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Posts Tagged ‘Fannie Mae’

[HVCC and AMCs Violate RESPA?] Here’s a possible solution

March 16, 2010 | 12:01 am | |

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:

  • Appraisers, Realtors, Brokers HATE the HVCC.
  • AMC’s and Banks LOVE the HVCC.
  • Regulators are disconnected from the problem just like they were when mortgage brokers controlled the ordering of appraisals during the credit boom.
  • Appraisers and borrowers are paying for services the banks receive.
  • Banks should pay for the services received from the AMC’s.
  • Appraiser’s fees should be market driven.
  • Banks should be held accountable for the quality of the appraisal.

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.

The Ultimate Solution for the Appraisal Industry

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 This agreement, originally made with the Office of Federal Housing Enterprise Oversight, requires Fannie Mae and Freddie Mac to only accept appraisals ordered from parties independent to the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.


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[Checking It Twice] IRS Form 4506-T For Good Reason

October 12, 2009 | 11:48 pm | |

As a testament to the overcorrection in mortgage underwriting mentality, Kenneth Harney in his The Nation’s Housing column writes about the IRS Form 4506-T that

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.


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[NY Times Real Estate Cover Story] New York Appraisals Get Shortchanged

September 26, 2009 | 3:24 pm | | Articles |

It is nice to see the appraisal process move front and center after being on the back burner for the past 7 years during the credit bubble. The appraisal process in mortgage lending is like politics and making sausage – its not pretty when you look at it up close (except for my photo, of course).

Vivian Toy pens a great article which talks about the disconnect between the ideals of the appraisal profession and what is being forced on the profession by the lending community and regulators in this weekend’s real estate section cover story called New York Appraisals Get Shortchanged.

And without a stockpile of comparable sales for reference, Mr. Miller said, “you have to really know the local market, so you can go beyond the raw sales data and use all the subjective factors you can to really tell the story about a property.”

Here’s a key issue affecting all mortgage lending nationwide: APPRAISAL MANAGEMENT COMPANIES (all caps for emphasis beyond using bold).

The potential pitfalls are not exclusive to New York. “The least qualified and least experienced people are doing appraisals across the country,” said Jim Amorin, the president of the Appraisal Institute, a national trade group that represents 26,000 appraisers. He estimated that appraisal management companies now handle about 90 percent of the appraisal market, up from about 30 percent before May 1.

Mr. Amorin said he had heard of appraisers in California who travel 150 to 200 miles to do an appraisal.

It’s hard to believe that they could still be in their geographically competent area, he said. And in Manhattan it would be even harder if you have someone coming in from the suburbs, since things can be vastly different from one side of the street to another.

When you commoditize the appraisal profession as appraisal management companies do, you really get poor quality at a higher cost. The costs are measured in risk exposure, lost revenue from killing transactions that shouldn’t be, and AMC fees are often higher (remember the appraiser only gets about half of the total appraisal fee).

The irony here is that many of the appraisers who were the source of overvaluation during the boom times – cranking out a high volume of reports, mainly for mortgage brokers – are now getting most of the work through appraisal management companies. They are undervaluing because they are unfamiliar with the markets they appraise in and think the lenders want them to be low (they probably do). Remember that in either the high or low scenario, its all about making their clients happy – in other words – insanity continues to be pervasive in mortgage lending…but now it is costing the consumer directly.

The New York Times ran an A1 (page one) story back in August called “In Appraisal Shift, Lenders Gain Power and Critics.” Which talked about how good appraisers are being forced out of business because of the Home Valuation Code of Conduct agreement between NY AG Andrew Cuomo and Fannie Mae. Banks have all the power now and they are showing that they don’t understand the problem at hand.


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[BankThink] Then Don’t Call It An Appraisal

August 24, 2009 | 11:24 pm | | Columns |

I stumbled on a really great blog on the American Banker site called BankThink and it’s worth checking back on a regular basis.

Webmaster/Journalist Emily Flitter asked me to contribute a guest column on the current state of appraising. I named it:

Then Don’t Call It An Appraisal.

I hope you enjoy it.

