Gov’t-Indulged Middlemen Are Wrong RX for Battered Borrowers, The Infirm

The U.S. government impoverishes homebuyers as it does the chronically ill – by promoting the use of middlemen who prey upon them.

A cadre of such middlemen was created decades ago as a firewall between Big Pharma, the insurance companies and the pharmacy chains. Called “pharmacy benefit managers,” they were to negotiate drug prices, streamline distribution and manage lists of prescription drugs covered by insurance plans. But since the government has gone whole-hog into health care under the Affordable Care Act and into drug-price controls under the Inflation Reduction Act, things have gotten crazy at the slop trough.

Today, according to the publication Healthcare Finance, three big pharmacy benefit managers have come to control 80% of the brand-medicines market. Their activities account for 42 cents of every dollar spent on brand medicines in the commercial market. You can view YouTube humorist Dr. Glaucomflecken’s viral take on the racket here. It received over a million views.

Unfortunately, there was never an actual financial incentive for the middlemen to lower drug costs (but there was a big incentive for them to play all sides against the middle, buy influence in Washington and consolidate power).

thousand cases of price-gouging by another obscure group of middlemen known as “appraisal management companies.” Now, a group of whistleblowers in federally backed mortgage lending has collected a random sampling of nearly a thousand cases of price-gouging by another obscure group of middlemen known as “appraisal management companies.” Some of the federally backed mortgage transactions show mark-ups of more than 60% on brokered appraisals in connection with home purchases and refinancings.

Consider:

• A borrower in the university town of Eugene, Oregon, paid for an appraisal. The mark-up on the appraiser’s underlying $325 fee was $740, costing the borrower a total of $1,065. The middleman’s mark-up amounted to nearly 70% of the total fee for the appraisal.
• A borrower in Commerce City, Colorado, just north of Denver, paid a total of $820 for an appraisal. The mark-up on the appraiser’s fee of $315 was $505. The mark-up was 62% of the total appraisal fee.
• A homeowner in rural Lonedell, Missouri, paid $525 for an appraisal. The mark-up on the appraiser’s $220 fee was $305, amounting to nearly 58% of the total cost to the borrower.
• A Los Angeles homeowner paid a mark-up on the appraiser’s $375 fee of $725, for a total cost to the borrower of $1,100. The middleman’s mark-up amounted to 66% of the total appraisal fee.
• A borrower in the university town of Lansing, Michigan, paid a mark-up on the appraiser’s $250 fee of $415, for a total cost to the borrower of $665. The middleman’s mark-up amounted to nearly 62% of the total appraisal fee.
• A borrower in rural Oxford, North Carolina, pop. 8,628, paid for an appraisal. The mark-up on the appraiser’s underlying $125 fee was $470, for a total cost to the borrower of $595. The middleman’s mark-up amounted to nearly 79% of the appraisal fee.

In the smoldering wreckage of the 2007-2008 financial crisis, the firewall model was embraced to create a buffer between residential appraisers in federally backed mortgages and the commissioned salespeople who used to hire them directly and then attempt to manipulate them. It was thought these intermediaries would create a layer of integrity and independence in the appraisal process. The firewall was the brainchild of then-New York State Attorney General Andrew Cuomo. It was contained in something called the “Home Valuation Code of Conduct.” The code was inserted as a portion of a lawsuit filed by Cuomo against Fannie Mae and Freddie Mac. It was later implemented without challenge.

“But there was money to be made in the middle and nothing stopping [the intermediaries] from raising their fees, while they reduced the fees they paid to appraisers,” said Cindy Chance, CEO of the Appraisal Institute, a professional organization for appraisers. “The public is not aware of this because [the appraisal management companies] do not need to disclose their fees.” An expensive junk fee has been allowed to taint the $7.5 trillion in mortgages backstopped by mortgage giants Fannie Mae and Freddie Mac. Sellers are often expected to pay borrowers’ closing costs at the lower end of the market. Those sellers implicitly build the costs into the sale price.

