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Posts Tagged ‘Fannie Mae’

[Form-Fillers Anonymous] The Power Not To Check A Box

January 19, 2008 | 7:10 pm | |

The recurring theme as of late is appraiser pressure.

Near the top of all the various appraisal forms designed by Fannie Mae, considered the standard by the residential mortgage industry, is the “neighborhood” section. It contains a series of check boxes that appraiser uses to identify the overall trend of the neighborhood where the subject property is located.

An appraiser in California is suing Washington Mutual Bank, the embattled mortgage lender who is under regulatory investigation by the Office of Thrift Supervision after the New York State Attorney General initiated a law suit against one of their primary appraisal vendors. The appraiser was supposedly blacklisted by WaMu for checking the “declining” box on her appraisal forms, because she observed price declines in the market she was covering.

The action is surprising to me since appraisers are usually the recipients of punishment. The appraiser is hired to render an opinion about the local housing market. Based on the lawsuit, this appraiser was not allowed to present her opinion without retribution. Kudos to her. The typical new type of appraiser born out of the housing boom, would not have checked that box and that makes me angry.

This was my comment to the Wall Street Journal about this last week.

Jonathan Miller, a New York appraiser, said pressure on appraisers not to check the “declining” box in their reports is widespread and that many appraisers submit to such demands. But “if you do that,” he says, “you’re not doing an appraisal anymore — you’re a form-filler.”

I always viewed these check boxes as an “on/off switch” and ethical appraisers that would check these boxes were placed at high risk to lose their retail banking clients because those clients had to sell the mortgage paper to investors. There was generally less concern about banking clients that held the reports in portfolio.

Fannie Mae released policy guidance last year that would cut back the allowed mortgage by 5% if this check box was selected. It is logical for Fannie Mae to implement this policy since it is an underwriting decision whether or not to lend or how much to lend in a market. The appraiser is merely the observer and the valuation expert, and the appraiser has nothing to do whatsoever with making underwriting decisions for the lender.

On the other end of the spectrum, I remember getting calls about not checking the “Increasing” box when the market began to rise in the late 1990s so as to be more conservative. Of course we would decline the instruction explain how we could not implement the request without a full disclosure and disclaimer. We found that most of the other appraisers on the approved panel of that same bank, would readily agree to the lender instructions without resistance.

Where was our profession’s backbone? Good grief.

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[5% Holiday Update] Declining Markets Get Smaller Mortgages

December 24, 2007 | 5:58 pm |

One of the problems with lack of transparency, is that people…errr…don’t know what you are thinking. Just like the fact that I have been weak in my quantity of postings as of late. I can’t explain it, because, well, I got tired of being, uhhhh…transparent. Needless to say, I am again transparent, and even more superficial.

One of the rumors floating around the appraisal/mortgage world for the past few weeks, covers the topic of Fannie Mae’s restriction on loans in markets they designate as declining. It was even suggested that a restriction in one market versus another, suggests redlining. However, I don’t see that correlation.

but i digress…

In a market that is declining, Fannie Mae will have a 5% higher loan to value ratio so instead of requiring 20% down, it might be 25% if the local market is declining. So markets with average mortgage amounts below the $417,000 conforming limit, this could have quite an impact.

>Current home price trends indicate that home values continue to decline in many markets across the country. As a result, and based on our continued monitoring of loan performance, Fannie Mae is reinstating a policy to restrict the maximum loan-to-value (LTV) ratio and combined loan-to-value (CLTV) ratio for properties located within a declining market to five percentage points less than the maximum permitted for the selected mortgage product.

Notice the use of the word reinstating. This is a recurring theme in mortgage lending these days. Its not the introduction of new lending guidelines, its simply the enforcement of existing guidelines.

In theory, the appraiser gets to lead the way in determining declining markets (in sarcastic tone: shocking!, amazing!, incredible!)

>Fannie Mae strongly encourages lenders to use supplemental sources and tools to independently assess current housing trends, unless the appraisal indicates that the subject property is located within a declining market. When the appraisal notes that the subject property is in a declining market, the maximum financing policy must be applied. When the appraisal does not indicate that the subject property is located within a declining market, Fannie Mae strongly urges lenders to implement processes and apply supplemental sources and tools to validate current housing trends and not rely solely on the information reflected in the appraisal.

