Fannie Mae to Maryland: DROP DEAD

Fannie Mae to State of Maryland: DROP DEAD

Mortgage giant Fannie Mae and her twin, Freddie Mac, have a message for the State of Maryland: Kindly disintegrate.

A snubbed Maryland task force is close to filing its report to the governor. It attempted, in vain, to obtain detailed information about the government-sponsored twins’ valuation algorithms – tools that have replaced many home appraisals in the Old-Line State and resulted, some contend, in a feedback loop and run-up in home prices. The task force was formed on the reasonable premise that the state has an interest in the twins’ activities, since Marylanders will be left with the clean-up costs, hard-luck stories and urban blight of another 2007-2008-style housing collapse.

In its quest for information from the twins, the governor’s panel was doomed from the outset. Its committee tasked with monitoring the twins’ alternative property valuation methods initially couldn’t get telephone calls or emails returned. It endured months of stonewalling as key risk managers and valuation officials with the twins went silent.

The ghosting set the stage for future disappointments. The panel had – and still has – many questions about base parameters used by the twins’ algorithmic models, along with information about the developers of the tools and general information about ongoing system management.

The panelists believe the twins are generating automated appraisals similar to Zillow’s “Zestimates” – but likely much more inaccurate. They fear these so-called “black-box appraisals” are at best incompetent, at worst being manipulated to inflate appraised values in the state, dialed up to make a greater number of transactions “work.” The beneficiary? The nonbank lenders, fintechs, home builders and Realtors, the twins’ traditional allies. Panelists fear the models have been gradually inserting risk into Maryland’s economy and making homes there increasingly unaffordable and putting home buyers immediately underwater.

Fannie, for one, maintains its automated valuation tool has been tested and found reliable for generating property values. The panelists aren’t so sure.

The mortgage giants have a history of earnings manipulation, mismanagement and infiltration by bad actors. Beginning in the late 1990s, executive pay at Fannie and Freddie became tied almost exclusively to earnings growth. To maximize bonus payouts, top management at the twins cooked the books.

In 2006, the Securities and Exchange Commission accused Fannie of securities fraud from at least 1998 through 2004. Then, in 2011, the commission charged six former top executives at Fannie and Freddie with securities fraud, including former Fannie Mae CEO Daniel Mudd and former Freddie Mac CEO Richard Syron, alleging they knew and approved of misleading statements claiming the mortgage giants had only minimal holdings of subprime loans. It was later revealed that in 2006, Freddie and Fannie insured 70% of all subprime loans. The duo nearly destroyed the U.S. economy, requiring a combined $200 billion bailout in 2008. Both are still in federal conservatorship.

But back to the Maryland task force. In its investigation, the task force discovered two risk-analysis products were used originally to evaluate appraisal reports and then to replace appraisals in a widespread appraisal waiver policy that was later renamed “value acceptance.”

According to a draft report provided to appraiser-author Jeremy Bagott, the committee’s recommendations to the governor will include the requirement that if an automated valuation model is used for a valuation waiver in the State of Maryland, then the parametric data and risk-analysis information must be released to the public. Also, any waiver of a traditional appraisal must be followed by a written, detailed document with a fixed value.

There is no precedent for a computer model correctly mimicking Adam Smith’s invisible hand of the market. In 2021, Zillow abruptly shuttered its once-promising Zillow Offers division. Its iBuying business had purchased thousands of homes, buttressed by its valuation algorithms, for prices higher than it could sell them for. The move sent the company’s stock tumbling and erased hundreds of millions of dollars in investor value overnight.

One of the frequently cited causes of the 2007-2008 financial crisis was the corrupted valuation models used by S&P, Fitch and Moody’s. Their models assigned investment-grade ratings to junk-quality mortgage-backed securities and collateralized debt obligations. The investment-grade ratings were prized by Fannie, Freddie and the private-label investment banks, since they allowed the mortgage-backed securities these actors created to be sold to pension funds.

The Maryland panel rightly worries the same hubris, dishonesty and incompetence are now at play at Fannie and Freddie. The task force believes the models are caught in a feedback loop, one in which output is based on the use of derivative data that is influenced from sales relying on other derivative data. Appraiser-podcaster Phil Crawford calls it “data cancer.”

The tool being used at Fannie Mae is known as Collateral Underwriter. At Freddie Mac, it is called Loan Collateral Advisor. A similar tool, known as VeroScore, is in use at the Veterans Administration.

they are not required to share any of their parameters with the State of MarylandWhen a channel of communication was finally opened by the Maryland committee, the twins contended their computer models are proprietary, and that they are not required to share any of their parameters with the State of Maryland. Fannie officials reported the mortgage giant’s self-managed appraisal waiver process is not a process that results in an appraisal report, so no number is generated. You’ll just have to trust ‘em.

The task force has concluded that Maryland homeowners often have no idea what “value” is being assigned to the property the latter are putting up as collateral for six- and seven-figure mortgage transactions.

The state isn’t sold on the idea.

