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Friday, November 09, 2007

I'll Be So Happy When This Week Is Over

Today FNMA is supposed to release its 2007 quarterlies. That's the big story of the day.

Even if you never read Calculated Risk, you've got to read this one post of Tanta's about the implications of the eAppraiseIT scandal. Read the comments too. It's worth noting (to support Tanta's comments about why inflated appraisals occur) that for 2006 volume (page 125 internal numbering), FNMA had 50% 70-80% LTV bracket with an overall weighted average of 73%. I had commented to a buddy that I wondered if that didn't represent a lot of fluffy appraisals. Less than 70% LTV was 33% of volume. Therefore a weighted average of 73% looks to me like a lot of appraisals came so as to get the LTV just below 80%. This issue of inflated appraisals is the elephant in the living room. As Tanta comments:
Remember our ongoing puzzlement about what counts as subprime: you keep seeing data showing that the average FICO in recent subprime pools is higher than 620, and lots of these loans have FICOs over 660. How come they're "subprime" if the borrower's credit is that good?

Well, the answer is frequently that they involve extremely high LTVs and CLTVs, which pushes them into subprime even though the borrower's credit is OK.

One possible implication of that is that if the appraisal could be inflated enough, loans that would have been subprime went prime. Meaning Fannie and Freddie took them. So by dragging the Fs into this, Cuomo just shifted from the 5% we "know about" (subprime) to the 95% we don't "know about."
Exactly. If appraisals were inflated, MI isn't sufficient (and may not be paid), and loan quality ratings could be significantly off. Loan To Value ratios are a major factor when calculating expected losses.

FNMA's conference call today is at three, and I bet they are going to be getting some questions about this issue.

Update: Lockhart letter to Cuomo (wanting "consultation"). Naked Capitalism (it's ugly when capitalism gets naked). Calculated Risk post. It's a dark week for OFHEO and OTS.

MOM it does not take many inflated appraisals to totally skew a market,particularly in an area of tract homes.say the first bad one inflates the "value" 10%...real estate is priced at the margins,so every similar home gets boosted 10% because the next appraiser will assume an arms length transaction.if you get 3 or 4 of these 10% boosts,and buyers buy and lenders lend based on it.....I have spoken to an appraiser who refuses to even try to appraise a large central valley area because the collusion between appraisers,loan brokers and real estate brokers has made it impossible to determine a reasonable value.we are talking about quite a few thousand homes,each inflated hundreds of thousands of dollars.BTW the best Appraisers i know are hurting for business right now,but the hit the number folks are doing fine.
The huge run ups that we saw in some places really could only have come from inflated appraisals. How, mechanically, can you justify a 40% increase in a year except in extreme cases? Tighter appraisals would have controlled all that.

If you would like to do a post about how this works, I'd love to host it.

I know for a fact that some honest appraisers in Florida got completely out of the business because of the exact problem you are describing. And many of them did complain to authorities.

I get angry when brokers and appraisers are all lumped into the same category. There are lots of honest ones out there who spent years trying to get someone to listen to them. The real truth is that everyone was making so much money no one wanted to hear what they had to say.

In a way I'm glad Cuomo is blowing this thing sky high. The truth is that the industry as a whole allowed the honest brokers and appraisers to be practically driven out of business in favor of the dishonest and the inexperienced who didn't even know how to do it right. To try to turn around and blame it now on the lowest rung of the ladder is more than a bit delusional.
PS: I didn't use your name because it would be best to keep it anonymous. Isn't it a tragic reality that the only people who can write freely about this are the ones who are anonymous?

Our whole society has a huge problem with lack of responsibility and a willingness to deflect blame. All the isms fail when we don't exercise basic honesty and good faith with each other.
MOM : I'm just curious. Please shoot holes in this theory if there is one.

Why, precisely, is Lockhart going public with this attempted slap-down of Cuomo? He's the regulator, this stuff happened on his watch, therefore he's by definition lax in his regulating.

It would seem to me that Lockhart has no legs to stand on.. Fannie and Freddie haven't produced financials in years, and are not exactly paragons of virtue.

Add in Bernankepants' comments about raising the conforming limit to $1M and the whole thing is a catastrophic cluster-F of mammoth proportions.

But the bottom line is this.. how does Lockhart feel he's solid enough to tell Cuomo to run away? More importantly, should Cuomo pay attention.. or is this just a case of job-justifying pitter-patter between lovers?
I am going to find the complaint and copy it up in a post. The thing is dynamite. The comments about "take us all down", referring to not hitting the mark on appraisals? Yowser!!!!

The thing is, Lockhart doesn't want anyone asking questions or poking around in Fannie/Freddie's business. Especially appraisals. God forbid investors start wondering about appraisals.

If you look at the 2006 FNMA financials released in August, about 50% of the 2006 business came in 70-80% LTV. Consider what it means if some hefty portion of those appraisals were inflated!!! They don't have MI, and the underlying collateral value is mostly diminishing so mark-to-market LTV will be rising anyway.

The last couple of years the REO shortage for FNMA doubled anyway.
Cuomo has standing. USPAP has a mixed federal/state enforcement regimen. The states license appraisers. A court is not just gonna say to Cuomo "Get your meddling butt outta here" when he shows up with this sort of stuff. He really got some of these guys to squeal.

Cuomo can't go after WaMu directly, but by pointing out that FNMA's holding a lot of the bad, he makes it clear that OTS is gonna have to put its boots on and stomp all over WaMu.
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