How U.S. Home Valuations Are Being Subverted
Sometimes when the hair on the back of your neck stands up, there’s a reason for it.
The nation’s $11 trillion mortgage market has been nationalized. This coup occurred in broad daylight and gradually. With Freddie and Fannie now in their second decade in federal conservatorship, the prospect that they will ever again be subjected to the watchful eye of shareholders is a pipedream. Their employees will continue to operate as de facto federal employees – but ones scarily outside the civil service constraints contained in Title 5 of the U.S. Code.
Fannie and Freddie’s status – neither government agency nor private corporation – is a peril to free enterprise and a peril to the U.S. economy. Their conservatorship has made them only more dangerous. They inhabit a Bizarro World where they can harness the coercive powers of government while enjoying the spoils of the private sector.
Wielding the full faith and credit of the U.S. government and subject to limited accountability, Freddie and Fannie have increasingly been targeted by technocrats, opportunists, disrupters and schemers. The best way to view these government-sponsored enterprises is as politburos.
a campaign to weaken or eliminate valuationsAt the crossroads of it all is a campaign by the fintechs, nonbank lenders, Realtors and homebuilders – the traditional allies of Fannie and Freddie – to weaken or eliminate valuations. It will eventually lead to a failure of the U.S. mortgage market and a drawn-out crisis of confidence as market participants come to identify the institutional corruption. Below are three ways residential appraisals, a critical guardrail for investors and taxpayers, are being subverted by malign interests.
Takeover of Obscure Publisher – A little-known 501(c)(3) controls a congressionally authorized monopoly as the officially recognized purveyor of national appraisal standards for federally backed mortgages. Those who track this unusual nonprofit publisher, known as the Appraisal Foundation, find it hard to imagine a scenario in which an organization could be more wasteful, more abusive or more influenced by special-interests. But they may need to think again. The fiefdom is run by a long-tenured chief executive and world citizen named David Bunton. His nonprofit sells the continually changing standards on a website to captive licensees, and then he and a group of favored trustees travel the globe on the nonprofit’s dime and host foreign delegations. (These types of bon-vivants could only exist in the Beltway.)
In a recent letter, a grievance organization called the National Fair Housing Alliance, which appears to view all fields of human endeavor through the narrow lens of race, along with nine similarly predisposed groups, correctly pronounced the Appraisal Foundation a “pay-to-play” operation. Kudos to them.
But the pay-to-play pronouncement hasn’t stopped a D.C. law firm with a social-justice bent, Relman Colfax, from providing the shadowy nonprofit with protective cover. Because appraisers have not paid close attention to what has been happening at this nonprofit over the years, it has become a juicy takeover target. There is much to loot – not least the $10.5 million in cash and publicly traded securities the 16-employee nonprofit reports in its 2020 IRS Form 990, the most recent filing available.
The money once belonged to captive licensees who have had to pay monopoly prices to purchase the foundation’s fluid standards and related products in order to learn their respective state laws and renew their state licenses. (Yes, in many states, the copyrighted standards represent binding state law.)
Expect greater distortions from Freddie and Fannie’s plodding and committee-driven foray into automated valuations.The nonprofit is now exploring ways it can set standards for automated valuation models. Scholars of the 2007-2008 financial crisis will recognize similar valuation models used by Fitch, Standard & Poor and Moody’s with disastrous results. During the lead-up to the crisis, the obtuse computer models had a habit of spitting out investment-grade ratings for junk-quality mortgage-backed securities. Last November, listing giant Zillow shut down its Zillow Offers business. It reported losing $880 million and taking a half-billion-dollar write-down on homes it owned as part of the venture. The reason for the failure? Zillow’s algorithmic-driven tech platform failed to adequately forecast changes in home prices. Expect greater distortions from Freddie and Fannie’s plodding and committee-driven foray into automated valuations.
The nonprofit publisher also shills for a special licensing wormhole dishonestly called “the Practical Application of Real Estate Appraisal.” This special dispensation allows lenders to simply purchase state appraiser licenses for their employees by signing them up for online classes and computer simulations with no on-the-job training required. The scheme promises the opposite of its name.