Jeremy Bagott
Image credit flickr - Martin Hearn
Jeremy Bagott

Jeremy Bagott

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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33 Responses

  1. Avatar Dave says:

    I recommend that my colleagues read “Dark Towers” by David Enrich very much substantiating similar historic and current behavior of the “twins”. I would proffer that we currently are at an inflection point where high risk atypical properties are being loaded into the residential portfolios. Appraisers need only look at the last 10 appraisal requests and compare complexity to appraisal fee offered. It is in your face – take note. Can other appraisers confirm this?

  2. Avatar Eric Kretz says:

    “If an automated valuation model is used for a valuation waiver in the State of Maryland, then the parametric data and risk-analysis information must be released to the public. Also, any waiver of a traditional appraisal must be followed by a written, detailed document with a fixed value.”

    This is the answer.

    If our clown-show overlords insist on using this rubber stamping technology, this should be the minimum they would have to provide the consumer. Show your work, right? Can it be replicated by a human?

    Problem being, is Fannie & Freddie exist in an echo chamber and nobody will sign their name to these fake algorithms. If an appraiser must sign a certification, they should too.

    If this directive was somehow adopted by just 1/2 of the States you’d see Fannie & Freddie back-peddling in a hurry.

  3. Avatar Truett Neathery, Retired says:

    When I worked in the engineering field (Flour, Ralph Parsons et al) the watchword was “Show calculations “, when there was a question or a doubt !!

  4. Avatar PD says:

    I for one have always found it troubling a “for profit” company sets the parameters for the mortgage industry. Of course any company that is answerable to their stake holders is going to do their best to maximize their returns. Why does anyone believe FNMA is any different? How they managed to get into the hen house is ripe for discussion. The fact they are not willing to admit there may be a problem does not play into their plans so rather than admitting there may be a problem they simply shut it down. These and other types of decisions should be in the hands of people who have no vested interest (monetarily speaking) in the outcome, kind of like Maryland.

  5. Avatar Mark S. Davis says:

    Transparency is the minimum standard for both valuation professionals and government entities; anything less is evidence of fraud and/or manipulation.

  6. Baggins Baggins says:

    Great comments. Another great article. Don’t worry the taxpayer is backing everything. Insiders will find their way out ahead of the crowds after primary goals are achieved. Things are moving along nicely, just as planned.

    The plunge protection teams current status; tap dancing on a bubble, whiskey and cigar in hand. Those whom rushed in with wild eyed ideas of saving the world and restructuring society, those whom believed that entrusting the same government and corporations whom failed to deliver before, with advanced automation capable of replacing and reorganizing entire groups of people and entire systems, that this would benefit them rather than increasing the harm; pawns on the board.

    TAF papers on AVM’s.

    • Avatar Lindsey says:

      Statistics haven’t had it easy ever since Mark Twain’s famous “ There are three kinds of lies: lies, damned lies and statistics.” I think stats can be used as a baseline but not the end all be all. My stats teacher taught me how to bet on race horses with stats and win. But real estate? Though, in the end, any investment is a risk. But as mathematician Frederick Mosteller would have replied, “while it is easy to lie with statistics, it is even easier to lie without them.” Especially as the GSEs bowing to the stakeholders. Who are the stakeholders anyway? I’m so tired of the corporate/stakeholder model. It’s not working for society. It’s crushing it

  7. Avatar Spencer Paul says:

    Big Short 2 is coming soon to a theater near you. I can help be see FNMA as a just a CDO manger that create a crappy product to put out in the market with no care to risk of the general public because too much money can be made in the secondary markets masquerading B’s and under as AAA – with the whores at the ratings agencies backing them up. Meanwhile the lowly appraisers are running around shouting the data doesn’t support this. FNMA knows the data doesn’t support it, which is why they will not share their algorithm’s with anyone for public scrutiny all the while under government conservatorship; which means it has the backing of said government. All states would be wise to “opt-out” or ban the use of the AVM product FNMA is offering in their state, a choice that would not be easy due to the size of FNMA.

    • Avatar Lindsey says:

      Yes, I’m actually tired of pointless questions from some AMCs questioning my work based on some “market standard.” I actually asked where this data is coming from and guess what….crickets. Here’s my latest: (subject is canal front with boat lift and pool). I had a recon with a much lower sale they wanted me to review that wasn’t even waterfront on a side of town that’s much less valued. It took me aback. This is Florida open waters. Shouldn’t that be common sense? I only used canal front properties. Doesn’t everyone want to jump on their boat during summer and cruise the waters? Pretty much everyone on the Florida coast. Apparently they don’t realize home owners share their prior appraisals, or we have to go behind desktop appraisers who aren’t geographically competent, nor do they realize banks ask for reviews on appraisals. It’s highly confusing. Bring back common sense! Please!