But the appraisal industry has been neutered so severely by the mortgage brokerage and mortgage lending industry with pressure to “play ball” that I am not confident the appraisal industry is able to have this responsibility in the first place until proper regulatory restrictions protecting appraisers are in place. No more than a small percentage (you know who you are) of appraisers would be brave enough to show a negative time adjustment for fear of losing a client. I hope recent enforcement actions by the NY Attorney General and the SEC will make a difference.

Still, its a prudent and thoughtful first step for Fannie Mae to take. One of the things that drove me crazy in prior periods of market decline, lenders would send out policy notices saying they would not allow negative time adjustments. We would argue back, saying that this was an underwriting issue and it was simply a matter of adjusting the loan to value ratio, not to mandate rose colored glasses and ear plugs for the eyes and ears of the lenders. We either dropped them as a client or they changed their mind.

The byproduct of this action in declining markets will likely be even lower sales volume via stricter credit, placing more price stress in already distressed markets.

I can’t help but see the irony here: the reduction of Fannie Mae’s loan to value criteria in declining markets could actually lead to more foreclosure volume and more exposure for lender’s collateral. But in the long run, its a prudent action.

This restriction in declining markets should never have been lifted in the first place. It is better for the stability of the lending system by re-introducing the concept of risk awareness to lending decisions.

Now thats a concept I think we can risk having.

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A Jumbo Mortgage Problem May Be Conforming

October 10, 2007 | 8:04 am | |

David Berson, Chief Economist for Fannie Mae, in his weekly commentary discussed a possible sign that there was improvement in the jumbo mortgage market because the spread between conforming and non-conforming mortgage rates was stabilizing, if not contracting. Jumbo mortgages are currently anything over $417,000. Mortgages at or below this threshold are considered conforming and are the type that GSE’s (government sponsored enterprises: Fannie Mae and Freddie Mac) can purchase from banks. This helps promote liquidity and lower mortgage rates throughout the country.

The problem with the credit markets (coming to a theatre near you: Mortgage Meltdown, Subprime Crisis, Credit Crunch) over the summer, was that investors came to the sudden realization that they did not know what loan products were actually in the portfolios they were buying. Did prime portfolios include slices of subprime or Alt-A in prime portfolios? Apparently they did. In other words, the risk did not match the pricing being paid for these loans pools. Thats why American Home Mortgage, Countrywide and others ran into difficultly when selling their mortgage paper in order to free up capital to continue to lend.

Without the GSE’s, investors were especially reluctant to buy mortgage paper from jumbo mortgage originators and as a result, jumbo rates began to spike because it was harder to get a jumbo mortgage. (Fannie and Freddie by definition can’t buy their paper.) The lack of liquidity caused widespread concerns that mortgage money in higher priced housing markets would evaporate, causing housing prices to decline. No buyers, falling prices, etc. At the same time, I suspect the flight to safety seen in the financial markets was also seen in falling conforming mortgage rates to a certain degree. In fact, because of restrictions placed on the GSE’s last year due to the accounting scandal, they were forced to comply with a cap on the volume of mortgage paper they could buy and perhaps that may have eased the liquidity problem somewhat. Fannie and Feddie wanted to buy more mortgage paper but were not allowed to under these restrictions (The debate over raising the conforming mortgage rate or mortgage volume limit by GSE’s is for another post).

To this day, when I talk to agents, clients and appraisers in the field, there is still the impression that jumbo mortgages are scarce. Yet I have had conversations with chief credit officers at various national and regional lending institutions whom are all chomping at the bit (non-equestrian) that this is a sigificant opportunity to grab market share. In addition, jumbo mortgage rates are falling, indicating that that financing is available. However, the reality is that underwriting guidelines are actually being followed now rather than using exceptions as the basis, so it is still more difficult to get financing on marginal deals.

Its very, very early, but the contraction of spreads between conforming and non-conforming mortgages suggest that the mortgage investors are getting a getting a little more comfortable with what mortgage risks are out there and how they should be reflected in pricing, rather than simply waiting on the sidelines. After all, thats their business.

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Mortgage Patterns: Beating Values, Going Conventional, Government Gets Busy

July 17, 2007 | 2:20 pm | |

There has been a lot of change and turmoil in the mortgage arena as of late: Subprime problems, rising mortgage rates, credit tightening and so on are the things that many of us are acutely aware of. Never in my experience has so much discussion been placed on the topic of mortgages. The orientation about a formerly overheated housing market has shifted front and center to mortgages. As a result, the topic is being analyzed, dissected and over-interpreted just the way the housing market was.

