Open Letter to Taxpayers
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An Open Letter to Taxpayers
Dear Ms; Mrs. & Mr. Taxpayer:
In a recent article published by Housing Wire; authored by Ben Lane (November 20, 2018) it was reported that our federal “regulators” are at it again.
“At what?” One might ask.
Facilitation of increased LOAN FRAUD & consumer deception with Taxpayers yet again left holding the bag. Click here for the article
Back in 1994 (actually it started in 1989-91 when FIRREA was being drafted) the Fed agreed that the loan threshold for banks when an appraisal of real estate would not be required was $250,000. That was roughly TEN TIMES the original exclusion amount proposed for FIRREA ($25,000). The argument then was that it made no real sense to charge a consumer-homeowner a full appraisal fee for simple secondary financing of comparatively very small amounts. For example; in a predominantly $300,000 neighborhood, a homeowner with a $100,000 first mortgage or deed of trust that only needed $25,000 for a child’s college expenses clearly had enough equity to collateralize both loans.
Reacting to either mortgage banker pressure; OR perhaps a simple typo adding a zero, Congress in its infinite wisdom raised the threshold to $250,000 vs the drafted language exemption of $25,000.
Look how well that worked out in 2008… a mere fourteen years later when the world economy was at risk of total collapse arising out of the American Real Estate Market collapse and its ripple effect.
For the past several years, Bankers have argued that rising appraisal costs posed an unfair burden on consumers… though due to bank price fixing, many appraiser fees  were as low or in some instances LOWER than they were in 1994. This was after first arguing 100% fabricated stories of nationwide appraisal shortages were causing consumers unreasonable delays in obtaining mortgages. The delays are actually caused by loan officers failing to order appraisals until after loan approvals were obtained subject only to favorable appraisals. The last step of most escrows aside from funding itself.
Now that the shortage myth has been debunked, bankers have adopted the consumer-cost-concerns fairy tale. When is the last time any reader ever heard of bankers being concerned about costs of their services to consumers?
So I ask myself, what is the reason bankers are so concerned all of a sudden with eliminating real estate appraisals on the taxpayer-insured or at least backed security for the loans they make?
The answer is incredibly simple.
With virtually all loans either insured by private mortgage insurance; or government guarantees the risk of loss to the bank and more importantly risk of compensation loss to the CEO’s and bank boards is almost zero. Too Big to Fail has become a fact of life in American Finance. If bad loan policies bury a bank, no worry…FDIC will step in!
The combined generosity of taxpayers coupled with the absolute knowledge that no big bank CEO or Board Member will ever go to jail for their future financial crimes eliminates all meaningful risk for making bad loans. As long as some illusory pretense of compliance with ‘prudent lending practices’ can be created and maintained.
After all, taxpayers aren’t stupid… just incredibly generous.
SO, what’s the problem? Why is anything else needed in this banking environment?
First off, rising home values and prices (generally a good thing) have gone up much faster than wages and income. Fewer people can qualify for home ownership. Fewer new home loans are being made.
The next item is the abnormally low (extremely low) interest rates over the past three to four years has spoiled existing homeowners. Only the most foolish are willing to refinance their 4% loans for higher 5 ½% to 6% loans for frivolous non-critical expenses. Fewer loans are being made.
The last item is the inherent checks and balances intended to protect taxpayers and consumers alike. Appraisals. Historically to assure buyers are not paying too much; sellers are getting fair prices, and lenders are not accepting under collateralized loans. If all property were worth what is being asked, there would never be any price reductions or need for negotiation. Fewer loans are being made when appraisers do their jobs properly.
In recent years, the finance process has virtually eliminated consumer/taxpayers concerns from consideration. Virtually ALL state laws that held a person paying for a service was entitled to at least fiduciary consideration (if not outright client status & rights) were over tuned by the simple expedient of redefining ‘client’ in federally regulated transactions to mean only the lender. A client with little or no risk of meaningful loss.
Bankers Solutions to reduced loan demand:
- Bring back the exact same creative financing that helped create the borrowing frenzy of the early 2000’s. Low teaser rates; stated income loans and new rules & services to allow poor credit to be treated as good credit.
- Outright deception – get those folks with seasoned FHA or other insured loans to refinance to ‘escape’ their mortgage insurance… even to their own long-term detriment. Hustle deferred payment no closing cost loans as an inducement. Particularly during holidays. Develop aggressive marketing strategies.
