Freddie Mac Criminal Aspects of Its Appraisal Free Mortgages
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Freddie Mac is opening itself up to over 150,000± potential individual lawsuits…
This is a response from Mike Ford to Kenneth Harney’s article, “Freddie Mac planning appraisal-free mortgages”.
I represent the American Guild of Appraisers, #44OPEIU, AFL-CIO, and the real estate appraisal-related consumer and taxpayer interests of our more than fifteen million± AFL-CIO members, retirees and their families.
I’m prompted to write this open letter regarding your recent well written & researched article, titled “Freddie Mac planning appraisal free mortgages”. Regrettably, it was too brief to cover several additional critical aspects of the issue, but I assume the Chicago Tribune’s editors impose space limits.
It should be no surprise that the mortgage and banking industry is again seeking to eliminate the final checks and balance consumers have in refinance and home purchase decisions. They have been doing this in one form or another since before I entered the appraisal profession in 1986. It’s why laws like ECOA, TILA, RESPA, TRID, FIRREA and Dodd Frank had to be passed in the first place.
These are the same folks (industry anyway) that gave us the Lincoln Savings and Loan scandal of the mid 1980’s necessitating creation of the taxpayer financed Resolution Trust Corporation (RTC) for the so called S&L Bailout.
The abuse of public trust and violation of the most basic sound lending policies then, are what caused the United States Congress to pass the Financial Institutions Reform, Recovery & Enforcement Act of 1989 (FIRREA). It is this Act (under Title XI) that resulted in the adoption of Uniform Standards of Professional Appraisal Practices (USPAP), state licensing of appraisers and creation of the Appraisal Subcommittee and The Appraisal Foundation, Appraisal Practices, Qualifications and Standards Boards to implement the Act.
Even before the Act was adopted back in 1989 they exerted their underhanded behind the scenes influence to have the old deminimis loan transaction amount increased from $25,000 to $250,000.
That meant that federally regulated lenders COULD make loans up to $250,000 with no appraisal at all. It was argued that the low limit would only apply to second deeds of trust Home Equity lines, etc. where the small amount coupled with first position lien holders interests posed low risk levels. Of course, in practice this increase was then twisted to argue the necessity for allowing “something less than” complete appraisals “in the interests of saving consumers money and time”. What could POSSIBLY go wrong?
Because the existing appraisal product that already met those criteria (with disclosure of their limitations) did not meet the collateral assurance needs of investors, these same folks forced Fannie Mae to adopt/create the infamous 2055 “drive by” form which was designed to appear ‘almost as thorough’ as a “real” or full appraisal. Its use was routinely abused. It was, and still is, used for properties that have no business being done on a drive by basis. These included improvements that were behind closed gates, condominiums in secure entry projects where no interior access was permitted, and properties set so far back from roads as to be impossible to ‘analyze’ properly. But they were generally faster and usually cheaper since no interior inspection was required and no verification of legal living area or interior (or even side or rear exterior) condition took place. Speed and cost was the argument but deception and avoidance of disclosure were the real motives of these so called “lenders” that are nothing more than correspondent lenders, making insured loans using other people’s money and backed by taxpayers. “Lenders” no longer have a direct pecuniary stake in assuring sound loans. Their attacks and subversion of FIRREA continue unabated.
Act II: November 2008 Hank Paulson announces he must have unfettered control of Americas wallet in order to avoid a complete economic worldwide disaster.
After November 8, 2008 virtually ALL residential lending including loans ‘in the pipeline’ ceased in America until TARP and taxpayers paid the cost of Fannie Mae and Freddie Mac’s criminally negligent loan policies. Receivers had to be appointed because they could not be trusted to continue operating without federal oversight. Because taxpayers paid for the completely avoidable economic collapse that took place despite Paulson, any real lessons were, and continue to be obfuscated.