Here are a few mortgage topicss and their interplay with a weak housing market. Additional topic ideas are welcome.

According to David Berson of Fannie Mae, there is growing trend toward government backed mortgages like FHA and VA loans.

Borrowers with blemished credit histories (who previously might have taken out conventional subprime loans) are likely now turning to FHA loans to purchase a home or to refinance their existing mortgages.

While the idea that the US government is gaining more exposure to residential mortgages after being asleep at the switch as the subprime mortgage mess developed is offensive to many, its not like the government is lending the money directly (unless I am missing something, so please enlighten me if I am). Here’s some message board feedback addressing the irony (via

Of course, having lived through the S&L crisis filled with acronyms like FDIC and RTC, I know that government has a weak track record of oversight when it comes to mortgages.

In addition, conventional mortgages are getting “fixed”…

The market share of adjustable rate mortgages have dropped considerably as mortgage rates trend upward (albeit modestly). According to the Mortgage Banker’s Association, the market share of ARM’s to Fixed Rate mortgages have dropped from 31% to 20% over the past 18 months. The drop is attributed to the decline in the number of investors and weakening sales prices. Regulatory pressures will also keep the number of new ARM mortgage products down, like no-doc (liar) loans and negative-ams (negative amortization). This will filter out a large swath of potential buyers including a large swath of first time buyers making the shift from rental to owner occupancy.

A self-serving (for me, since I am a co-owner of an appraisal firm) strategy that comes into play with values slipping in many markets is playing with the timing of the appraisal. In Bob Tedeschi’s always interesting (despite the column name) Mortgages column, his recent article Could Be Time for an Appraisal, addresses the issue of slipping markets and timing the appraisal.

“If you’re not selling, you’re typically fine,” said Bob Moulton, the president of the Americana Mortgage Group, a brokerage in Manhasset, N.Y.

But, Mr. Moulton said, there are exceptions. “As house values drop,” he said, “people can have a tougher time refinancing, because the house won’t appraise for the amount they might need.”

I am a little fuzzy (and squeamish) on the comment made about “not selling” but otherwise, this concept banks (sorry) on the idea that in a declining market, get an appraisal early in the application process. In other words, it may be an advantage to the applicant (you) to request the appraisal earlier from your mortgage broker. If values are dropping, the mortgage will be based on a higher value than if the appraisal was done just before closing. hmmmm…

This seems logical (but as a result, off-loads more risk to lenders), but I am not aware of any banks that my firm deals with that will generally honor an appraisal even if it is three to four months old. Even during the height of the market, I wasn’t familiar with appraisal valuation dates exceeding 90 days.

The appraisal is a perishable product, a snap shot of the market. Lenders are well aware of generally weaker market conditions than seen in prior years. In other words, when a market is deteriorating, one of the things a lender looks more closely at is the valuation date of the appraisal (and rumor has it, is actually reading the reports now). In changing markets, an underwriter’s comfort level drops significantly as the timeline from appraisal (valuation) date to closing date expands.

Possible summaries

* Recap (safe, generic version): In the cart before the horse analysis, the challenges facing the mortgage market will exaggerate the problems facing the housing market. Tightening credit and an elevated wariness within lending institutions toward home mortgages will temper any form of housing recover for the next few years.

* Recap (cynical, sarcastic, “late-night I’m tired” version): Weaker housing markets (price and volume) have caused more emphasis to be placed on (clearing throat sound) an actual understanding of the market values of collateral being used, with less emphasis on questionable lending practices and less volatile mortgage products. While there is certainly nothing wrong with being creative in lending, the backlash of tightening credit is in direct response to lax lending practices by the very same industry to begin with.

I wonder if any lessons have been learned in this housing cycle as it pertains to mortgages. When taking the long view, somehow I doubt it.

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[Getting Graphic] Stressing Subprime Mortgage Rate Resets

June 19, 2007 | 7:41 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Source: Fannie Mae

With all the discussion about the doubling of the foreclosure rate last month as compared to the prior month (based on RealtyTrac‘s stats), then it would follow that sub-prime resets are something to look at. David Berson of Fannie Mae, in his weekly column, took a close look at the numbers. [Note: Berson’s link lasts one week. On or after 5/25/07, go here and search for his 5/18/07 post.]