Here’s a local copy of the article:

The trillions in adverse financial exposure and lost economic opportunity were supposed to teach us, especially those of us connected with the banking system, something about risk. But a look at the latest trend in home appraisal practices shows that although the relationship between mortgage lenders and appraisers may look different on the surface, its nature remains troubled.

As a rule, appraisers are generally ignored until we make a mistake. We’re the back-of-the-house worker bees. During the housing boom (actually a credit boom with a housing boom as a symptom), an appraisal was relegated to a commodity status like a flood certification. Without much political clout or public awareness, we weren’t used to being in the spotlight. We’re finding it not at all flattering.

Mortgage brokers’ business swelled during the boom years and many participated in compromising as much as two thirds of the residential mortgage lending business at peak – they only got paid if they could close the deal. That took an appraisal. Guess what type of appraiser was hired en masse? The ones who provided the “right” value.

How did things work in the banking industry? During the boom, in-house appraisal review departments were closed in most US Banks because they were “cost” centers. Mergers and consolidation caused lenders to lose local relationships with appraisers.

After the September financial system tipping point, it seemed like we appraisers might get an opportunity to redeem ourselves. After all, we were part of the problem along with regulators, investment banks, commercial banks, ratings agencies, real estate brokers, mortgage brokers, mortgage bankers and consumers. One big happy party.

Regulators have set out new guidelines on appraisals for lenders. The Home Valuation Code of Conduct, pronounced “Havoc” is an agreement between New York State Attorney General Andrew Cuomo and Fannie Mae that was intended to change everything.

Comp Checks, inquiries in which an appraiser was often asked to assure a floor value for a property without actually performing an appraisal, are over. Mortgage brokers can’t order appraisals anymore – otherwise the bank can’t sell the paper to Fannie Mae.

But not much else has changed. Lenders now call appraisal management companies who pay the appraiser half their wage (fees for AMCs are lower than appraisal fees paid 20 years ago) and require 24 – 48 hour turn times without exception.

The National Association of Realtors wants appraisers to use “good” comps and ignore foreclosure activity because we are “killing the recovery.”

Many of the ethical “appraisers” have been forced to seek new types of work or switch careers, as they have been replaced by an army of “form-fillers.”

After all of the financial system turmoil, not much has changed in the mortgage process as it relates to appraisers. A conversation with a loan consultant we had last week perhaps best exemplifies how detached from reality many in the lending community really are.

One of my staff appraisers recapped to me a direct conversation with a loan consultant at a large national bank. The consultant had contacted the appraiser to complain about the appraised value not being high enough on several occasions, even bringing the borrower in without advanced notice to the appraiser on one of the calls. This is a frequent conversation and it’s getting old.

When trying to get an understanding of the collateral, does the banking industry want to know what the value is from a neutral source or not? If not, don’t call it an appraisal because its not.

Jonathan Miller is a real estate appraisal consultant in New York. He is the co-founder of the residential appraiser Miller Samuel, and a managing principal of the commercial appraiser Miller Cicero.


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[Appraisal Management Companies] An Accident Waiting To Happen

May 20, 2009 | 12:51 am | |

In other words, the institutional entities that are responsible for ordering, reviewing, approving and managing licensed appraisers, aren’t held to the same or similar standard – Appraisal Management Companies (AMCs).

One of the byproducts of New York State Attorney General Cuomo’s agreement with Fannie Mae (HVCC), was to prevent mortgage brokers from ordering appraisals for conforming mortgages that would be purchased by Fannie Mae. That’s a good idea in general. But by doing that, most national retail banks and many regional banks, are forced by necessity to manage the appraisal process directly. Few have the overhead to do this and therefore resort to appraisal management companies. Call an 800 number and order a report anywhere in the country.

Appraisal management companies are generally paid the same fee as an independent appraiser would be, so they have to find appraisers who will work for 1/3 to 1/2 the market rate (or 2/3 the rate as their trade group claims). To differentiate, they generally require 24 to 48 turn time per assignment, yet an appraisal is not a commodity like a flood certification – it’s a professional analysis by an expert.

Here’s a classic example of the new breed of unregulated appraisal oversight. It’s worth the read. Same problem as the mortgage boom days – pressure, sloppy work, crank it out – just a different type of institution doing the ordering.