      • Baggins Baggins says:

        The fact the automatic valuation model (AVM) programmers can’t even share or talk about their methodology used is a glaring admission they’re not competent to complete the task in the first place. That’s because of the compartmentalization of a system that big and all the people their in. Nobody individually is actually qualified to do the job, but somehow collectively after substantial effort and hours, revisions to process and changes to programming, over and over again, they find a way to push their final product. The moment something faults or an update is needed, the credibility of the entire system and all their output streams is immediately in question all over again. People whom think robots can substitute humans are the real luddites of the world; They never even understood their own human potential in the first place.

        • Avatar Lindsey says:

          Baggins, how can I soak up all your knowledge before you retire. I’m all ears and you’re brilliant.

  8. Avatar Kevin says:

    Dont worry, we the taxpayer will just bail ’em out again like what happened in the blow-bama era. They will simply try to blame the appraiser’s again, but we all know this is total bs!

  9. Retired Appraiser Retired Appraiser says:

    Strong words from two pathetic entities who were spared from death at the tax payers expense and are still on life support 15 years later. Cocky little beastards aren’t they?

  10. Avatar Eric Kretz says:

    Phil Crawfords new show lays it all out:

    (skip to 7:30)

    I’m going go mow lawns with Baggins.

  11. Avatar Dave says:

    Total nonsense – you do neither your self or the profession justice. Probably not even a member of this profession!

    • Avatar Spencer Paul says:

      Dave – what are you talking about?

    • Avatar Eric Kretz says:


      What is total nonsense? How do I not do myself or the profession justice?

      I get you don’t like the message, or the messenger, but don’t attack me because of your ignorance.

      • Avatar Lindsey says:

        Can someone explain the message? Hopefully no one is touting $25 per hour for an appraiser…..I’ll go back to house cleaning for $25 an hour like I did 15 years ago….and I’ll bet my old customers (doctors, lawyers, lenders, physicians assistants, etc) would pay me a lot more now. And that’s for house cleaning (not putting anyone down, just educational wise). Sometimes the old farts need to break out of routine and really grasp the market.

        • Avatar Spencer Paul says:

          Watch the video and the message will be explained. Just skip the whole bit of the coronation at TAF and get to the point of the matter.

      • Baggins Baggins says:

        Eric, I did listen to that today. The outlook is rather bleak. I am not sure if marketing is even worth it anymore. Contraction is everywhere. The GSE’s appear to be advocating for investor class dominance of residential housing markets, supported by automation. I mean hell, my reserve smaller lawn mower would not even start and somehow the front wheel is broken. I’m not sure what to do…

        Check out this find. Colorado proposed bill on; Consumer Protections For Artificial Intelligence. Is the avm qualified as ‘synthetic digital content’? ‘Algorithmic discrimination.’ People may have mistook a technical automated lender side process for appraisal bias.

        • Avatar Eric Kretz says:

          That is scary.
          Data analytics models for loan treatment? The Colorado overlords know not what they do if they green-light this, which could set a dangerous precedent. I’ll read more on this later.

          Off to mow lawns…

  12. Avatar Lindsey says:

    Ok, I listened to it. I’ll go back to house cleaning for more money (waaaaaaayyyyyy less liability with happier customers) and let the GSEs run out of quality material after 3 years once the industry dries up and appraisers aren’t there to verify solid data. #nevertrustasalesman

  13. Avatar Mat J says:

    Incredible how much power the Twins have.

    • Avatar PD says:

      Maybe too much? The question comes to mind, who’s bidding are they doing? For the good of the public? Seems to me when reviewing the facts, the consumer has been us getting the short of the stick for some time now yet they are just singing in the rain..

  14. Avatar Dave says:

    Might I suggest we all take the following or similar answer to the AMC community:
    “Thank you for contacting us. Like many appraisers, we no longer participate in bid requests. We value our work based on quality, service and turn times. We’re always available for immediate inspections with five business day turn times. When and if that becomes a priority to you or your lenders, we’d be happy to accommodate you.”

  15. Baggins Baggins says:

    The saga of proposed AI regulation in Colorado continues…

    He added: “The defense of innovation for the sake of innovation fails to mean something when that innovation is concentrated in the hands of the few, held behind opaque curtains, and is a source of systemic abuses.”

    That above is a quote from a high school kid. Below, a conversational AI type system executive.

    “This bill ensures that careful developers stay that way and makes reckless development impossible,” he said.

    Beth Rudden, CEO of Bast AI, called the bill a “pragmatic and necessary measure” to maintain the integrity of artificial intelligence systems. She argued that the bill is not just about compliance within the industry, but also about holding developers accountable for unethical actions.

    “By supporting this bill, we commit to a path that respects consumer rights, promotes transparency, and fosters trust in the technologies that are shaping our future,” she concluded.

    And the high school kid wins by a mile.

  16. Avatar Spencer Paul says:

    Has there been any updates on this investigation? Still going?

  17. Baggins Baggins says:

    Yellen warns of ‘significant’ AI risks to financial system


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Fannie Mae to Maryland: DROP DEAD

by Jeremy Bagott time to read: 4 min