Tuesday , 18 December 2018

‘Liar loans’ are passé, but now we’re seeing ‘black box appraisals’

Plus ça change, plus c’est la même chose.

Loosely translated from the French, that means, “Just shoot me.”

The Northern San Joaquin Valley was ground zero in the housing meltdown, which will see its 10-year anniversary by early 2018. Now, a recent policy shift by mortgage giants Fannie Mae and Freddie Mac threaten to unleash a new round of chaos.

A catalyst in the collapse of the American housing market was the stated-income loan – a mortgage in which the lender wasn’t forced to verify the borrower’s income. Rather, the borrower just stated his income using the honor system. It came to be called “the liar loan” – wink, wink.

In August, the website HousingWire reported that Fannie Mae would be following Freddie Mac in guaranteeing mortgages without an appraisal of certain homes put up as collateral. While the Dodd-Act Frank curbed issuance of liar loans, Fannie and Freddie are ushering in its equivalent for the smartphone era – call it “the black-box appraisal.”

As in the dotcom boom, new technology is being touted as changing the laws of the marketplace. Again, the time-tested rules for making a home loan don’t apply.

“With Amazon shopping one click away and streaming Netflix on your smartphone, looking for a mortgage is a wildly different digital experience,” Fannie Mae CEO Timothy Mayopoulous told HousingWire.

This time around, an unspecified and growing number of loans – all backstopped by the U.S. taxpayer – will be based on algorithms and computer models, with no appraisal of the homes being put up as collateral. Similar computer models developed by Wall Street a decade ago foretold that the U.S. housing market would appreciate each year forever and ever.

Somewhere in this column, I need to disclose that I am a certified real estate appraiser in California and Nevada, though I do little bank work these days. The only dog I have this hunt is as a U.S. taxpayer.

If Fannie and Freddie were backstopped by private investors, none of this would be an issue. The two would be free to accept any degree of risk they wished. But Fannie and Freddie are so-called “government-sponsored enterprises.” They’re backed by the full faith and credit of the United States government.

This hasn’t stopped them from acting like private companies. They have lobbied lawmakers and have made donations to politicians on Capitol Hill.

The government took over Fannie and Freddie in 2008, bailing them out to the tune of $187.5 billion. Apparently, the two have learned little since.

report released by their regulator in August shows they could require nearly $100 billion more in bailout funds in the event of a new economic crisis.

Both Fannie and Freddie have increased the number of loans they guarantee without appraisals. For those loans, they will not force the lender to buy the loan back if there are valuation problems. They say the vast majority of their loans will still require an appraisal.

“The problem is the slippery slope,” said Scott DiBiasio, manager of State and Industry Affairs for the Chicago-based Appraisal Institute at a recent industry conference. “It could easily go from 5 percent to 10 percent to 15 percent to 25 percent (of loans).

“Freddie and Fannie have bankers, brokers, lenders, and homebuilders behind them on this,” he said. “These groups are very strong.”

Fannie Mae will now allow a cash-out refinance with an appraisal-free loan, said DiBiasio.

“Fannie has been more open about it than Freddie,” he said. “Freddie Mac is playing its hand closer to its vest. It won’t provide us any numbers.”

Earlier in the month, Freddie Mac announced it would extend its appraisal-free mortgage program to purchase loans.

The two hold $4.6 trillion of mortgage-backed securities outstanding, which is about a quarter of the U.S. gross domestic product.

The appraisal-free mortgage might not raise as many eyebrows if there weren’t continual reminders that Fannie Mae and Freddie Mac do not always act as honest brokers.

A rap sheet of rapacious rigmarole over the years suggests it has also become a mill for sinecures – mostly from Democratic administrations. It has also been the subject of allegations over the years ranging from executives manipulating earnings to raise their bonuses to securities fraud to conflicts of interest and self-dealing.

Fannie Mae was established during the depths of the Great Depression to provide a secondary mortgage market for local banks to finance home mortgages. Now, fully backstopped by the U.S. taxpayer, it enables banks to originate – and then quickly cash out of – increasingly dubious loans that benefit Wall Street and pass the risk on to the rest of us.

Jeremy Bagott is a former journalist who writes about finance, land-use, and public policy issues. He wrote this for The Modesto Bee. Email: columns@modbee.com


About Jeremy Bagott

Jeremy Bagott
Jeremy Bagott is a senior real estate appraiser covering Southern and Central California for the right-of-way firm Bender Rosenthal and a writer on land-use and finance issues. He has appraised properties for the purposes of eminent domain, community facilities district bond issuance, redevelopment agency disposition, public school construction, lender special servicing, the U.S. Department of Housing and Urban Development's Neighborhood Stabilization Program and conventional lending. He holds the designation of Member of the Appraisal Institute. A former editor at the Los Angeles Daily News, Bagott has written for the Wall Street Journal and for newspapers in California and other states. He is a graduate of California State University at Northridge and a former U.S. Marine.

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