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The difficulty here is that no matter who pays for the appraisal or who employs the appraiser, the whole system is still based on comps. This is true for professional, commercial appraisers, for off-the-cuff valuations by brokers, for 'sophisticated' market study reports. If prices start to run away as they did in 2004-2006, the appraisals will run with them. Nobody will stand up in the face of what 'everybody else' is doing. Appraisals also cannot predict shifts in market preference, as when giant 2-story-plus-walkout 3 and 4 car garage suburban boxes start to be abandoned by boomers who no longer are raising kids there.
It's interesting.
we often hear about how "Adam Smith's Invisible Hand" will make the market better...
but I have to say, often times it seems more like Adam Smith's Invisible Hand turns Fluffy into Cujo, and then government's quite visible hand must do a karate chop to put Cujo down.
Not saying Govt improves the situation, just saying that there is this yin and yang sort of thing.
And then 15 years from now we'll hear about how it was regulation that caused this (when clearly it was "free market") and we'll tear down all the protective regulation we do have, and the cycle will repeat.
guess I'm getting cynical
wally, it isn't the job of a real estate appraiser to tell everyone what they "should be" paying for homes.
I'd be happy if they just documented what everybody is, at the moment, paying for homes. The junk appraisals we got during the boom couldn't even get that right.
You seem to think that appraisers should function as some kind of organized price controls.
I guess that if you want to get all hard-core-free-market about it, the fundamental problem is that lenders will finance a sale for a transaction that has only one bidder.
Yearning, remember that what we are seeing here is not, actually, regulation. Not as most people use the term.
You don't like Fannie and Freddie rules? Don't sell to them.
Okay, so we just went through a long period in which lenders didn't like Fannie and Freddie rules, and didn't sell to them, and, um.
So now lenders want to go home to Mom and Dad, after this experiment of living on their own, and Mom and Dad say OK, but you can't bring your wild-west practices that you developed in the "private label" model with you.
It's quite an indictment of the industry that the GSEs feel the need to change their model from "securitizer of loans" to "Nanny of the Industry," but the industry has pretty conclusively proven it needs a nanny.
And yes, in several years the major bitch-fest about the giant appraisal-management bureacracy at the GSEs will start up. Some feckless twits will opine as how a free market could do so much better. Thus always it has been.
I never understood why anyone would trust an appraiser who works for the lender or a rating agency that works for the secrurities issuer. Would you trust a movie review written by the director or a restaurant review written by the chef?
Boy, it didn`t take any time at all for Fannie to realize there was a problem with the appraisal reports.
PS. Bacon, it is a joke!
I guess that if you want to get all hard-core-free-market about it, the fundamental problem is that lenders will finance a sale for a transaction that has only one bidder.
I don't quite understand what you mean there.
Well, if there's only one bidder, where's the 'invisible hand' of competing costs and benefits that makes it all rational?
Broker, i'm still waiting for you to explain your joke from yesterday...
I never understood why anyone would trust an appraiser who works for the lender
That, frankly, amuses me.
There was a time when nobody understood why anyone would trust a fee appraiser. Back when we wuz thrifts and thought of ourselves as the bagholder if this deal went south, it was clear that our interest was in the best, most thorough appraisal we could get, and if it came back with bad news, we wanted to know about that. Very often the best appraisals we ever got were from our staff appraisers. They worked for us. They were "us." Fee appraisers just wanted to get a fee for doing some work; fee appraisers don't have any particular interest in the long-term safety and soundess of the lender.
But of course you can corrupt a staff appraiser. But that implies you want to.
This "makes sense" to people only because we have accepted the underlying assumption that all lenders are not motivated to lend conservatively, as long as someone else buys the loan. Therefore, the buyer of loans is reluctant to take an appraisal prepared by a lender employee or affiliate because its chances are better with a fee appraiser.
Matt, I still don't get it.
You are saying that lenders will do loans on a purchase when only one contract has been offered? Yes, they will do that.
The whole idea of using comparable sales is to proxy what multiple offers might look like. We do not force home sellers to keep their properties listed until they get three contract offers. We use the contract offer they got plus three comparable sales.
Dear Tanta, I am going to let you in a little secret. No private biz. can compete with a Gov. or GSE. (if quality is not an issue)
Tanta explains: "The whole idea of using comparable sales is to proxy what multiple offers might look like."
I guess I'm trying to see where the system got broken-- it looks like the proxy got turned around in some way.
I am going to let you in a little secret
No, no, no. Your job is to disabuse bacon dreamz of his delusions about the world.
If quality is not an issue, I can prove any proposition.
Tanta
You are correct, I am an inhouse appraiser. I work for farm credit and we finance rural agriculture properties, we own our loans. When you keep the loan you very much want to have an accurate view of what it is worth. We don't have much luck with "independent" appraisers, because industry standard is less than our standard.
Oops. 9:00. Time to earn paycheck.
Your job is to disabuse bacon dreamz of his delusions about the world.
actually, i wish he wouldn't. i suspect my brain will explode when i hear his explain yesterday's joke. i'm pretty sure it involves the type of math you have to be proficient in to become a mortgage broker.
I guess I'm trying to see where the system got broken-- it looks like the proxy got turned around in some way.
Well, I don't think the problem is the comparable sale model itself. Wally does, but I don't really understand why.
The GSEs aren't saying the comparable sale model is broken. They are saying there's too much incentive to make up comps, fail to adjust them, etc. because lenders who don't keep the loans that get originated are simply motivated to make the largest loans they can, and to get loans closed as quickly as possible without tedious negotiations over appraisal issues.
In the current environment, appraisals that are based on cost or income can be and are just as inflated and bogus as comp-based appraisals. Make up building costs. Make up market rents. Distort vacacy rates. You can write a fraudulent appraisal on any known theory of value.
Residential home mortgages rely on the comparable sale theory (reconciled, in fact, with income and cost approaches) because of the nature of residential real estate. It isn't income-producing, lots of markets just don't have much if any single-family rentals (the competing rental market is strictly apartments), and cost to replace is awful hard to calculate for a condo unit or an attached townhouse, etc.
But we do get cost-based or income-based appraisals, and even comparable-sale based appraisals have to reconcile those two approaches.
It just comes down to who is motivated to pressure appraisers to do it wrong.
Tanta,
Can you explain the following?
https://www.efanniemae.com/sf/servicing/homesaveradvance.jsp
A New Loss Mitigation Option for Delinquent Mortgages
HomeSaver Advance is an extension of Fannie Mae's HomeStay initiative a multi-faceted initiative that helps lenders and servicers meet the needs of today's challenging market. HomeSaver Advance is the latest example of our ongoing commitment to flexible servicing policies and homeownership preservation.
HomeSaver Advance, an unsecured personal loan, is a new loss mitigation alternative available to approved Fannie Mae servicers for eligible borrowers designed to bring a delinquent loan current without a formal loan modification. It provides funds to cure arrearages of principal, interest, taxes, and insurance (PITI), as well as other advances and fees as listed in the Highlights section below. HomeSaver Advance is documented by a borrower-signed promissory note, payable over 15 years at a fixed rate of 5% with no payments or interest accrual for the first six months.