Going forward, expect special interests to have an outsized say in what the Appraisal Foundation does. With Bunton aging, the stage is now set for a Putsch with new cronies and bad actors taking over its board, since a majority of trustees will no longer have to be appraisers (though, truth be told, the latter restriction hardly prevented cronyism).
The bigger prize is the ability to change the standards by which nearly every piece of real estate in the nation is appraised for collateral-risk management and, in most states, as a basis for ad valorem taxation.
Mischief by Rogue Federal Entity – A tiny federal entity known by the tortuous name the Appraisal Subcommittee of the Federal Financial Institutions Examination Council has gone rogue. The obscure entity oversees what has become a slush fund. Like the nonprofit publisher, it uses its funding stream for gratuitous travel but also to create problems, or exacerbate existing problems, it can later be seen as “solving.” Call it a form of Munchausen’s Syndrome by Proxy.
The agency routinely violates its authorizing statute and the federal Administrative Procedure Act by failing to submit each new version of the publisher’s continually changing appraisal standards to a federal NPRM rulemaking. The agency then pressures state boards to enforce always the most recent version of the standards. Officials from the agency also regularly meet and deliberate behind closed doors with the publisher’s paid panelists. This puts it in open violation of the Federal Advisory Committee Act, but whatever.
Its budget skirts the congressional appropriations process, and that’s the heart of the problem. Its funding violates the Constitution’s Spending Clause. The Fifth Circuit ruled in a near-identical situation in Community Financial Services Association of America v. Consumer Financial Protection Bureau. Congress isn’t permitted to create mercenary agencies that are impervious to congressional appropriations and review.
Because there is no congressional oversight, the tiny agency was able to award $1 million to a Kentucky-based 501(c)(3) run by a man whose LinkedIn page identifies him as living in Bristol in the United Kingdom. The nonprofit’s website was recently changed, removing the man’s overseas telephone line. The group has been used as an intermediary to funnel money to still other organizations, such as the aforementioned National Fair Housing Alliance, for purposes related to justifying the existence of the federal entity. The agency’s authorizing statute only allows it to make grants to the Appraisal Foundation and to the states directly. It isn’t authorized to sprinkle money around to other groups.
For a decade, the tiny federal entity diverted grant money owed the states to the nonprofit publisher. The publisher then used the money to send state regulators on all-expense-paid trips to places like Tampa, Florida, to promote the use of its copyrighted standards at the state level.
The federal entity receives its sole funding from license renewal fees paid to the states by licensed appraisers. The states then forward a portion of the license renewal funds to the federal entity. Besides violating the Spending Clause, the use of state boards as a collection mechanism for a federal agency’s budget may also violate commandeering prohibitions in the U.S. Constitution’s 10th Amendment.
The rogue agency and the mischief it manufactures is a danger to trillions in collateral valuations.
Capture of Freddie and Fannie – The capture of Freddie and Fannie by the powerful interests of the lenders, homebuilders and Realtors has become a fait accompli. And it happened quickly, as if it had been war-gamed in advance.
In a matter of months, Fannie has eliminated critical checks and balances in an utterly radical experiment with the U.S. taxpayer and U.S. economy on the hook. The mortgage giant began scrapping or weakening long-accepted underwriting safeguards like FICO scoring, title insurance, mortgage insurance, downpayment requirements and appraisals.
Fannie is even encouraging a new form of the “liar loan.” It’s called “Value Acceptance.” It allows a collateral value to be pulled out of the ether by parties with a monetary interest in the loan’s successful closing. But don’t worry. Fannie checks the stated value against its algorithm – the equivalent of a “Zestimate.”
On March 10, Fannie Mae announced it had approved six vendors who will help the mortgage giant skirt appraisals in favor of algorithmic solutions similar to the one that cost Zillow’s investors a half-billion dollars.
