Appraisal Fraud, Mortgage Brokers and the heating of the California Real Estate Market A lot of posts have written about the sometimes difficult relationship between appraisers and mortgage brokers. One thing has become clear though, appraisal fraud and appraisal exaggeration have played a part in the run up of housing prices well ahead of incomes in the California real estate market.

I realize that little supposition needs more support so let's take a look at the

role that the appraiser plays in a real estate transaction. Traditionally the appraiser's role is to secure the bank's interest in the transaction. The bank is the largest owner in any real estate transaction. Unless you are buying your home with cash, you need to get the money from somewhere.

Let's think back to how Ward Cleaver probably bought his house. It's a little different. Ward probably got a loan from a local bank guaranteeed by the VA. Little known fact about Ward - he served in WW2 as a SeeBee in the Pacific. His local banker probably knew his neighborhood, understood the value of the home and additionally was going to was likely to carry the paper throughout the life of the loan.

In today's market your loan is likely going to be done by mortgage broker. This broker has an interest in getting the deal done since that's the only way he gets paid. The actual lender on the property is probably going to re-package and sell the loan within a few months of the house closing.

So how can appraisal fraud play a part in a real estate bubble? The mortgage broker begins to assert pressure to "hit a number" with the appraisal. Don't think it doesn't happen?

According to Appraiser Petition - it certainly does

The concern of this petition has to do with our "independent judgment" in performing real estate appraisals. We, the undersigned, represent a large number of licensed and certified real estate appraisers in the United States, who seek your assistance in solving a problem facing us on a daily basis. Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value.

This pressure comes in many forms and includes the following:

• the withholding of business if we refuse to inflate values,
  
• the withholding of business if we refuse to guarantee a predetermined value,
  
• the withholding of business if we refuse to ignore deficiencies in the property,
  
• refusing to pay for an appraisal that does not give them what they want,
  
• black listing honest appraisers in order to use "rubber stamp" appraisers, etc.
  

This combined with the free money and loose underwriting standards, means that that housing prices have grown faster than incomes and far faster than they should have. But this isn't a bubble blog.

Labels: appraisal, appraisalfraud, appraisers, mortgagebrokerbasics

  ¶ Appraisal Fraud, Mortgage Brokers and the heating of the California Real Estate Market 0 Comments

Ameriquest Settlement and Corporate Moral Behaviour Sorry for the delay in posting a new piece of commentary.I have been swamped.
On the recent events that has stuck in my mind was the recent settlement by Ameriquest for a wide number of mortgage fraud offenses. (Changing rates, adding points and in general screwing the sub-prime market)

Here's some observations from the The Checkout - a consumer blog at the Washington Post

The settlement ends a two-year investigation by all 50 state attorneys general, banking regulators and local prosecutors into allegations that Ameriquest deceived consumers to sell mortgages, using high-presure sales tactics to meet employee sales quotas. In addition to paying $295 million in consumer redress and $30 million in legal fees, the company has agreed to change some of its business practices and accept outside monitors who will observe the company...

Ameriquest did not admit any wrongdoing in agreeing to the settlement; but issued a statement saying "we regret those occasions when our associates have not met this ideal to our customers' expectations... This agreement is good for consumers and fair to the company. It provides a framework for new lending policies that improve and enhance our ability to serve our customers and are a model for the industry."

One of things that immediately comes to mind is that any time you are writing a $325,000,000 check, you will want to do everything possible to avoid that. Despite the silly protests of "no wrongdoing" it's clear that Ameriquest knew they would lose at trial. Why? Because the last time I looked even a 1/3 of that money (roughly 100 million) would be quite a bit of legal defense. You settle now to prevent an even more devestating judgement at trial (undoubtedly in the billions of dollars). Why do corporations that have inflicted damage on hundreds of thousands of people insist when settling, "they admit no wrong doing?"

First of it's a purely legalistic defense so their lawyers think they can mitigate damage at trial. At every one of the civil trials for Ameriquest (from people who Ameriquest robbed from), they can mention that they admitted no wrongdoing in the hopes it will mitigate the cupability of the company. Why do corporations often do this?

Let's remember one of the roles the corporation serves for the individual who are employees. The corporation serves to lessen the moral responsibility for each employee. Each employee is then able to commit acts that they would never think of doing as a private person. This transfer of moral authority to a corporation is fairly obvious to anyone that thinks about it and is supported by the Milgram experiment which show how people can defer to authority even when it conflicts with their conscience. The transfer of moral responsibility from employee to the the corporation is yet another clear example.

Employees of Ameriquest lied, stole and robbed people of thousands of dollars - an action which they would not take in the context of say robbing a bank but were able to easily do in the context of sub prime loan.

I have seen people argue somewhat childishly "that corporations are composed of people." Yes they are comprised of people but their moral behaviour in groups is entirely different than their individual behaviour.

Labels: Ameriquest, Ameriquestmortgagecompany, Milgramexperiement

  ¶ Ameriquest Settlement and Corporate Moral Behaviour 0 Comments

Rate Update Average mortgage rates for single-family homes in the 10 largest metropolitan areas as of Jan. 18 as compiled by bankrate.com. The rates are for 30-year, fixed-rate mortgages for 80 percent of the value of the house. A point is a one-time fee equaling one percent of mortgage.
Jan. 18 Prev. Wk
percent+points
Boston 6.14 + 0.11 6.23 + 0.05
Chicago 6.23 + 0.04 6.31 + 0.10
Dallas 6.08 + 0.56 6.25 + 0.42
Detroit 6.23 + 0.00 6.29 + 0.00
Houston 6.01 + 0.65 6.12 + 0.69
Los Angeles 6.16 + 0.48 6.27 + 0.46
New York 6.13 + 0.18 6.19 + 0.16
Philadelphia 6.00 + 0.38 6.13 + 0.26
San Francisco 6.19 + 0.20 6.30 + 0.20
DC Metro 6.01 + 0.55 6.07 + 0.54
National Avg 6.12 + 0.31 6.22 + 0.29  ¶ Rate Update 0 Comments

Freddie Macs ARM Survey Notes Increased Lender Discounts Freddie Macs ARM Survey Notes Increased Lender Discounts
While the flattening of the yield curve has not noticeably hurt the popularity of ARMS, it is largely lender discounts that have kept the products in the game. Not entirely surprising since lenders have large incentives to keep them in the game. Given the way that revenues are booked by lenders, they are heavily incentivized to push ARMS

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