I've never liked the argument between more regulation and less regulation. Neither of those is the answer. What we need is better regulation that actually addresses the problem without bogging down the industry. I've written plenty about new regulations I don't like, but now I've found one that really seems to make sense.
The Federal Housing Finance Agency, which regulates Fannie and Freddie, announced the new rules last week. Starting in January of 2010 individual mortgages will include loan-level identifiers on the lender, loan officer and appraiser who were involved. This means that we will be able to track the performance of individual loan officers and appraisers. Loan officers and appraisers with high default rates or incidents of fraud will be easily identified.
This computerized information will make it possible to finally weed out the bad actors in the industry. All the education requirements and additional forms in the world won't improve the industry or protect consumers nearly as much as simply getting rid of those individuals. People who want to commit fraud will find a way around most regulations, but if they're doing bad loans this system will catch them.
Of course, the real test is going to be what is done with the information. We can't simply compile information and do nothing with it. It is critical that the information gathering be accompanied by strong enforcement actions. Lenders and appraisers are licensed professionals, and the bad ones need to have those licenses revoked.
This new regulation won't single-handedly fix the mortgage industry, but at least it will give us the tools to go after the root of the problem.
Monday, January 26, 2009
Friday, January 16, 2009
Where's My Bailout?
For months we've been seeing bailouts for companies and individuals who made bad investments. The financial institutions get $750 billion, AIG gets $85 billion, the automakers get some, and homeowners threatened with foreclosure get their loans modified with lower rates and even lower principal balances.
Through it all the biggest objection has been from people who made sound decisisions. Why should my neighbor who got in over his head get his balance reduced while I still have to pay back what I borrowed? Plus, it's generally the people who aren't in trouble who end up paying the taxes that fund the bailouts. Doesn't seem fair, does it?
To all those who have made sound decisions and paid their bills on time, here's your bailout... Fixed rate mortgages are in the mid to high 4% range. I'll leave it to the advertisers to gush about how rare and wonderful a sub 5% mortgage is, but the point is here is a benefit reserved solely for you, the fiscally responsible.
I thought that we'd see first time homebuyers coming out of the woodwork when rates fell below 5%, but we haven't. It also hasn't helped the people who are in over their heads and need some relief. In fact, only people with good credit and equity are able to take advantage.
I've been shocked at the ratio of refinances to purchases, and I'm not the only one. Everyone from the big wholesale lenders to small local banks to real estate appraisers tell the same story. It's been all refinances and almost exclusively for strong borrowers.
So if you've only borrowed what you could afford, paid your bills on time and resent footing the bill for the mistakes of others, here's your bailout!
Through it all the biggest objection has been from people who made sound decisisions. Why should my neighbor who got in over his head get his balance reduced while I still have to pay back what I borrowed? Plus, it's generally the people who aren't in trouble who end up paying the taxes that fund the bailouts. Doesn't seem fair, does it?
To all those who have made sound decisions and paid their bills on time, here's your bailout... Fixed rate mortgages are in the mid to high 4% range. I'll leave it to the advertisers to gush about how rare and wonderful a sub 5% mortgage is, but the point is here is a benefit reserved solely for you, the fiscally responsible.
I thought that we'd see first time homebuyers coming out of the woodwork when rates fell below 5%, but we haven't. It also hasn't helped the people who are in over their heads and need some relief. In fact, only people with good credit and equity are able to take advantage.
I've been shocked at the ratio of refinances to purchases, and I'm not the only one. Everyone from the big wholesale lenders to small local banks to real estate appraisers tell the same story. It's been all refinances and almost exclusively for strong borrowers.
So if you've only borrowed what you could afford, paid your bills on time and resent footing the bill for the mistakes of others, here's your bailout!
Friday, January 9, 2009
The Next Threat to the Housing Market
It's beginning to look like unemployment may be the next big threat to the housing market. Today's numbers were, once again, not good. 524,000 people lost their jobs in December for a total of 2.6 million in 2008. People without jobs can't buy houses, and people who fear losing their jobs don't buy much either.
