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Source of Title Blog

Fannie Mae Loses $1.39 Billion In 3rd Quarter
by Robert Franco | 2007/11/12 |

Fannie Mae owns or guarantees about 20 percent, or $2.7 Trillion, of the U.S. home mortgage market. RealtyTrac reported that foreclosures in the third-quarter doubled to a record and the problem is expected to worsen. The chief executive of Fannie Mae, Daniel Mudd, expects to see the average price of a home fall 2 percent this year and 4 percent in 2008.

This news comes just days after New York Attorney General Andrew Cuomo announced that he sent subpoenas to Fannie Mae and Freddie Mac as a part of his investigation of mortgage fraud. Cuomo is seeking information on the mortgage loans Fannie Mae and Freddie Mac purchased from banks, including Washington Mutual, the nation’s largest savings and loan. The subpoenas also seek information on the due diligence practices of Fannie Mae and Freddie Mac, and their valuations of appraisals.

“In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual’s mortgages have not been corrupted by inflated appraisals,” said Attorney General Cuomo. “Our expanding investigation into the mortgage industry has uncovered that Washington Mutual improperly pressured appraisers to provide inflated values that best served the lender’s interest. Knowing this, Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals.


In a letter to Daniel Mudd, Attorney General Cuomo succinctly explained the problems created by collusion between lenders and appraisers.

As you no doubt are aware, lenders now regularly sell the mortgage loans they make into the financial markets, either directly or to investment banks or Government Sponsored Enterprises ("GSEs"), such as Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The loans are then pooled together, securitized, and sold to the general public as mortgage backed securities.

This configuration has the effect of making the lender less vigilant against risky loans since any risk is quickly transferred to the purchasers of the loans. Moreover, as the lender does not hold many of its loans in its portfolio, the lender's interest in ensuring the accuracy of the appraisal backing the loan is severely diminished. Even worse, because lender's profits are determined by the quantity of loans they successfully close, and not the quality of those loans, there is an incentive for a lender to pressure appraisers to reach values that will allow the loan to close, whether or not the appraisal accurately reflects the home value.

Further jeopardizing the process, mortgage brokers and the lenders' loan production staff are almost always paid on commission. Thus, the income of these individuals depends on whether a loan closes and on the size of the loan. Accordingly, brokers and loan production staff have strong personal incentives to pressure appraisers to value a home at the maximum possible amount, so that loans will close and generate maximum commissions. For these reasons, mortgage brokers and lenders frequently subject real estate appraisers to intense pressure to change values in appraisal reports.

The investment banks and GSEs may also have an interest in inflating (or at least in not questioning) the value of the pooled loans. The values of these loans serve as a basis for the value of their securities. As such, the higher the value of the loans closed, the greater the value for which the securities are sold on the secondary market.


The attorney general's office held a press conference where they fully explained the reason for the investigation and effects of "conflicts of interest and really outright fraud" in the appraisal process. When homes are artificially valued, borrowers are enticed to spend money (equity) that they don't have, and investors are misled into buying securities that aren't worth the amount at which they are valued.

The independence of the appraisers is sacrosanct and an accurate independent appraisal is the the cornerstone of the mortgage and housing industry. The nation is now paying the price for violating sound practices and the mortgage crisis is really a crisis stemming from a valuation crisis.

The Martin Act subpoenas sent out by the attorney general's office could result in a criminal action, a civil action, or a finding of no wrongdoing. No matter what the outcome of the investigation into Fannie Mae and Freddie Mac, we will likely see the issue of appraisal fraud get a lot more attention in the media. Ultimately, the effects of appraisal fraud, and the corrective measures taken by Congress, will have a profound impact on the mortgage and housing industries.

Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com

Source of Title Blog ::




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Categories: Mortgage Fraud, Mortgage Industry

1135 words | 2326 views | 1 comments | log in or register to post a comment


Announcements from the same politic...
Announcements from the same politically active AG who has also recently gone after FaceBook looks more like someone seeking a victim to burn at the stake to make a headline.

This is scapegoating. There has always been pressure on appraisers to inflate values. In this market, however, they didn't need to over-inflate values because buyers and sellers were doing that on their own. This was simple supply and demand.

The Fed opened the flood gates and the lenders relaxed their underwriting standards. Everyone could suddenly afford to borrow but the supply of housing was limited. That drove prices through the roof.

Now that too many houses have been built in response, ARM payments have gone up, more houses are going into foreclosure, and the credit tap has been turned off, we now have a glut of supply. House values are coming back down.

The AG can't lose on this one. It is guaranteed that he will be able to prove that appraisals were "inflated" because nearly every home in America has gone down in value in the last year because of simple supply and demand.

I saw quite a few appraisals that killed deals during the boom because they were too low. That tells me that we had plenty of buyers willing to pay the asking prices independent of any appraisal. If it was worth that price to them, then it was not, by definition, "inflated". No amount of scapegoating will prevent people from making bad decisions with their money now or in the future.
 
by David Jenkins | 2007/11/12 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

 

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