Don't play games with appraisals, feds warn

[54anickel]

http://www.miami.com/mld/miamiherald/living/home/9393889.htm

Does it really matter if the appraisal on the house you buy is accurate? Is a little fudging a big deal?

You bet. If your valuation is inflated to hit the contract price -- a not-uncommon occurrence, according to appraisers themselves -- you could end up with a mortgage that's larger than the market resale value of your home. Or if the appraiser ignores some key value-depressing features of the property, you could be stuck with thousands of dollars of repair bills.

Now the federal government is weighing into this issue with a blunt new message to appraisers and the lenders who hire them: Don't play games with home appraisals. Don't fool with the numbers or turn a blind eye to obvious property defects. If you do so, you could face severe financial penalties.

Though the new policy applies only to appraisals made on Federal Housing Administration mortgages, the ripple effects could be helpful to home buyers throughout the marketplace.

In a regulation issued by Housing Secretary Alphonso Jackson, the government said it will hold not only appraisers themselves legally responsible for bad appraisals, but will look to the lenders who hired them as well. If a lender knew or should have known that an appraisal was inaccurate, or that the appraiser intended to inflate the valuation, the lender will be subject to potentially stiff fines and federal administrative sanctions. If the appraisal was part of a larger effort to defraud the government, the lender, appraiser and anybody else involved could end up in prison.

more...

[RhodaGrits]

1. I am waiting for the banks to...

start calling in these mortgages the same way the brokerage firms started upping the margin requirements during the end of the "internet bubble" - a lot of people are going to get crushed when the Greenspan house comes tumbling down.

9. The way it works

The mortgage brokers don't care, it isn't their problem (the loan goes "OUT THE FANNIE");

The phony loans are packaged up and sold as anonymous securities (clever huh?) to "investors"; turns out, these "investors" are unfortunately the "top holdings of FDIC banks", according to the FDIC report earlier this year, which is scary.

Can you say "uh-oh trouble ahead"?

The system is very broken.

By the way, the Feds were also given the power to stop the whole cycle recently. I will try to find the news release.

[German-Lefty]

2. Interesting - buyer beware

It's an interesting trick for them to justify backing a huge morgage on a crappy house, but you still need to find a sucker willing to by the crappy house at a huge price.

I guess the main problem is that if the seller highers the expert and not the buyer, that expert is going to be baised.

How much does hiring such an expert cost anyway? It seems like they could come up with some kind of system to keep the sellers from opinion shopping.

[phish_head]

3. How much

It typically costs around $300 in my area. The mortgage company is the one who should hire the appraiser. The deal is appraisers (and home inspectors) do not like to kill deals, because the mortgage companies and relators will stop using them.

[Frodo]

4. Heck, the mortgage company should EMPLOY the appraiser.

It only matters if the loan goes bad.

If the loan goes bad and the collateral is not worth enough to cover it then the mortgage company is going to end up in a hole, perhaps a big one.

If a bank hires an outside appraiser who lies to them about the value of the property just to get a deal done then the appraiser (and possibly the Realtor) have committed fraud against the mortgage company.

If, on the other hand, the appraiser WORKS for the mortgage company and is lying about loan/value ratios to get deals done? Well, that's an internal problem and the mortgage company deserves to lose money.

[phish_head]

5. Heck, the mortgage company

Most banks/mortgage companies cannot afford to employ a full-time appraiser. Some of the largest one do in, but most are too small. For the most part the current system works fine around here.

[Frodo]

6. Bah! I find that hard to believe.

You're not really a "mortgage company" if you're doing 10,15,25 loan/month. You're a "mortgage broker". If you're doing more loans than that then you can afford a professional on staff. And if you're a BANK it should be little problem since you can use the same person for home equity products. Your "most banks" must mean banks with three or fewer branches.


You want to know a sure-fired way to make a small fortune? Start with a LARGE fortune and go in to the mortgage business. It's one of the easiest things to do... and one of the hardest things to turn a profit at.

