Posts Tagged ‘mortgage industry’

Technical Mortgage Info Warning: parts of this article are not intended to be comprehensible to the man on the street. I know some mortgage professionals that won’t understand them either, though, so don’t feel bad.

There is a lot of chatter on the ‘net about the Home Valuation Code of Conduct (HVCC), most of it centered around “repealing” it.  For the uninitiated, the HVCC is a 3-page set of rules governing compliant appraisals on all loans to be sold to FNMA/FHLMC (Fannie Mae and Freddie Mac), which is almost all non-FHA loans currently being written.

Up to May 1 of this year, appraisals were ordered by loan originating staff, either by loan officers or underwriters, directly from the appraisers or appraisal companies that would perform the work.  Those arrangements often became very close, with a loan officer directing most or even all of his appraisal ordering to a single appraiser.  This contact often resulted in close friendships between appraisers and loan originating staff.

Occasionally – nobody really knows how often – that relationship resulted in an appraiser fudging his numbers, giving a property a higher value than he would have if he had been working for a stranger.  Occasionally, a loan officer would direct an appraiser to hit a particular value in order to make the loan work.  Very occasionally – everyone admits that this didn’t happen very often – a loan officer would threaten an appraiser, telling him that unless he hit a particular value, he wouldn’t get paid at all.  This was illegal, but it still happened once in a while.

Look, nobody wanted to do an appraisal that would make the loan not work.  Nobody had any incentive for that.  It hurt the borrower, who couldn’t get his loan, it hurt the LO, who was on the hook for the appraisal and now wouldn’t get paid for all the work he had done, and it hurt the lender, who wouldn’t get to write the loan, and it hurt the appraiser, who not only risked not getting paid, but also might find that he didn’t get any work from that LO any more.  There was gigantic incentive for the appraiser to hit a target price for the house.

Enter Andrew Cuomo and the State of New York.  They determined that they could score big political points by suing someone in the mortgage industry, so they chose First American Corp and its subsidiary, AppraiseIt, which provided appraisals to, among others, the late Washington Mutual, for conspiring to inflate the value of appraisals.  The lawsuit widened as everyone sought to shift the blame, and eventually it encompassed the two largest mortgage holders in the US, Fannie and Freddie.

They settled.  The settlement was, in part, HVCC, wherein Fannie and Freddie agreed that every loan they purchased would have to be certified tamper-free, that is, that the origination staff had nothing to do with selecting the appraiser involved, nor had that origination staff communicated with that appraiser directly in any way.  There’s other stuff, but that’s the gist of it.

How do you order an appraisal without talking to an appraiser?  Well, you use (tadaaaa!) an appraisal management company (AMC), which becomes the middleman in the operation.  Obviously, these AMCs do this work out of the goodness of their hearts, without taking a fee.  What’s the phrase, here, ROFLMAO?

No, of course they charge money for doing the ordering of the appraisal and coordination of the process, which money comes from two places – one, they charge the LO an additional fee on top of the appraisal fee, and two, they (almost always) pay the appraiser less.   Adding this layer of bureaucracy slows down the loan process and increases its cost.  With me so far?  Looking for the good part?  Keep looking.

While building a firewall (Diana Olick’s phrase) between the appraisers and the loan officers sounds like a good idea, in practice, it doesn’t work very well.  True, it will make it more difficult for LOs and their staff to put pressure on an appraiser to reach a particular value, but nobody thinks that was routinely happening anyway, since it was already illegal.  It does NOT, however, remove the incentive for an appraiser to inflate the value, since all the parties that were harmed by a low appraisal before are still harmed by it now.  AMCs know which appraisers give low values, and they shuffle them off to the nether parts of the panel’s rotation, because they have to have happy LOs, or they don’t get any work.  The surest way to tick off the LO is still to provide a low appraisal.  So the conflict didn’t go away, it just got an intermediary.  This is almost never a solution to a problem.

Appraisers hate the HVCC because they’re getting chintzed on their fees, have to work with big, impersonal firms instead of the guys who do the actual ordering, and now have to negotiate getting approved by new groups of people that they don’t know in order to get the same work they used to get by being good at their jobs.  LOs hate the HVCC because it increases the time to get loans done, which costs them money, and because they now have to use faceless companies of orderers to get appraisals instead of the guys they know and trust.  Borrowers hate the HVCC because it slows down the mortgage process and costs them more money.  So like many judicial settlements, it creates a perfect storm of crap that hits everyone at once.

And we had better get used to it, because it is not going to go away.

