GSE Compression Into One Entity

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Sign of GSE Compression Into One EntityHere’s one little thought before you sip that New Year’s champagne…

Because we appraisers sweat the details to provide credible valuations, we might miss the macro right in front of us.

A few months ago I suggested that the current pilot programs for wide-scale bifurcation assignments were “dead man walking” per suggestions and insider tips related to actions by the new head of FHFA. He has consistently mentioned his aversion to the additional risk taken on by the GSEs in public speaking. Yes there is already bifurcation out there, but nothing near the scale should bifurcation go mainstream (under false pretenses I might add.)

The GSEs remain in receivership yet specifically Fannie Mae still behaves more like a Wall Street Institution than a government-sponsored entity or an entity in receivership under the federal government that they are. Remember that Fannie has a cost advantage over other financial institutions because they have the implicit backing of The Taxpayer if the mortgage market goes south. Perhaps this is why they are more willing to take risks. The GSEs made that implied guarantee a fact in their 2008 bailout and they continue to push the risk envelope with their pilot projects.

Appraisers have felt that impact first hand with our continued, irresponsible, marginalization by the banking industry who is closely and necessarily aligned with the GSEs.

As a refresher, Fannie got into trouble because they chose to serve only one of their two masters (Freddie just follows the actions of Fannie) during the bubble: “The Shareholder”, and they forgot about “The Taxpayer” – that’s what got them into trouble in 2004-2006 and eventually, by 2008 they were bailed out by us, “The Taxpayer.” And then this.

And then there is this announcement made last week from Reuters: Freddie Mac offers early retirement to 25% of workforce

Why is a GSE trying to reduce its workforce by as much as 25%? Here are two potential reasons:

  1. Mortgage volume will collapse in 2020 and they are overstaffed – unlikely – rates aren’t going up in 2020.
  2. The FHFA is planning the merger of Fannie & Freddie, a goal; of the current administration.

If option 2 is the more likely, then it makes sense that any bifurcation pilot program – which is more expensive, less accurate and slower than traditional appraisals – is not a needed expansion of their risk profile before such a GSE merger is undertaken. A botched merger could bring down the entire economy so why would FHFA take that chance?

Ok, now sip your champagne!

Happy New Year!

Jonathan Miller

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Image credit flickr - Kain Kalju
Jonathan Miller

Jonathan Miller

Jonathan Miller is President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm he co-founded in 1986. He is a state-certified real estate appraiser in New York and Connecticut, performing court testimony as an expert witness in various local, state and federal courts.

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15 Responses

  1. Avatar anonymous says:

    Maybe they take that chance, because it meets the goal of controlling the “value”, hence, controlling the “wealth”, of those that won’t see it, before it’s too late.

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  2. Avatar Derek Foreal says:

    I think option two would be the more likely reason. The GSEs have been offering buyouts for the last few years to reduce headcount, so this isn’t really a new trend. Reason being, they’re fighting to be privatized and need to start operating as such. This means certain projects like bifurcation and inspection apps need to be put on hold. While in conservatorship, the GSEs were given a unique opportunity where all profits above operating costs were swept to treasury. As a result, they invested heavily in people and infrastructure and now the time has come for them to start operating like a private company to be competitive with other market players.

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    • Baggins Baggins says:

      So in other words Derek, the government being involved is the primary reason the gse’s pursued hybrid programs in the first place? Genius, and that figures. Did they use those surpluses to hype up the mismo programs as well?

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      • Avatar Derek Foreal says:

        The conservatorship allowed the GSEs to focus on building a future platform for real estate finance, which needed (still needs) an overhaul. It was an FHFA directive since the company was stabilized. Also, just think, how can a company, that technically generates no revenue, able to build two state-of-the-art campuses (D.C. and Dallas) without any real pushback?

        Warning- be nice here, this is just my opinion….I feel the concept of bifurcation is a worthy endeavor for the profession, but it’s been tainted by the AMC model. When I was at a GSE (recently), we were able to prove, for the most part, that a qualified valuation practitioner could value a property just as accurately as a field appraiser or broker, if they had a good/reliable data source and knew exactly what they’re valuing. Unfortunately, the general idea has been abused by large AMCs who only seek someone with a license to sign a report. I’m hoping appraisers eventually embrace the concept, but actually take real ownership of it as well. It’s the perfect time for appraisers to unite with one of the professional organizations and put some structure and standardization to it. It’s also a good time for appraisers to start thinking about creating standardized forms that meet the needs of market participants. Sadly, only the AMCs are doing this, but a lot of good folks in our profession have been fighting them hard. However, I do feel the time has come to actually produce appraisal solutions as well……again, just my two cents (respectfully) as someone who provides valuation services and is a user of them.