By 2009 Andrew Cuomo identified certain aspects of Countrywide and Washington Mutual lending / appraisal practices that despite being exceptions to the rule resulted in over 90% of their reviewed FDIC defaulted loan portfolios showing egregious deficient appraisals. No attention was directed to WHY these appraisals were deficient (low cost and limited experience of the appraisers related and mostly isolated to the specific lenders). Cuomo simply accepted self-serving interests (title companies) promoted idea that appraisers weren’t able to resist the pressure brought to bear on them by big lenders like Countrywide of Washington Mutual and therefore third party entities (like themselves) had to be inserted into the process. The Home Valuation Code of Conduct (HVCC) was created and ignorantly adopted by ALL GSEs in a knee jerk response. It took until Dodd Frank to eliminate HVCC which created widespread use of Appraisal Management Companies (AMCs), but the systemic damage was already irreversible.
Banks knew they could eliminate their entire appraisal departments and pass the buck on to (then) completely unregulated third parties (AMCs). Even today only 38 states have ANY AMC regulations! Most have non-existent enforcement programs.
AMCs started paying less than 50% appraisal fees though borrowers actually wound up paying more than appraisals used to cost. The third parties and banks split the increases in gross fees (kickbacks or service fees) and the reduced appraisal fees.
- Appraisal quality dropped drastically as only the bottom of the barrel appraisers would take many assignments, and the better appraisers were punished for standing up to pressure to ignore deal killing conditions like physical deficiencies or permit issues in properties.
- The over-supply of appraisers circa 2007 of 150,000 dropped down to around 80,000 nationally by 2016. Many retired or abandoned the profession rather than work for only $10 or $20 an hour (net), and even more pressure to violate sound appraisal standards than ever existed before. Unfortunately where we could ‘fire’ a client before, multi-client AMCs eliminated that as a viable option for many of us. Anger one, and the appraiser is black balled by ten or twenty major banks.
“Lenders” (commission based loan correspondents in the mortgage industry) promote the idea that the loss of appraisers was due to the aging of the profession and lack of newcomers. They promoted the idea that “Big Data” (read that as multiple linear regression analysis) could ‘replace most appraisals’ because Big Data and modern software is so good as to be able to virtually eliminate all significant variances. Besides it would only be used where ‘safe’. “Trust us” they say.
Heck even Fannie Mae adopted a patented process, Collateral Underwriter (CU), that has already been proven time and again to be a huge fraud of a failure. Now Freddie Mac wants to follow suit except to use unregulated, non-uniform processes to produce the same GIGO that Fannie Mae gets from CU.
Let’s look at Zillow as the best known regression based software though there are many others. Zillow at least includes a statement about its limitations. (Read up on “Zestimate”) in which they disclose limitations “usually 90% to 95% accuracy PROVIDED THE SUBJECT PROPERTY IS WITHIN 5% OF THE MEDIAN AREA PRICELINE! An accuracy rate of 95% or better could be acceptable if that were the outer limit of the range rather than the best scenario available, AND if the area of consideration was truly in a competitive market. When property values vary from the median by more than 5%, accuracy drops drastically to a point where it is unsuitable for lending purposes. A property that is say 7 to 10% from median will only have a reliability rating of 80 to 90% at best.
In California this means that if the median (Los Angeles City) value is $590,400 and you are refinancing a property in Wilmington (worth $290,000 in the real world) or in Beverly Hills P.O. 90210 technically in City of L.A. for $11,000,000 the AVM (regression soft wares Big Data) will probably have less than a 20% chance of hitting anything remotely close to the “market value”.
But it is worse than even this level of inaccuracy. The search parameters set for any AVM search can be easily manipulated to produce larger or smaller search areas and elimination or addition of filters to produce nearly any result desired. Unlike Zillow, many if not most are snake oil. I mean AVM sales hucksters are not honest enough to provide explanations of the limitations of their estimates. I respect Zillow for their doing so.
This isn’t the end of the problem though.
Fannie Mae has already admitted including “big data” that was never theirs to include in their CU process. Appraisals performed for the sole and exclusive purpose of determining clearly specified conditional collateral values as of a specific point in time were mined in order to steal data without compensation to the appraisers to use their work for purposes never intended or authorized. In fact ALL FNMA appraisals up until UAD and CU had specific language forbidding their use for any purpose other than the clearly defined and identified purpose/use stated in the report. This is a condition of USPAP by the way. ANY intended and authorized use must be stated in the appraisal to prevent misuse and consumer fraud.