There are so many problems with getting rid of this thing that I hardly know where to start, but here’s a stab at it.  First, it’s more regulation of the mortgage industry.  Since all the problems in the world, from foul air to decreased calcification of coral reefs along oceanic shelves, have been caused by mortgage people, the trend is decidedly in favor of more and more regulation of the loan process.  Having myself come from the securities industry, I can tell you that regulation NEVER goes back in the bottle.  No form is ever shortened, much less eliminated.  All regulation gets worse, all the time.

Second, we’re not dealing here with a regulation that can be adjusted, or a piece of legislation that can be repealed or struck down in the courts.  This was a settlement, imposed by a judge, agreed to by the parties involved.  How, exactly, does one go about getting rid of that?  You can’t re-open the case.  You can’t change the HVCC, being as it is part of the settlement, unless you can get both parties and the court to agree to the alteration.  Have you read the State of New York’s hymn of praise to itself over this deal?  Here it is. Go ahead, I’ll wait.  It’s pretty short.

I take from that statement by Mr. Cuomo that “repeal” of the HVCC is not really part of his agenda.  I take it, in fact, that he’d have to be dead before he would agree to such a thing.  Add that to the regulatory climate, the attention span of most people, who don’t know what the HVCC is and don’t see why they should learn, and the total inability of the mortgage industry to get together to lobby for anything, and I confidently predict we’re not going to see much change in this Code of Conduct.

There were hosannas shouted when the Federal Housing and Finance Administration (FHFA) issued a call for specific instances where the HVCC had caused problems, but I don’t see why, because what problems has it created that weren’t there before (in, admittedly, much reduced form)?  Your appraisals are slow to come back?  They cost more than they used to?  The valuations are lower than you think they should be?  Can you see any of this being at all persuasive to a federal agency?

I can’t.

So my advice to all the loan officers out there is to just shelve it and find an AMC that does a good job fast, with great customer service.  Someone like these guys, for instance.  If you’re an appraiser, I recommend finding an AMC that will pay you what you are used to getting paid.  Like these guys, for instance.

And get ready for the HVCC to be applied to FHA loans in the near future.  That is significantly more likely than that it will go away.

Okay, I’ve now officially had it.

On Zillow this morning there was a fathead complaining that one servicing lender was not modifying its mortgages in the way that suited him.  He wanted them to be modified according to the government’s Making Home Affordable plan, instead of the way the servicer preferred.  Leaving aside for a moment that he didn’t understand modification of any stripe, essentially he was complaining that a business was not voluntarily giving up enough money.

This is standard stuff, though.  Everyone is complaining right now, because everyone is a victim.  Boo hoo.  Woe is me.  It’s really quite difficult at the moment to find an adult to have a conversation with about mortgage finance.  I expect that.

But then, the fathead trotted out that mortgage lenders ought to be dragged through the courts like Bernie Madoff.  A week or so ago, a really smart financial planner decided to block me on Twitter because I asked her a tough question – specifically, isn’t it better for a family to have a shot at home ownership rather than being shut out of the process altogether?  Isn’t it better to have a home for a few years, even if that home ends in foreclosure, than never to have had a chance to own one at all?

Having previously rented a house for many years myself, I flatly reject the idea that my family would be better off if we had never gotten a 100% stated-income subprime loan, which is EXACTLY what we have now.  I reject the idea that we have been taken advantage of.  I cannot, in fact, see ANY POSSIBLE WAY that a sane person could contend that we are victims of something.

And here is this fathead arguing that the loan my family and I – and MILLIONS OF OTHER FAMILIES – consider a fantastic blessing is somehow a prosecutable offense.

Well, now I’m really angry.

I was a loan officer during the insane first two-thirds of this decade.  I personally made, and got for myself, 100% subprime loans.  I made option-ARM loans.  I made no-doc loans.  I participated in practically every part of the home financing extravaganza.  I was there, I did it all, and I don’t regret one second of it.   In the interest of full disclosure, I have now had three clients default on loans that were made to them, all of them for investment properties and all of them done, originally, AS investment property loans.  I still do not have a client that has lost his primary residence due to foreclosure.  My clients understood their loans, because I explained them in detail.  That’s what professionals do.

Regardless, even the BAD loan officers have something in common with the pros, and that is that the borrowers signed the bleeping documents.  With a few obvious and rare exceptions, every single person that is being foreclosed on right now knew in advance that he was betting heavily on a risky proposition.  There’s the celebrated NY Times financial columnist that is eight months delinquent on his house.  My heart breaks.  He’s still living in a very fancy house in a spectacular neighborhood.  How, exactly, has he been taken advantage of?

