How Deep Fakes Have Burrowed Into Home Finance
In the 1960s, technocrats at the Pentagon used the latest IBM mainframe computers to analyze complex data related to the Vietnam War. Planners fed punch cards into the machines and ran endless simulations, hoping to determine strategies for winning the war.
In 1967, analysts finally asked the computer, “When will we win in Vietnam?” The machine’s answer: “You won in 1965.” It exposed the hubris and naiveté of those who believed computer-generated models could capture and quantify millions of complex human interactions on the battlefield.
Fast-forward to July 10, 2007. Standard and Poor’s Rating Services, which had developed a similar computer model that valued mortgage-backed securities, dropped a bombshell on the markets: Its algorithm had failed to replicate the market’s “invisible hand.” It announced it was putting 612 formerly “investment grade” mortgage-backed securities on “CreditWatch negative” due to high delinquency and foreclosure rates.
The rating agency Moody’s dropped a similar bombshell later that day. Two days later, rival Fitch Ratings made a similar announcement. Many of the garbage securities were in the portfolios of public-employee pension funds and Wall Street players like Bear Stearns, Citigroup, JPMorgan, Merrill Lynch and Morgan Stanley.
The parameters and coefficients had been tinkered with to allow the credit ratings agencies to stamp “investment grade” on junk securities. Today, we might call these dishonest computer-generated ratings “deep fakes.” There was a strong profit motive involved. The ratings downgrades unleashed the 2007-2008 financial crisis.
Fast-forward again. This time to 2024. With the blessing of the housing lobby – the Realtors, homebuilders, nonbank lenders, banks and fintechs – and their friends in Congress and in the Biden administration, Fannie Mae and Freddie Mac have been waiving home appraisals in favor of computer models.
Fannie and Freddie, like the Pentagon planners in the ‘60s and the computer scientists at S&P, Fitch and Moody’s in the aughts, have been toiling at the coalface of “synthetic appraisals” – “black box valuations.” Hiding behind a wall of gibberish and acronyms, they call the practice “Value Acceptance + Property Data.” It has contributed to what we have today: a massive fraud-filled housing bubble in which starter homes in many markets are selling for over a million dollars and homes nationwide have seen a doubling and tripling of prices.
Fannie and Freddie, the silent partners in most U.S. home sales, have enabled it.
As early as 2017, the website HousingWire reported that Fannie would be following Freddie in guaranteeing mortgages without the appraisal of certain homes put up as collateral. While the Dodd-Frank Act curbed issuance of “liar loans” – so-called “stated income loans” – Fannie and Freddie have ushered in its equivalent for the new era with “the black-box appraisal.”
Black-box appraisals are like Zillow’s “Zestimates.” They can be generated quickly and cheaply. Because they are based on software and templates, they don’t meet the IRS definition of a qualified valuation. Investors in Zillow, too, lost their shirts when the company began purchasing homes based on a version of its own Zestimates.
Ohio podcaster and appraiser Phil Crawford warns these synthetic appraisals don’t satisfy the terms of the appraisal contingency found in the standard home sales agreement. Some brokers advise their clients to waive the appraisal contingency outright. “Buyers deserve better counsel from their fiduciaries,” said Crawford. “Buyers need to be advised to get their own appraisals to protect themselves.”
Unfortunately, even if an actual appraiser is engaged to appraise a home prior to a sale, Fannie and Freddie have significantly distorted the data in certain markets through previous experiments in lax underwriting, the derivative effect of past synthetic appraisals, and the refusal to foreclose on homes, thus frustrating market corrections and price discovery. Crawford calls this effect “data cancer.”
This is not to say employees of Freddie and Fannie are bad people. Some suffer from what Polish philosopher Zygmunt Bauman refers to as a hyperrational systemic thinking that enables people to detach from the implications of their actions. Like the Pentagon technocrats during the fog of war, many of the people promoting black-box appraisals in federally backed mortgages are ideologically committed to tech.
Some political appointees assigned to oversee Fannie, Freddie and the FHA are openly contemptuous of free markets. They believe modern-day politburos like Fannie and Freddie – opaque organizations with limited accountability – should be used as agents to redistribute housing, to create a “universal basic home value.”
The nation’s state-licensed appraisers, who tend to be experts in the geographic areas they cover, report Freddie and Fannie sending computer-generated complaints to their state boards over the selection of individual sales used as data points in their appraisal reports.