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  3. I don’t care why or ‘if’ Freddie or Fanny reduce their workforce. In FNMAs case it has been going on for quite a while (according to an AGA Member that was a senior reviewer for FNMA). They don’t want reviewers anymore. They prefer facilitators (according to our member – the former FNMA employee) to keep that money pump to Wall Street going.

    As for the bifurcated hybrid appraisals, it is appraiser opposition that is killing them off. Nothing else. VA recently announced policies (AADP) that many took to mean they allow bifurcated hybrid appraisals (as currently practiced and referred to).

    They do not. What they WILL allow in one of their loan programs is the old style “bifurcation” of the field inspection portion of what we used to call ‘complete or full appraisals’ before the whores at TAF muddied the definition waters in favor of the current anything-goes SOW in lieu of the much more honest departure clause and full USPAP compliance.

    Under VAs new system they will allow a qualified licensed trainee, employed directly by the approved appraiser to inspect the property provided that they also sign the final report along with the approved appraiser. There is no prohibition against that same trainee doing other research/analytical work or draft report writing-presumably as long as it is all reviewed and approved by the supervisory appraiser.

    Folks, this is a HUGE win for all appraisers! VA has essentially endorsed a system and process that many if not most of us learned under. A process that has the potential to return economic viability to hiring trainees. A process that could or should eliminate all unlicensed “runners” currently used (under the table) by some less than ethical appraisal companies.

    Folks, let’s all ‘take the wins’ when we achieve them! Jonathan is right is his observations but as a practical matter, the recent opposition of the VA in the face of FHFA and all the other promoters of inferior valuation products and methods is where we need to focus & build on.

    Collectively, we all need to recognize the chinks in the armor of those undermining our profession. We also need to recognize (& support) agencies such as the VA when they adopt policies that can only benefit most appraisers; and reinforce the need for quality appraisals in pragmatic, real-world conditions.

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    • Avatar Derek Foreal says:

      Mike- I think it’s great the VA is advocating for trainees, hopefully others will follow suit. If this profession is to survive, we need to get more people involved and trained for the future. It’s really sad such unnecessary obstacles have been placed in front of appraisers. How can anyone grow a business and compete with large AMCs if they can’t even train and use their own staff? It’s pretty absurd……

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      • Derek – concur. Read the comments though. A relatively simple topic. VA’s position is very clear from their own articles.

        1. Either appraiser are not reading it carefully, or they don’t understand the nuances and impact. I’m pretty used to reading this kind of stuff and I had to reread it before I realized they are not talking about “hybrids” at all. More obfuscation of the term ‘bifurcation.’ Technically it’s being properly used, though what’s being proposed has NOTHING to do with the type of ‘bifurcated HYBRIDS’ desktop BS that’s been undermining our profession.

        2. We cant ‘take a win’. We want to debate the weather. The time of day and whether textbook technicalities supersede regulatory and client requirements or guidelines.

        3. For any appraisers actually trying to accomplish anything positive today, we have to contend with misinformation and contrariness from our own peers that SHOULD be supportive. We have enough organized opposition from special and self-serving interests. Wasting time in meaningless debates among people we KNOW want to see improvements or allowing topics to be hijacked hurts us every bit as much as those malevolent folks promoting AMCs and national franchises etc.

        It’s one of the reasons I don’t choose to post in AB nearly as much as I used to as much as I personally like and respect the Administrator.

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  4. Avatar Pierce Blitch III IFAS, ASA says:

    Ladies and Gentlemen, the VA’s AAPP program is DEAD out of the box. The Lenders have the choice to OPT OUT and NOT allow a trainee, licensed, or certified appraiser to complete the inspection/appraisal and sign on the left side. I have received two VA orders in 2020. Both of the orders had the following statement, high lighted in yellow, at the bottom of the email that I received with the request. “Restrictions: The assigned appraiser may not utilize the Assisted Appraisal Processing Program (AAPP) on this appraisal assignment.” Therefore, nothing has changed.

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    • Avatar Bill Johnson says:

      I guess the coach will have to scrap his next blog “How to screw veterans out of money while hiring a soccer mom to conduct the inspection all while working 4 days a week with only a single visit to the office”. No offense meant to soccer moms, but it’s now so easy to become a trainee, that everybody is doing it.

      Seek the truth.

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      • Baggins Baggins says:

        Soccer moms. Genius. The hits keep on coming. It’s not healthy to only hate on a single individual this much though, spread it around more. He’s not the only one operating with complete disregard for the management rule.

