Livinglies's Weblog

Thank you Alan Baron for submitting the article.

Editor’s Note: Maybe too little too late but a good start nonetheless. This issue is very simple. In the law it is called “fraud on the market.” Wall Street targeted specific swaths of geography and made it look like the entire market was going wild in that area. It wasn’t. It was all a big lie. They did it by inflating ALL appraisals in the area. This gave them the cover of  plausible deniability. In the end, the “appraisals” were improperly rendered and could not withstand the test of time or any other scrutiny. They used developer’s asking prices as comparables instead of sales. They used anything they could get their hands on to inflate the appraisals because Wall Street had already sold MBS securities and needed a place to put the money. They were running out of houses and borrowers so they did the next “best” thing: they artificially inflated the value of the houses.

Any appraisal company that refused to “play the game” didn’t get any business. Any appraiser who did play according to the new rules was given lots of business and lavishly awarded excess fees, some of which were siphoned off as kickbacks to developers or other sellers or intermediaries.

Bottom Line: Homeowners got the shaft. And the TARP money went to Bank Holding Companies that don’t lend money by definition. My solution is the same as it was in October, 2007: push the reset button — put everyone back into heir homes, get rid of these toxic unenforceable mortgages, restore wealth to the middle class, and strengthen the vast community banking system and credit unions (7,000 out of the total of 8,000 financial institutions in the U.S. alone). It’s not just good sense. It is reality. Without reality we have no credibility. Without credibility we can have no confidence.
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Rules set to cut off mortgage originators from appraisers this week

By AUBREY COHEN
SEATTLEPI.COM STAFF

Most people who buy a home know they pay to have it appraised but don’t know why and never see the resulting appraisal report.

But bad appraisals played a big part in adding air to the recent real-estate bubble, which is why the appraisal world officially will be remade on May 1. Some professionals, however, say the changes will cause more problems than they fix, while even supporters say implementation is problematic.

A quick history lesson. Appraisals historically protected lenders, ensuring the homes their customers wanted to buy were worth what customers wanted to pay (or at least as much as the mortgage). But the incentive for good appraisals faded in recent years with the rise of mortgage brokers who were paid per closed loan and of lenders who almost immediately resold mortgages on the secondary market.

That’s why appraisers have been complaining loudly in recent years about brokers, loan officers and bank supervisors pressuring them to hit the value in the sales contract, regardless of a home’s condition.

Enter New York Attorney General Andew Cuomo, who filed a lawsuit in late 2007 accusing First American Corp. and its eAppraiseIT subsidiary of improperly allowing Washington Mutual’s loan-production staff to hand-pick appraisers who brought in desired values and pressure appraisers to change values.

Cuomo then subpoenaed to government-sponsored mortgage buyers Fannie Mae and Freddie Mac, which own or back most U.S. house mortgages. Cuomo wanted to know about loans Fannie and Freddie bought from banks, including Washington Mutual, and how they handled appraisals.

Cuomo eventually got Fannie and Freddie to agree to a new Home Valuation Code of Conduct, which is what takes effect May 1. The importance of Fannie and Freddie to the mortgage industry, particularly now that many investors have fled the market, means pretty much every loan under their size limits will have to comply with the code.

Last week, National Association of Realtors President Charles McMillan sent letters Fannie and Freddie, with copies to Cuomo and the Federal Housing Finance Agency (which oversees Fannie and Freddie), asking them to delay implementation of the code for a year so people would have more time to prepare.

“Everybody’s going to get sucked into this eventually,” said Richard Hagar, a Mercer Island appraiser, said during a class he taught on the code earlier this month.

So what does the code say? Basically, it’s that the people responsible for originating mortgages can have nothing to do with the appraisal process.

The code also, among other things:

* Prohibits lenders and third parties from influencing or attempting to influence appraisals.
* Requires lenders to ensure that borrowers get a free copy of appraisal reports at least three business days before closing.
* Allows lenders to have in-house appraisers, so long as they’re completely independent of sales staff and their compensation does not depend on their estimates or on loan closings.
* Requires lenders to test a randomly selected 10 percent (or other statistically significant percentage) of appraisals and report any problems to Fannie Mae or Freddie Mac, which may force lenders to buy loans back from them.
* Requires lenders to report appraisal misconduct to applicable state agencies.

The code does not apply to Federal Housing Administration and Veterans Administration insured loans.

Many of the rules mirror federal regulations, Hagar said. “They didn’t create a lot of new rules. They just pulled up older federal rules that people had forgotten.”

Appraisers should get themselves on lenders’ lists of approved appraisers, Hagar said. “If you’re simply a form filler and your business is based upon mortgage brokers, you’re hosed.”

The requirement to provide copies of appraisals to buyers before closing means buyers will be able to claim they relied on the reports in deciding to go through with a purchase, Hagar said. “I will tell you there are going to be a lot of successful lawsuits.”

The code also calls for creation of an Independent Valuation Protection Institute that would run a telephone line and e-mail address to receive complaints about code violations and publish and promote best practices for independent valuation.

“Everybody now has a place to squeal,” Hagar said.

So what’s wrong with all this? Plenty, according to some appraisers and mortgage brokers.

“I think this going to be incredibly bad for everyone involved,” said Jason Bloom, chairman of Elliott Bay Mortgage in Bellevue, president of the Washington Association of Mortgage Professionals and chairman of the state Mortgage Broker Commission.