The headlines say this is the worst since World War II, but that's a bit of an over-dramatization. It is true that this is the largest annual job loss since 1945 when 2.75 million people lost their jobs. However, in a growing country you can't just compare numbers like that without adjusting for the size of the workforce. The US population was less than half what it is now, so 2.75 million was a lot more back then.
The scary detail in these numbers is that 1.9 million of the 2.6 million total were lost in the last four months of the year. The job losses will likely get worse before they get better, and it could be a while if we're only four months into it.
Unemployment is really more of an indirect threat to our local real estate market. We don't have any good jobs to lose in Grants Pass. The people moving here, however, have to sell their old homes to someone, and that someone usually needs a job to afford that house. Great rates and low prices are all very nice, but they won't be enough to fix the market without jobs.
The headlines say this is the worst since World War II, but that's a bit of an over-dramatization. It is true that this is the largest annual job loss since 1945 when 2.75 million people lost their jobs. However, in a growing country you can't just compare numbers like that without adjusting for the size of the workforce. The US population was less than half what it is now, so 2.75 million was a lot more back then.
The scary detail in these numbers is that 1.9 million of the 2.6 million total were lost in the last four months of the year. The job losses will likely get worse before they get better, and it could be a while if we're only four months into it.
Unemployment is really more of an indirect threat to our local real estate market. We don't have any good jobs to lose in Grants Pass. The people moving here, however, have to sell their old homes to someone, and that someone usually needs a job to afford that house. Great rates and low prices are all very nice, but they won't be enough to fix the market without jobs.
Monday, January 5, 2009
New Appraisal Rules
On December 23rd the final Home Valuation Code of Conduct was released. The HVCC is a new set of rules designed to prevent undue influence on appraisers by lenders, mortgage brokers and realtors. While inflated appraisals may or may not be a significant problem (see my earlier post), these rules are definitely not the solution.
The most significant change is that virtually all appraisals will have to be ordered through Appraisal Management Companies, or AMCs. These AMCs are essentially middlemen who take orders from lenders and assign them out to appraisers. This firewall is seen as a way to prevent appraisers from feeling pressure to hit a specific value.
Of course this assumes that lenders are bad and the AMCs are above reproach. The irony of the situation is best expressed in an article by Dave Biggers, "This massive push toward AMCs is all the more surprising given that the original lawsuit by the Attorney General was filed against eAppraiseIT, an AMC, accusing it of inflating appraisals to satisfy Washington Mutual's demands."
Even if we assume that appraisers were inflating values in response to pressure from their clients, this solution takes us in the complete wrong direction. If an appraiser is pressured by a loan officer, the worst that can happen is that they'll lose that person's business. Is one client really worth risking your license over?
Once all the appraisals are ordered by a small handful of national AMCs that becomes a whole different question. Can any appraiser afford to piss off Landsafe, LSI, or eAppraiseIT when they become the Wal-Marts of appraisal ordering? The potential for abuse is much higher in a world where there are only a few large clients ordering all the appraisals.
The most significant change is that virtually all appraisals will have to be ordered through Appraisal Management Companies, or AMCs. These AMCs are essentially middlemen who take orders from lenders and assign them out to appraisers. This firewall is seen as a way to prevent appraisers from feeling pressure to hit a specific value.
Of course this assumes that lenders are bad and the AMCs are above reproach. The irony of the situation is best expressed in an article by Dave Biggers, "This massive push toward AMCs is all the more surprising given that the original lawsuit by the Attorney General was filed against eAppraiseIT, an AMC, accusing it of inflating appraisals to satisfy Washington Mutual's demands."
Even if we assume that appraisers were inflating values in response to pressure from their clients, this solution takes us in the complete wrong direction. If an appraiser is pressured by a loan officer, the worst that can happen is that they'll lose that person's business. Is one client really worth risking your license over?
Once all the appraisals are ordered by a small handful of national AMCs that becomes a whole different question. Can any appraiser afford to piss off Landsafe, LSI, or eAppraiseIT when they become the Wal-Marts of appraisal ordering? The potential for abuse is much higher in a world where there are only a few large clients ordering all the appraisals.
Scapegoating the Appraisers
We've been looking for someone to blame for the crash of the real estate market since the beginning. Maybe it was the homeowners borrowing more than they could afford. Maybe it was the subprime lenders selling those adjustable rate loans. Maybe it was the big investment bankers with their insatiable appetite for exotic mortgages. Or maybe it was the appraisers for inflating the values and allowing people to borrow more than their houses are worth.