It’s like we have no ability to understand what hardship consists of.  Everything that doesn’t go exactly according to our most fevered dreams is somehow a tragedy?  Nobody’s life is “ruined” by getting to live in an unsustainably large house for two years until reality sets back in and we have to rent a condo.  But somehow, this is the end of all life on earth, to hear it told on the news.  Yes, there were people that were outright lied to.  This happens, and I fervently wish it did not.  But the overwhelming majority of people “caught in the subprime meltdown” got caught in the famous monkey trap, where they simply will not let go of the acorn so they can get their hand out.

This is now the lenders’ fault.  Never mind the pressure the lenders were under – don’t think I’ve forgotten this – to make sure everyone could participate in the American Dream.  Because, you know, it isn’t fair that some people can afford houses and some can’t.  So lenders came up with ways to extend credit even to people that had no business borrowing, because they knew they could lay off the risk, and besides, doesn’t real estate just go up and up in an ascending spiral forever?

Stupid, yes.  Evil, no.  Prosecutable, no.  Lots of people are hyperventilating about all this.  Just stop it.  You’re embarrassing yourselves.

You want someone to take responsibility?  Take it yourself.  Take responsibility for having too much debt.  Take responsibility for not having been conservative enough with your investments.  Take responsibility for signing loan documents you didn’t understand.  You’re trying to tell me you didn’t know that signing legal documents without a clear understanding of what is on them is stupid? Really?  You didn’t know?

Stop feeling sorry for people that lived in bigger houses than they could afford.  Here’s a tough question: would you rather live in a mud hut in the Andes or a 4200 sq ft house on half an acre in St Louis?  But wait! Before you answer, if you choose the house in St. Louis you’ll be foreclosed on after three years!

Sigh.

I don’t even feel sorry for our children.  I grant you that compounding the stupidity of saddling themselves with enormous debt, their parents are now electing politicians that think the best way to get rid of excess debt is to transfer it from those that incurred it to everyone altogether, sort of a tax on the sane (but then, that’s democracy, and that’s why it doesn’t work.  Ask the Athenians).  It’s okay.  Most of our children were in a fair way to being ruined by having everything they wanted whenever they wanted it, and they’ll grow up substantially improved by the idea that they might have to work really hard and save for a long time before they can have what they want most.  Hardship can be a blessing, if you handle it right.  I still have some confidence that kids will handle things right, even if their parents are, by and large, spoiled rotten.

This was going to be a short rant, and has turned into a long one.  I am not, really, depressed about our current situation.  I think we’re going to be fine, though admittedly my definition of fine is a bit different from that of most people.  But please, please, people.  Stop blaming the lenders.  Stop blaming the brokers.  Stop looking around for somewhere else to put the blame.

It belongs to all of us.

Okay, so everyone’s asking what I think of the bailout. Let me get this on the record: I don’t know. The fact is, nobody knows. That’s one really, really good reason to vote “no”.

Most people are a lot like me; they don’t really know what the bailout contains, so they’re generally opposed to it because this is not what government is supposed to be doing (or, alternatively, this IS what government is supposed to be doing, but it should be doing it for ME, and not for other people, depending on your home base on the political spectrum). But they also recognize that something is very, very wrong with the world financial system, and the only people that seem interested or capable of doing something about it are the people in Congress. So we’d like to see something happen, and sooner rather than later.

Several comments need to be made here:

1. It’s silly, and I mean really silly, to blame Republicans for the bailout not passing. If you’re Speaker of the House, you have to get more than 60% of your own party on board. No, the GOP isn’t helping you, or the President, who is supposed to be a member of their party. Guess what? Right now he’s ideologically closer to you than to them, Nancy, a point which I guarantee you won’t be emphasizing in the next 5 weeks.

2. Early reaction is that the Republicans are going to catch it for voting this thing down. Nah. There are two reasons this is incorrect: one, the fact is that most of the nation, and by far the majority of people likely to be voting in November, were not supporting this bill, and two, something is finally going to get passed, and if it’s even marginally better than what failed, the GOP comes off looking like Horatio at the Bridge. This will not be good for the Democrats.

3. There is a lot being made of how this bill would cost taxpayers $700 billion. This is just silly. It wouldn’t cost even close to that much. [note: I am not saying this to support the bailout. I am saying it because it is true. I don't like winning arguments using bad facts or bad logic, even if I can win that way. There are reasons not to vote for the bailout, but this isn't one of them.] The government would be buying assets (at least some of what they spend will buy straight mortgages, for instance), and those assets have value. In fact, they almost certainly have greater value than their cost. I predict that if the bailout finally passes, that the government will eventually turn a substantial profit on the deal. This is actually worse than if the government lost money, and I’ll elaborate below.