Now, there are plenty of LARGE national mortgage companies who can't "afford" appraisers in each and every market they serve and may have to go outside. But that's a bit different.

[Name removed]

7. Deleted message

Message removed by moderator. Click here to review the message board rules.

10. More often, it is done by a computer program

That is scary, because the computer program can take a few phony house values and make the neighborhood worth millons.

Apparently, that is what happened, to some degree.

[Frodo]

11. "To some degree" ok, but that's mostly wrong.

The only time you're going to get a loan underwritten based on a computerized appraisal (sometimes called a "drive-by appraisal") is when the loan-to-value ratio is incredibly low (varies from lender to lender, but lets say 60-70%).

So if you're applying for a $130,000 mortgage on an (assumed) $225,000 house, all they do is run a bunch of stats on the neighborhood and drive by to make sure the house is still standing and not dramatically unlike the rest of the neighborhood. They say "Yeah, it might be as low as $200k or as high as $250k... but it's well over what we need to support the loan ($162k)" and they don't worry about measuring rooms and seeing how old the carpet is and whether that "finished basement" is a bunch of paneling stapled to the studs with a throw-rug over the concrete floor.

But nobody gets "computerized" appraisal on a Fannie loan at greater than something around 70% LTV (just going from memory) and ALL of the high LTV (low down-payment) loans need a full appraisal or they are not "conforming" (and can not be packaged and sold by Fannie).

8. Much earlier this year, I talked about this EXACT problem on my site

Nice to see the feds clamping down after my complaint; it has a very bad effect when those prices go into the computer database, and then others are calculated against them, and then money is loaned.

My article - 03/05/04

McMansions Ate my Job
"Another source of price rises associated with the mortgage and cash-out boom may simply be the persistent upward bias of appraisers, seeking commissions on ever-higher principal amounts. That is, each appraisal in any neighborhood inflates prices a bit, and each subsequent appraiser then references the most recent. Therefore, more appraisals may lead to higher prices--especially when homes are never actually sold, as is the case with cash-out refis. In those cases, the cash is gained, but no sale ever verifies the appraised price in a market."

[Frodo]

12. Try that again please?

Therefore, more appraisals may lead to higher prices--especially when homes are never actually sold, as is the case with cash-out refis. In those cases, the cash is gained, but no sale ever verifies the appraised price in a market.

Market data used for "com parables" in an appraisal does not include appraisals for cash-out refis (how would they even get such information unless they did that appraisal themselves?). In fact, they largely discount even listed prices of homes for sale or under contract. The largest factor (usually the ONLY factor unless the neighborhood has had very few sales) is actual NET prices of homes that have settled and are in the books. This is the ONLY reliable estimate of value of ANY comodity... the price a willing buyer pays a willing seller.

13. You can read that two ways

The cash-out refi home is never actually sold at the appraised price. Hence, you have a non-market "sale." There is really no home market buyer for it.

But come to think of it, since there are no standards for how this is done that are actually enforced, it wouldn't surprise me if they entered refi appraisals into a database so as to weight others against it.

[Frodo]

14. ??? You know you can actually look into this, right?

You can go take a class on home appraisals. You don't need to be "surprised" by how they are done.

A hint? It isn't the way you're describing it. Again, refis do not impact home valuations in any way. As I said, I won't even take in to account that the identical home next to yours just sold for $10,000 above asking price and the one down the street is listed higher than that unless I have no other recent data. Only closed sales that are recorded go in to an appraisal.

The only place something even close comes into the picture is in a rapidly rising market, BUT where there are no recent sales in the immediate neighborhood. I could look at three comparable properties that all sold a year ago and take in to account that the whole Northern Virginia area has gone up an average of 7% in that time. But the appraisal would reflect that data.

15. Mortgages: 1987 all over again--computers added without forethought?

Maybe it used to be worth going to a class--

Now it is the computer programs running the whole mortgage mess; loan-seeking programs working in tandem with automated appraisals. (Emphasis added) computer programs which are ill-specified, and ill-regulated.