But what of the risk all of this has created? Fannie has a plan for that, too. It has begun dumping the surplus risk into capital markets in the form of junk-rated credit default swaps it calls “CRTs.” Fannie has found itself propping up an over-the-counter marketplace for the synthetic derivatives. This was never part of Fannie or Freddie’s mission and will end badly.
Onlookers should not be optimistic about the corrective mechanisms of Freddie and Fannie’s regulator, the Federal Housing Finance Agency. This agency tends to blow with the political winds. The only actual regulator of Freddie and Fannie is the agency’s Inspector General’s Office, though the latter lacks the manpower to do the job of the regulator.
If the hairs on your neck stand straight up, there’s probably a good reason for it.
CRT 101: Everything you need to know about Freddie Mac and Fannie Mae Credit Risk Transfer
The GSE’s are 100% liable for CRT Bonds first year losses and for any losses that typically exceed 4%. Fannie Mae’s loss rates in 2006 and 2007 were 3.8% and 3.7%, respectively. With the elimination of the “critical checks and balances” mentioned in this article, the question is not “if” but “when” will the GSE’s and US taxpayers be responsible for billions of dollars of losses that result from these absurd practices.
Appraisers have worked for a long time with the IRS definitions; on Charitable Loss, commonly referred to as 501(c)(3).
This must be a mistake, as you refer to an individual and private corporation later in the article.
There are specifies which change some of the features of Market value and WHO would work for The IRS?
Definitely NOT what the economy needs.
Jeremy, are you sending your articles out to the press and the various appraisal organizations?
CDSs… etc etc..
…all the same nonsense of packaged/over-valued garbage like 2006.
Cycles of financial history and the subsequent consequences will be a certain headache to…
‘Those who do not learn history & are doomed to repeat it.’
How about the Senate Banking Committee Members – wouldn’t this be related info for their current “investigation” – who are the “Investors” buying the CRTs/risk as shown on FNMA’s flow chart for CRTs?
CRT buyers include large fund managers, public and private pension funds. Beneficiaries of CRTs can range from billionaires to schoolteachers and first responders (through pension fund investments).
Since late 2021, Fannie and Freddie have repurchased almost $11 billion outstanding CRT securities.
Let’s do away with the vanguards, the safety net of the housing market: The INDEPENDENT APPRAISER. Let’s make up values so we can make loans and receive OUR over inflated fees and salaries. No oversight, we’ll make up the values and the rules as we go along. What can go wrong?
I feel like I just read the scripts of “The Big Short 2”.
This just about sums up everything wrong with the industry……
A Pulitzer Prize-Winning journalistic bonanza that most Americans will never get the chance to read. I suggest you all copy and paste.
Kim, If you sign up via the authors twitter feed, you will get these directly to your email for easy forwarding. Previous articles available via twitter. Sign up link is at bottom of articles, click through to any one of them and you’ll be able to sign up. I subscribed a few months ago. I’ve been bugging the site moderator to post them slightly more real time. Agreed, quality independent journalism worthy of broader recognition. He is after all, a self described news man. Except instead of being on the take, Mr Bagott came out of a time capsule from an era before news sold out to the highest bidder. It’s a refreshing turn form the Joan Trice and Dustin Harris era, where those whom capitulated to the dismantling of this industry received the most recognition.
Did you catch FNMA’s latest effort to further promote restraint of trade upon the appraisal profession? If you still want field work in the future, you’ll have no choice but to go with FNMA’s preferred appraisal management companies. And we can know ahead of time exactly how it will shake out. They’ll onboard appraisers to calm the masses during great transition. Then before too long the amc’s will move back to existing vendor networks they’re already using, and appraisers will be in competition with the whole world for the ‘inspection service’, the license will no longer matter and the fees will plummet further. I mean they’re already slashing to a tenth of the compensation, one could literally earn more delivering pizza than being a field inspector for FNMA under the amc partners programs.