4. There is at least one plan I have heard that makes much more sense (I think) than what was voted down on Monday. That plan would still authorize the expenditure of hundreds of billions, but would require that those billions be spent exclusively on the whole mortgage notes being held by banks, and not on the Collateralized Debt Obligations (CDOs)those mortgages ostensibly back, much less other debt that banks are holding. This does several positive things, in my opinion. First, it allows the government to demonstrably spend our money on things with real value. Not 100% of face value, I grant this, but some value. Even houses in downtown Detroit or suburban Cleveland have some value. The mortgages can be bought cheap and the value maximized by, second, negotiating the terms of the note with the homeowner when he’s in default, to allow him to stay in the house. In a rising market, foreclosure is a good option for recovery of value. In a declining market, it sucks. It not only loses immediate value on the note itself, but it exacerbates the decline of property value across the board, further harming the asset value of your other mortgages. The government has been yammering at mortgage servicers to undertake this negotiative process; this plan would allow the government to just do it themselves. Second sub a, it would put shims under dropping property values by reducing foreclosures. Third, it would pour liquid cash into banks, which is desperately needed, and fourth, it would put a floor under the CDOs, because the bad mortgages that have destroyed their value would now be backstopped by the government. Those notes would therefore begin to trade again, and the machine would re-start.

This plan, I suspect, has no possible chance of being enacted. It would still have two bad effects; one, it would give government a huge windfall if it did its job properly and two, it still isn’t what government should be doing with taxpayer money. But since it is going to do something with it, this seems the least harmful in the long run.

5. When the government makes money on an investment, it spend it on some pet project it couldn’t get taxpayers to back. This is true at every level of government. Did you know that the Chrysler bailout in the 80s produced a $500 million windfall? No? YOu don’t remember getting a check for your share? Darn right you don’t. And if the government succeeds in getting this bailout to pass, and if it works, the government will get a profit that will dwarf the Chrysler windfall and make Exxon-Mobil look like a kid’s lemonade stand. If the government gets these assets at .20 on the dollar, which seems likely, and they are worth .45 on the dollar, which, if the bailout is successful, also seems likely, the government will make a trillion-dollar profit. That money will not be paid out to you and me. It will instead be used to fund all the pet projects Congress can’t get popular support for, like, most certainly, universal health care, among many many others. It will also lead Congress to believe that other intervention in other markets can have the same effect, and what you will get is socialism on a grand scale and the destruction of the free world. I do, in fact, predict that this is what will happen.

6. Europe is supposed to be immune to this cycle of crash and boom, because of its superior controls (read: socialism) provided by the government. Haha. Watch the news. The problems in Europe are worse, and they have no way to fight them. The EuroFed is only supposed to keep inflation in check, and has no mandate to stabilize markets. Oh, inflation is in check all right. It usually is when you have rising unemployment. The EU needs a bailout package as badly as we do, but they don’t have any mechanism for getting one.

7. From a free-market perspective, the best thing to do is nothing at all, or to repeal some of the stupid regulations that contributed mightily to the current crisis. If the government will stop “rescuing” some things and not rescuing others, so that everyone knows they have to win or lose by these rules that exist right now, things will get worse very fast and better starting fairly shortly. I will lose my business, but I’m volunteering to do that if it will help convince the government to force the market to deal with its own problems. I’m not advocating some nebulous “hard time” for others; this would be my own financial ruin, despite my not having contributed in any way to the crisis. But it’s the right thing and the best thing.

Instead, what we’ll do is keep the comatose patient alive until all the organs fail at once and we have global meltdown and blood in the streets.

8. This brings me to the religious portion of this post, which you may skip if you don’t care for that sort of thing. We know that this kind of financial meltdown is going to happen eventually. Most of us will have no idea it’s happening until it’s too late, which is why we are advised to be ready at all times. As the canary in the coalmine, so to speak, let me say that I do not think that this is the “big one”. I think this is a head fake. It is a very clear, very obvious, somewhat painful warning that God is not kidding around when He tells us to be ready. But it is not going to be the beginning of the end. It is, however, the beginning of the beginning of the end. It is the day and a night and a day with no darkness. Right now, it’s really obvious that the warnings we’ve been given to prepare are serious, but the signs will fade and things will go back to “normal”, and we will forget, and the shock will be somewhat complete when, a few years from now, we get the three days of darkness and the tempests and the floods and the earthquakes. DO NOT FORGET. No matter what semblance of “normalcy” we get from whatever bailout passes, we must not forget. Get out of debt. Get food and water stored up. Lean on Christ and come to know Him well. Get close to the Spirit and listen to his voice. We have been warned.

And that’s it for the longest post of my career. Let the comment wars begin.