Freddie Mac Criminal Aspects of Its Appraisal Free Mortgages

Freddie Mac Criminal Aspects of Its Appraisal Free Mortgages

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.

  1. 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.
  2. 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.

Michael Ford
Latest posts by Michael Ford (see all)
Michael Ford

Michael Ford

Over 28 years appraising all property types and interests, in Southern California real estate. VP/Chairman National Appraiser Peer Review Committee, American Guild of Appraisers, #44OPEIU/AFL-CIO. - Michael Ford on e-AppraisersDirectory

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38 Responses

  1. Avatar Diana N. says:

    AMEN brother, right on the money.

  2. Avatar Chris says:

    I vote to put you in charge !

  3. Avatar Nanny says:

    I just completed an appraisal, the property was almost directly under a cell tower AND power lines. After completed, the Lender asked for clarification, as the last appraiser never mentioned.  So here, we go..

  4. Avatar Diana N. says:

    Shame on the last appraiser, guess they were trying to make it work. You did the right thing.

  5. Avatar Bill Johnson says:

    Thank you Mike, well said.

  6. Andrea Couture on Facebook Andrea Couture on Facebook says:

    Well said indeed…

  7. Avatar Jan Bellas says:

    ARE YOU AWARE OF THIS HEARING: November 16, 2016, Housing and Insurance Subcommittee Hearing on “Modernizing Appraisals. A Regulatory Review and the Future of this Industry.” Here is the LINK to view the MEMORANDOM,at 10:00 a.m. on Wednesday, November 16, 2016, in Room 2128 of the Rayburn House Office Building

    See the entire memo here.

  8. Avatar Jan Bellas says:

    ARE YOU AWARE OF THIS HEARING: November 16, 2016, Housing and Insurance Subcommittee Hearing on “Modernizing Appraisals. A Regulatory Review and the Future of this Industry.” Here is the LINK to view the MEMORANDOM,at 10:00 a.m. on Wednesday, November 16, 2016, in Room 2128 of the Rayburn House Office Building

    See the entire memo here.

  9. Apologies for my typos. The above was originally intended as an open letter to the author referenced toward the middle of the article (Mr. Ken Harney).

    Nanny, I am proud to be in a profession where there are still people like yourself “doing the right thing.” That particular lenders ‘request for clarification’ could be well suited for an article all by itself.

    Different topic: Did y’all know that the Congressional Subcommittee on Housing & Insurance is meeting this Wednesday in what is essentially a closed hearing (closed in the sense that their panel of “expert witnesses” is already set and “there is no room” for any additional witnesses according to subcommittee staffers).

    Topic is “Modern Appraising and Regulatory Review & the Future of the Industry.” Current scheduled witnesses include James Park (Executive Director Appraisal Sub Committee); David Bunton (The Appraisal Foundation), Joan Trice (Clearbox and whatever other title of convenience she is holding today); a representative of the Appraisal Institute (unknown if an MAI; SRA or just another lobbyist) and representation from a Builders Group.

    The Appraisal Institute DOES NOT SPEAK for independent appraisers! Despite their past claims before TAF Boards to represent the interests of all appraisers, they represent no one but their own membership!

    Joan Trice (as near as anyone can determine) represents the interests of appraisal management and similar interests. Since there is no Joan Trice in the Federal Registry with a currently active appraisal license it would be misleading to think or consider her to be representing appraiser interests. She is not an appraiser as of this posting. Her name does appear numerous times as having held now INACTIVE licenses.

    I urge all that read this to find Jan Bellas posting in this blog page with the link to the committee hearing.

    Contact them direct or if they don’t provide for public input then contact your Senator and Representatives and go on record as objecting to any type of public hearing as important as this that excludes broad representation for appraisers interests. Im sure ASA; NAIFA and a host of others along with AGA would be more that interested in providing input. This hearing gives the appearance of only being interested in hearing from the advocates with similar self serving views.

  10. Avatar B says:

    Joan Trice is only one of many sell-outs and no friend of appraisers except to make money off of them.

  11. Avatar B says:

    She actually told me she recently did actual appraisals and I was wrong in my assumption

  12. Avatar Robyn Krohn says:

    Michael Ford for PRESIDENT!  You speak the truth and I’ll put my name in that Class Action!