HomeSaver Advance is designed for qualified borrowers who have fallen behind on their mortgage, but are able to resume timely payments once their loan is brought current by the advance. It helps simplify and streamline the workout process for applicable loans, as it provides an option for earlier resolution of delinquent loans.
HomeSaver Advance Highlights
Workout fee paid to servicer is $600
him, not his. sorry, i was typing with ny nobse and i sneezed.
"If quality is not an issue, I can prove any proposition.
Tanta | Homepage | 02.28"
If you need help on that one.
Moody's is thinking of cutting Fannie's rating. Don't they need to get permission from Paulson & Co before they do this?
Moody's says may cut Fannie Mae financial strength
| Reuters
I didn't mean to insult in-house appraisers. Obviously the director trusts his assistants and the chef trusts his sous chef to tell him when the film or souffle is off. But when you are the audience or diners, then you want Roger Ebert or Zagat.
Funny - a free market based on naked self-interest in collecting as much money upfront as possible doesn't lead to desirable long term results, at least in the eyes of a government sponsored enterprise.
A GSE which will mess up the free market by creating rules which will tend to create more hurdles for those already paying taxes on their not so well earned but formerly considerable income, while contributing large amounts to the political system.
Please ignore the irony that committed devotees of the free market are equally devoted to the marketplace in shopping for politicians and buying laws. Or talking about the sanctity of contracts while breaking them.
If only the government would stay out of the marketplace altogether, we could live in the paradise that was the Netherlands during its flowering, or England during its South Seas excursion.
On the other hand, even tulips wilt, and a typhoon ruins the island landscapes - maybe the silly chatter about 'free market' and 'socialism' will flutter like a delicate cherry blossom along the Tidal Basin in a savage storm.
At some point, this discussion will end, without popcorn.
In electronic fault diagnosis it helps to think there is only one fundamental fault.
Was it appraisers?
No it was on selling your crap investment decisions to some other sucker for a profit so that you could have capital available to on sell your crap investment decisions to a sucker endlessly forever so that everything you look at now seems total crap.
Securitization is the fault
Surely?
Ahead of the curve,
If the "no insult" was addressed to me, none taken. Of course you didn't read the agriculture part. I'm a farm boy, I guess you are talking about a cook, a cooks helper and some cheese dip or something. Anyway, yes it we were packaging and selling our loans, we would be much less concerned about quality and you would probably need Ebert watching us. But as long as we are eating our own cooking we will make sure no rat is in the soup.
Your anti-pissant broker bias is showing, Tanta, and it colors your analysis. We brokers have originated VA loans forever with appraisers chosen by the VA, and that system does not work well, not because of anything we brokers do or do not do, but because the list is very outdated, the process is slow and the appraiser will sometimes undervalue the property, thinking it will benefit the VA borrower, when in fact it is more likely to kill the transaction. The VA appraisal system works very badly and it will hopefully not be the model adopted by Fannie or Freddie.
There are those of us, Tanta, who do not push appraisers or appraised values and my take on this news is Fine, do it, Ill cope and it will not affect my business one whit. Brokers exist and do the majority of the mortgage business in this country because big lenders get fat, arrogant, sloppy, offer their product only and move rates around to adjust their portfolio. They suffer the bureaucratic bloat evident in all large organizations.
I consider myself to be a professional (12 years in the business and with a long background in finance before that). You may consider me to be whatever you choose. What you think of me wont affect my business. What my clients think of me does and will affect my business. It is a service business.
However, with all criticism aside for the moment, your blog is a dont miss for me, whether I agree with it or not, and I clearly sometimes do not. It is one of the best, in my opinion.
wally, it isn't the job of a real estate appraiser to tell everyone what they "should be" paying for homes. I've been arguing that the bid presented by the prospective buyer establishes what the "greatest fool," is willing to pay. The appraisal is supposed to estimate what the "second greatest fool," would be willing to pay. This is always a judgement call. In the case of a homogenous development with alot of recent sales, the range of estimates should be small. With a unique house and few sales, the range of estimates can be quite large. Any kind of judgement call is going to be subject to manipulation.
Loan amount up to the lesser of $15,000 or 15% of the original UPB
That's the key here, really.
This is an option for loans that have a fairly modest past-due amount. Instead of going to the time and expense of modifying the mortgage (which is going to involve either Fannie or the servicer buying it out of the MBS and then having to re-securitize it or hold it in portfolio), they're letting lenders just write a note for the past-due amount that isn't secured by the real estate (it isn't a junior lien).
I can't say I think this is a fabulous idea on the whole, although I have certainly encountered limited occasions in the past where a portfolio lender did something like this as part of a workout. It was always one of those classic cases where you could document that the borrower's problem was temporary (a layoff or something) and the past-due amount was so small that it seemed silly to go to the expense of officially re-writing the mortgage to secure another $1000 or something.
We've always let people borrow from their 401(k) or their parents or whatever to make up a past-due amount. The best-case argument for this is that it's probably better for the borrower than raiding the retirement account and it's an option for people without wealthy parents.
I'd be happier with a smaller cap than $15,000--15% is getting to a material difference in the LTV as far as I'm concerned. On the other hand, I'm guessing the most troubled loans wouldn't qualify because the past due amount is a lot more than $15K when you take into account past due junior liens and taxes and so on.
At the risk of bunny slippers o' death, OT:
Thornburg Mortgage Debt Hit with Margin Calls
By Reuters | 28 Feb 2008 | 08:01 AM ET Font size: Thornburg Mortgage, a lender trying to recover from tough credit market conditions, said on Thursday it has faced more than $300 million of margin calls in the last two weeks following a sudden deterioration in mortgage market conditions.
Shares Thornburg Mortgage fell $2.79, or 24.2 percent, to $8.75 in pre-market electronic trading.
Thornburg in its annual report filed with the Securities and Exchange Commission said the calls were tied largely to $2.9 billion of "super-senior, credit-enhanced mortgage securities" that carry "triple-A" ratings and are backed by below-prime "Alt-A" mortgages.
Thornburg said it has yet to realize any losses on these securities but that their market value has fallen 10 percent to 15 percent this month amid "deterioration in the liquidity for these securities and increased difficulty in obtaining market prices."
As a result of this decline, Thornburg said it had "reduced readily available liquidity" to meet future margin calls and might need to "selectively" sell assets if it cannot use cash to meet them.
[snip]
heh.
Dear Broker, I am going to let you in on a little secret. If I pick the measures, government (and GSE) are more efficient, more effective, and just plain better than any private biz.
More seriously, then, the true argument should be 'which measures matter.' That is, What measures are you using to call it "quality"? On my personal front, profitability is not a measure of quality - just as an example.
Tanta, look at this
Mass AG is stopping FC on "presumptively
unfair" loans, including most 2/28 and teasers.
Don't see you or CR discussed this.
The mind boggles here.
Preliminary Injunction Restricts Fremont’s Ability to Foreclose in Massachusetts : HousingWire || financial news for the mortgage market
I do wonder if Pam Crowley's dust up with E-Appraiseit! might have caught Coumo's attention.I believe that the SLAPP suit is still ongoing.The curious can check it out at MortgageFraudWatchlist.com.