Of course, as in all spheres of human endeavor, there are those who are in it for personal gain and to secure powerful positions. Some, like former HUD Secretary Marcia Fudge, appear to have simply been auditioning for a lucrative lobbyist position all along. Fudge, now a lobbyist, commutes between Cleveland and Washington, D.C. This group is closely related to the forces seeking to privatize profits while collectivizing losses. The latter have been in the background of the government-backed housing game since time immemorial.
The current embrace of black-box valuations has brought together a perfect storm of odd bedfellows. The black-box appraisal has become the ultimate deep fake for the home lending industry. It needs to be investigated by the new Congress. And Freddie and Fannie need to be booted out of government for good.
- Is a Horde of Deadbeat Borrowers Again Walking Among Us? - November 4, 2024
- How Deep Fakes Have Burrowed Into Home Finance - October 14, 2024
- Stoked by HUD, Cottage Industry Shakes Down Mom-and-Pop Appraisers - September 6, 2024
Can you all say Lyle Rieke!!!!!!
Great article. This is exactly what’s happening today. Low interest rates caused by low Fed rate also contributed to the home price appreciation. Median HPA in last five years in US is 36%. It’s over 50% in some areas. I remember the huge HPA before the bubble burst and we had the Great Recession. When prices dumped people and the government blamed appraisers for the values. We just report values. We don’t make them.Similar things are happening today with different causes. In 2008 it was government backed loans approving risky buyers with risky terms. Now it’s risky home valuations set by AVMs, waivers, stated value by borrower. We never seem to learn from history. Human greed to make more money seems to always overpower common sense and the law. Players in the housing industry have lobbied the government to reduce the home valuation requirements. Covid was a good excuse to rationalize the use of AVMs, waivers and desktops.
And who do you suppose created that atmosphere of no rules/waivers – DONALD J TRUMP! And of course don’t forget FANNIE’s Lyle Rieke!!!!
Now, that’s funny. Thanks for the laugh.
The waivers first started because of Covid. Trump was President when Covid started. That’s also when desktops and hybrids got going. The rationalization was that appraisers couldn’t do inspections because of Covid. They also said there weren’t enough appraisers so there was allegedly a backlog so waivers were needed. The current rationalization is appraiser bias. “We need waivers, value acceptance because all appraisers are biased.” The real goal is to get the appraiser out of the equation so lenders, mortgage brokers can make more money more quickly with no checks and balances.
Sounds like someone is in dire need of a history lesson.
Dave, in October 2016, prior to the 2016 presidential election and the Trump administration, Fannie Mae and Freddie Mac announced new initiatives that included appraisal waivers. Fannie Mae referred to this as the Enhanced Property Inspection Waiver (PIW), while Freddie Mac called it the Automated Collateral Evaluation (ACE).
https://www.thewbkfirm.com/industry/fannie-mae-and-freddie-mac-announce-new-initiatives-for-mortgage-origination-process
Very good article! And its no surprise Marcia Fudge is now in the lobbying game, she was doing this work all along but at least now she is not being paid by the taxpayers of Ohio. It’s pretty obvious as this now unfolds the whole ‘Appraiser Bias’ accusations and hearings that followed were/are just an effort to undermine or smear the Certified Residential Appraiser, if you discredit the truthtellers, people don’t know what to believe. AI and all the valuation models are just tools – GIGO, sales with waivers are still sales, and its too late to require disclosure if the home sold with or without a waiver. I’ve stepped back for the business for a bit, I really want to see what happens after the first of the year, I don’t think its going to be very pretty.
Hi Jeremy, was just talking to Mike Powers about your great blogs. So has anyone ever wondered why they changed the name from Appraisal Waiver to VALUE ACCEPTANCE? Becasue they wanted the poor borrowers to think that the home was appraised and the lender ACCEPTED the value….FRAUD! Those poor borrowers they are being led down a very dark path. Then we have borrowers providing ROV’s, Borrowers saying what they think their home is worth…TAIL WAGGING THE DOG AGAIN! I don’t see a license hanging on their walls.
Martha Fudge is useless and has no clue about the process. There is only 1 common denominator through all the housing crisis milestones….The Appraiser. Meaning it is the Appraiser who is blamed for everyone’s lot is life. We are the weaklings of the big bunch….Congress, Fannie, Freddie & Hud. We cannot go up against the Giants. Unless some Lawyers see the huge dollar signs that could be part of a Class Action Lawsuit..Appraisers against all of them for stealing money off our backs via the AMC’s and for Defamation for calling us Biased, Racist White Appraisers. It is insanity run amuk. On my way out very soon. Good luck to you all. If you have not made your business all about PRIVATE work…you need to do it now. More people are getting smart about this and ordering their own Appraisals before they buy their homes and before they sell their homes. It is a lucrative business for those that work their way out of the lending world.
