Archive for April, 2009
This is my 300th blog post, as counted by WordPress. I really wanted it to be about something happy.
Not to be.
Tomorrow, one of the biggest regulatory changes in the mortgage industry goes into effect. It will alter the process, increase costs and processing times, and add a layer of bureaucracy to all but a handful of mortgage applications, affecting almost every borrower in the US.
And you have never heard of it.
It’s called the Home Valuation Code of Conduct (HVCC). It’s the result of a lawsuit initiated by the State of New York, which was settled last year by Fannie/Freddie. The settlement establishes the HVCC, and it has a number of provisions that are significant, expensive, and almost invisible to the general public.
First, and probably most significantly, the days of getting an appraisal yourself, or of having your loan officer arrange one, are over. Any contact whatever between your loan officer, his processor, or any member of the originating staff, and the appraiser, invalidates the appraisal. You, the borrower, can no longer pay for your appraisal at the door, as has been done for centuries. All appraisals have to be arranged through an appraisal management company (AMC) like this one. They take the order from the LO, transmit it to the appraiser, collect it when completed, and send it to the underwriter. At some companies, the LO never sees the appraisal at all. No kidding.
Second, the appraisers have to deal with AMCs now, and not with LOs. This is supposed to provide a level of insulation, so that the LOs can’t put undue pressure on appraisers to raise the value of their appraisals. Sounds great, right? Well, as with so many government “fixes”, this one causes more problems than it solves. True, as an LO, I can’t influence my appraiser to artificially raise the value of the appraisal. Neither, however, can I ask for additional comparables when I know that they exist. I can’t go out, search for non-disclosed sales (Utah, and many other states, do not require home sales to be reported to any central database), and get documentation so that those sales can be used for comparison purposes. I can’t even call the appraiser to get “E” changed to “East” so that the appraisal and the title report match. Nope. I have to call the AMC for that. Then they have to call the appraiser.
Naturally, this takes longer, too. I don’t even have to mention this, do I? A whole new company has to handle the request in between the initial order and the acceptance. Every piece of communication, no matter how small, has to be funneled through the AMC. The guys I use are fast. But no company can possibly be as fast as a direct phone call.
And of course, the AMC doesn’t do any of this for free. They charge. Frequently, with very few exceptions, they charge the LO (which means the borrower gets charged most of the time) AND they charge the appraiser. If an appraiser was used to getting $350 for an appraisal, AMCs are routinely offering $300 or less, while charging the LO/borrower $450 or more, and keeping the spread. It’s quite a thing to see.
Finally, the HVCC is, well, impotent. It creates more paperwork, which we’ve addressed, and it creates higher loan fees, which we talked about as well, but the kicker is that it does all this without impacting real mortgage fraud in any significant way. Sure, there are LOs that used to really put strong pressure on their appraisers to edge up, but now will not be able to do that. There are a few of those, which I freely admit. But the real fraud, the fraud committed by appraisers and LOs in concert, either by inventing fake comps or by appraising mythical houses, etc., that sort of fraud won’t blink at having to pass through an intermediary. These guys already involved title companies and large numbers of third-party helpers; what’s one more? It isn’t as if those kinds of safeguards aren’t easily circumvented. There’s an AMC next door. Do you think I don’t know the guys that run it? Do you seriously think I couldn’t bribe them to cheat for me, if that’s the sort of fellow I was? When I stand to make tens of thousands of dollars by doing so?
So here we are again, with the mortgage industry reeling, costs spiraling upward and home values declining, and credit restrictions getting so tight that the Apostle Paul would be denied a loan, and the regulators’ response to this is…add some more costs, more bureaucrats, and more time. Well, okay then! That will fix it!
One of the problems we have in the mortgage industry, and everywhere else that I can see, is that we think that we can make dishonest people straighten up and fly right if we just throw enough regulations at them. This is ridiculous. IT NEVER WORKS. All it does is cost the honest people money and time, while increasing the inconvenience of cheating a very, very little.
Born of decent intentions, the HVCC is just one more thing to add to the pile.
Analysis: There isn’t anything happening that we haven’t discussed before. Times are uncertain. It appears that we are hitting bottom in some areas on housing, and that certain sectors of the economy are no longer contracting, though nobody is claiming growth at this point. Most likely what we’re seeing is the acclimatization of the markets to the idea that the economy is not going to roar ahead, so we’ve gotten used to the smell, so to speak. I think there will be pickups in the economy as we head into summer. Summer always makes people feel better.
Meanwhile, there are really great incentives to purchase houses, and those incentives are starting to work their magic, especially in the lower price ranges. $8000 of government money is nothing to sneeze at. In Utah mortgages, we’re also seeing the impact of the $6000 Home Run Grant on purchases of new-built homes. Other states have incentives as well. There’s a synopsis of these here. So better days, relatively speaking, are ahead.
Tidbit: Look for appraisal fee increases. FNMA and FHA are requiring new, difficult and complicated forms to be filled out for their appraisals, so appraisers are charging more for that. Additionally, thanks to a lawsuit by the State of New York, as of Friday all appraisals will have to be ordered through third-party administrators, and not directly by loan officers. This will entail delay, slower mortgage processing times, and, of course, higher fees. But you feel protected, don’t you? Very good.
The trend is still good. Better times are ahead.
Now that it appears that mortgage cramdowns are going to be stripped out of the housing bill in Congress, let’s talk about why they were a bad idea in the first place.
Yes, I know that bankruptcy judges re-write credit card debt all the time. This is the argument that Elizabeth Warren, the chief TARP watchdog, used yesterday in her statements to Congress. Perhaps someone ought to point out to Ms. Warrent that credit card interest rates are in the 20% range, and ask her to consider how much of that high interest is due to the additional risk credit-card issuers have to take on because bankruptcy judges can re-write their contracts with their borrowers any time they like.
The economy functions based on trust. No trust, no economy. If I don’t trust the guy I’m dealing with, then I have to borrow that trust from being able to count on stable financial arrangements, like contracts, being enforceable as written. If I can’t trust those contracts, either, then I’m just not going to do business. What’s the point? I could be taken advantage of at any time.
Don’t want to pay me back if I lend you money? Hey, no biggie. Let the judge just write off your debt for you. Why would a lender be willing to lend under those circumstances?
And the answer is – very good, you there in the back – they won’t. Or, more accurately, they will, but they will cover their butts by raising interest rates so they can make sure that those of us that WILL pay them back can cover their losses on the ones that won’t. This is basic economics.
Then, when lenders raise their rates, the government can step in again, this time to stop rate-gouging, or whatever, and within a fairly short period of time the government will be the nation’s banking system as well. And won’t that be better for everyone?
Once again, the government is contemplating action that will benefit a few people at the expense of everyone else. But then, this is what large, centralized bureaucracies do. It gives them life, because they never, ever run out of problems to “solve”.
Count me out. Kudos to the Republicans (I can’t hardly even write this sentence) and the couple of Democrats that could see this, and refuse to pass the bill with the cramdowns in it.
I’ve been online all day, tweeting and sending email and talking on the phone. My son had an assignment to list the ways he communicates and consumes communication in an average day. He had 6 things on the list. So I made one for me. Here it is:
Email (five email accounts)
My Blog (and thank you so much for coming)
The Pontificating Potty Post
The US Mail (2 addresses)
Full-length fiction print (reading)
Electronic fiction of indeterminate length (writing – unpublished, for now)
Non-fiction print (educational)
Non-fiction print (biography)
Phone (3 phone numbers)
I’m sure there are a lot more, I just ran out of patience, or didn’t do them today. How about you?