The price-gouging revelations were a surprise to nobody in the profession except the one federal official tasked specifically with overseeing the regulation of these middlemen on a state-by-state basis. A University of Texas-trained lawyer and activist called Zixta Q. Martinez is chair of an obscure do-nothing federal committee tasked with overseeing the way states regulate appraisers and appraisal management companies. Besides her duties on the committee, she is deputy director at the federal Consumer Financial Protection Bureau. No one in the universe was better positioned to uncover price-gouging by appraisal management companies in mortgage transactions than Martinez.

But instead of regulating, Martinez was busy self-promoting and peddling a poisonous canard known as “appraiser bias.” The reductive theory holds that an appraiser of one racial group cannot properly appraise real estate owned by someone of a different racial group. The nation’s 80,000 state-licensed appraisers are a key check on the banks, nonbank lenders, homebuilders and Realtors. Conveniently, the housing lobby has attempted to cash in on this peculiar madness, as they would like to be rid of appraisers. It has resulted in a weird partnership of convenience in which members of the housing lobby have joined hands with militants who harbor contempt for free markets. Together they work to delegitimize and sideline appraisers in federally backed transactions. These odd bedfellows promote the falsehood that appraisers, rather than socio-economic factors, are responsible for America’s racial wealth gap. This scapegoating is about shooting the messenger. It makes a mockery of actual efforts to narrow the racial wealth gap.

The intimidation of appraisers – or the waiving of valuations altogether – is partly responsible for the current inflation in home prices. In May, Fitch Ratings estimated national home prices were 11.1% overvalued. That’s likely understating it. Appraisers are a key bulwark. At the end of the day, they protect taxpayers in federally related mortgages. For America’s housing economy to function, appraisers must be able to occasionally conclude values that sink transactions, sending buyers, sellers and their commissioned brokers back to the negotiating table. Instead, agencies like HUD and Martinez’s committee encourage borrowers and salespeople to simply report appraisers for suspected discrimination when the latter refuse to act as rubber-stamps. It’s a scorched-earth policy.

The committee of seat-warmers that Martinez chairs goes by the long-winded name the Appraisal Subcommittee of the Federal Financial Institutions Examination Council. Martinez has no accountability to voters and is not dependent on congressional appropriations for her committee’s budget. (It commands pass-through fees from state licensing agencies to fund its entire operation.) This is not what the Framers envisioned for a government agency.

Her past employers include the National Fair Housing Alliance – which has received hundreds of thousands of dollars from her committee outside the federal procurement process – the Mexican American Legal Defense and Education Fund, the National Council of La Raza and Freddie Mac. She ought to be able to spot price-gouging in real estate transaction fees.

The whistleblowers – each with a different vantage point on the problem – have collected a random sampling of nearly a thousand instances of price-gouging by these middlemen and presented their findings directly to Martinez’s boss, Consumer Financial Protection Bureau Director Rohit Chopra. Many of the instances illustrate mark-ups of more than 60% of the total fee paid by hapless borrowers in connection with home purchases and refinances.

Chopra’s agency is now soliciting information from the public about “fees charged by providers of mortgages and related settlement services.” It’s thin gruel. You can view the request here. The whistleblowers believe the combined markups on borrowers are in the billions (which is a rounding error given the trillions in federally backed loans originated over recent years).

America’s beleaguered homebuyers can no longer afford the high cost of the federal government’s protective services. Chopra should shake up his lieutenants. He clearly needs to replace Martinez with a new horse-holder.

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Jeremy Bagott

Certified General Real Estate Appraiser at Bender Rosenthal Inc

Jeremy Bagott is a real estate appraiser and former newspaperman. His most recent book, “The Ichthyologist’s Guide to the Subprime Meltdown,” is a concise almanac that distills the cataclysmic financial crisis of 2007-2008 to its essence. This pithy guide to the upheaval includes essays, chronologies, roundups and key lists, weaving together the stories of the politics-infused Freddie and Fannie; the doomed Wall Street investment banks Lehman and Bear Stearns; the dereliction of duty by the Big Three credit-rating services; the mayhem caused by the shadowy nonbank lenders; and the massive government bailouts. It provides a rapid-fire succession of “ah-hah” moments as it lays out the meltdown, convulsion by convulsion.

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