And AMCs have a trade group called TAVMA (The NAR of AMCs), which does all it can to further their mission. Here’s their recent blog post saying their fees are 60% of the market rate rather than 50% as has been my experience as well as the appraisal organizations who testified in front of Congress.

Think about it – their argument is essentially this: Taking a 40% pay cut is a whole lot better than a 50% pay cut.

Whether it’s 40-20-10 [yet even more spin] or whatever percent the fee reflects what willing sellers (appraisers) and willing buyers (AMCs) in the local marketplace are willing to accept based upon their own self-interests. To try and draw a cause-effect relationship between fee and quality before congress is a little bit disingenuous, absent hard data.

Here’s the AMC fee logic in a nutshell:

If an employer posted a job listing with a starting salary 40% below the last hire’s salary – this will result in no measurable differences in the quality of job applications received? Forget the correlation/causation argument, what about common sense?

Good grief.

For once, I agree with NAR.

Appraisal management companies are not currently regulated at the federal level and regulation at the state level varies. Regulation would ensure that AMCs operate within the same basic guidelines and standards as independent appraisers. Further, this allows AMCs to be regulated within the existing appraisal regulatory structure, which avoids the need to create additional layers of government bureaucracy.

The Appraisal Institute announced the House version of bill 1728:

Furthermore, the bill requires separation and clear disclosure of fees paid to appraisers and fees paid for appraisal administration (i.e., fees paid to appraisal management companies); prohibits the use of broker price opinions in loan origination; and requires registration, and a regulatory framework, for Appraisal Management Companies, with mechanisms to prohibit infiltration by appraisers sanctioned by state regulatory agencies.

That specific wording “and a regulatory framework, for Appraisal Management Companies, with mechanisms to prohibit infiltration by appraisers sanctioned by state regulatory agencies” reflects the situation discussed in the St. Petersburg Times article.

Here’s usually the way the process works:

  • To be approved, the appraiser submits a state license and in some cases, submits a couple of sample reports.
  • The appraiser agrees to the half market rate fee structure and 24-48 hour turn time requirements (market rate is 5-7 days).
  • The appraiser is placed in a computerized queue and is given an assignment
  • The appraiser gets 1-2 calls by young kids out of high school making sure the appraiser will turn around the assignment in 24-48 hours
  • The appraiser has to be very pushy to be able to get into the property in order to turn the assignment around in time.
  • If there is a valuation problem or issue that needs interpretation by the AMC, the solution is often to just disclaim the problem in the addendum somewhere.
  • Little if any interaction available from qualified appraisal professionals on AMC staff
  • The appraiser gets more work if the jobs are turned around faster because the queue is set to have maximum amounts allowed by an appraiser at any one time.
  • Remember, the fees are half market rate. In higher cost housing markets, the fees can be as low as 1/3 the market rate because the AMC appraisal fees are often set at national rates. In other words, appraisers in Manhattan would be paid the same as North Dakota even though the cost of doing business is 4x higher in Manhattan.

Now imagine the quality and reliability of this product, which is not a commodity, but an expert opinion prepared by a professional. It’s hard imagine much professionalism squeezed in this process, isn’t it?

HR 1728 H.R. 1728: Mortgage Reform and Anti-Predatory Lending Act was just passed by the House and Senate and is ready to be signed by POTUS. Here’s the appraisal portion.

It looks as though AMCs will be licensed just like appraisers will:

‘(7) maintain a national registry of appraisal management companies that either are registered with and subject to supervision of a State appraiser certifying and licensing agency or are operating subsidiaries of a Federally regulated financial institution.’

However, this will be more of a revenue opportunity by the states – licensing doesn’t have much to do with competence. Plus, I don’t see how states will have the manpower to provide meaningful oversight other than clerical aspects.

Mark my words here – this is an accident waiting to happen.


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[DMV-Like Executives] Placing All Our Housing Hopes On Institutions Losing Billions

May 19, 2009 | 10:24 am | |

Every quarter for more than a year, we have seen losses in the neighborhood of $10B – $20B for each of the former GSEs Fannie and Freddie. However, with the Stim and bailouts in the multi-trillion range, the current losses seem like chicken feed (no offense meant to hard working chickens).

My kids remind me often of the Austin Powers quote:

Why make trillions,
…when you can make…billions?