Bacon, I am not a mortgage broker and whats even funnier I used to teach math for a living back in the old country and for a few years in my new country.(it is true it was about imaginary numbers.. it might be a little too much for you). The joke you cant understand is about two farmer friends who kept selling the same horse to each other at increasingly higher prices. Eventually one of the farmers sold the horse to a third party. When his friend came back to buy the horse he was very disapointed and said: "Why did you sell the horse to someone else? We were both making money!"
Mass AG is stopping FC on "presumptively
unfair" loans, including most 2/28 and teasers.
That's an injunction against one lender, dudes. And it's Fremont. The one subject to the mighty Cease & Desist from the FDIC for good-gawd-almighty-hideous lending practices.
Tanta,
Thanks for the response.
It seems like a good deal to the homeowner. They get to pay 5% for the life of the loan, plus no interest for 6 months.
What I fear is everyone who falls behind will use this and what will happen is Fannie Mae will be out $15,000 more per loan than they would be otherwise for most of the loans.
I think most people who are behind aren't behind due to some short term bad event, but rather to them getting in over their heads.
From looking at the requirements for the program, it seems everyone qualifies. The home doesn't even have to be the primary residence.
If you ask me, this is a short term bailout that will delay and make the inevitable worse for Fannie Mae. I see this as a very bad decision for Fannie Mae.
Well I just refinanced, albeit only some 60% of value, and the appraisal was arranged by the broker and came in rather above what Zillow says the house is worth. I am probably lucky to have gotten this "good" appraisal in the nick of time before honesty enters into the matter. LOL
Fannie Mae, the biggest source of financing for U.S. home loans, told lenders it will probably ban their use of appraisals by in-house employees or those arranged by brokers.
In other news, the American Farmer's Association has announced that foxes are no longer recommended for guarding the henhouse.
YTL @ 8:51 -
It probably won't take 15 years; more likely 60+ years, which is about what it took to take apart Glass-Steagal.
This is going to be a generational learning experience and the youngsters going to the Obama candidacy are going to want/demand a larger govt presence.
This would be a good time for me to re-read the stuff behind the Kondratieff Wave theory. Had kind of discounted it, but then again...
Tanta
With all respect, no, No, NONONONO.
Yes its against only Fremont, but respectfully THAT IS NOT THE POINT. If you read the ACTUAL preliminary injunction itself, which is here
http://www.mass.gov/Cago/docs/press/2008_02_26_fremont_pi.pdf
you will see that the court is ruling that the AG is likely to prevail in litigation arguing that these kinds of mortgages are STRUCTURALLY UNSOUND.
this is a very accessible legal document and common sense will work for most of it, its not technical.
read what the court finds as fact.
the court finds that there were subprime loans made, yadda yadda yadda, but goes on to find that there is no evidence that fremont participated with the mortgage brokers in "looking the other way" or facilitating loan fraud.
the court SAYS in so many words, "as a matter of law, the simple existence of these kinds of loans made to borrowers who were way out of their league intellectually and foreseeably not likely to understand, for example, that if they lied about their income theyd be in deep shit, makes these loans and providing them PER SE unfair and deceptive business conduct.
There is NOTHING in that opinion that would not be applicable to Countrywide.
THIS IS NOT FACT SPECIFIC TO FREMONT AND REASONABLY COULD APPLY TO ALMOST ALL LENDERS ISSUING THESE KINDS OF LOANS.
Dudes.
From looking at the requirements for the program, it seems everyone qualifies.
Well, not exactly.
You have to have made at least the first six payments on the loan (no EPDs). Plus there are some requirements for verifying the reason for delinquency, the fact that the reason has resolved, and the capacity to carry both the payments on the loan and on the note. Those verification requirements could in my view be a lot stronger, but at least there's some nod to that. So if people don't have some short-term event causing this, then either they or the servicer are making misreps.
My guess is that Fannie did the math and realized that given current loss severities, $15K is a rounding error.
"You seem to think that appraisers should function as some kind of organized price controls."
Yes, I guess I do. If not them... then who? I'd suggest that an appraiser return two numbers: a comps-based number and a $ per sq ft current construction value with no adjustment for neighborhood desirability, speculative potential, etc. At least then the lender would know how much ether might be getting financed. Maybe the borrower could even be expected to cover that ether with the down payment.
The point has been consistently made on this blog that housing is a consumption item, not an 'investment', but I see nothing built into the system of pricing and financing that discourages speculative price bubbles, other than the pain of a burst bubble - never felt in some parts of the country but felt repeatedly in others.
Kinds joining this late, but I can't pass up the comparison between the GSE wanting to "regulate" appraisal-quality and the Federal Ag Dept. regulating the quality of our beef. (See the story in todays NYT.) Have brokers propped up "downer" appraisers in order to complete skewed appraisal reports ? Of course they have. I'm just not sure that Federal level regulation is the solution. The buy-back requests have always been the stick behind the back. They just need to bring it out and really use it, not just threaten to use it. I'm just not sure that the GSE inserting itself into the origination process is the best use of their resources. And their rhetoric now is just like the Ag Dept. looking into bad meat processing practices now that the beef has already been consumed by the school lunch programs.
Meanwhile, back at the ranch, I read that, "Home repossessions by banks rose 90 percent to 45,327 last month ... ."
Let's see, 45,327 x 12 comes to ... ahhh, 543,924 -- about one-tenth of what annual sales will be this year. And the foreclosure rate is surging upward. What percentage of sales this year do you suppose will be REO?
I don't think the redundancies in processing are what has broken the wholesale model. These issues have been around for years. The unfettered growth of the wholesale market has been it's undoing as of late. There is very little barrier of entry to become a broker in most states and the regulation is completely inadequate. Without tougher licensing requirements regulation is nearly impossible. In addition wholesale lenders have tried to use technology to compensate for personnel with limited experience or training. Taking an underwriter with limited abilities and supplementing their decision making by requiring an AVM, field review or second review is not as effective as hiring a competent underwriter.
you will see that the court is ruling that the AG is likely to prevail in litigation arguing that these kinds of mortgages are STRUCTURALLY UNSOUND.
True. So it is possible that any other lender who offered the exact kind of mortgages that Fremont did (as specified in this injuction) could face a similar injunction in MA.
But why are YOU SO FIRED UP?
fred had some of your good coffee, T?
Tanta, questions, if you have time.
What percentage, roughly, of mortgages are likely to be affected by this going forward, now that the private house parties got raided?
Don't you think if a "clearinghouse" is to work, it has to in some way assign appraisers to specific transactions? As long as lenders are free to withhold business from honest appraisers, nothing changes.
Oh, and fred: This is a Superior Court decision. A trial court, not an appellate court. It binds nothing outside the case at hand. And the judge has already said he doesn't expect to see the homeowners permanently escape their obligations.
The system is predicated on checks and balances. The appraiser protects the lender. The lenders need to sort this out perhaps by having the appraisers put skin in the game.