- Eliminate the deal killers! ‘Low’ or actual market value appraisals are inconvenient when more than market value is required to make a deal work. The very last hurdle to overcome for the next round of consumer/taxpayer fraud to be perpetrated is the appraiser. Whether a sale or a refinance, clearly defined market value simply cannot be permitted to keep killing deals in the contracting mortgage bankers market.
Since 2009 several steps were undertaken by the banking world (bankers, title companies and their affiliates).
First effective appraisal price fixing by banks was achieved by HVCC & later solidified by TRID. Hyped as a safety measure or firewall between weak willed appraisers and dishonest commissioned loan brokers, HVCC was the first nail in the coffin of professional appraisal services in banking.
Control outside of the banks themselves over the appraisal process was turned over to third parties who collected fees direct from consumers OR entered into billing arrangements with banks, that allowed the banks to participate in profiteering from so called ‘appraisal fees’ that AMCs had already discovered. While fees paid for or to appraisers remained stagnant and suppressed for nearly a decade; the ‘appraisal costs’ charged to consumers at least doubled to around $650+/-. The ‘excess’ that was often more than the appraisal cost itself was added profit to the bank or AMC. So much for the myth of bankers concerns about fees.
As appraisers fought back against price fixing, low fees and unneeded scope of work creep both the AMCs and bankers resisted. They tried to foster a misguided trust in the infallibility of Big Data computerization solutions (AVMs); automated appraisal scoring systems misused for appraisal reviews, litigated against Dodd Frank mandated reasonable and customary fee payment requirements and lied about purported appraisal shortages.
All the time trying to circumvent consumer protection rules and taxpayers safety financial reform legislation.
The Federal Housing Finance Agency (FHFA) first created a White Paper of automated appraisal (AVMs) techniques using hedonic regression. Ostensibly it was for purposes of opening dialogue on AVMs, but in less than half a year virtually all federal agencies including the Treasury Department appear to have hopped on board in support of the thoroughly refuted and proven inadequate hedonic linear regression form of valuation as a credible alternative.
A process designed as no more than a limited benefit tool of professionally trained appraisers has been mischaracterized and misused as a purported replacement for appraisals. Despite the phenomenal record of credible result failure.
Why is that important?
Evaluations are to be used in lieu of appraisals with banks self-attesting to ‘values’. AVMs will be used for this.
In 1989 America realized greater uniformity and standards of professional appraisal practice were required to prevent the next S&L crisis. Now, banks are being given carte blanche to self-certify values with virtually NO CHECKS AND BALANCES or uniformity of process. None.
Literally any file clerk can type in an address and develop and AVM for any property. If the value is not ‘acceptable’ it’s easily fixed. By making a very few tweaks to the comparability characteristics so that lower indicators are excluded or higher indicators are included, the desired value can be easily reached.
Any trainee appraiser that has ever attempted to search for the most relevant potential comparable sales is aware of this. It takes conscious, informed effort coupled with integrity to identify proper comparables. Requirements that don’t exist in interested party commissioned lenders self-certifying of value.
So, what can the nonpartisan taxpayers and consumers do about this to protect themselves?
- IF acting as a buyer, insist on an appraisal. Do NOT allow yourself to be hustled into a no appraisal contingency loan. It is your absolute right. Do NOT let the agents involved pick your appraiser. You do it. Select from the Appraisal Sub Committee (ASC) National Registry of Appraisers. Just type in your county and see who’s close. CALL and interview them!
- Write your own Congress Member and Senator and ask them to intervene in this process and prohibit raising the de minimus limit when evaluations may be performed instead of appraisals.
- Contact Congress Member Waters at https://democrats-financialservices.house.gov/ Phone number is at bottom of site if email system excludes you due to district bounds. As the Ranking Member, Member Waters will most likely become the new Committee Head when new House Members are sworn in January.
No bank that is FDIC insured should be allowed to waive appraisals. Not even at the $250,000 limit.
Consumers have a right to not overpay. Taxpayers have a right to expect Congress and Federal Regulators to learn from the mistakes of the past.
-  Fees actually charged by the appraiser for their professional services – excluding add on fees charged by banks and their agent Appraisal Management Companies (AMCs) and mandatory portal uploading fees.