Modified version “why lose trillions, when you can lose billions?”

FHFA, the federal oversight agency that was created after the meltdown began (don’t get excited, it is essentially the former OFHEO and appears to be run per the same executives that were in charge of oversight before the meltdown) reported that both Fannie and Freddie are facing “critical” problems.

Ok, this is nothing new. We know these agencies will be losing money for many years until we undergo extensive de-leveraging.

What continues to be a concern for me is the ability of these agencies to attract talented people to steer them. Even though the GSEs are essentially federal agencies, they are dealing with enormous and complex problems. Their predecessors were highly compensated but, like everyone else, didn’t see it coming.

Images of the government issued gray painted rooms and bulky metal desks come to mind – ie, your local DMV. One could argue that the “talented” executives were the ones that got us in trouble. However, I think this is an over simplification and short sighted.

One hurdle to putting Fannie and Freddie back on firm financial footing is the many vacancies in their executive ranks. Hiring has been slowed by compensation concerns, the agency said.

That’s why salary caps in most company situations are probably short-sighted. Ben & Jerry’s took several years to find a CFO because of their 5x salary cap from lowest to highest paid employees kept away good talent.

Yes some Wall Streeters got crazy compensation packages, but do we get even with them and apply it to all executives connected with this financial morass that take Fed dollars or work in Fed agencies? Is this a case where the exception makes the rule?

How will “toxic mortgages” be sold off if the company purchasing them feels even a hint of salary cap talk, even retroactive salary caps? Senior executives are not likely to jump in the pool, if their bathing suit might be taken away without warning – ok, bad visual but hopefully you get my point.

Although when I renewed my driver’s license last year, it only took 10 minutes.


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B of A Goes Jumbo Just In Time, Hides Countrywide, Wants Identity (Mine)

March 24, 2009 | 12:05 am | |

One of the biggest issues facing higher priced housing markets as of late, has been the absolute lack of jumbo mortgage financing. The TARP, TALF (and BARF – Bank Asset Relief Fund) only address mortgages within the parameters of Fannie Mae, ie conventional and jumbo conventional financing. In Manhattan that’s about $729k and with an average sales price just under $1.6M, a lot of homeowners are having great difficulty in obtaining mortgages with more than a 50% LTV.

This Bank of America announcement is great news for this sector of the housing market and may spark other interest in the sector.

Kenneth R. Harney’s must-read WaPo column “The Nation’s Housing” covers this announcement this week in his article: A Big Boost for Buyers Seeking Jumbo Loans:

Bank of America, the country’s largest mortgage lender, is rolling out a large program to finance jumbo loans between roughly $730,000 and $1.5 million, with fixed 30-year rates starting in the upper 5 percent range. The loans will be available through the bank’s retail network and also through its Countrywide Home Loans subsidiary. After April 27, Countrywide will be rebranded — shedding the name it has had since 1969 — and morph into Bank of America Home Loans. Bank of America acquired Countrywide, once one of the biggest subprime lenders, last year.

So Countrywide becomes Bank of America Home Loans.

Last week, Landsafe, the appraisal management company arm of Countrywide approached us to be approved as an appraiser. Their quality people have met with us many times but for some reason, the sales function didn’t allow our type of firm to connect because you had to rub elbows with loan reps at each of their offices. Crazy bad.

I believe that has all been changed or is being changed for the better.

However, although we are state certified and likely because of all their problems with appraisal quality, their efforts to right the wrongs effective screen out qualified appraisers. They wanted among other things:

  • our social security numbers
  • credit card numbers?
  • driver’s license #’s
  • date of birth
  • consumer reports containing illness records and medical information

Seemed pretty aggressive to us. What about identity theft concerns?

The irony of this sort of scrutiny is pretty powerful given past practices. Hopefully once things begin to run more smoothly and one hand knows what the other is doing, they’ll reconsider trying to attract qualified appraisers. We’ll wait patiently.

Good grief.


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[Seeing only 70% of the Risk] Fannie Mae Crushed Condo New Development Sales

March 22, 2009 | 11:40 pm | |

The future of condo new development sales activity across the US appears in serious trouble, yet it doesn’t have to be that way – and its all due to a new government agency, Fannie Mae.