Bloom said his company is setting up a firewalled appraisal operation, but many small lenders and mortgage brokers are turning to appraisal-management companies. These companies provide a buffer, but also keep a large chunk of appraisal fees, forcing appraisers to make up lost revenue by doing more and faster reviews, he said.

They also often assign appraisers unfamiliar with a particular area, Bloom said. “Neighborhood to neighborhood, mile to mile, the housing markets in a volatile environmental like this are different.”

A year ago, Washington Real Estate Appraiser Commission Chairwoman Cheryl Kelley Farivar and Ralph Birkdahl, manager of the state Department of Licensing’s Appraiser Program, sent state Attorney General Rob McKenna a letter urging him to reject the code of conduct.

Farival hasn’t grown any fonder of the code since then.

“It doesn’t reach the intended goal of accuracy in appraisal,” she said earlier this month, asserting that most brokers have signed on with appraisal management companies.

“We end up getting appraisal by the lowest bidder,” she said. “They’re looking for the cheapest appraiser and the fastest appraiser, and good appraisers are not cheap and they’re not generally fast.”

Kevin Malesis, owner of Westside Appraisal, in Auburn, said appraisal-management companies generally keep 30 to 50 percent of the appraisal fee, which typically is around $500.

Malesis said some of his best clients are moving to appraisal-management companies, but he generally declines appraisal-management company assignments unless they pay him his normal fee, which they rarely do.

“You get only the least-experienced and the least-qualified appraisers, who are willing to take a huge pay cut to work,” he said. “I’m hoping it gets to a point where they realize their business model’s wrong.”

Two of the nation’s largest home lenders, Countrywide (now owned by Bank of America) and Wells Fargo, have their own subsidiary appraisal-management companies, LandSafe and Rels Valuation.

Seattle-based law firm Hagens Berman Sobol Shapiro has filed lawsuits against Countrywide/LandSafe and Wells Fargo/Rels, accusing each of improperly pressuring appraisers.

Responding to questions about complaints against Rels, Wells Fargo spokeswoman Lara Underhill said the company is responsible for ensuring appraisers meet legal requirements and provide fair and accurate reports that meet legal standards.

“While there are some administrative costs associated with these quality control measures, they act as important safeguards to protect both the borrower and the bank from appraisals done by unqualified and unlicensed individuals,” she said. “When Wells Fargo customers pay for the appraisal, those charges reflect the actual cost of providing the appraisal and Rels’ administrative costs.”

Bank of America spokesman Terry Francisco said LandSafe follows federal regulatory guidance in “charging a reasonable fee to recapture the operating costs.”

Also, he said: “LandSafe has the controls in place to ensure that appraisals are independent from the influence of persons who may financially benefit from the funding of a loan. No persons involved in the origination of a loan is ever in contact with an appraiser.”

LandSafe has quality-control measures that screen some appraisals, particularly in areas where home values have fallen faster than the national average, has a confidential hotline that appraisers can call to report unethical behavior and puts the toll-free hotline number on every appraisal request, Francisco said.

Farival noted that the Independent Valuation Protection Institute doesn’t exist yet. A Freddie Mac information sheet on the code says: “The Institute has not yet been established, and therefore, the provisions regarding the Institute are not effective.”

In February, the National Association of Mortgage Brokers filed a lawsuit seeking to block the code, saying it amounted to rule-making without following federal requirements and arguing it would inhibit competition among mortgage originators and increase the cost of mortgages to consumers.

On April 2, the association withdrew the lawsuit as a “strategic maneuver” to assess how it could refute the Federal Housing Finance Agency’s claim that courts cannot review their decisions while Fannie and Freddie are in federal conservatorship.

“There were a lot of banks that held back a little bit on implementing this sooner, thinking (the National Association of Mortgage Brokers) would win or at least get a stay,” Bloom said. “I think the industry as a whole is surprised that its here and that it’s happening.”

In his letter, McMillan said, among other things, that Fannie and Freddie only recently had provided substantial guidance on code implementation, states were just starting to enact laws to regulate appraisal management companies, and many lenders were not ready to implement the code.

So what should happen?

“I honestly think that this was one of the problems that sort of solved itself due to what has happened to the economy,” Farival said. “Since the mortgage crisis, lenders are doing what they should have always done, which is reviewing all the appraisals they receive.”

Another important step is licensing mortgage brokers and the loan originators who work under them, Farival said. Washington now does this, but many other states don’t.

Hagar also sees appraisal-management companies as an “extremely flawed” solution, at least in their current form.

“There’s going to be a lot of users of these appraisal management company systems, and there’s going to still be a lot of problems,” he said. “But now it’s going to be more focused to a small group of people, and they can be regulated quicker, faster.”

Regulators “are hiring lots and lots of auditors,” Hagar said. And, he added: “There’s a lot of a guys just looking to sue more people for not doing their job right.”

Aubrey Cohen can be reached at 206-448-8362 or aubreycohen@seattlepi.com.

Filed under: CDO, CORRUPTION, Eviction, foreclosure, foreign relations, GTC | Honor, Investor, MODIFICATION, Mortgage, Obama, securities fraud, Servicer | Tagged: bailout, borrower, disclosure, foreclosure defense, foreclosure offense, fraud, Lender Liability, Mortgage, predatory lending, rescission, securitization, TILA audit |