I've heard this argument, that appraisers are to blame for people owing more than their house is worth, even from "respectable" news sources like Bloomberg. This is just ridiculous. Certainly there are bad actors in any profession and those individuals should be rooted out, but that's not why people owe more than their homes are worth.
The real estate market is like any other market, like the stock market for example. My stocks are worth a lot less now than they were six months ago. Does that mean that they weren't really worth that much when I bought them? I don't think so. Values go up and down, the difference here is that people are highly leveraged in their homes. If you took out a 100% loan on your home a year ago you now owe more than the house is worth, period. It doesn't matter what it was worth back then, it's going to be lower now because values are down.
If we all borrowed money to buy stocks we'd be in the same situation because of the stock market collapse. As it is we lament the money we've lost in our retirement accounts, but nobody looks to blame someone else for having paid too much. We accept that this is the way markets work and hope it recovers soon. We all need to take a deep breath and realize that the same is true of the housing market. Or should we go after our stock brokers for allowing us to pay too much for shares we bought a year ago?
If you got the house you want and a payment you can afford, who cares what the value is now? Most people aren't in default because of the value. They're in default because they can't afford their payments. Of course if values were still going up many of those people could have bailed themselves out by selling, but that still wouldn't have made it a good idea to take that loan in the first place.
For the most part those "inflated appraisals" were simply a reflection of the inflated home prices at the peak of the market. In addition, inflated appraisals aren't even the big issue when it comes to mortgage fraud. According to Fannie Mae's Fraud Update on loans done in 2006 and 2007, inflated values account for a whopping 5% of all mortgage fraud. Compare that to 30% for misrepresented income and 26% for doctored up liabilities and you see that appraisers are not the root of the problem after all.
Obviously there are appraisers committing fraud for their own gain, and those individuals should be punished. Appraiser's are licensed, and the licenses of bad appraisers should be revoked. The unethical will always find a way around whatever new rules we throw at them. The best solution here is to spend some time finding and removing the bad ones instead of coming down on the whole industry.
I've heard this argument, that appraisers are to blame for people owing more than their house is worth, even from "respectable" news sources like Bloomberg. This is just ridiculous. Certainly there are bad actors in any profession and those individuals should be rooted out, but that's not why people owe more than their homes are worth.
The real estate market is like any other market, like the stock market for example. My stocks are worth a lot less now than they were six months ago. Does that mean that they weren't really worth that much when I bought them? I don't think so. Values go up and down, the difference here is that people are highly leveraged in their homes. If you took out a 100% loan on your home a year ago you now owe more than the house is worth, period. It doesn't matter what it was worth back then, it's going to be lower now because values are down.
If we all borrowed money to buy stocks we'd be in the same situation because of the stock market collapse. As it is we lament the money we've lost in our retirement accounts, but nobody looks to blame someone else for having paid too much. We accept that this is the way markets work and hope it recovers soon. We all need to take a deep breath and realize that the same is true of the housing market. Or should we go after our stock brokers for allowing us to pay too much for shares we bought a year ago?
If you got the house you want and a payment you can afford, who cares what the value is now? Most people aren't in default because of the value. They're in default because they can't afford their payments. Of course if values were still going up many of those people could have bailed themselves out by selling, but that still wouldn't have made it a good idea to take that loan in the first place.
For the most part those "inflated appraisals" were simply a reflection of the inflated home prices at the peak of the market. In addition, inflated appraisals aren't even the big issue when it comes to mortgage fraud. According to Fannie Mae's Fraud Update on loans done in 2006 and 2007, inflated values account for a whopping 5% of all mortgage fraud. Compare that to 30% for misrepresented income and 26% for doctored up liabilities and you see that appraisers are not the root of the problem after all.
Obviously there are appraisers committing fraud for their own gain, and those individuals should be punished. Appraiser's are licensed, and the licenses of bad appraisers should be revoked. The unethical will always find a way around whatever new rules we throw at them. The best solution here is to spend some time finding and removing the bad ones instead of coming down on the whole industry.
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