mae and Freddie Mac over the past 24 hours will stimulate some sort of shake up in the mortgage industry to prevent what happened over the past several years to not happen again.
$3.6B here, $2.5B there,
soon or later its real money
I have been a long time proponent of the lending process to be open and honest about actually knowing how much the collateral is worth that mortgages are issued against. If the value is in the property, then whats the problem? It’s an underwriting decision, not a valuation placement whether to make the deal when guidelines are strayed from. Appraisers are to simply report what is happening in the market and move on to the next assignment as a disinterested third party.
It’s all about appraiser neutrality – thats essential to maintain credibility of values.
Sharon Lynch at Bloomberg News in her article Fannie Proposes Ban on Lenders’ In-House Appraisers presented my thoughts on the current problem:
About three quarters of residential mortgage appraisals are arranged through brokers who only get paid if a loan closes, Miller said today in a phone interview. He called the practice “laughable” because it creates a financial incentive for mortgage brokers to push appraisers toward higher valuations. Higher appraisals also mean more homeowners qualify to refinance their homes and take cash out, he said.
and broke the story about the placement of a Fannie Mae talking points memo on the American Banker web site yesterday which lays out the key points in the negotiation with NYS AG Cuomo.
“It would be a monumental change because it would require a shift in the way that the lending industry does business,” said Jonathan Miller, chief executive officer of Manhattan-based appraisal company Miller Samuel Inc. and a longtime proponent of creating a firewall between residential appraisers and mortgage originators. “I think it would be tremendous.”
I fretted in an earlier post that the large losses would slow down progress for reform, simply because any reform would slow down transaction activity until the lending industry adjusted to them and that would hurt the GSE’s near term financial performance.
Here is the text of the talking points memo (items in bold appeared in bold in the original memo):
THE NATIONAL APPRAISAL CLEARINGHOUSE TALKING POINTS
In November, 2007, the New York Attorney Generalâ€™s Office sued First American (and its subsidiary, eAppraiseIT) for allegedly inflating the appraised values of homes.
The lawsuit is part of a broader investigation into alleged fraudulent practices in the mortgage industry, specifically related to appraisal practices.
Fannie Mae wishes to cooperate with the New York AGâ€™s investigation and, as part of a cooperation agreement, will likely agree to a number of items, the most significant being:
- Requiring as part of our reps and warrants, and as a precondition of the sale of any mortgage to Fannie Mae, that the lenders or brokers do not have and did not utilize either in house appraisers to conduct the subject property appraisal NOR do they have any wholly owned subsidiary or other subordinate entity that performs appraisals.
- Requiring as part of our reps and warrants, and as a precondition of the sale of any mortgage to Fannie Mae, that LENDERS not rely on appraisals provided by brokers, either for purchase transactions or refinancing transactions. This would, in effect, require lenders to always secure their own appraisal of any property purchased through a broker.
- A CLEARINGHOUSE of appraiser information, conduct and activity will be established.
a. All lenders will be required to provide post-purchase copies of appraisal documents to the Clearinghouse.
b. It will be an independent entity with an executive and board of directors (no Fannie Mae employee involved).
c. It will staff a hotline for industry and consumer complaints.
d. It will provide annual reporting publicly.
- These requirements will go into effect for loans acquired by Fannie Mae after September 1, 2008.
In my next post, I am going to expand on what I think the ramifications of this are. Of course, the big assumption is whether this deal will even happen.
UPDATE: Catch the comments on Mortgage News Daily about this post.