Harrington: eloquent account of the law of unintended consequences of APPRAISAL FRAUD

SEE ALSO securitization-understanding-the-risks-and-rewards?page=1

Subprime debacle – the truth emerges: Part 2

Subprime mortgage crisis | Subprime debacle – the truth emerges: Part 2 Anthony Harrington

Amongst the real horrors perpetrated during the subprime disaster, such as the many outright frauds practised on US homebuyers who should never have been re-mortgaging their homes in the first place, the testimony of real estate appraiser Karen Mann to the Financial Crisis Inquiry Commission (FCIC) sounds a barely heard note but it is an eloquent account of the law of unintended consequences in full cry.

The background is simple. For decades US mortgage lenders used professionally qualified appraisers to check the value of the “collateral”, namely the home that was the subject of the mortgage. This was the equivalent of the UK surveyor’s valuation report and was required by the Federal National Mortgage Association (FNMA), aka Fannie Mae, and by Freddie Mac, both of which carry out the securitization of mortgage assets.

However, by 1994 a political view developed that the expense of having proper valuations (appraisals) was deterring poorer folk from buying homes. Accordingly, bending with the times, and with the prevailing view in the US Congress, US regulators, including the FDIC (Federal Deposit Insurance Corporation) decided that it was no longer necessary to have homes over $100,000 subject to an appraisal. They moved the bar up to $250,000 in the interests of “improving credit availability… without threatening the safety and soundness of financial institutions”. With the benefit of hindsight, sentences like that make one’s eyes water. For loans under $250,000 what would be important henceforth was more the borrower’s creditworthiness than the collateral value of the house, according to Mann.

Instead of formal appraisals by professional appraisers, lenders could rely on statistical services which provided views on the value of homes in particular areas, or on “evaluations”. These were different from “appraisals” in that they could be done by anyone who fancied being an “evaluator” and who felt that they could stick a finger in the wind and come up with a price for a property. No training required. The benefit to the lending organisation was that it could pay peanuts, $40 dollars for an evaluation, in Mann’s testimony, versus $430 for an appraisal.

The short sightedness of this policy, from the lender’s perspective, is obvious. If the loan goes bad and the lender forecloses, the value remaining in the property is the only thing that stops the lender from taking a total write off. If the valuation is a massive overstatement, the lender takes a bath.

Even worse, Mann points out that since between 1994 and 2003 Bank Regulators left the oversight of real estate appraisal to state regulatory agencies, and since there are states with no oversight appraisal boards, many people were licensed as real estate appraisers who had no proper training or mentoring at all. As Mann diplomatically puts it, “We had a vast increase of licensed appraisers in the State of California (which does not have an oversight appraisal board) despite the lack of qualified/experienced trainers.” In other words, the distinction between professional appraisers and “evaluators” was itself being heavily diluted. Mann told the FCIC: “It would be curious” – an understatement if ever there was one – “to know the percentage of subprime loans which were Evaluations versus Appraisal Reports…”

Mann then told the FCIC of the difficulties that appraisers encountered when the housing bubble began to show signs of strain in late 2005 and 2006. Through 2003 to 2005 house prices had been going up by 30% year on year as the housing bubble peaked under the influence of cheap money and lax mortgage underwriting policies. However, by 2006, Mann says, she and her colleagues were starting to register a downturn in housing prices and were disappointing sellers by coming up with appraisals that were well under the seller’s expectations. For example, a $500,000 dollar house in 2005 had slipped back to just over $300,000 by 2008, and under that by 2009. The median price for a property in West Sacramento, California, leapt from $90,000 in 2000, to $478,000 in January 2006 and has since wandered down to just over $200,000. This is for all housing, not just subprime.

For Mann, what happened through to 2007 was that market commentators, including noted economists, generally became extremely lax in observing market signs which many appraisers were picking up on. This created a false confidence and fed the myth that real estate would henceforth never go down in value.

Absolutely basic underwriting practices went out the window. For example, although most mortgages sold were adjustable rate mortgages, Mann points out that lenders and underwriters were qualifying borrowers only at the introductory rate of the loan (often set artificially low to lure in the unwary) and not at the maximum rate that the loan could be adjusted to. This did the consumer a very poor service and stored up huge problems for the securitized mortgage industry, as we all now know.

Mann’s testimony is about regulatory muddle and the makings of the mess that allowed a sub prime bubble to grow to such toxic proportions. It is not as dramatic as some of the testimony before the FCIC, but it should be mandatory reading for regulators everywhere….

6 Responses

  1. Pelucheven & ANONYMOUS,

    You guys post some very good points that counter the issues. Keep up the good fight ! I will continue the quest !

  2. Think about , why Corelogic split from First American,
    and how Banks make money :
    Corelogic tells the Bank , the House is 50% underwater : CLOSE Heloc account . NO refinancing possible , Next Step = Foreclosure and auction , and
    then come the point who makes the money ?

  3. Pelucheven

    Agree. But, I am also very tired of promotion of “deadbeats” – and Obama continues this.

  4. One of the biggest problems we have is to face incredulous judges and bad case law. We are facing all the cases that were brought up in the past and that the banksters and their felonious lawyers were able to run over in all our states, because the borrowers were either badly represented, the lawyers did not have the necessary information, evidence and tools, when looking at the documentation it all looks compliant and that is the problem. They kept all the juicy commissions and fees away from you and from the loan officer as well. They created a facade of legality when in fact all these loans are non compliant with TILA, RESPA and other laws.

    But how to fight them, how to over come all the bad precedent. In Federal 4th district of Virginia the borrowers even if you rescind, the lender can decline your rescission. Something that does not correspond to the federal statutes, but the Banksters and their Lawyers have literally rewritten the Federal Statutes in court, changing the nature of the application and meaning of the law to their advantage, and the foreclosure defense lawyers and prose litigants need to face that additional hurdle.

    In many instances is the lack of proper research and understanding of how the many laws and the violations of those laws by the banksters work together for the benefit of the borrower, some times the reasoning of the attorney is to go through the path of least resistance.

    That is why our fight is not only in court is in the public realm, the political realm, the financial realm, and the legal realm.

    If we stay home and keep our mouths shut, the enemy wins. Every time we become vocal and visible we push further in the direction of our victory whatever that may mean to you.

    If we just sit down and wait for the enemy to do their evil deed, we are just being facilitators to their fraud. We cannot sit still. We must keep bringing the issue out there. I am so amazed at the fact that only two politicians of the thousands that are running actually took our cause and made it an issue in the campaign.

    The rest concentrated their efforts items that are highly emotional but irrelevant for our economy and our homes.

    We need to use these four days before the elections to make lots of noise and to become a thorn in their side.

    Our lawyers and our efforts combined in addition to the hard work of people like the creators of this blog and others have helped bring the truth to the open. Let us keep the pressure, remember your home may be next in the criminal foreclosure machine.

  5. One of the biggest problems we have had is countering the administration/media/federal reserve’s notion of “moral hazard.” This was the strategy from the onset. Given the recent publicity of foreclosure fraud – the myth of “moral hazard” should be dispelled.. But, with Obama still clinging to the original notion of “moral hazard” – it remains difficult.

    see below for good article on this.


  6. […] This post was mentioned on Twitter by John Carmine, Financial Wellness. Financial Wellness said: SEE ALSO securitization-understanding-the-risks-and-rewards?page=1 Subprime debacle – the truth emerges: Part 2 … http://bit.ly/bT7FNa […]

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