  13. Avatar marion says:

    Does everyone miss that the truth in lending act, a law passed by Congress, requires interior appraisals for higher priced mortgages?  How do the GSEs issue wavers against that law?  Where are the regulators and the judiciary?

    • Baggins Baggins says:

      Could we appeal with citizen grand jury activity? What’s your take on class action for existing malfeasance? Personally I think it’s time to wind down FNMA and Freddie. The GSE’s have long since departed from their mantras which justified their federal charters in the first place. Let’s simply get the government out of lending and let the free market sort this out. It seems very obvious that most regulatory advancements merely put more burden on the taxpayer and relieve the lenders of actual financial responsibility. That is after all the point of self regulation activity which these closed door meetings are all about. If they want to be risky, let them, but remove their taxpayer backing and take FDIC insurability out of the picture?

    • Avatar Michael says:

      The GSE’s do not purchase loans that are higher priced mortgages as that term is defined under the law and loans sold to the GSE’s are exempted from the definition of federally regulated transactions, so the GSE’s need no waiver of any law in order to purchase loans without appraisals (even loans > $250,000)

  14. Avatar Diana N. says:

    The whole mortgage and appraisal system has gone to hell in a hand basket. And, as usual, we are the one to suffer.

  15. Avatar Diana N. says:

    Anybody wonder what’s going to happen once our new President takes over, that might be a whole new can of worms.

  16. Avatar Lee says:

    This was posted on AF. Any thoughts?

    “So this afternoon I listened to the Fannie Mae webinar regarding their new Day 1 Certainty program. The new program kicks off 10/10/16 and part of it to allow for some refinance transactions to have appraisal waivers. While there wasn’t a ton of super detailed information provided here’s a few items I learned.

    They have offered limited appraisal waivers for 15 years but those old waivers were based on the borrower’s credit, not property value. The new program is based on property value using the 20 million appraisals we have all submitted to CU with standardized data and incorporates analytics to determine value. They were clear that is the first phase which makes everyone to believe that there will be other phases.

    Their reason for rolling this out is it saves the lender time and reduces loan and borrower costs by waiving the appraisal requirement. The CU value is free starting 01/01/17. If the lender gets the approval to waive the appraisal they are released of any future value liability if they use the CU value.

    Right now the appraisal waiver only applies to refi’s of normal homes and condos under $1M. These homes can be a primary residence, second home, or investment homes. They are not for purchases, new construction, construction loans, or multi-family homes. They are also not for leasehold, land trusts, or other properties with resale restrictions. Keep in mind, this is phase 1 so who knows what will be included in future phases.

    If an appraisal is ordered and completed and a waiver is also issued the lender has to use the appraisal. If the lender orders an appraisal and gets a waiver before the appraisal is completed they can cancel the appraisal. So, for those that pre-write reports, be careful if you are doing that for refi’s…you might get stuck doing work for free.

    It looks like with the new program we might see less CU feedback unless there is a discrepancy in subject data. If there isn’t any subject data questions and the CU score is 2.5+ they can ignore the other CU findings.That was it in a nutshell. Keep in mind that Freddie Mac is rolling out a similar appraisal waiver program in the spring.”

    • Mike Ford, AGA, SCREA, GAA, RAA Mike Ford, AGA, SCREA, GAA, RAA says:

      Excellent information Lee. Thank you.

      Lets all remember that the CU process itself is fatally flawed. I’ve written previously that I carefully  studied the FNMA CU Patent Application and that the entire process was designed by seven people that have no appraisal license or certifications.

      Then, those seven people used numeric ratios and ranges derived from FNMA data records that they admit came from appraisers that appraised to guidelines rather than to market. At best, this means that their CU system is based on their old (subsequently admitted to be wrong) “guidelines driven adjustments” rather than “peers” as their messages in CU state. Might be nice if the data were based on valid MARKET DATA instead of erroneous information!

      In any event. Real word experiences of both AMCs and appraisers since CU was rolled out include a widespread practice among lenders that scores of 3.5 or higher are the same as hard stops. Many will simply not process loans at or above 3.5 scores even though FNMA claims they can be manually over ridden.

      Now, they have a system where if the meaningless “risk score” is coincidentally 2.5 or lower, there will not even be a review of the appraisal (automated or otherwise). I mean, what’s the risk, right?