You make my point exactly--let's say two ninnes in my neighborhood move in and pay a lot for nearby house, using ARM loans and paying fifty percent of their incomes in mortgage payments. Those sales get recorded in the comp database, unqualified.

Then let's say ten times as many neighbors get a call from Countrywide loan--because a computer program (so intimately connected to the comp sales database) cranks out a few orders for phone reps to call neighbors of the ninnes. telling them how they can borrow "free money" if they refinance or "equity loan" now, since their ten houses are suddenly worth what the two sold were.

(You miss my point slightly) So then, the ten "fractions" of homes are "sold" (really, the computers crank and say they are worth something as if they were sold), let's say 10 *.4, netting the "sale" of 4 homes, even though those 4 homes never went on the market. So you have the value of 4 homes of cash loosed or "created", based on two ninnie sales. And whether appraisals for the loans get entered into the comp database (or another elsewhere) doesn't really matter.

Soon you have a cash-out party! it's that simple. That's how computer programs run--they crank. And clever people go to great lengths to crank them ever faster. And (although a few weeks ago the Feds clamped down) the appraisal values get bumped up to make slightly bigger loans for all! A little bump on one comp sale can generate a tenfold return in loans, because of the computer programs.

But it is really a phony market. And it makes you wonder if the whole thing is secure or real. What's to stop a bogus entry getting into the database, to drive the programs faster? (Nothing) I know of no security or audit specification for the mortgage software market...show me one, and I will review it!

Then finally, it all lands on the 'butt-slurping' Fannie MBS programs, which allow the mortgages to get quickly lost and made anonymous. Oh yeah, and then next year, Fannie bumps up the conforming loan limit by the amount the programs tell them to--based on the velocity of the whole contraption over the previous year!

At some point, FDIC banks get worried, because the amount of MBS notes keep going up in their holdings, and they really aren't worth the face value (according to the FDICs own report earlier this year). Then Greenspan mumbles something to Congress about how the whole thing could collapse, but it is ignored (and besides, mortgage industry hasn't been re-regulated since the 1970s).

The whole thing is like a rube goldberg contraption. Perhaps I shall re-release my article with emphasis added, and clarifying the point related to refis and comps, though I don't see that as definite nor material, because of the ill-specified computer systems running things. The whole thing is very much like the "Black Box Voting" thing which I and a few others started several years ago...how about "Black Box Mortgage"??? (p.s. Diebold, inc is being sued for millions, in this regard)

Meanwhile, the public is told "there isn't a housing bubble" (although Greenspan seems to have changed his view recently, suggesting there might be)...while the programs grind away. And Greenspan is right, we "don't know"--because the computer programs running the mortgage loan market are ill-designed by private companies, and their is no real regulation.

Put another way, the mortgage market of 2004 is much like the electronic stock options exchange first run by computer programs in 1987. It wasn't well thought out! (and crashed)

[AP]

16. Why do this now? Does Bush plan on loosing? This could cause the house of

cards to tumble.

17. Good question--

I'm not sure which question you ask--

#1 "Why have a housing bubble now?"

It turns out that the huge federal deficit of 500-odd billion is measured against US gross dometic product (GDP).

Now, an increasingly large portion of that GDP number is residential real estate sales--yes--that is right, add all the numbers of high price houses together, and it boosts GDP numbers hugely.

So with a US GDP inflated by houses, the deficit falls around five percent of GDP--instead of much more. If it were much more, the US would be "bankrupt" in world financial markets.

In other words, the housing bubble serves well, at least until it pops or deflates--it makes the huge US deficit "look better."

The only problem is, the MBS (Fannie Mae) debt related to mortgages is "thought to be backed by the US govt"--but no where on the US Treasury balance sheet is this accounted for! Accounting for it properly would put a huge debt on the US books (where it belongs as a liabilty, or at least reserves for it belong).

In which case, the deficit is really far far higher than 5% of GDP!

