Dump is really the right word. Fannie Mae and Freddie Mac, says a White House fact sheet, “would be directed to use mark-to-market accounting or other alternatives to manual appraisals for any loans for which the loan-to-value cannot be determined with the GSE’s Automated Valuation Model. This will eliminate a significant barrier that will reduce cost and time for borrowers and lenders alike.”

This sounds great except that the goal of an appraisal is to protect not only borrowers and lenders, it’s also to protect mortgage investors such as pension funds and insurance companies — entities we want to attract or face far-higher interest rates.

The Need For Appraisals

It’s true that appraisals are a cost, but so are food, shoes and tires. The important point is not that appraisal are an expense, it’s that appraisals made by actual humans have value.

For some time there has been an effort to eliminate appraisers from the mortgage process with seers, soothsayers and automated processing. The pretext is that independent appraisals cost money and the computerized systems are pretty good.

Pretty good is an okay standard when you own thousands of loans, but residential borrowers typically have only one or two mortgages. To them, having a property accurately appraised is hugely important so they do not overpay whether they use conventional, FHA or VA financing. Indeed, most real estate sale agreements provide that the deal is off without penalty if the appraisal comes in below the sale price — speak with a buyer broker or attorney for specifics.

But not only home buyers are protected, with a good appraisal the lender does not lend more than it should (thus protecting shareholders) and a mortgage investor does not have excess risk (thus protecting pensions and insurance funds).

If you’re a buyer and make an offer on a property it will not get financed unless the appraiser says the home is worth at least the sale price. Without independent assurance from an appraiser — someone who is paid regardless of the valuation — no lender will provide the mortgage financing necessary to create the sale.

But it’s not just the buyer and the “lender” who are protected, if by “lender” we mean the folks who originate the loan.

Today after most loans are originated they are sold into the secondary market. Packagers gather up 5,000 or 10,000 loans and create a mortgage-backed security or MBS. Investors then purchase a portion of the MBS called a tranche.

One of the most basic protections for buyers, lenders and mortgage investors is an independent valuation of the property. The fact that a buyer and seller have agreed on a price does not mean they have accepted a price that will protect the investor if home values decline or the borrower defaults.

So, yes, let’s move ahead with new and better housing programs to reduce foreclosures and clean-up a system damaged by too many short-cuts. But while we’re at it, let’s not end a basic protection that makes the market safer for buyers, investors and mortgage insurers.

Why Obama Should Favor Mortgage Appraisals is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Many of the items in the measure relate to mortgage loan financing. The summary below tells us part of the story — it does not tell us what was left out of the legislation and it says nothing about the specific exceptions and benefits buried in the text. (The last revision of the bill was 1,616 pages in length so you can bet there are plenty of goodies for various special interests. We’ll know more when the final text is published.)

Below is a list of inclusions in the bill, as reported by the Financial Services Committee.

Mortgage Reform

• Require Lenders Ensure a Borrower’s Ability to Repay: Establishes a simple federal standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold.
• Prohibit Unfair Lending Practices: Prohibits the financial incentives for subprime loans that encourage lenders to steer borrowers into more costly loans, including the bonuses known as “yield spread premiums” that lenders pay to brokers to inflate the cost of loans. Prohibits pre-payment penalties that trapped so many borrowers into unaffordable loans.
• Prohibit Unfair Lending Practices: Prohibits the financial incentives for subprime loans that encourage lenders to steer borrowers into more costly loans, including the bonuses known as “yield spread premiums” that lenders pay to brokers to inflate the cost of loans. Prohibits pre-payment penalties that trapped so many borrowers into unaffordable loans.
• Establishes
  Penalties for Irresponsible Lending: Lenders and mortgage brokers who don’t comply with new standards will be held accountable by consumers for as high as three-years of interest payments and damages plus attorney’s fees (if any). Protects borrowers against foreclosure for violations of these standards.
• Expands Consumer Protections for High-Cost Mortgages: Expands the protections available under federal rules on high-cost loans — lowering the interest rate and the points and fee triggers that define high cost loans.
• Requires Additional Disclosures for Consumers on Mortgages: Lenders must disclose the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes.
• Housing Counseling: Establishes an Office of Housing Counseling within HUD to boost homeownership and rental housing counseling.