Woody said "90% of life is just showing up". That would be a good starting point for an appraisal instead of a drive-by or a look-up.
A standardized electronic form and central database would identify outliers in a region. An overall impression with justification for deviation, meaning the lender provides their estimate of value based on past regional appraisals and the new value must be justified by the appraiser.
There have been some interesting stories in local papers about appraisals including contracts given to appraisers 30 miles distant (resulting in an orchestrated look-up). The $100,000 increased value was justified by phony remodeling bills and real, but bogus, carefully selected appraisals in the neighborhood by the Realtor. Ultimately the appraiser escaped prosecution.
I'm not fired up im expressive. Largely its because I've been doing this long enough to recognize flailing around when I see it and I don't know how to stop a bad situation getting worse.
I respect YOUR experience and background and note that you suggest strongly you never permitted your shop to engage in devil-may-care reckless behavior (or worse).
Right now I'm very concerned that there are too many people jockeying for power in a Balkanized situation.
I am no Rooseveltian proponent of federal preemption but geez the idea of 50 attorneys general who are would-be governors all and agency regulators and private sector interests all using this as an excuse to run around like chicken littles can produce systemic gridlock and massive unintended consequences.
CAN, not must.
Politically, it can easily lead to a rapid increase in the socialization of private home lending, even going forward, and the attempt to insulate the (voting) middle class from the risks of capitalism.
That way lies a great unknown.
I do believe things have a habit of working out, but they don't always.
I remember the final scenes of Atlas Shrugged, with the abandoned locomotive there with the searchlight staring off into the darkness.
And you're comfortable with the legal position that any teaser rate mortgage is per se unfair and deceptive?
Aren't you exorcised at the idea that from now on, theoretically anyway, banks that are not immune to state suit by preemption will never know whether a perfectly normal product is going to be ruled unfair and deceptive somewhere?
Appraisers need to Unionize and collectively bargain their services. In exchange they need to establish professional standards. training and self police.
There's another impact if brokers can't order the appraisal, that's one less piece of "work" that they can do to avoid having a yield spread premium being treated as an illegal appraisal fee under the Real Estate Settlement Procedures Act (RESPA). See Error Occurred While Processing Request (search for "(g) Initiating/ordering appraisals.") This is one of many ways that RESPA is wrong-headed. Call the fee what it is--a sales commission. Don't criminalize it, just recognize that there are "search costs" in every business. Keep your sales people (whether independent contractor brokers or in-house "loan officers") away from loan underwriting, just as the sleaziest auto dealer doesn't trust the sales people to check the brakes on a used car. Make sure the borrower understands that the mortgage broker is trying to sell something and make sure they understand what the cost is. The trend of regulation (see the Fed proposal and pending bills) and is in the opposite direction, to make the sales person a "fiduciary" with a duty to figure out what's in the borrower's best interest.
And you're comfortable with the legal position that any teaser rate mortgage is per se unfair and deceptive?
It doesn't say any teaser rate mortgage, it says any mortgage qualified on the teaser rate. Which is what the joint agency nontraditional guidance said getting on for two years ago.
a perfectly normal product
That's a hoot. The filing to which you linked goes to some length to show how the structure of this product is fairly obviously comparable to products that have been ruled unfair or deceptive since at least the early 90s.
Ah, I see, you're a Randie. That explains a lot.
Yeah, that's what we need. BIG GOVERNMENT...and lots of it! Yum!
This is getting tiresome. Fannie and Freddie are the Democrats private slush funds. Have you ever met some ofthe dumbasses that work there making 6 figures?
I have. Bunch of retards. And Tanta's solution is to create more jobs there. Pathetic. And by the way, how does creating more red tape actually help the consumer? I know your response, "people just don't know what is good for them, so (as a power hungry bearucrat) I'll force them to do what I think is good for them." The people are stupid rap doesn't mean jack and creates poverty (see socialism).
By the way, this is why Hillary Clinton has lost to Obama. She's a revolting individual who everyone can tell just wants to run everyone elses lives.
What ever happened to good old-fashioned liability?
If an appraiser fudges an appraisal, sue the bastard. Or just quit using him.
If a mortgage broker misrepresents anything in the loan package, force a buyback or sue the bastard or both.
If a securities broker misrepresents a security to an investor, sue the bastard. Revoke his license.
If a buyer or investor makes a bad investment and can't demonstrate fraud on someone else's part, take the loss and learn to do some due dilligence next time.
That's the incentive to be honest. It doesn't require new regulation.
I don't mean to sound naive, there were a lot of things that happened in the business over the past few years that really shouldn't have. I just think that if you can't enforce basic representations and warranties, trying to fancy-dance our way around the problem isn't going to solve it.
Right now I'm very concerned that there are too many people jockeying for power in a Balkanized situation.
Where was the (political) concern while people were hoping to get rich off the practices that caused the Balkanization?
Don't you think if a "clearinghouse" is to work, it has to in some way assign appraisers to specific transactions? As long as lenders are free to withhold business from honest appraisers, nothing changes.
We'll have to see the details of the plan.
It doesn't have to assign the appraiser. The GSEs can't do that; they don't get involved in originating the loan. Compare to the mortgage insurance situation: the GSEs don't pick the MI company for any given loan. They just publish guidelines saying that if you don't choose from the list of MIs that the GSEs will do business with, then you won't be able to sell that loan.
The thing is, the GSEs can build big databases. Lender A might have only ever gotten one kinda squirrely appraisal from Appraiser A. Lender B might only have gotten one. And C and D and so on. But Fannie Mae ended up getting them all. So it can say it will no longer accept appraisals from Appraiser A, regardless of who originates the loan. No lender will use that appraiser unless it's comfortable originating a loan that can never be sold to the GSEs, or to any other investor who requires it to be GSE-eligible.
Most likely, I think, what will happen is that lenders will be required to check this clearinghouse every time they order an appraisal, and verify that the appraiser chosen isn't on the shit list.
Tanta:
"Ah, I see you're a randie. That explains a lot."
Now I understand what my wife was talking about the other night.
That's the incentive to be honest. It doesn't require new regulation.
This isn't new regulation.
Fannie Mae doesn't write law, nor has it been given authority in a law to enforce that law by promulgating regulations that are binding on the regulated entities.
You are suggesting that if I have ended up buying twenty loans from twenty different lenders that all use the same appraiser and are all junk, I should just sue that appraiser 20 times instead of announcing I will no longer buy loans that use that appraiser.
The problem actually goes beyond dishonest lenders who choose bad appraisers. There is the risk that honest lenders will choose bad appraisers because they have no experience with this appraiser and don't know any reason not to use him or her. What's so anti-free market about Fannie and Freddie supplying more information to market participants? They know why you shouldn't use that appraiser.
BTW, suing most appraisers or brokers is pointless. They don't have any money.
There is a difference between a broker's price opinion and an appraisal. The former is based on comparable sales and listings which reflect the fair market value of the subject. The latter is also based on comparable sales and listings, but in addition includes information such as quality of construction and nifty little maps showing the location of the subject and the comparables.