Nothing says equity like doling out special favors to the most abusive companies in an industry. Courtesy of ‘Fannie Mae Digital Alliances Team’. Resistance to the bureaucratic state apparatus will no longer be tolerated. There will not be anyone left to hear complaints, nobody to care, no compassion to share, when everything becomes automated. The lenders and other corporations whom run our government will prescribe to the surfs, just the right amount of engagement, at the appropriate frequencies. There will be no more upward mobility or even general independent participation in the future. You will be required to be an insider, or you’ll be completely out. Either your company will be able to provide return favors in return for the allowance to participate in these systems, or you will be on the outside. Independents need not apply. Unless you’re just looking for part time income without benefits, they the Fannie Mae digital alliances team certainly does encourage you to apply with one of it’s partner vendor management companies. The people setting this up are already earning a fortune, but as that’s never enough, they want even more. Government sponsored luxury, your tax dollars hard at work.
I hate to be the odd person out… and the article is needed… but it is way too long and too difficult for the average person to read, let alone understand.
An example is 4 or 5 paragraphs in “At the crossroads of it all is a campaign by the fintechs”.
Fintechs? I had to look that word up. Financial Technology.
When you loose the reader… you loose your chance to get your point across.
I suggest articles be written so MORE people can read and understand the problems the appraisal profession is facing.
it is spelled LOSE… hello.
I’m sorry, but if you didn’t know what Fintech was in the RE industry as a whole, you really need to update your course work and look outside solely of the appraisal industry an into the lending side of things. This would allow for a more rounded view of the market and “things” that directly impacts what we do. This was a great article and I was not lost. There is nothing wrong with have a new term for those that don’t know or may need a refresher. Not trying cut in on you, but there is no reason to cut the article short, other than summing in up in a single sentence of “We are ****ed” taken from the Big Short when asked what the head lines should read regarding this very topic.
Entry level articles are on the other website. I mean, get around the internet, this article is short by many comparative journalistic standards. Concise, explanative, to the point with complex subject matter. Why does spelling cat suddenly look like he is frightened, shuffling sideways, back arched, hissing and such?
This guys twitter feed is here; click through articles for a sign up link.
Your cat is hissing because I’m not concerned about that much about spelling and grammatical correctness in a blog.
The article is definitely short compared to many of Baggins posts. 🙂
(Sorry Baggins, I just couldn’t help myself). We still love you (but not in that way). 🙂
I need a life, lol. When you can see the end of the line in the distance, far earlier than imagined. My take is if you are competent in real estate, one should be able to talk competently about real estate, and subsequently should also be able to express that in written form. I type 100wpm+ and speed read. I consume about 10-50 news articles usually 4-5 days a week i about an hour or two. I type the majority of the appraisal report content manually each and every time.
The Bagott articles are next level. Because he has a good understanding of the fundamentals, as well as the complexities of an entangled network of bureaucratic ‘oversight’. That’s the thing, licensees are only tested on theory, but not on the real world requirements handed down from the regulatory authorities. It would literally be impossible for a PAREA graduate to be even remotely close to keeping up. Two years apprentice time is not even enough to pick up competent valuation service development, alongside comprehensive regulatory structure understanding.
I’ve tried trainees a few times but they never were willing to stay after the routine crash course into regulatory structure. ‘Being an appraiser is as easy as memorizing somewhere between 10,000 and 20,000 pages of regulatory guidance.’ Although I won’t do this, if I were to take on a trainee, I’d assign them 6 months of reading assignments just to get started, fnma guide, state regs for everything; realty, mortgage, and valuation. firea, dodd frank, hud guide, various underwriter guidelines, back reading industry news more than a decade here and on appraisal scoop. I used to quick fire a long list. If they’re over achievers, dig into the AI books and such, learn to competently communicate in both short and long form on sites like this. Then valuation service skill development, finish with a re read of regulatory docs. I’m constantly impressed by other appraisers skill levels, then I’m also constantly disappointed too. I would not even know where to begin, in order to so efficiently and competently highlight and describe what’s going on with this industry like this particular author. That’s why I’m happy promoting Mr Bagott, even though I really don’t know anything about him other than the content of these articles. We need a champion, the emperor sent us here to die.