I’m taking my last CE this month. I’m not even sure I’ll finish it. Won’t be doing it again for numerous reasons as are many of you. Just getting too old to tolerate this Nanny State mentality.
Fact, Fannie took information from a BPO and changed it to value along with UAD terminology including condition rating. If that can happen to a BPO that was uploaded, it can happen to any appraisal that is uploaded.
https://www.zerohedge.com/markets/hard-rain-going-fall-0
GSE’s over estimate their ability, capabilities, and influence. / article quote; Our hubristic faith in the god-like powers of technology and central banks / states creates an illusion that the credit cycle turning is the result of a “policy error,” when in fact it’s just the way systems function. We’ve created extremely fragile, centralized systems optimized for profit, and operated on the false premise that all systems are infinitely controllable given the right technology or policy. The result of our hubris is that the turning of systemic cycles will be more disruptive and painful than was necessary, as a direct result of our attempt to manipulate / rig the system to suit our expedient, short-term desires. / end quote
They’ll never get the artificial non-intelligence algorithms right. Because people with biased motivations code the system parameters. Explaining to the laymen or devout believers alike why mass data analysis and market regression data extrapolation does not function well is complicated and not worth the effort for every important detail. To summarize; the fault of the approach is too much data from categorically dis similar and distant housing stock, which creates too broad of potential adjustment factor differentials, leaving far more room for human and automatic system error during the data interpretation phase, in such an overly convoluted complex process. Scatter charts… Data cancer; defined. They’re moving too fast with too much data. Misleading data output is the result.
Manual traditional appraisal process; logically sorting a smaller sampling of more narrowly similar and local recent sales, dealing with rational limitations to incorporated data analysis which is based on limited modalities, brings more logical and credible results. Requiring fewer market adjustments, providing less room for human or automated process error. The solution? Distributed proportional allotment. The amount of potential adjustments that need distributed as indicated by the ranges of the local market, and only the local market. The closer your comps are, the fewer the adjustments required, the narrower the range. The fault of mass data analysts is turning the adjustment process into a fixed science. They mechanically adjust more or less adjustments then appropriate because the mass data analysis chart outputs indicated irrational ranges. Increasing the probability of systemic process errors for all who utilize automated mass data extraction technology.
They’re doing it wrong. The real world parsed and local data provides a better rational basis to define benchmarks to value. That is where fraud and accidental over or under valuation comes from, because there is too much data being interpreted and subsequently too much room for error. Couple that with institutional investors forecasting and adjusting the black box avm tech to indicate profitability, to favor the invested class, the housing bubble is truly epic.
More disruptive, more painful AND more often.
Very well written article that sums up the current situation. I’ve often wondered what would happen when a home gets a loan without a proper inspection, and shortly thereafter, it’s discovered that the home is completely trashed inside. I am also so ready to retire from all this – wish I could. Not looking forward to all the changes planned for 2025. I hope it doesn’t get as bad as 2007-2008, but I suspect more such ridiculous valuations are coming. Oh, and just to note, blaming Trump for everything doesn’t answer as to why it continued to go downhill during the current administration.
Data are not a substitute for judgement.
I respectfully disagree with the waiver explanation. Appraisers were almost immediately designated an essential service and allowed to travel. Elizabeth Warren and the office of inspector general did not support allowing “small” lenders and “lower loan amounts” slip through the system – This was a successful attempt by the Trump administration to strip federal oversight not unlike the Post Office disaster. Baggins fact check time – less than 2 paragraphs please!
Hi there Dave. We’re probably in more agreement with each other then not. Specifically I was trying to provide summary technical explanations for the primary articles complex subject matter; (article quote) ‘Fannie Mae and Freddie Mac have been waiving home appraisals in favor of computer models.’