Do either really mean anything? No. It is the fundamental and irrefutable law of real estate that a house is only worth what someone is willing to pay for it. A price opinion or an appraisal is only a guestimate at best, since neither a broker nor an appraiser can possibly know what a buyer would be willing to pay for a house. Thus, both are a valuation within a range of say 15%, high or low. As long as the actual sales price of the subject falls within that range, both would be considered reasonably accurate.
The problem with the appraisal process, as I've mentioned before, is that Congress changed the law in the 1980s, after the savings and loan debacle, so that the appraiser must be given a copy of the sales contract prior to writing the appraisal. This gives him a target price to meet, since the appraisal must value the subject at the sales price or higher, otherwise the loan cannot be justified. And, since the appraiser is hired by the lender, his job is not to provide a fair market value of the subject but to justify the loan. Thus, the entire process has been corrupted.
I write price opinions all the time, every day in fact. I am never given a copy of the sales contract or a target price to meet beforehand. I look up the property in the county records to see at what value it's being taxed. I also look up the deed to see what the original loan was. Then I search for comparable sales and listings. I base my price opinion on the nearest, most similar and most recent sales, as those are the best indicators of a fair value the market will bear.
I've also written price opinions for subjects on which I was given copies of the appraisals. I have yet to come across one that did not overvalue the property by at least $25,000. This is because the appraiser is searching for comparable prices to justify the loan, not comparable homes to estimate the fair value of the subject.
A truly independent appraisal would be done without a copy of the sales contract. It would be based on the condition of the property, the quality of construction and comparable sales and listings. The purpose of said appraisal would be to provide an accurate estimate of the fair value of the subject, not to justify a loan.
If the subject was overpriced and some idiot agreed to pay that much for it, there is nothing in the current appraisal process that would indicate that, since the appraiser's job is to justify the loan, not to provide a fair value of the subject.
Until the corruption in the appraisal process, which was created by Congress, is addressed, nothing Fannie Mae and Freddie Mac do is going to change much of anything.
You know guys, I wonder who realy won the cold war. We ended up bankrupt, and you ended up brainwashed.
PS. Bacon, this in not a joke.
A truly independent appraisal would be done without a copy of the sales contract.
I hear this a lot. I violently disagree.
The reason FIRREA requires that the appraiser have access to the contract is so that sales concessions, inducements, and creative financing can be taken into account.
What's the value of a property if the contract sales price is $100,000 but the contract requires the seller to pay moving allowance and decorator allowance and throw in the lawnmower and the stereo and a piano plus buy the borrower's current home from them?
It is true that appraisers can be pressured to "hit the number" when they are given the contract. They do even worse when they never see the contract.
corruption in the appraisal process, which was created by Congress
Um, which Act of Congress created the appraisal process? I totally missed that one.
...It is the fundamental and irrefutable law of real estate that a house is only worth what someone is willing to pay for it
Most people borrow money to buy homes. If I'm lending you money, and the home is used as collateral I need to assess the value of the collateral. If the buyer is willing to pay more than the assessed collateral value they should pay that out of their own funds not borrowed funds
We continue to get confused about what people can pay for houses (anything they want to) and what people can expect a lender to lend against a house.
Lenders don't really care what you want to pay for a house. The idea is that they will only lend that part of what you pay that they think is adequately secured.
I do not think it helps to confuse this issue.
which Act of Congress created the appraisal process?
I think he's talking about FIRREA, which didn't create a process, of course. It created appraisal and appraiser standards. But it doesn't enforce a process for choosing appraisers or who orders it (the broker or the wholesaler, etc.).
Tanta, thanks for the explicamacation about the clearinghouse.
Any insights into the other question--what share of residential mortgages this will affect? I see that Fannie and Freddie together typically have their fingers in nearly half of residential mortgages.
But are there any guesses about going forward, with more mortgages coming home to crash in the 'rents basement? How many mortgages could this rule affect?
Any insights into the other question--what share of residential mortgages this will affect? I see that Fannie and Freddie together typically have their fingers in nearly half of residential mortgages.
Any rule the GSEs make always ends up affecting way more mortgages than just the ones they actually buy (which are a lot of them, of course).
That is because so many market participants, as well as regulators, use "meeting GSE standards" as a kind of short-hand designation for "an investment quality loan."
For instance, if you looked at the loan sale contracts for jumbo or Alt-A deals, you would find that they approach the reps and warranties basically by saying, "all loans meet all GSE rules, with only these exceptions allowed" (like loan amount, in the case of jumbos). You then just specify what non-GSE parameters you will accept.
In the case of regulators, the issue of how much capital you set aside for a mortgage portfolio, for instance, often starts with defining a loan as "GSE-eligible" and goes from there. It's just a conventional way of establishing some baseline definition of investment quality, in comparison to which any given loan might be of higher or lower quality.
It is always possible that a private investor would decide to go ahead and buy loans under the old appraisal rules. But the beauty of the thing--there's always some advantage to doing things this way--is that it forces them to come right out in their published guidelines/contracts/prospectuses and say these loans are made/sold whatever under this exception.
I profoundly doubt that anyone with one functioning brain cell can be watching Cuomo go after lenders and appraisers and investors right now and think the smart thing to do would be to put itself on record as willing to buy loans that don't follow the GSE rules in this respect. While technically it isn't a "safe harbor," practically it is.
"The idea is that they will only lend that part of what you pay that they think is adequately secured."
Which is, of course, ultimately of compilation of what other people recently paid. There is not much difference in that distinction.
Gawains Ghost: A truly independent appraisal would be done without a copy of the sales contract.
Tanta: I hear this a lot. I violently disagree. The reason FIRREA requires that the appraiser have access to the contract is so that sales concessions, inducements, and creative financing can be taken into account.
Tanta (later): Lenders don't really care what you want to pay for a house. The idea is that they will only lend that part of what you pay that they think is adequately secured.
I think you've argued against yourself here... if all the lender cares about is securing the loan, then why worry about concessions, inducements, and creative financing? None of that will change the security: the land and the box. And the corrupting influence of the appraiser knowing "the target" is indisputable.
(As an aside, not sure why you "violently" disagreed... this seemed a garden-variety argument. Perhaps you and FRED both had triple-strength coffee this morning...)
Which is, of course, ultimately of compilation of what other people recently paid. There is not much difference in that distinction.
Oh, I think there is a difference. But I probably know wackier people than you. Makes me think of the Olympic judging system: Throw out the high and the low and accept the rest of the group average.
ultimately of compilation of what other people recently paid with borrowed money.
Wally, it's not the appraisal or the appraiser or the comp approach.
It's lenders being conservative or not.
If you had a market with sane lending standards, you could rely on the comps because they reflected what an average borrower could borrow in order to buy.
The problem we have now is that the comps reflected what any idiot could borrow from any other idiot who wasn't paying attention.
Look, if you were buying a home, wouldn't you want to assure yourself that if you got transferred in your job or something and had to sell, your house would sell in a price range that a reasonable number of borrowers could pay? That means a reasonable number of borrowers could borrow. If you don't care about that kind of thing, congratulations for being a damned sight richer than the rest of us are.