Back in September 2008, when the wheels were coming off the economic wagon, the US Treasury bailed out the former GSEs Fannie Mae and Freddie Mac (and AIG). It was the end of an era where both enterprises served two masters: the US taxpayer (exposure to risk) and its shareholders (profits and share price), to simply serving the former.

The mandate of promoting home ownership at all costs (literally) by these institutions had run amok which is one of the reasons why we are in this mess. While the GSEs served a noble purchase of providing standardization and liquidity to the mortgage market to promote home ownership, somewhere along the way, the link between value and risk was lost because systemic risks were not clearly understood. To be fair, they were simply one part of a giant problem, yet a key part because Fannie Mae set the tone for the mortgage industry and that message was grow at all costs and lend by exception.

Now that Fannie Mae is effectively a government agency, it is getting reacquainted with the religion of risk, and it’s become a quick student by adopting policies that are prudent, but very damaging to the collateral they are trying to protect. It is of great concern because the rules are being changed in the middle of the game, making weak markets worse by stranding thousands of would be buyers and owners. Many new development projects are stalled or have had only a handful of sales since the September tipping point.

Effective March 1, Fannie Mae:

The government-backed mortgage-finance company stopped guaranteeing mortgages in condo buildings where fewer than 70% of the units have been sold, up from 51%. In addition, the company won’t back loans for sales in buildings where 15% of current owners are delinquent on association fees or where more than 10% of units are owned by a single-entity.

Prudent, yet devastating to the existing inventory of newly developed condos across the country – a robotic like ruling that may likely stop most sales activity in new developments if buyers can’t qualify for mortgages. This will simply damage the entire collateral classification (new development condo) and push many existing loans underwater.

Of all the new changes (which are not unreasonable if the housing market wasn’t in crisis) the increase from 51% to 70% pre-sale requirement for a mortgage to qualify for purchase by Fannie Mae makes it nearly impossible for buyers to qualify for a mortgage in a new development unless it is nearly sold out. All the projects that came online late in the cycle could be damaged by this hard core – its a catch-22 really. How does a project claw its way from say 20% sold to 70% sold? All cash lenders and those that ignore Fannie Mae are few.

The policy will result in a higher rate of foreclosures for entire developments as well as individual homeowners who no longer qualify.

In other words, if you helped make the mess, you need to help clean it up, not make it worse. And of course, get a bonus.


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[Mortgage Appraisal Havoc] Of AMCs and Code of Conduct

January 14, 2009 | 2:07 am | |

The appraisal world changes on May 1, 2009.

I have been on a mission over the past year to creat awareness of the continuing issue of appraisal pressure and to prevent the enabling of appraisal management companies via the Cuomo/Fannie deal to dominate the mortgage appraisal business. It appears a foregone conclusion that appraisal management companies will dominate the mortgage appraisal process and as a result, will end up with a system worse off than before the credit crunch began.

Earlier this year, Mr. Cuomo threatened to sue government-sponsored mortgage investors Fannie Mae and Freddie Mac for allegedly failing to ensure that appraisers were shielded from pressure to inflate their estimates. Appraisers have long maintained that many loan officers or brokers, whose pay depends on how many loans they complete, pressure them to come up with value estimates high enough to ensure approval of the loans.

In March, Fannie and Freddie, eager to avoid a legal battle, agreed with Mr. Cuomo on an appraisal code of conduct. That plan drew fire from mortgage-industry groups and some federal regulators. Among other things, they said the code could raise costs for consumers and cause unnecessary disruption in the appraisal business.

One of the key issues facing appraisers was the pressure we were placed under to “hit the number” during the recent mortgage/housing boom. 20 years ago our clients were stodgy financial institutions with a separate appraisal departments surrounded by a firewall to keep loan officers away from the appraiser. Just before the onset of the credit crunch, the mortgage system originated something like 3/4 of its volume via mortgage brokers, who are paid when the loan closes. They select the appraiser {red flag} to perform the appraisal for the mortgage. If the appraiser comes in low, eventually, maybe not initially, the mortgage broker would find someone “better” {wink}. I can tell you, 75% of the appraisals completed for mortgage purposes are not worth the paper they are written on.