For political activity influencing the appraisal industry, ongoing through multiple administrations over a long period of time. I wrote up this post previously at the request of another poster, a summary of FRB activity since DF was implemented, w/ links.
https://appraisersblogs.com/lack-of-fee-transparency-exposing-the-amc-exploitation/#comment-43166
Also relevant; Previous research efforts from multiple appraisers resulted in new discoveries regarding the structure and form of ‘predictive modeling’. Scroll down and read the collectivist human stereotypes applied to borrower and behavior. The various technical utilities which are replacing human appraisers have similar modeling. Now, back to the regularly scheduled program of blaming everything on appraisers.
https://patents.google.com/patent/US8775300B2/en?q=(~patent%2fUS20160078573A1)
Thank you xpert for your clarification. However the Trump Administration released Fannie Mae and Freddie Mac from Conservatorship and rolled back some regulations, making it easier for banks and other financial institutions to lend;- Homeownership rates declined (64.7% in 2019, lowest since 2016).
– Housing affordability dropped 10% (2019),- Mortgage debt increased ($15.8 trillion in 2020), Homelessness rose 3% (2020. During the Trump Administration Freddie Mac and Fannie Mae: Both government-sponsored enterprises (GSEs) introduced appraisal waivers for eligible transactions:; Freddie Mac’s Automated Collateral Evaluation (ACE);] – Fannie Mae’s Property Inspection Waiver (PIW; Department of Veterans Affairs (VA) Appraisal Waiver: Effective 2020, the VA waived appraisal requirements for certain Interest Rate Reduction Refinance Loans (IRRRLs); . USDA Appraisal Waiver: The United States Department of Agriculture (USDA) Rural Development waived appraisals for certain streamlined refinance transactions; FHA Condominium Appraisal Waiver: In 2020, the FHA waived appraisal requirements for condominiums in approved developments – JUST to name a few
it was during the obama admin that they started stealing appraisers data…and oh by the way fannie and freddie are still in conservatorship
To ohiobeasttwoonesix –
In 2010, the Federal Housing Finance Agency (FHFA) launched the Uniform Mortgage Data Program (UMDP) to improve mortgage data quality and consistency. This program included the Uniform Appraisal Dataset (UAD), which standardized appraisal data. Not the Obana Administration –
So – The Trump administration made significant changes to lending criteria regarding appraisals for loans. One notable change was the raising of the threshold for requiring an appraisal on commercial real estate loans from $250,000 to $500,000 [not explicitly stated, but general knowledge]. This change, implemented by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve System, reduced the number of loans requiring appraisals, making it easier for borrowers to access credit. Additionally, the Trump administration rolled back some of the Dodd-Frank Act’s provisions, which had tightened lending regulations after the 2008 financial crisis [not explicitly stated, but general knowledge]. This rollback included reducing the frequency of appraisals required for certain types of loans and exempting some small banks and credit unions from appraisal requirements. The Trump administration’s changes to lending criteria and appraisal requirements had a significant impact on waivers for small lenders. Specifically, the changes allowed small lenders to benefit from exemptions and waivers related to appraisal requirements.
Small lenders were exempted from certain appraisal requirements for residential mortgage loans, allowing them to provide loans without obtaining an appraisal ¹. This exemption applied to loans under $250,000 and was intended to reduce regulatory burdens on small lenders.
The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) also introduced waivers for small lenders, allowing them to obtain exemptions from certain appraisal requirements ². These waivers were designed to facilitate lending in rural areas and reduce costs for small lenders. AND HERE WE ARE NOW ALL CRYING FOUL!
i do not need history lessons…i lived through it…but keep on standardizing the mailing address
Mmm, maybe. We are paid to collect, analyze, and report to our clients. Our work belongs to them, not us.
born and raised by those who praise appraiser control…
Great summary. The lesson of the story; Bureaucrats are in control. How many of those policy changes actually benefited the regular citizen? You are observing political theater which never ends.
We should demand better compliance with states administrative procedural rules. Recently I read the state of Colorado’s administrative procedural rules, inspired by Mr Bagott’s efforts.
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(c) If any agency incorporates or proposes to incorporate any material by reference in a rule and the version or edition of the material to be incorporated has not previously been provided to the state publications depository and distribution center, and if the rule or proposed rule does not identify where the incorporated material is available to the public on the internet at no cost, then the agency shall provide one copy of the material in either paper or electronic format to the state publications depository and distribution center. The state librarian shall retain the copy of the material and shall make the copy available to the public.
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Then why are Colorado appraisers forced to buy the uspap book every two years to retain our appraisers licenses? The publication is supposed to be available free of charge, to include updated editions. Look up the legal definition of extortion.
The lesson here is that the expansion to automated tools is happening because of the obfuscation of what should have been transparent and readily available appraisal industry guidelines and practices. When nobody knows what you’re doing behind a black curtain, one can be accused of anything, manipulated to no end. Stake holders agree. Appraisal modernization.