Any market will have a few cash sales in it; in fact, the most expensive homes in any given market are most likely to be cash. Bill Gates don't need no steenkin' mortgage. And, of course, the one-bedroom 100 year old bungalow next to the tracks might sell for cash. Lots of folks can come up with $2,000.
Outside of those transactions, it matters to most people not what "other people paid," but what "lenders were willing to lend."
A whole lot of homes, by the way, sell for much less than their cost to build/rebuild. We were just looking at the "overimprovement" issue the other day. Properly done, the comparable approach adjusts for market reaction to cost.
When oh, when is the litigation going to start. I'm sure that appraisers have to be insured by errors and emmisions insurance and this is just too big of a problem to turn a blind eye to.
The sooner the better.
None of that will change the security: the land and the box.
The security is that I can force you to sell the land and the box if you don't pay me.
If the only way anyone will buy the land and the box is if I throw in another lawnmower and piano and stereo and so on, then I have to adjust the value of the collateral by the required inducements.
Lenders are not in the business of owning real estate. The lender doesn't want to live in that house.
The lender wants some idea of what the thing might bring in in FC. It also wants some idea of what you could sell for if you decide you don't want/can't afford this house, to keep out of FC.
This is why, for instance, lenders have always had problems with "unique" properties. This issue goes way back before this boom. I actually once got saddled with a file where a first-time homebuyer wanted a 95% loan to buy a 30-year-old geodesic dome.
The problem there was that this particular borrower was probably the only person in a 5-state radius who would have lived in that house on a bet. It had been listed on and off for years, and had never even gotten one serious offer.
We refused to make the loan for anything but a 50% LTV. It just isn't marketable collateral.
We have noted off and on for years now, by the way, that builders are artificially propping up prices by using "incentives." Instead of reducing the contract price, they throw in a bunch of upgrades or a trip to Hawaii or something.
Well, if the only way you can move this property at this price is by throwing in a vacation and kewl countertops, then the value of the house is contract price minus the cost of the inducements.
That is why appraisers are required to read the contract and adjust for that kind of stuff.
It is also why a lot of folks got very disappointed when they found out they couldn't resell their own units at the prices the builders were getting. It turns out that the builders were only getting that price because they threw in inducements. Once resellers threw in the same inducements, they were losing money.
This is not an old problem, and it's one reason that appraised value is not simply equal to contract sales price.
errors and emmisions
Is an appraisal with an 'emmission' like a really stinky one?
As an appraiser friend of mine here in California said, "You show me an honest appraiser and I'll show you a poor one.."
As already pointed out( I don't have any original thoughts at the moment so I'll pretend I'm an MSM member and repeat someone else's), Much of the problem has been caused by all the front line parties working on commission with no accountability for the long term results of individual loans. How about holding most of every commission in escrow and paying it out in time based on loan performance. That idea will cause a lot of soiled underwear in the business.
Tanta,
Minyanville today brings up the item on Pg 79 of the 10k that they are lending unsecured to cover delinquent payments to circumvent mark to market. I know you commented on it earlier in the thread,but should this not get regulatory attention? Perhaps they are on the fast track to nationalizing the mortgage market?
As an appraiser, this whole thing really scares me. While I understand the importance of appraiser independence, the effect of this will be more orders being placed through AMCs -- which are notorious for paying 50 cents on the dollar (or less) for an appraisal, while demanding a 48 hour turn around. While the borrower is paying $350 for the appraisal, many AMCs only pay $150-175 to the appraiser.
Another problem in the industry is the GSEs automated underwriting -- if the borrower's credit risk is low and the AVM says the LTV is 80% or less, no appraisal is required. The net effect is that only high LTV and high risk loans even require appraisals.
I understand that this proposal is primarily aimed at LandSafe, which is CountryWide's AMC. A LandSafe staff appraiser I talked to said he got 45-55% of the fee, and he was doing 60 to 90 reports every month. Many of them were CountryWide REOs, so his value helped determine the offering price. He also said that any appraiser that turned 45 reports per month or less got canned -- another incentive for quality reports.
Personally, 20 to 25 per month is my comfort zone, but I can handle up to 35+ per month for a short period of time. My biggest client is an AMC that pays me $260 for a URAR -- I love working for them, and prefer the lower fee to the PITA of dealing with mortgage brokers. But AMCs are big corporate orgs, and they can cut off an appraiser at any time for any reason.
The appraisal business is loaded with perverse incentives, and it's hard to turn it around on a dime.
they are lending unsecured to cover delinquent payments to circumvent mark to market.
Apparently OFHEO doesn't agree that the point of this is solely to avoid MTM.
The 10-K does say it should reduce the number of loans that Fannie has to buy out the MBS (since it avoids modification of the mortgage). That reduces FMV write-downs because Fannie doesn't own the loans.
But until you show me that this does not involve a charge against the g-fee account, I am not willing to assume it is not reflected somewhere else in the books.
I have not yet had time to run that part down. I rather wish people who are willing to claim that this is solely for the purpose of avoiding FMV write downs would back up their claims.
ME: None of that will change the security: the land and the box.
Tanta: The security is that I can force you to sell the land and the box if you don't pay me. If the only way anyone will buy the land and the box is if I throw in another lawnmower and piano and stereo and so on, then I have to adjust the value of the collateral by the required inducements. [...] The lender wants some idea of what the thing might bring in in FC.
Betcha the lawnmower, piano and stereo will be long gone in FC! Hope the appraiser penciled in their collateral value at -$0-.
Tanta: [L]enders have always had problems with "unique" properties. [...] I actually once got saddled with a file where a first-time homebuyer wanted a 95% loan to buy a 30-year-old geodesic dome.
There but for the grace of God... I once looked at buying desert land near Joshua Tree CA that had a geodesic dome on it. (Shame it burned in the fires a few years back... brought out the nascent hippie in me...)
brought out the nascent hippie in me
Let me assure you that I have always really liked people who want to live in geodesic domes. I just never wanted to foreclose on one.
Tanta, someone stole your homepage! is there a reward for whoever gets it back?
Is it possible this is needed because of brokers like this guy?
(From BrokerOutpost.com)
Don't think it will end the broker biz but probably will cause more lenders/brokers to leave and drastically change how our business is done. If this happens I can see 5-10 years from now the gov't thinking of taking away the ability of lenders to order an appraisal because Appraisers are high/low balling the appraisal so that they could keep the lender as a client....and then we go back to the system we have now
Everyone knows appraisers get beat up to hit a value but as an LO that tells an appraiser to be conservative (because I know the lender is going to tear apart the appraisal apart) I don't think it's fair to a homeowner to fork out 350-550 dollars for an appraisal that might not have the value that is needed.
At some level, it makes little difference whether the appraiser is only paid if the loan goes through, or his HIRED BY somebody who only get's paid if the loan goes through. So long as the person doing the hiring is not meaningfully affected by loss rates on the loan.
I don't think it's fair to a homeowner to fork out 350-550 dollars for an appraisal that might not have the value that is needed.
Exactly!
I paid $350 for this appraisal! I expect it to tell me there is a pony! How do these jerks get away with taking money from me and then not telling me what I want to hear??? There should be a law against that!!1!
