One of the hardest things for people to get their minds around is how borrowers were defrauded. The nagging question keeps coming to mind “But you DID sign the loan and take the money, didn’t you?” Yes you did, but you did it because of a representation and virtual guarantee from several parties at the closing table who knew the appraisal was a lie, that you were believing it, that you relied on it, and that you never would have done a deal where the real appraised fair market value was far less than the amount of the loan.

So then the question becomes “How can you be sure the appraisal was inflated? Were all appraisals inflated? How do you know that?” Answers: Read on, YES, Read On, in that order.

I start with the proposition that the only legitimate factors that cause changes in housing prices (up or down) are changes in supply and demand, rising costs or labor and materials and related services. Anything else is a manipulation UNLESS it is thoroughly disclosed in language that a normal reasonable person would understand. Even if such disclosure is made and the deal goes through BOTH parties would be defrauding someone by definition, to wit: they are agreeing that the stated price or value of the property is inflated but they are doing the deal anyway.

How could anyone inflate the price of a house without everyone knowing it? ANSWER: By inflating the entire market in that geographical area. Note that during the securitization era, ONLY the places that were targeted had sharply rising prices, sometimes from one month to the next. Other places, like Seneca Falls, NY (highlighted in NY Times article) were not not affected by either the boom or bust except indirectly where they are dealing with decreased services from the state and county resulting from budget deficits resulting from an expectation of rising revenues based upon the apparent rise in tax appraised value.

How does one inflate values of any commodity or property in the entire relevant marketplace? ANSWER: By creating false liquidity (i.e, availability of money) and by speculation pushing up the “value” of the derivatives and other hedge products which in turn raises the value of the actual commodity, or in our case, the actual house. Since the cost of the money decreases, despite government attempts to raise interest rates, and speculation is allowed without supervision, the speculators control the market on the way up and on the way down. They win on both sides because they are controlling the events. That is not a free market. That is a privately controlled market.

So the reason I am sure that false appraisals were the rule, not just the norm are as follows:

1. There was no abnormal trends or changes in demand, supply, or costs — except that supply actually outpaced demand by a factor of at least 200%. Thus prices should have probably dropped as developers increased competition for buyers. There is no observable reason for prices to rise, much less at the pace seen in the period 2002-2007. By all public accounts it will be at least 2030 before the current inventory of houses are sold. This level of overbuilding is unprecedented and cannot be tied to an expectation of increased demand but rather an expectation that the seller controlled the transaction and collectively with loan brokers, originators, aggregators, and investment bankers would do anything to close the deal even if it meant having the borrower sign for a loan that called for NO PAYMENTS.
   
2. 8,000 certified licensed appraisers signed a petition to Congress in 2005 complaining they were being coerced into justifying the deal rather than actually estimating fair market value. They feared they would be blacklisted from all the deals because an honest appraisal would have slowed down sales of homes and sales of financial products to borrowers.
3. This was a complete reversal of practices existing before the securitization era. The value of the collateral was the Lender’s only guarantee of repayment. hence the tendency was to minimize the estimate of fair market value. Once the risk of repayment was eliminated “lenders” (i.e., mortgage brokers and originators) were under pressure to close loan transactions dollar volumes. The easiest way of doing that was to increase the value of the properties. The more this practice took hold of meeting the contract terms  which were always disclosed to the appraiser (contrary to prior practice) the easier it became, since the “comparables” used by the appraisers were produced by the same practice, incentives and pressures. As the mortgage bonds were sold in increasing dollar volumes, the pressure to place investment dollars increased exponentially. Incentives for mortgage brokers and originators to close deals at any level of risk or terms increased proportionately. Marketing and selling of loan products became big business, with large fees and apparently no risk as the managers of such companies perceived it. The upward pressure to increase the size of loans directly resulted in an upward pressure on sale prices and the perception of “value” in the marketplace. A snowball effect was thus created producing a spike in housing prices that is completely unprecedented in the history of housing since the 1870’s when such measurements began to  be recorded. No other boom or bust cycle in any part of the country had ever experienced spikes of this magnitude.
   
4. Starting 3-4 loan products in the 1970’s, the number of possible loan products has skyrocketed to over 400 different kinds of loans — a bewildering array that increases asymmetry of information — causing the buyer to depend and rely upon the more sophisticated side (“lender”) for information about the loan product they were steered into.
   
5. The number of loan originating companies masquerading as actual lenders went from 1 (Household Finance, now HSBC) to hundreds during the entire securitization period (circa 1990-2008) and then back down again as most of them went out of business, liquidated, or went bankrupt. New business start-ups would not  have flooded the market but for the virtual certainty of high fees without regard to whether the product worked or not (i.e., whether the loan was repaid or not).
6. The amount of money attributable to derivatives that increased availability of loans increased from zero in 1983 to more than $30 trillion in 2007 — twice the Gross National Product of this country.
7. I see no reason for price increases other than the flood of money into certain marketplaces, which in turn gave some color of verification of an appraisal that was plainly wrong, inflated, and where fees for such appraisals increased geometrically.
   

Yes they were virtually all inflated. That was the requirement. Just as the rating agencies falsely inflated the value and risk of the mortgage bonds that were used to attract the $30 trillion in capital used to flood the marketplace, the appraisers likewise inflated the appraisals of the value and thus the risk to the borrowers AND investors. The proof is simply in the present situation where prices have fallen by as much as 80%. This is further corroborated by the price levels before the flood of money into the marketplace. The final verification is that median income was flat during this period. Most economists and housing experts agree that ultimately median income is the main determinant in housing prices.

How do I know this is true? It is the only workable explanation that is being offered, even including comments, reports and statements issued by the financial services industry.

For an example of how this has worked against the poorest, starving people of the world, see the following, which demonstrates that the Wall Street process, if unregulated, leads to bizarre social and financial consequences.

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Johann Hari: How Goldman gambled on starvation

Speculators set up a casino where the chips were the stomachs of millions. What does it say about our system that we can so casually inflict so much pain?

Filed under: bubble, CDO, CORRUPTION, Eviction, evidence, expert witness, foreclosure, foreclosure mill, foreign relations, GTC | Honor, investment banking, Investor, Mortgage, Pleading, securities fraud, STATUTES, taxes | Tagged: appraisals, derivatives, loans, mortgage bonds, ratings |