Now Freddie Mac wants to do the same thing. I’ve performed many hundreds if not thousands of appraisals for Freddie Mac over the years. NOT ONE of them authorizes Freddie Mac to use my professional individual work products for data mining, compiling databases or creating spurious “valuation systems” inferred to have a glimmer of credibility because the data was mined from “real appraisals” and “scientifically analyzed” using “modern technology and unspecified methods”. Not one.
Freddie Mac may well wind up paying for the retirement of the entire appraisal profession! Freddie Mac is opening itself up to over 150,000± potential individual lawsuits or one giant class action lawsuit covering the tens of millions of appraisals used to data mine their so called Big Data. CoreLogic or First American or other public records sources do NOT have adequate information for any reliable defined market value to be determined. So they cannot sidestep by saying they used “public records” only. Freddie Mac may well wind up paying for the retirement of the entire appraisal profession! I’m not even trying to calculate the losses to millions of homeowners that paid for confidential appraisals only to find out now that Freddie Mac intends to use stolen data from services THEY paid for in order to use it for their own commercial purposes? Perhaps the Consumer Financial Protection Bureau (CFPB) will be interested in such a theft?
The following is an excerpt from your copyrighted article in the Chicago Tribune 2016 (Ken Harney, Author):
“Bill Dallas, chairman and CEO of Skyline Financial Corp headquartered in Calabasas, Calif., calls the traditional use of appraisers “a really screwed-up system.” He’d like to see the industry move toward an approach that makes maximum use of the huge property-specific databases built up from previous appraisals along with inspections when needed.”
Clearly Mr. Dallas has no identified objection to stealing the professional work product and past services of thousands of appraisers without compensating them for their unintended and unauthorized “contributions” to these databases. Similarly, he seems unconcerned about the professional appraisal standard that requires an appraiser not to permit his or her work product or report to be used in a manner that is misleading. One has to wonder if Skyline Financial disclosed their views on appraisals when they applied for their NMLS? Clearly Mr. Dallas comment suggests he doesn’t have a clue when it comes to what constitutes acceptable appraisal standards & principles OR why they exist.
Absent professional appraiser analyses, regression analyses can only account for around 70% of the value related physical property characteristics in a sale. It cannot accurately assess or support the dollar amount of a partially obstructed ocean view, or impact of a sewage treatment facility upwind and over a mile away on a windy day. It has no way of knowing if remodeling was minimal or top quality. It cannot come close to identifying whether health and safety issues exist at a property. None such would have disclosed Porter Ranch (gas blow out) was sitting on the second largest natural gas storage facility in the nation.
It may ‘allocate’ the unidentified 30% of unknowns to other categories to claim 100% of price is analyzed or ‘accounted’ for but it will still be grossly wrong.
Take the $466± sf median indicated in the Zillow link above and apply it to ANY single family property on Gulf Street in Wilmington, CA (City of L.A. by the harbor) OR any condominium on Wilshire Blvd in the Wilshire Corridor by the Miracle Mile of Los Angeles and BOTH ‘values’ will be grossly incorrect / unsupported. ($466 x stated SF in public records). Remember also that Zillow is among the more honestly identified AVM processes because it explains its limitations. Most such systems and certainly ALL envisioned by Freddie Mac will not be nearly as forthcoming. Certainly Fannie Mae’s CU wasn’t, but that’s another story completely.
Are we (appraisers) arguing merely to preserve our profession? Hardly. Most of us can go on to other far more lucrative careers. Heck, without the burden of our licenses, appraisal principles and our standards of integrity we could even go into the AVM software design & snake oil sales and AMC business for ourselves! If you want to know WHERE the pressure for alternative products stems from just look at the full scope of “services” offered by First American (as an illustrative example only) including their ownership of the second largest or most prolific distributor of appraisal software (ACI). From listing the property to servicing the loan, they’ll do it all. Research their “PACE PRO Product”.
Conclusion? America doesn’t actually learn from past mistakes. We merely purport to regulate their causes and as soon as ‘public memory’ fades or regulators retire, we start treating the sharks and snake oil purveyors as if they were responsible advocates.
I predict the next giant economic disaster to be no more than ten years after we pretend these new “valuation products” have any more value than cyber toilet paper. Sound great as a concept, but not very practical.