Let's hope this approach never catches on in the medical world. "I paid $500 for a physical exam, and you told me I was fat and sick!! That is not the health status I need! I need to be told I am perfect!! Take this guy's license away . . ."
This crap about how it's unfair to borrowers to pay for an appraisal that doesn't give them the value they "need" is actually very widespread, if not always so clearly stated.
Where it comes from is this belief that there should be no transaction costs in a purchase or refinance mortgage. There should always be enough equity to roll those costs into the loan and/or there should be no costs to a "fishing expedition." If you want to apply for a refinance just to see what happens, you shouldn't be stuck paying for the appraisal if you get turned down.
In other words, there should just be a free lunch. Loan officers and brokers who think like that just have to get ground out of the business on the rock of reality.
Should AVMs play a bigger role given appraisal issues? There are issues with AVMs but the data is out there to measure accuracy and bias.
"You are suggesting that if I have ended up buying twenty loans from twenty different lenders that all use the same appraiser and are all junk, I should just sue that appraiser 20 times instead of announcing I will no longer buy loans that use that appraiser."
No, I'm suggesting that you put the loans back to the twenty different lenders.
I don't have a problem with the idea of a GSE maintaining an approved appraiser list. It's actually a good idea. Actually, I'd even support, say, a State Appraisal Board with the ability to compile complaints against particular appraisers and even revoke their licenses.
Saying "Well, maybe if the appraiser talks to party B in the food chain instead of party C in the food chain..." may or may not be a good idea, but it doesn't address what I see as the fundamental issue.
The point is, all participants need to be accountable for their actions, and holding the loan long term isn't the only way to do that.
Suing appraisers and brokers is mostly useless if my sole purpose is to recover full damages. But there's some benefit to getting whatever they have left and making sure they don't stay in business. It does in fact provide incentive to do quality work. As you've pointed out, guidance about what constitutes a good appraisal or good underwriting has been around for years. People just weren't being held accountable.
AVMs already do play a big role, but they are a blunt instrument and can not replace appraisals.
Should AVMs play a bigger role given appraisal issues?
For an average house in average condition in an average neighborhood with lots of conformity, AVMs can be very good predictors of an average value.
When dealing with homes that are in above or below average condition, or otherwise significantly different from the norm, AVMs reliability breaks down pretty quickly.
I had an order for a property in the mountains -- it was a purchase, with a 20% down payment. The automated underwriting system did not require an appraisal, but the buyers wanted one just to be sure. This was a property in an area where every home is unique, and the comps ranged from 20% below the purchase price to 15% above it. Should this loan have been approved with an AVM? I don't think so, but the GSEs did.
AVMs have there place, but they are not a substitute for an accurate appraisal.
And other than being free, Zillow is teh suck as an AVM -- but that's another story.
A whole lot of homes, by the way, sell for much less than their cost to build/rebuild.
Don't most mortgages requires homeowner's insurance? Seems like the insurance company has a say in the matter - if you are willing to pay 320K but the insurance company is only going to insure the house for 200K, isn't that a clue to the lender that something might be out of whack in the transaction?
Where it comes from is this belief that there should be no transaction costs in a purchase or refinance mortgage.
The entitlement society. The call will be to nationalize the appraisal industry.
Should AVMs play a bigger role given appraisal issues?
Well, not if this dead body thing turns into a trend. AVMs are notorious for being unable to do interior inspections.
An AVM might be rather generous to your geodesic dome house. I don't any of them have incorporated a white elephant blocker into their algorhytm yet.
If I were asked to structure or organize appraisal as an economic function (business) today, I'd want to take advantage of the advances in information technology -- basically, the ability to maintain huge databases, in real-time.
If I can introduce an analogy, it is not unlike what is happening in medicine, where a highly trained doctor is asked to do diagnosis and prescribe treatment, but, increasingly, the critical information is not actually available in the room with doctor and patient -- rather it is in the collective experience of hundreds of people with similar disease and courses of treatment. Will inserting a stent help a patient with heart disease? The only way to know is to study hundreds or thousands of people -- the doctor in the room with a particular patient has to either be informed by that mass data, or has to follow rules, derived from that careful analysis of that data, by others.
It is not just a matter of making appraisers "independent" in incentive terms. Appraisers will have to become instruments in a larger, collective system of data processing and analysis. Fannie Mae and Freddie Mac have the resources and the motive to invest resources in building up the kind of real-time data collection and analysis, which could support "independent" appraisals, which would be actually more "scientific", because they were informed by a collective effort at data modeling and processing -- it would be technocratic, but given the technological possibilities, it is a logical way forward.
Joy Division writes:
Should AVMs play a bigger role given appraisal issues? There are issues with AVMs but the data is out there to measure accuracy and bias.
AVMS are only slightly reliable in very homogenous areas with easily rercognizable patterns of devlopment. I have been checking a sort of AVM from realist against my own work and the AVM is on another planet. Or maybe I am?
What's the value of a property if the contract sales price is $100,000 but the contract requires the seller to pay moving allowance and decorator allowance and throw in the lawnmower and the stereo and a piano plus buy the borrower's current home from them?
The appraiser doesn't need that for the appraised house to determine a fair cash value for the house (they do need it for the comparables). To me it seems the efficient way is for the appraiser to produce a cash value and for the lender/borrower to negotiate cash alternatives. In principle, you wouldn't expect the appraiser to be able to determine fair value for various incentives - they lie outside his formal region of expertise. In practice, perhaps they will know the appropriate cash value for a 3 yo Civic with accident-related bodywork. But we shouldn't count on it.
Fair Economist, the suggestion that was made was that the appraiser shouldn't be allowed to even see the contract before appraising the home. He would therefore never know that non-cash inducements, personal property, or other concessions were in that contract.
It does not actually matter much whether the appraiser knows how to value the old Civic. All he needs to know is that it is not usual in most RE markets to have to give away a car in order to get someone to make an offer on your house. The point is that this could be considered an inducement to sale, not just some non-cash part of the price.
It's the old story: if you have to tie a porkchop around its neck to get the dog to play with it, it's an ugly kid.
Of course it's not really throwing in the old car that's the problem. That certainly wasn't the big problem back when FIRREA was written. The problem was undisclosed seller seconds, lease-back deals, and "cash back" kickbacks.
Some of the big problems today are builders secretly agreeing to buy your current home as an undisclosed "trade in" or making your first few mortgage payments for you or something like that. No appraiser would use standard sale comparables to support the value if he knew about those terms of the transaction.
The appraiser needs to value the house, not the contract. If the appraiser gives a value for the house, separate from contractual shenannigans, the lender or guarantor can evaluate the value/cost of incentives. That makes for a simple, fair, system.
OTOH, if the appraiser has a contract in front of him, he can't give a truly independent assessment of value. He will be biased by the sales price - he can't help it, all humans are biased by others' opinions. You are giving up the ability to get a good value estimate in return for having the appraiser evaluate the incentives - something the lender would normally do better anyway.