The 2006 loan status is a good summary because all those products have reset. 76% were paid off and 12% continue to be paid at the higher rate (88% in good shape). 10% are under some sort of stress. The 2007 are really too soon to rely on because this data is only through the 1st quarter. However the stressed loans (excluding payoffs and current) are nearly double the rate of last year at 18%.

This is probably something to worry about because mortgage rates are currently rising which will add to the stress level.

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[Getting Graphic] Fed Holds The Line, Mortgage Applicants Fill Dotted Lines

May 10, 2007 | 10:23 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

The FOMC held the line on the federal funds rate this go round which didn’t surprise anyone. Here is the WSJ’s interpretation of the FOMC press release (here’s the actual):

I don’t think housing hasn’t been fully accounted for in the economic slowdown, and despite the Fed’s somewhat sanguine views, which may change later this year. Sales concessions in lieu of price drops are likely tempering the housing number stats nationwide.

Purchase mortgage applications have been generally flat (They increased this week.) yet home sales are about 20%+ below the same period in the prior year.

Why is that? Perhaps one reason is the general tightening of credit. David Berson of Fannie Mae suggests that people are submitting more applications when making a purchase. [Note: Berson’s link lasts one week. After 5/13/07, go here and search for his 5/7/07 post.]

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Appraisers: Band-aids Don’t Prevent Cuts

April 13, 2007 | 10:57 am |

I ran across this Q&A at MarketWatch: How fair are appraisers who already know home price? and I got very annoyed at the assumption made by the person posing the question, stirring up an already healthy dose of irritation at the predicament my industry is in.

Q: One of my pet peeves for years has been how appraisers are given the house contract before they appraise the house. Why is that, other than the fact he needs to make sure that his valuation comes in close to the contract price, otherwise the deal is off and he won’t get any more business from that real estate and/or mortgage company? Appraisers should be above this. -Timothy Murray, certified financial planner, Chantilly Va

He further proposes to make it illegal to allow the appraiser to have contractual information about the sale.

Do you think that the appraiser can’t find out what the sales price is without viewing the contract? Duh. Ok, make it illegal to provide the contract. Boy, that will really prevent appraisers from being pressured by their clients. Do you think a bank or mortgage broker, who is trying to make the deal, would feel the same way this questioner does? How about the real estate broker who has a commission riding on it? Of course not. In a mortgage related transactions, the appraiser usually only interacts with people who have a stake in the outcome.

Here are some thoughts:

  • We are mandated by law – its part of our licensing requirement – to review the sales contract. Why? To understand the terms of the sale. Its not all about the price. What is the actual asset being delivered to the buyer? Are their concessions provided by the seller in lieu of a lower price? Is the proposed new kitchen part of the price? and on and on.

  • We need to understand who the parties are – Fannie Mae has made this a top priority in their quality requirements and revised their appraisal forms a few years back to address this specific concern. They want the appraiser to have an understanding of what the transaction is about. If its a flip, the lender wants to know. In other words, does the seller name match with the owner on record? What and when was the prior sale and does it correlate to the current sales price?

  • We do not need to know the loan amount – That’s definitely a heads up from the lender that tells the appraiser what they need to come in at without actually telling them. This is prevalent in refinance assignments where there is no sales price to guide the unscrupulous or incompetent appraiser. The appraiser can safely assume that as long as the mortgage amount is 80% of the appraised value, there won’t be any problems with the deal.

  • The level of precision possible in valuation is not always practical in a blind scenario. – For example: A property sells for $1,001,000 and the “blinded” appraiser estimates the value at $1,000,000. Could the value be $1,001,000? Of course it can. At that level, there is not that type of precision. That’s 0.1% accuracy. I think the best we can hope for as a profession, is 3% unless you get lucky and nail it. The value could be $998,000, $1,010,000, etc. The empirical evidence used to estimate value is not the granular. Yet the loan to value ratio may require it and in the process, invalidate the transaction because of a variance of 0.1%.

So is the issue resolved by hiding the price from the appraiser? Of course not. It may make you think that you have made the appraiser unbiased. But that’s incredibly naive.

So to figure out the solution, we need to understand why this happens.

Because, in real world lending practice, the appraisal profession has been shredded into nothing more than an army of form-fillers.

Appraisers have to play ball. Its all about making the number. Instead of window dressing the problem, how about protecting the appraiser’s independence so we can provide a real service to the lending industry and the consumer? Not fear for our income because we didn’t make the loan work?

