Tracking the mortgage mess

[radhak]

Very interesting article here : Would You Pay $103,000 for This Arizona Fixer-Upper? ('fixer-upper' flatters that structure).

What I like is that it tracks the money-trail and in parallel also tries to track the accountability of the various people who should have known better than to be party to this sort of blatant ripoff.

[LCHIEN]

those people will never be held accountable, unfortunately.
the owner should have known better but it was like free money to her. her credit record will be smirched (is that a word? If something can be "besmirched" is it then smirched? I like that word...) for life but then it wasn't really any good before the loan.

The appraiser more or less lied - was he under any oath or license that requires reporting true value?
The loan originator made money off points and reselling the loan, they had every reason to tell their appraisers to lie, close loans to poor risk clients, and get it off their hands. Maybe I don't really blame them so much as the banks --- if I was a bank and somebody was selling me shoddy merchandise I would take a look at it and refuse to buy it. As long as the banks would take everything thrown at them they deserved to get raped. If you are buying millions in property loans secured by the properties, maybe taking some time to drive by and see if the appearance was anything close to the value of the loans would have been prudent.
How could standard and poor rate the loan packages as AAA? Surely they should have driven by same as the bank.
Some guys really need to be penalized or tossed in the slammer but never will be.

[crokett]

I don't think the owner cares that her credit record is bad. Seems to me it was easy enough to get the money anyway.

[Tom Slick]

Amazing how fat, dumb, and happy the real estate and corollary industries were when they played with imaginary money.

around here the lot would still be worth more than $103,000 after teardown and cleanup.

[JR]

That's an excellent case study in the whole mess - from buyer, to apparaiser, to loan broker, to bank, to CDO, to investor. The only thing it missed is the credit default swap.

Just about every one of them was at fault in some way, but the linchpin is the apparaiser. He has a fiduciary responsibility to both the mortgage company and the buyer. If the only other comp was half the value of his appraisal he is in serious trouble. That's at the micro level.

At the macro level, S&P and Moody's messed up badly. 85% of the 4,050 mortgages bundled into a CDO by Wells Fargo were sub-prime, and still the CDO was rated AAA. Un-flipping-believable.

JR

[Tom Slick]

The last two loans I took against my house (re-fi and heloc) had no real appraisal. They took it at face value that my house was worth more than I paid for it. Both loans were issued and serviced by the same institutions, i.e. I didn't go through a broker.
notice how those ideas screwed everything up. I just received a letter that my line of credit on my heloc is now closed due to a downturn in the realestate market in the area. BS, I still have over 30% equity, they don't want to loan me any money at 3%, my current rate!

[LCHIEN]

That's an excellent case study in the whole mess - from buyer, to apparaiser, to loan broker, to bank, to CDO, to investor. The only thing it missed is the credit default swap.

Just about every one of them was at fault in some way, but the linchpin is the apparaiser. He has a fiduciary responsibility to both the mortgage company and the buyer. If the only other comp was half the value of his appraisal he is in serious trouble. That's at the micro level.

At the macro level, S&P and Moody's messed up badly. 85% of the 4,050 mortgages bundled into a CDO by Wells Fargo were sub-prime, and still the CDO was rated AAA. Un-flipping-believable.

JR

i don't know who appraisers work for. or who licenses and regulates them. Maybe they work for the lender (in the end they do, since the lender/borrower ends up paying them). But I'm willing to bet that the first lender told the appraiser what to appraise it for, just turn it in and I'll give you your fee; easy money.

[jackellis]

At one point I thought the whole idea of repackaging loans and selling them was brilliant because it would allow banks to get risks off their books and make more loans. In hindsight, that view had a couple of flaws:

1) When the loans are sold, there's no longer anyone accountable for worrying about credit quality and the ability to repay.

2) Lenders and appraisers have a perverse incentive to make loans because they can make large fees with little or no risk.

Unfortunately, there are a lot of people who either lack the discipline to be financially responsible or just don't care or just don't know and will simply walk away from a mortgage when their equity is upside down.

[ragswl4]

I'll bet its not the worst case loan out there. However, dumb, dumber and dumbest. Just too hard to tell who that phrase fits the best in that article. Vodka will melt your brain. Been there, done that.

[JR]

i don't know who appraisers work for. or who licenses and regulates them.

They are usually independent contractors. Their primary responsibility is to the lender, but not the mortgage broker. They are licensed and certified by each state, as required by federal law.

As the Arizona case shows, any questions arising from a mortgage transaction are likely to lead back to the appraiser. He is obligated to make a fair appraisal using the the techniques identified by USPAP. The appraisal is a statement of factual value. If the appraiser can not justify the appraisal he will have committed fraud. In California, apart from any judgement from fraud proceedings, he is subject to a fine of up to $10,000 from the agency which administers the license.

This language appears in a number of sites on the 'net, and would seem to be boilerplate from USPAP, a national society:

"Appraiser Ethics
Appraisal is a profession, and appraisers are professionals. In our field as with any profession we are bound by ethical considerations.

An appraiser's primary responsibility is to his or her client. Normally, in residential practice, the appraiser's client is the lender ordering the appraisal to decide whether to make the mortgage loan. Appraisers have certain duties of confidentiality to their clients -- as a homeowner, if you want a copy of an appraisal report, you normally have to request it through your lender -- obligations of numerical accuracy depending on the assignment parameters, an obligation to attain and maintain a certain level of competency and education, and must generally conduct him or herself as a professional. Here, we take
these ethical responsibilities very seriously.
Appraisers may also have fiduciary obligations to third parties, such as homeowners, both buyers and sellers, or others. Those third parties normally are spelled out in the appraisal assignment itself. An appraiser's fiduciary duty is limited to those third parties who the appraiser knows, based on the scope of work or other written parameters of the assignment.

There are ethical rules that have nothing to do with clients and others. Appraisers must keep their work files for a minimum of five years.
We only perform to the highest ethical standards possible. We don't do assignments on contingency fees. That is, we don't agree to do an appraisal report and get paid only if the loan closes. We don't do assignments on percentage fees. That is probably the appraisal profession’s biggest no-no, because it would tend to make appraisers inflate the value of homes or properties to increase their paycheck. We don't do that. Other unethical practices may be defined by state law or professional societies to which an appraiser belongs.
The Uniform Standards of Professional Appraisal Practice (USPAP) also defines as unethical the acceptance of an assignment that is contingent on "the reporting of a pre-determined result (e.g., opinion of value)," "a direction in assignment results that favors the cause of the client," "the amount of a value opinion," and other things. This means you can be assured we are working to objectively determine the home or property value."