New York State Attorney General Cuomo opted to start with the appraiser and follow the mortgage. He ended up striking a deal with then GSEs Fannie and Freddie to curtail some past practices called Home Valuation Code of Conduct or HVCC. Some appraisers lovingly call the agreement “Havoc” because of the chaos it created. It enabled appraisal management companies.

One of the main changes was removing the ability of mortgage brokers to order mortgage appraisals directly if the mortgage was to be sold to Fannie and Freddie. If a mortgage application has an appraisal order through the mortgage broker, then Fannie Mae and Freddie Mac won’t buy it from the bank. This is a significant incentive for a lender because many banks need to sell their loans rather than retain them in portfolio in order to recapitalize and lend more.

I thought this was a terrific idea because stopped this tainted relationship structure between the person setting values and the person being paid on a commission if the value was high enough. But with this solution, a problem was created and that new problem outweighs the former problem.

Because of the way the HVCC is being implemented, most lenders are effectively incentivized to order appraisals through appraisal management companies. The best way I can describe much of this cottage industry is

a centralized appraisal ordering and management organization run by 19 year old kids without any real estate experience who focus nearly exclusively on turn time and half market rate appraisal fees.

Kenneth Harney, of the nationally syndicated column, The Nation’s Housing in the Washington Post writes in his article: An Appraisal Upheaval

When you apply for a mortgage to buy or refinance a house, should you be concerned that your appraiser is being paid much less than the $300 to $600 you’re charged, perhaps half?

Should you know who pockets the rest, or that cut-rate fees are too low to attract the most experienced appraisers?

Should you care that the appraiser might be pushed to come up with a number so quickly — almost overnight in some cases — that he or she doesn’t have the time to do a proper inspection and accurate evaluation of comparable properties, pending sales contracts and local market trends?

Without realizing it, Cuomo has moved the problem from “values biased high” to “values unreliable”

But some prominent appraisers are scathing in their criticism of management firms. “Their quality is terrible — all they want you to do is crank it out at the lowest cost,” said Jonathan Miller, president and chief executive of Miller Samuel, one of the largest appraisal companies in the New York City area. Only “the least experienced people” are willing to do the work, he said, “and the product is unreliable.”

In recent issue of American Banker, Kate Berry wrote an article Re-Appraisal: How Revision is Recasting Expectations

“You’re creating a situation where a lender is going to have to order a lot of appraisals from an AMC,” said Jonathan Miller, the president and chief executive officer of the New York appraisal firm Miller Samuel Inc.

Mr. Miller said, “Appraisal-management companies are subject to the same pressure as mortgage brokers; only there’s actually more at stake. They’re almost more vulnerable” because most of the companies depend heavily on a few lender clients.

Do you remember the AMC known as eAppraise-it?

Cuomo sued them for all the reasons this agreement shouldn’t be implemented without modification.


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[Treasury-Paulson-American Dream-Working In The Taxpayer’s Behalf Update] Drive Home Prices Down

December 18, 2008 | 1:15 pm | |

I took a double take today after reading HousingWire’s article about Treasury Secretary Paulson’s rejection of the rumor that the US Treasury was interested creating a 4.5% interest rate for mortgages issued by Fannie Mae to stimulate the housing market.

Paulson said:

“We didn’t float any plan,” Paulson said. “I am always looking at new ideas and I have said from day one that the key thing to get us through this period is getting housing prices down.

Mission accomplished: – housing prices are down. Perhaps that is why he is leaving in January.

Warning – excessive rhetorical questions ahead

So the US Government is working hard to push housing prices down?
…go against the “American Dream” agenda of the current and prior administrations?
Isn’t it kind of late for that?
And that type of policy will solve the credit crunch?

Ok, I’m back

The financial system enabled now-obviously illogically cheap credit which pushed housing prices higher with little regulatory oversight. We experienced a mortgage bubble – a housing boom was merely the byproduct.

To follow his logic, by going backwards using the recent history timeline, Paulson seem to view falling housing prices as a way to stabilize the financial system – take the pressure off, so to speak.

What he probably meant by his quote: I think he is simply a poor communicator and probably meant that housing price declines have a way to go and he doesn’t want to do anything to artificially “prop” them up.