So the whole thing is like Enron, at the Federal level. Either of the following is true:

1) Some accounting for MBS liabilty belongs on the US Treasury balance sheet--in which case the US is bankrupt.
OR
2) The MBS notes aren't really worth face value, which makes 60 percent of US FDIC bank holdings in big trouble.

NOTE: one of the above IS true, its just that the market hasn't yet arrived at either proper adjustment.

#2 "Why crack down now?"

SImple answer: the whole thing is out of control, and Greenspan has warned congress. Someday when it collapses (and that could be next month or next year), they have to show they at least did something.

The next president of the US will inherit this problem, and people will want to know why a housing Depression happened.

Moreover, I believe the US regulator who is cracking down MAY be somewhat independent from the US executive branch.

[Frodo]

18. No offense, but wrong again.

Home sales do not contribute to GDP.

Resales/refinances are not a component. Construction of new homes DOES, but not sales of new homes. And that construction figure is based on actual costs paid to actual people - not some "fuzzy math" calculation based on "artificially" inflated sales figures.

20. I didn't say that refinances did contribute, at all--

You are "wriggly" and that unqualified statement "home sales do not contribute to GDP" is absolutely false! Without production. no consumption, and vice versa.

I note that you like to sit there, and criticize everything by sleight and addition of words. Oh, maybe you are some kind of purist.

I wrote that note as a simplified explanation of the ever-increasing part of GDP related to house bubble.

Moreover, I never said refinances contributed directly to GDP--but then again, you are wrong on the basic premise. Cash-outs against a higher appraisal directly lead to GDP demand, in the form of consumer expenditures which consume, and thus such is directly related to appraisal and loan value. This is an indirect, yet VERY significant effect which is part of the cycle we are seeing.

Here is the official definition of fixed residential investment:
(As part of GDP) Fixed residential and nonresidential investment refers to the creation of income-producing assets. Assets that will generate net-benefits (benefits-costs from housing services) in the case of owner-occupied housing or generate profits as part of the production process. These net-benefits and profits depend on the expected revenue or gross benefits generated by the asset as well as the costs of acquiring, maintaining and replacing these assets.

http://www.digitaleconomist.com/ad_4020.html

And in fact, the cost of production of houses is rising due to (guess what) rising production of houses--and ever bigger ones of "higher quality". Things like cement, steel, wood, etc are all directly added to the spiraling cost of production as recognized in GDP.

So then, if ever more expensive houses based on a rising cost of production are produced, which entails all the factors of production (including "quality adjustments" such as larger size and more expensive land, etc.), housing production and sales leads to higher GDP, and are in fact a higher percentage of it.

Then essentially unlimited liquidity is provided by Fannie Mae et. al, allowing the percentage of GDP which is FRI to increase as production is increased quarter over quarter along with allowable conforming liquidity.

25. Please note line in my message should say "production which leads to sale"

Frodo is right on a SECOND count!

I should have said "production of expensive houses boosts GDP, which leads to expensive sales of houses"

[Frodo]

26. lol.

Took away half of my next post. Goodness.

[AP]

19. No, I mean why enact a policy that might pierce the bubble before the...

...election?

FHA could (and should) have done this 3 years ago.

Doing it now could collapse the whole deal.

Does Bush plan on losing?

Is this how he'll make life hard for Kerry?

[Frodo]

21. Nothing will "pierce the bubble" THAT fast.

Even if I were to agree with a "bubble" theory to begin with, home sales don't swing that far that fast. There are just too few homes on the market right now to "pop" the "bubble" and see dramatic sales price differences reported by November.

22. I agree 100 percent with Frodo

Unless the bubble is MUCH bigger than even I or Alan Greenspan thinks, the clamp down won't be very noticeable by November.

HOWEVER, I DID notice some news in Las Vegas where speculative homes have been built and are sitting VACANT. So there might be an effect in the bubbly areas quicker than you think.

In those areas, people know something naughty has been going on.

[Frodo]

23. A sign of the Apocalypse!!!

"I agree 100 percent with Frodo"

lol :hi:

I'll hit ya later on the other line. I've got a meeting.

24. I thought the same thing!

Hee hee