      Its not like anyone knows how to manipulate the CU score by merely running all sales (comparable or otherwise) within the same census tract going back 24 months; or applying arbitrary GLA adjustments within FNMAs bell curve or “peer” adjustments from $35 sf to $220 sf. Both these things would lower a CU score.

      So would going back to the appraiser (in violation of FNMA CU Licensing) and simply telling them the specific CU triggers that turned up in a first bite of the apple so that they could modify their work to produce a lower score…instead of a most accurate, independently developed and credibly supported market value.

  17. Avatar Diana N. says:

    Exactly what I said would happen when these new forms were developed that had to be in XML form. All our information into a huge data base and there will be no need for appraisers. Bah Humbug.

  18. Avatar Almost Retired Appraiser says:

    Not sure what to make of this. Good or bad for appraisers? Looks like next year will be a change for all of us

    • Baggins Baggins says:

      What an interesting article.  I’ve been trying to get more educated on these concepts.  Did the article writer confuse government ownership for receivership?  Will the gse’s still be federally chartered?  Will they still have access to the fed where they can lend themselves money for interest?  Will quantitative easing continue?  Will this solve the;  “fnma mortgage shell game”?  It’s all over my head man.  The pertinent question should be;  If the gse’s and lenders involved with them take losses, will they actually take the losses or pass them back to taxpayers?  Does this move effect the too big to fail argument?  Do I even know what I’m talking about?  Probably not, but I’m keen to learn more about this issue.


    • Hardly a bombshell to anyone that read (1) FHFA working paper; (2) Mnuchins Treasury Dept. Report to White House, (3) Jeb Hensarling’s Bill to eliminate Fannie and Freddie and replace it with a modified Ginnie & of course my old favorites (4) MISMO.

  19. Avatar chris says:

    The Cu database is just another form of an AVM. They been using them for 20+ years. The need us appraisers to keep their database rolling. Realtors adding data is worthless. They are clueless when it comes to adverse conditions. Wait till the foreclosures start to happen and they find out how no good is it to use another idiotic computer model to do appraising.

    The real problem out there is that 50% of the appraisers out there were never taught right. I have seen their reports and know many reviewers who pull their hair out. They all tell me how bad these people are writing their appraisals. Nothing has changed with AMC’s.

    When fee’s go in the right direction, We will start training again, until then….the bullshit continues !

    Where did many appraisers go…..into review. And I say, those that can do…do, those who cant….go into review.


    • Baggins - double dare you to read it. Baggins - double dare you to read it. says:

      Yo Chris!  Did you say something about foreclosures….

    • Mike Ford, AGA, SCREA, GAA, RAA Mike Ford, AGA, SCREA, GAA, RAA says:

      Chris you are right. Again, unrealistically low fees that are neither reasonable, nor customary produced appraisers that don’t know how to appraise…or that know how but still choose to take unacceptable shortcuts.

      Many appraisals range from the merely shoddy and haphazard to the outright dishonest.

      Instead of learning how to develop and grow within our profession, most appraisers now study only what’s required for CE…even to the extent of taking the same courses over and over again.

      Regulators do not promote or encourage effective career development…they promote fear of having failed to dot an “I” or cross a “T”. Micro management of the trainee process has become so burdensome that most of us now say “Why bother?” Extreme risk for very little economic reward? No thank you!

      Those of us that could and would train or mentor, have to spend all our discretionary time fighting to recover our lost professional ‘respect’. ..or for C&R fees…or against the newest appraiser abuse of the month.

  20. Avatar Darian says:

    As an appraiser we should be tired of being the scapegoat for bad lending practices. We should sue for being stepped on and taking advantage of in such a manner – Stealing of our data is unacceptable. I smell a class action law suit!

  21. Avatar Michael Wilbanks says:

    Question. They wave the appraisal. Mr. homeowner buys the house for $200,000. A year down the road they have to sell the house. The house sells for $150,000 and it is discovered home was never worth $200,000. Who is liable. The mortgage company, the Wholesaler, the realtor?. Somebody will be on the hook.But Who?

  22. Avatar Appraiser says:

    Waiting for Fannie Mae to pay for my retirement!


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Freddie Mac Criminal Aspects of Its Appraisal Free Mortgages

by Michael Ford time to read: 10 min