The good appraisers want this to happen, to be protected, because for those who haven’t sold their soul (there are only a few of us left who haven’t), its a losing battle. Just look at firms that specialize or base their practice nearly all on mortgage broker business. Lenders haven’t been incentivised to change their standpoint on understanding the value of their collateral for so long because values have been rising for a long period of time. With the fallout from the sub-prime mess, this may change, but it will take a long time.

Instead of lumping us in with used car salesman (sorry guys), lets try to be a little smarter.

I hope Timothy Murray gets the message, because while it bugs me just as much as it does him, lets try to effect change on the actual problem, instead of simply using a band-aid to feel better about the whole issue.

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Subprime Locations: No One Is Safe

March 30, 2007 | 6:57 am | |

Ok, I am exagerating just a little here, but I couldn’t resist. I get the impression that the subprime market is some huge tsunami and I happened to walk really (emphasis on really) far out from shore. So I thought I would try to get my arms (no, not mortgages) around the visual.

The Wall Street Journal went all out and created a series of terrific interactive graphics of the subprime situation.

Map 1 shows the concentration of subprime mortgages as a percentage of all mortgages. What’s the deal with Sharon, Pennsylvania? The concentration of loans in the west coast is amazing. McAllen, TX, Memphis, Richmond and Miami are no surprise, though. These are regions that boomed economically. Chicago and New York too, but why not Boston and DC? Interesting.

Map 2 shows the delinquency of subprime mortgages. New Orleans is expected as well as Detroit. Althought the Midwest did not see the same degree of appreciation and housing activity that the coastal US did, their weaker economic condition is apparent in this chart, as well as nothern Alabama, Georgia and the Carolinas.

Map 3 shows the percentage increase in delinquencies and we see the situation is rapidly deteriorating in California, Detroit and the Boston region.

I am also struck by the growth of subprime in an already low mortgate rate environment. Rates drop, subprimes increase, meaning it wasn’t just about affordability.

David Berson of Fannie Mae does a great job in laying out the hard numbers of subprime laying out the hard numbers of subprime [after April 1, go here for the March 26th analysis] and I found it pretty compelling.

Subprime boomed as a percentage of single family originations during the period the Fed was agressively cutting interest rates or keeping them low (2001 to 2004). Why? Since mortgage rates dropped, affordability improved significantly. Then why such rapid gains in popularity?

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Prime In Sub-prime Sorta Violates Fair Lending Law

March 15, 2007 | 10:38 am |

Well actually, my point is that the use of the word “prime” in appraisals and lending vernaclar, could possibly be construed as violating fair lending laws. Fannie Mae in their Fair Lending and The Appraisal Guidance (LL02-95) lists examples of words or phrases to avoid:

  • pride of ownership
  • poor, good or desirable neighborhood
  • crime-ridden area

They are directing lenders and appraisers to avoid using words and phrases that could cause the reader of the reports to come to erroneous conclusions as to bias. Phrases like undesirable curb appeal and prime neighborhoods could fall into that category.

Think about it: When you say prime neighborhood or sub-prime mortgages, inferences to at least some of the no-no’s in the Fair Lending law such as race, color, religion, sex, handicap, familial status or national origin have to cross most people’s minds.

Sort of like one of George Carlin’s seven words you can’t say on television [Profanity Warning]

So the fact that the word prime is used in the word sub-prime should have told us that something was amiss.

Next on the verbal assault list: Use of the word prime in steakhouses, the prime rate and prime time television.

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Banking On Profits, Not Risks

February 26, 2007 | 12:01 am | |

Weakness in the national housing market hasn’t really hit the banking sector results yet, or so it would appear to be the case. Here are a few thoughts:

Banking Profits/Credit Quality
On Friday the Federal Deposit Insurance Corp (FDIC) announced that banks and thrifts reported record earnings in 2006, the sixth yearly increase in a row. The FDIC is an independent agency of the federal government created to maintain public confidence in the banking system.

However, credit quality of mortgage loans has fallen as evidenced by the increase in mortgages that are more than 90 days delinquent and the increase in charge-offs.

Residential mortgage loans that were noncurrent (90 days or more past due or in nonaccrual status) increased by $3.1 billion (15.6 percent) during the fourth quarter. This increase followed a $974 million (5.2 percent) increase in the third quarter. Net charge-offs of residential mortgage loans totaled $888 million in the fourth quarter, a three-year high.