Related Changes

• Establishes a Consumer Financial Protection Bureau.
• Monitor Personal Financial Rating: Allows consumers free access to their credit score if their score negatively affects them in a financial transaction or a hiring decision. Gives consumers access to credit score disclosures as part of an adverse action and risk-based pricing notice.

New Mortgage Loan Protections Outlined in Wall Street Reform is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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>>>Instead of a majority of valuation assignments going to appraisal managment companies we now have virtually ALL assignments being controlled by these joint venture arrangments. Notice how the market is doing?

There is a certain irony here. The worry pre-NVCC used to be that lenders and loan officers would pressure appraisers to come up with the “right” valuation. Now the worry is the cost and speed of services. Here’s a concept, why not let the borrower — who is paying for the appraisal — select the appraiser from the names on a local roster approved by the lender? The list would have to have at least 50 names for properties within a major metro area. No management companies would be needed.

>>>These appraisal managment companies, usually someway affiliated with First American Title, will have data on almost every home in America through their data collection process. Taken right from the appraisal reports, floorplans, interior and exterior photos, upgrades all the data that can be misused, abused but most importantly; resold. Because thats what its all about.

This is not really an HVCC problem; rather this is an issue which now confronts many professions: How do we deal with technological change? Many in real estate plainly believe there will be lower appraisal fees and fewer revenue opportunities for appraisers in the future. Many also believe that reduced appraisal costs should be passed through to borrowers and not used to pump up profits elsewhere in the lending process. As always, it pays to follow the money.

Automated appraisals may well work when you have a thousand identical townhouses with three models and lots of recent sales. The problem is that if an appraisal is inaccurate the lender is safe because it’s risk is spread among thousands of loans. The borrower, however, typically has one house — for the borrower an errant appraisal can be a disaster.

I think, though, that borrowers are better served when appraisers physically see the inside of a property and borrowers are certainly better off with a full appraisal when a property is in anyway distinctive — think of a homes in an older neighborhood with no common model or a house which has been unusually well maintained (or not).

>>>Just another line of easy profit by our big banking system. We should never have bailed them out, they have not demonstrated any gratitude to the taxpayer. Rates are still to high, credit is way to tight and no loans are being modified. Refinancing is not even an option. Best way to purchase is cash if you want to close in less than two months.

I suspect the dawning conclusion among the public is that bank reform is urgently needed. Let’s start with a Consumer Financial Protection Agency that can subpoena records and documents and let’s allow state regulators to finally have a real voice in the banking system.

>>>So how is this HVCC deal working out ?

Not badly enough that the entire idea should be “suspended” for 18 months. Fixed and made better, sure.

We thank Tim for a great post.

Appraisal Worries Really About The Future is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Now you might think, aha, a Consumer Advisory Council…wouldn’t that be a panel which consists largely or entirely of, er, well, consumers?

You might think so, but the Federal Reserve plainly disagrees. In a call for nominations it wants would-be appointees to list their organizational affiliation as well as “positions held in community and banking associations and on councils and boards.”

Why on earth would a consumer panel need MORE banking representatives? The whole point of a consumer panel is to represent borrowers and depositors, the people who use banking services and not the people who profit from them.

Lobbyists & The Federal Reserve

It’s not like the banking lobby is unknown to the Federal Reserve. Indeed, it’s often difficult to tell the difference between government “regulators” and the industries they allegedly regulate.

For instance, under the Home Ownership Equity Protection Act of 1994 (HOEPA), the Federal Reserve by “regulation or order, shall prohibit acts or practices in connection with (A) mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions of this section; and (B) refinancing of mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.”

As the Philadelphia Federal Reserve Bank explains, “it is important to note that while the existing HOEPA provisions only apply to high-rate or high-fee non-purchase loans, the Board’s HOEPA rulemaking authority applies to all mortgage loans. HOEPA authorizes the Board to prohibit any mortgage act or practice if the Board finds it is unfair or deceptive and to prohibit any mortgage refinancing practice if the Board finds it is abusive or not in the interest of the borrower.”

Notice that the Fed’s power applies to all loans, not just subprime mortgages.

Of course, the Federal Reserve never exercised such authority. You know the rest of the story, it’s called the mortgage meltdown and it’s largely responsible for today’s financial mess.

Would you like to serve on the consumer panel? Would you like to recommend someone? For details see the Federal Reserve Consumer Advisory Council application.

Good luck….

The “Consumer” Protection Panel That Isn’t is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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