Whoa...interesting!!

[6wolverines]

Check out the confessions of a subprime underwriter:


Bernanke’s Mortgage Doublespeak
Right now, Fed Chairman Ben Bernanke is nervously speaking to a group in Orlando about the subprime crisis and solutions for banks and borrowers. His comments could not be more self contradictory, which indicates that the Fed STILL has no idea how to solve this problem (since they are unable politically to recommend trade protection or slowing inflation).

Bernanke’s recommendation? Foreclosures are caused, in his mind, by borrowers who have little or no equity who walk away from their home when times get tough, having little to loose. So what should we do? Expand FHA (where borrowers qualify for 97% loans; little or no equity!). The truth is, he is talking out of both sides of his mouth.

What he wants to do is shift the pain off of the lenders, servicers and bond insurers, and put the pain on the American taxpayer who insures those FHA loans.

What a champion of the people!



GSE Baby Steps To Clean Up Fraudulent Appraisals
Fannie and Freddie took a tiny step today to clean up a rampant problem in the mortgage business: inflated appraisals.

What they are saying is that they will no longer allow banks that sell loans to them to use “in house” appraisers. Think about that for a moment. When you buy a home, would you buy it based on the value given by the seller’s appraiser, or would you want an independent opinion? It’s a bit absurd that this practice was ever allowed.

But remember, the GSE’s buy conforming loans, where the borrowers have much better payment histories, documentation (usually), and reserve assets.

But in the subprime world the problem of fictional appraised values was taken to an entirely new level. There, not only would the supposedly unbiased third party appraiser inflate a value, the banks would pressure their review appraisers to do the same!

A review appraiser is hired by a wholesale lender (the bank) to give a second opinion of value. The review is often completed on a 2055 form (a drive by without interior pictures). As an underwriter, viewing and making judgments on a dozen or more appraisals every day, I was keenly aware of the rampant “pushed” values in the business.

But all too often, sales reps (”AE’s”) would have such a cozy relationship with appraisers that they could simply pick up the phone and ask for another5, 10, or 20 grand in value. Sometimes it would be worse than that.

And then, when the underwriter would decline the transaction, the AE would immediately cry foul to superiors who would be pressured to override the underwriter and approve the loan anyway, often without opportunity to review the transaction with the fine toothed comb the underwriter used in his review.

You actually have the bank defrauding itself, not to mention the secondary buyers and insurers.

Why would these appraisers jeopardize their licenses to inflate values? Money. Lots of it. Stories of appraisers being bribed were common place, but usually it was simple economics. They are doing 2 or 3 “drive by’s” a day, at $250 a pop, and in some cases, although it would be difficult to prove without a private investigator, they weren’t even driving by the homes (I personally caught one reviewer who did hundreds of reviews for us using pictures of a subject property taken off a MLS).

As we will be laying out on this blog, there are two main categories that define the cause of the downfall in our credit markets. In the macro, they are insane trade policy and loose monetary policy driven by out of control corporate greed and the profits made by investment banks that finance international trade. In the micro, it was fraud and fictional business controls, again driven by greed throughout every player in the process of funding a mortgage loan.

The changes made today by Fannie and Freddie are truly a “drop in the bucket”. Stay tuned.


MBIA will have more writedowns.



In a regulatory filing today, bond insurer MBIA announced they will have more writedowns in the future.

For our readers who are not MBA’s, a bond insurer is a company that guarantees, for a premium, the investment made by the big boys that packaged up billions of dollars in loans. Now that a large chunk of those loans are defaulting, and losses are greater than expected because of inflated appraisals, the insurers are saying that expected payouts will be big. The ratings on the bonds that they insure are tanking, and the next flash point in this crisis will likely be the day that the rating agencies downgrade the insurers themselves, a decision that has been delayed by infusions of capital.

I suspect it is only a matter of time for the bond insurers; they cannot long avoid downgrades. When the downgrades hit, credit will tighten up even more; the lenders will not buy insurance from a company with a lower rating than the bonds they are insuring, or who have a potential capital shortfall such that they may not be able to pay claims. At that point, lenders will either stop lending, or they will further tighten underwriting standards to compensate.






A true explanation about what has happened to MOST OF US!!!!

Char

[mreedlaw]

Very interesting reading- I hadn't known (only had my suspicions) of the inner workings of some of the appraisal practices...thanks for posting Char.

[Ragdoll]

Great story!

I recall our appraiser commenting and adding value (ALOT) due to our "custom paint treatment"... that $5 OOPS! paint from Lowe's that I slapped on really drove up the equity! Glad I didn't try to become a professional interior decorator!