Exotic Mortgages
Even negative amortization adjustable rate mortgage (NegAm ARM) delinquencies, the universally loathed and blamed mortgage product of all that is bad with mortgage lending these days (excluding subprime) has remained relatively low so far. The risk of their delinquencies may rise as housing prices fall, especially since these products were more popular in markets that saw the largest levels of appreciation. Its a little premature to attribute the lack of significant problems with these types of loan products as a sign that they really weren’t a big problem to begin with.

According to RealtyTrac, foreclosures are clearly on the rise. January 2007 versus 2006 saw an increase of 25%. A scary number but percentages can be a little misleading since the hard numbers are not presented as a percentage of the total mortgages outstanding. According to the Mortgage Bankers Association, the December 2006 total delinquency rate was 4.67%, which is not high by historical standards. The largest portion came from subprime loans. However, delinquency is a broader definition than foreclosure, but for argument’s sake, its getting worse.

Click here for full sized graphic.

Risk Assessment
One of the problems with mortgage underwriting during the housing boom was the lack of understanding of risk. Automation and detachment from the collateral itself allowed lending institutions to marginalize the risk, perhaps by pushing it off onto theoretically unaware secondary market investors.

One of my favorite, go-go 1980’s books was Liars’ Poker by Michael Lewis (along with Barbarians at the Gate: The Fall of RJR Nabisco and Den of Thieves).

One of the stars of Liar’s Poker was Lewis Ranieri who helped invent the mortgage backed securities concept – selling bonds tied to mortgages was part of an excellent James Hagerty piece in the WSJ on Saturday called Mortgage-Bond Pioneer Dislikes What He Sees [WSJ].

Ranieri and his colleagues in the late 1980’s (thoughts of my Liar’s Poker readings included them bragging about having more powerboats than polyester suits and how they ate onion cheeseburgers for breakfast) combined

regular mortgages into giant pools of loans that could be divided up and resold as bonds to pension funds and other institutional investors. These bonds come with a variety of credit ratings and are repackaged in endless permutations to meet investors’ varying appetites for risk.

Ranieri’s current assessment of the problem is that today’s investors don’t understand the risk because the expansion of offerings has changed dramatically in recent years and they don’t have the historical perspective.

The problem, he says, is that in the past few years the business has changed so much that if the U.S. housing market takes another lurch downward, no one will know where all the bodies are buried. “I don’t know how to understand the ripple effects through the system today,”

One of the reasons, has been the meteoric rise in collateralized debt obligations, or CDO’s which are sort of like mutual funds for mortgage securities investors who want to spread their risk. The problem is that he says that buyers of the debt don’t understand the risk like secondary market investors do because they don’t have access to the same level of information.

Take away:
Its ok to work hard for profits, and banks have every right to do that. In fact its their responsibility. However, its also their responsibility to understand the risks that are out there. Mortgage lending played a significant role in the housing boom. I am not confident that the banking industry can remain impervious to the by-product of the aggressive lending we’ve seen in recent years, characterized by the don’t ask, don’t tell mentality. I am surprised that more attention hasn’t been placed on the risks in the mortgage collateral pool (note: faulty valuation of assets).

There hasn’t been enough time for the housing slow down to affect banking’s bottom line yet. We are starting to see signs of weakness in terms of rising foreclosures and noncurrent loans. However, I wonder if there is greater long term risk associated with the lack of understanding of the risks themselves, or simply greater demand for a good polyster suit with cheeseburger grease stains.

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OFHEO Is Trying Hard Not To Conform

December 4, 2006 | 11:34 am |

The hoopla over this issue occured last week but I have been trying to wrestle with it.

The agency who was responsible for oversight of Fannie Mae and Freddie Mac, who had essentially evolved in rubber stamp agency for the GSEs (government sponsored enterprises).

These enterprises seemed to have free reign in their dealings with the mortgage markets. The risk taken by these government enterprises started to balloon and the reported earnings were being manipulated to enhance compensation by their officers. I guess that means that the competitive advantage these enterprises have over their secondary market competitors breeds this sort of behavior. GSE’s have been a stabilizing factor in the mortgage markets in general. Thats why mortgage rates are relatively uniform across the country by property type.

After the Fannie Mae accounting scandal evolved a few years ago, OFHEO started to wake up and re-take control. One of their first public actions was initiated, after a miscalculation was made by Fannie Mae in calculating conforming loans limits, OFHEO took over this role as well (as well they should). It was off by a few thousand dollars, which is probably not a significant issue, but the symbolism of OFHEO’s actions was what I found important to maintain the trust and integrity of the US mortgage market.