I agree.

All fixes need to take the long view into consideration.

However, the economy can’t function without credit – it is not the exclusive purview of mortgages.

His poor communication skills ended up stalling transactions as people were waiting for rates to drop further.

Apparently large numbers of consumers thought precisely that during the week after the disclosure that the Treasury Department was working on plans to slash loan rates for consumers who buy houses in the coming months.

But in the meantime, the news threw a wrench into the marketplace — making some shoppers reluctant to commit to purchase without guaranteed access to 4.5 percent mortgage money. In some cases, it stalled deals that were ready to go.

Good grief – January 20th can’t get here fast enough. I’ve had it.

Aside: Shoe-ing is the new form of protest (hat tip to Curbed).

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[New Fannie Policy] Renters Rewarded For Meeting Obligations

December 15, 2008 | 1:02 am | |

Don’t fulfill your contractual obligations and you get bailed out.

Fulfill your contractual obligations and you get evicted.

That’s the way the process has played out.

Chauntay Barnes, 30, moved into a single-family home with her two kids in November 2007 on a quiet street in Hamden, Conn. She never missed a payment on her $800 rent — never had so much as a late fee — and yet in mid-September she opened her mail to find an eviction notice.

If you are going to solve the housing crisis, you can’t treat tenants who met the their obligations as a throwaway. Fannie Mae is going to work with some tenants to prevent eviction. Still, only a fraction of the evictions will be prevented.

In a move that provides relief to thousands of renters who face eviction but draws the federal government even deeper into the housing market, the loan giant Fannie Mae said Sunday that it would sign new leases with renters living in foreclosed properties owned by the company.

In recent months, skyrocketing foreclosure rates have exposed as many as 70,000 renters to evictions, even though many never missed rent payments, according to analysts who track housing data. In many cities and states, renters can be evicted after their home goes into foreclosure, regardless of how long their lease stretches into the future.

Yes, properties may be easier to market when vacant, but the reality is the property will likely see extended marketing times with the surplus inventory levels. Why not keep income coming in to the taxpayer while the market finds it groove?

“We’re not in the business of managing rental properties, and we’re not in the business of being a landlord,” said Thomas Kelly, a spokesman for JPMorgan Chase, which owns about two million loans. “Clearly the renter is caught in the middle in cases like this. When a property is in foreclosure, we follow the law.”

When will the renter stop being treated like a second class citizen? Is the American dream of homeownership myopic?

Aside: The National Community Reinvestment Coalition, a consumer advocacy group has an amazing public relations sensibility. I would guess that coverage of this issue in the NYT and WSJ was a perfectly placed pitch. Kudos to them on this important issue.


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[FHFA /OFHEO] On A Mission, With Bear Oversight

November 19, 2008 | 4:38 pm | |

I have been particularly impressed with the way that the newly created Federal Housing Finance Agency has been keeping us informed on what they have been doing to help with the housing market since the credit crunch began in the summer of 2007.

Organized, neat, outspoken, timely. You only have to read the FHFA mission statement to understand what they are all about:

Promote a stable and liquid mortgage market, affordable housing and community investment through safety and soundness oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Sounds like a necessary regulatory agency to me.

The FHFA’s predecessor, Office of Federal Housing Enterprise Oversight (OFHEO) was also responsible for regulatory oversight during the Fannie Mae accounting scandal and the collapse of the GSEs leading to their bailout in September 2008, had a remarkably similar mission statement as FHFA’s.

OFHEO has an important and compelling mission

to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.

Before the global credit crunch and US housing market decline, where was the actual oversight of Fannie Mae and Freddie Mac? Today the new institution replacing the old one is run by the same person (whom I find to be quite well-spoken) and their new web site is nearly identical to the old one yet the mission has now expanded to include the Federal Home Loan Banks.

The implication of promoting liquidity in the revised mission statement isn’t a new concept since that was one of the primary reasons for the existence of Fannie Mae and Freddie Mac in the first place. And OFHEO’s advocacy of affordable housing seemed to morph from low income housing to simply making housing finance costs cheaper.

Still, I have higher hopes for all federal regulators going forward now that they have been lulled from hibernation.

After all, there’s a bear out there.


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