As a mtg broker, I have no issues w/ the appraisal being ordered by the wholesaler but you really have only shifted the tendency to "make the deal" from the broker to the wholesaler. I would recommend a system like the VA uses. They assign the appraiser. Fannie and Freddie could do that and have the balance of collateral evaluation in their favor.
When I was an underwriter I had the same low opinion of mtg brokers as Tanta does. Tanta has never originated a loan I would be willing to bet. There is a reason why mtg brokers have evolved to their present form. Trust me Tanta, it isn't as easy as it looks. Freedom isn't free. Are you willing to keep working on 100% commission in this market environment? I doubt it. Few have the guts or the ability to foresee 3 years ahead and manage their money accordingly. The ones that do understand that those who are willing to tolerate risk and volatility will escape the slave trade and live like a free person. Underwriting was like slavery. A house slave, not a field slave but a slave nonetheless.
Does this equation make sense to anyone out there? Over-zealous risk management = self defeating process = credit crisis = severe recession/depression. Does anyone out there understand this?
The appraiser needs to value the house, not the contract.
Well, I hope no appraiser takes your advice, because he'd lose his license.
Here are the uniform standards of appraisal practice for determining market value:
http://commerce.appraisalfoundation.org/html/2006%20USPAP/std1.htm
Are you willing to keep working on 100% commission in this market environment? I doubt it.
For some reason I was willing to work for the same modest salary during booms--when the LOs made three or four times what I made--that I was willing to work for during the bust.
This is the same old same old I've heard from commissioned loan officers since the late 80s. You want a job with variable compensation because you want the upside potential, and you're willing to risk the downside. That's fine by me. But nobody pays the back room folks that way: they get salary, less downside, less upside.
You can display contempt for salaried people because they make a choice--income stability--that you obviously don't want. But if you do, I'd suggest not looking for pity when commissions are down.
Otherwise, as soon as we get really over-zealous, I'll join your lament. Right now I'm hearing people freak out because conforming loans require 5% down. We haven't gotten anywhere close to overzealous yet.
Over-zealous risk management = self defeating process = credit crisis
In logic class, I believe this error was called "making shit up."
Tanta, by the way, I just saw an article indicating that the proposal indeed includes the assignment of appraisers to transactions to avoid a freezeout of appraisers who won't play ball. Lost it, and tried to find it for you again, but couldn't. I got there via your blogroll, somehow.
Oh, duh:
On the Brink of Appraisal Reform, Proposed Deal Hits Snags : HousingWire || financial news for the mortgage market
The appraisal profession is blotted with inexperienced under trained dopes, clueless to the most basic appraisal principals. These are the knuckleheads that flowed in by the tens of thousands with the bubble. Point and click form fillers that bracket prices, consistently hitting value on a stretch while believing in their own sh!t. -The première appraiser of choice. Making big fees too boot.
The most cost effective solution would be to have the loan originator assume all responsibility for the quality of the appraisal report. That would include mortgage buyback, paying all fines, court costs, damages, and if the court so orders jail time; lock up the broker and set the appraiser free. This approach would immediately purge the system of all the lose-leaf appraisers that have clogged the system with goo. No respectable person wants jail time. Purge the short list. Its back to Jiffy Lube and dont forget your clipboard.
As an independent fee appraiser, I resent the implication that we are responsible for the crisis. Lenders have been making 100%+ LTV, no-doc stated income, negative amortization and teaser rate qualification loans which was just plain stupid. They relied on an up market and when it was no longer up, it bit them in the a** so I don't feel a lot of sympathy for these lenders.
But I do admit I get tons of calls from brokers shopping values and offering to give me a loan if I hit a value. This is even more the case now that they are trying to turn a 90-100% LTV loan into an 80% LTV loan. I of course turn these down and they just go to the next appraiser on the list. I don't think a big bureacracy based appraisal clearinghouse is the answer but I do feel that the state licensing organizations need to do more sting operations to catch appraisers willing to take these assignments and they also need to hold the brokers accountable.
"The appraiser needs to value the house, not the contract.
Well, I hope no appraiser takes your advice, because he'd lose his license.
Here are the uniform standards of appraisal practice for determining market value:"
I don't see anything in there the appraiser can't do for residential property without knowing the offered price.
Yo Markel,
Ever read about boom and bust cycles? A key aspect is the over optimistic i.e. self reinforcing process that applies to the boom phase. The bust phase is characterized by an overly pessimistic i.e. self defeating process otherwise known as over zealous risk management.
Sorry, but it isn't made up by me but is in many books that cover the made up subject of economics. Clearly, risk management was not in place during the boom as it should have been. My bias was different in 2004 and 2005 as I was asking "where are the regulators?". Now in 2008 I ask " are the regulators going to make it all worse?"
Tanta,
I've been an underwriter but have you ever been an originator? I think not. Until you have been on both sides of the fence, you are incomplete in the yin and the yang of mortgage finance.
I think the key lesson on this meltdown is that the securitization of loans is an achilles heel in our mtg system and that we will go back to the old way of a local S&L or bank making the loans and holding the notes. I was thinking the other day that the loans I have originated in the last 5 years, the vast majority have performed and have no problems. As a traditional banker, I would have been much better off getting a monthly basis point spread instead of a one time fee. I have always been a mtg broker w/ self-restraint (yes it is true) and have a philosophy that you do not take advantage of people or put them in harms way. This was instilled in me as a child and somehow carried over as an adult.
If I am thinking this same thing as far as long term banking relationships w/ borrowers, others are as well and will be looking to make loans to qualified applicants.
Once upon a time, I helped young families w/ FHA loans and 5% down conforming loans. While the paperchase(s) were sometimes a big pain in the ass, it was a good time. Not too hot and not too cold.
So Tanta, I hope you keep the balance of the yin and yang in check.
Tanta,
Informative article. I appreciate your efforts.
A clearing-house will be developed by FNMA and how will they select participants?
It is likely they will initially admit ALL state certified appraisers. As an owner of an appraisal shop, I have nine certified appraisers who perform under my review -- and eight of them REALLY need to stay there, for competency reasons. The clearing-house will likely create instant direct business for them. And you think that this is a good idea?
The real problem has been mis-identified. It has always been easiest, in every recent banking crisis, to blame appraisers. But the real problem is not a rash of fraudulent appraisals, although there were a few out there. It is much larger than this; it is macro-economic.
Appraisers must use the most current and proximate available data. We cannot determine when there are artificial value bubbles that have been swelling over the course of several years' time in various markets -- we are not macro-economists. In fact, the process disciplines us NOT to see past the data right in front of us. And the data for these inflated values was, by and large, THERE.
Perhaps those values would have been sustainable in many markets as well IF lenders hadn't gone credit stupid, creating opportunity for ne're-do-wells and nit-wits. THEIR programs, ARMS, higher LTVs and lowered credit standards FUELED that bubble AND, arguably, popped it. (Even the best under-writers was compelled to open the door for the fools who qualified.)
How ironic that the value crisis that they, to a large degree, created is now conveniently being laid at the feet of appraisers.
How foolish to think that it will be resolved by implementing a scheme that will ultimately promote further incompetency in the appraisal industry.