Last week, OFEHO (incorrectly presented by the LA Times as Fannie and Freddie making the decision) kept the loan limit of conventional mortgages unchanged [LA Times]:

The conforming loan limit, perhaps the most intently watched number in the mortgage business, will remain unchanged next year at $417,000.

The limit is the legislatively set ceiling on the size of loans that can be purchased or guaranteed by Fannie Mae and Freddie Mac, the two government-sponsored financial institutions that keep local lenders awash in cash for home loans.

Because the enterprises bring a certain amount of standardization to the market, and because investors throughout the world believe the government-sponsored enterprises’ securities are backed by the full faith and credit of Uncle Sam, rates charged on loans at or below the limit are often 0.25% to 0.5% less expensive than so-called jumbo loans above the ceiling.

The official loan limit sizes for conventional mortgages in 2007 [SOSD] are:

  • $417,000 for mortgages on single-family properties
  • $533,850 for mortgages on two-family properties
  • $645,300 for three-family properties
  • $801,950 for four-family properties

Its interesting that the decline of national median housing prices per OFHEO would have resulted in a $667 drop in the limit to $416,333, but OFHEO director James Lockhart said he would not order a lower limit next year “so as not to disrupt the end-of-year pipeline.

I don’t follow his reasoning, but nevertheless, I think its a good idea to keep investors from getting jittery, especial given the role the housing market plays into our economy, with the risk of recession rising for 2007.


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Confusing A Housing Bubble For A Lending Bubble

August 29, 2006 | 10:32 am |

Much of the housing boom can be attributed to the current lending environment. Housing prices are an indicator of where things are going. But its tough to analyze lending since the stats are few and far between.

In other words: the cart before the horse.

I have long vented about the perils of weak underwriting standards and the pressures placed on appraisers by the structure of the lending system, namely collateral valuation (appraisals). A double hat tip to Barry Riholz for articulating this point so clearly in his post Is a Housing Crisis Approaching? [Big Picture] via the very good Roger Nusbaum post in SeekingAlpha.

Barry’s post is based on a seminal piece in Barrons about loosening underwriting standards by Lon Witter [subsc]. Roger adds another related link with great info [RGE Monitor] as well.

the U.S. has is a lending bubble. His evidence is how loose the lending standards have become, and why not? The banks ultimately just flip the loans to the Fannie Mae (Federal National Mortgage Association, on the NYSE: FNM), where foreclosures and defaults become the headache of buyers looking for greater risk and return.

(And if that doesn’t make you squeamish, simply look at the recent accounting scandals at Fannie Mae.)

Traditionally, Mortgages have been low risk lending, as the loan is securitized by the underlying property. When banks were lending less than the value of the property (LTV), to people with good credit, who also were invested in the property (substantial down payments) you had the makings of a very good business: low risk, moderate, predictable returns, minimal defaults.

Lenders have encouraged people to use the appreciation in value of their houses as collateral for an unaffordable loan, an idea similar to the junk bonds being pushed in the late 1980s. The concept was to use the company you were taking over as collateral for the loan you needed to take over the company in the first place. The implosion of that idea caused the 1989 mini-crash.

The problem here is: what happens if the values of homes begin to decline as inventory builds and rates rise? What does the lender do? They had better decide to start caring about values as well as credit in order to make intelligent loans. Underwriting standards have to rise to avert a lending crisis.

WAMU is the posterboy for weak underwriting. They built their growth and aquisition engine around mortgage lending during the housing boom. As mortgage rates increased and the housing market started to cool in the way of lower transaction volume, what department did they cut to save money? You guess it: The appraisal department. Recently they pulled completely out of the valuation process [Soapbox] and have begun to rely on appraisal management companies [Soapbox] exclusively, which are notorious for attracting the worst element in valuation. The appraiser who work for them are usually form-fillers and provide no analytical service. [Disclaimer: My firm worked for WAMU from the first days of their expansion in New York and saw the problems first hand. They recently jettisoned every appraisal firm across the country (we were one) as part of their cost-cutting move.]

Barry’s post analyzes WAMU’s market position in his post.

Right now, many mortgage lenders are still hanging in there, any way they can. I yearn for the day they actually want to understand what their risk is. Unfortunately, only a select few actually get this point.


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