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    • Baggins Baggins says:

      Give it time. The lenders operate under the structure provided by the various funding entities, both private and governmental programs. It may take a little more work to make sure they are aware of rule changes and might update their policies accordingly. From a lenders perspective on a national scale, it may be more simple to only deal with the specific prohibitions rather than lenient exceptions. Otherwise, the rule of thumb is structure everything around gse rules.

      The reason being is for easy swapping of loan type which is a common event. Think of the lenders position, va order, trainee exception allowed. Then; oops, swap it to fha or conventional. But wait, trainee exception in place, now complicated by fha max consumer billing rules for appraisal service costs and appraiser telling us mandatory second inspection fee (w/ possibility of technical new assignment.) Gets tricky in a hurry.

      It’s commendable for one entity or major group to allow exceptions. Broadspread effect is likely delayed until fannie might adopt a similar policy. Welcome to the wonderful world of international investment, saleable mortgage products for bundled securities and government lending programs. (sarcasm).

      Anyone know of a strictly in house lending client that still operates under easy to manage frt rules, does not use amc’s, also handling all of their own loan servicing? Dare to dream.

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    • Respectfully Pierce, the cited experience doesn’t mean AAPP is dead by any means. The MOST probable reason the restriction was on the order is that the loan OR the property did not qualify for VA AAPP. We know from the original announcements that the alternate inspection option does NOT apply to all products. LAPP (if I remembered that right) does NOT currently qualify.

      Reread the original VA announcement. This is the ‘system’ that existed in virtually ALL multi-person appraisal shops prior to HVCC. Yes. There MAY be lenders that dont allow this. We have no evidence one way or the other.

      VA clarified two major positions: (1) They do NOT support bifurcated hybrid appraisals (such as 1004p) and all the other crap that has been promoted by various shills. (2) They DO recognize that the economics of bringing on new trainees prevents many seasoned appraisers from training new people. A limited return to the tried and proven methods that existed pre-HVCC for tightly controlled delegation of work just makes good sense and improves VA panel appraisers to handle substantially higher volume.

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      • Avatar Pierce Blitch III, IFAS, ASA says:

        Mike, please reread VA Circular 26-19-31 Page 2 Section 4b, bottom of the page.

        Also, cannot be used on complex properties, sales price/value over $1,000,000, or new construction. Nothing about LAPP.

        According to a local VA SAR, there is a box that can be checked by the lender on the VA Form 1805 that Restricts the use of AAPP at the discretion of the lender. Things may change with time but FNMA has allowed this for a long time and the lender’s refuse to take advantage of it.

        I now have 3 VA cases assigned in 2020. Three different lenders. All 3 have the restriction clause, highlighted in yellow, at the bottom of the page.

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        • Pierce, we are both reading from different sources. I’m NOT a VA appraiser and get my information from public or forwarded data. Occasionally from calls and discussions with regional centers (on behalf of members).

          The point is (was) twofold:

          (1) That VA adopted a pragmatic and positive policy on what others were calling bifurcated hybrids and deliberately conflating the ‘bifurcated ‘ part with old-style appraisal inspections. VA made it clear what they will accept under AAPP and it bore NO RESEMBLANCE to the overly hyped bifurcated fraud products. (A great thing in my opinion).

          (2) VA also opened the door to solutions to lenders recurring complaints that there is too great a shortage of appraisers therefore they need waivers statewide. VA offered a solution that at least in theory allows appraisers to earn the kind of money they used to earn (relative) and to bring in trainees in the process. It hasn’t been economic for one person appraiser businesses to bring trainees on board in a long time. If nothing else, VA has given us more ammunition in fighting statewide waivers when submitted to ASC. Another good thing in my opinion. That your three orders for three lenders don’t allow it does not mean the program is DOA. At worst it means the people you work for don’t allow it.

          It’s a brand new policy. Give it time. If all are still saying “no” six months from now, then I’ll conceded the point.

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          • Avatar Bill Johnson says:

            I’m also 3 for 3 on VA orders Mike (No AAPP). Small sample size yes, but how is a business supposed to ramp up and hire if its a crap shoot as to what will be allowed? Do you really think the processor/lender is asking themselves, if we allow a trainee to inspect today, in 5 years we could possibly keep the appraiser population in balance?

            Given a choice, as a consumer (same fee, same timeline, etc.), I would always check no so the higher qualified person did the work.

            Seek the truth.

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GSE Compression Into One Entity

by Jonathan Miller time to read: 2 min