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In one of the few government cases to accuse banks of wrongdoing in the housing crisis, a residential appraiser testified that he was dropped by Washington Mutual during the housing boom because he didn’t inflate home values, Reuters reported June 20.
Alfred Lama said he suddenly stopped receiving assignments from appraisal firm eAppraiseIT in April 2007. When he inquired as to the reason, he was told that his name was not on a list of appraisers provided by WaMu’s sales office. “The sales people were going to have certain control. If you weren’t making the numbers for the loans, you weren’t going to get work,” Lama testified, Reuters reported.
Lama was testifying in state court June 19 and 20 in a case initiated by New York Attorney General Eric Schneiderman who alleged that eAppraiseIT and its former parent company, First American Corporation, succumbed to pressure from WaMu to inflate home appraisals, Reuters reported.
Homes that were appraised for more than their value enabled mortgage companies to issue bigger loans, which is among the causes cited by experts for the housing bubble and subsequent financial crisis.
At the time, eAppraiseIT was the appraisal management unit of real estate services company First American Corporation. First American has since divided into two companies; First American Financial Corporation and CoreLogic Inc.; eAppraiseIT currently is a unit of CoreLogic.
According to Reuters, Lama testified that he performed appraisals for WaMu, eAppraiseIT’s largest client, for more than 10 years, and that between July 2005 and July 2006 alone he completed more than 350 appraisals.
Appraisal management companies are supposed to provide a buffer between bank loan employees and individual appraisers to curtail pressure or conflicts of interest, according to documents filed in the case, Reuters reported.
However, eAppraiseIT hired former WaMu staff and provided some authority to resolve situations when appraised values were lower than the purchase price, the documents showed, Reuters reported.
Court papers also stated that WaMu loan originators allegedly pressured appraisers to modify valuations upward, and in Feb. 2007 eAppraiseIT allegedly gave in to WaMu’s demand to use appraisers chosen by the bank’s loan employees.
“The sales people finally got their way at WaMu,” witness Sabina Senorans, a WaMu sales office staff member wrote April 27, 2007, in an email that was placed into evidence, Reuters reported. “The appraisal list that eAppraiseIT…is using has been totally scrubbed. But instead of keeping good appraisers, they went for BADddd [sic] ones.”
According to Reuters, Schneiderman alleges that eAppraiseIT initially resisted pressure from WaMu but then agreed to “roll over,” according to an email from former eAppraiseIT President Anthony Merlo to First American.
Patrick Smith, an attorney for eAppraiseIT, stated that every appraisal was completed in accordance with professional standards. “The state will be unable to prove that a single appraisal in this case was either improperly prepared or in any way inflated,” Smith said during a break in the trial, Reuters reported.
According to Reuters, First American tried to dismiss the case arguing that only federal law governs appraisals. In late 2011, however, New York state’s highest court ruled that the state could pursue the lawsuit.
Washington Mutual failed in September 2008 due to significant losses from billions of dollars of risky homes. JPMorgan Chase bought its lending business, Reuters reported.
The case is People of the State of New York v. First American Corp., New York state Supreme Court, New York County, No. 07-406796.
Increased refinancing through the Home Affordable Refinance Program has provided an unexpected revenue boost to the nation’s largest banks, The Wall Street Journal reported June 19. Banks may see as much as $12 billion in revenue from HARP by the end of the year.
Borrowers are benefiting, too, with the Journal projecting that homeowners will save a total of $2.25 billion to $5 billion this year as a result of HARP refinancings. More homeowners have utilized the program since its guidelines were adjusted to remove the 125 percent loan-to-value ratio cap.
Some critics, however, say HARP refinancing is akin to handing money to large banks since the new rules make it easiest for homeowners to refinance through their existing lenders, creating a captive market for the biggest banks and allowing them to charge higher interest rates. The Journal reported that 75 percent of HARP refinancings are going through the borrower’s existing lender.
Wells Fargo’s Chief Financial Officer Timothy Sloan said that HARP refinancings made up 15 percent of the bank’s mortgages in the first quarter of 2012.
“There’s essentially a monopoly on refinancing,” U.S. Housing and Urban Development Secretary Shaun Donovan told the Senate in May, the Journal reported. Big banks like Wells Fargo, JPMorgan Chase, U.S. Bancorp, Bank of America and Citigroup hold 58 percent of the mortgage market and have been charging borrowers as much as 0.53 percentage points more than market rate on refinanced loans.
Premiums for Fannie Mae borrowers have been substantially lower at about 0.1 percent, the Journal reported.
As a result, the Obama administration is pressuring Congress to make it easier for consumers to refinance through different lenders than those with whom they already have their mortgage.
Mortgage rates are at the lowest levels on record right now.
Banking regulators disclosed plans June 21 to compensate borrowers for a variety of foreclosure errors, including initiating foreclosures on borrowers not in default, erroneously denying loan assistance and making mistakes on loan modifications, The Wall Street Journal reported.
The compensation plan could force banks to pay up to $125,000 per borrower to reimburse them for foreclosure-processing errors, the Journal reported. Additionally, borrowers whose loan modification applications were improperly denied are in line for up to $15,000, and people who never were approached about loan help as is required under federal programs are eligible for up to $1,000.
Banks have set aside vast sums for these foreclosure-related liabilities, a banking analyst told the Journal. Despite having set aside millions to reimburse consumers subject to foreclosure errors, only about 194,000 of 4.4 million borrowers requested a review of their cases to date, the Journal reported. Separately, independent consultants are doing reviews of about 145,000 consumer files.
The newly announced compensation plan is separate from a $26 billion foreclosure-abuse settlement that federal and state officials announced in February. That settlement covered the nation's five largest mortgage-servicing firms: Ally Financial, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.
Mortgage services will be required to follow new short-sale policies that will make it easier for military homeowners with Fannie Mae and Freddie Mac loans to honor their financial commitments when required to move as part of their duty, the Federal Housing Finance Agency announced June 21.
The new guidance affects service members who get “permanent change in station” orders that cannot be appealed and must be followed on a short timetable. The goal of the guidance is to ensure that members of the military who must relocate because of a PCS order receive clear, accurate and timely information concerning their options, including loan modification or short sale alternatives.
The guidance requires mortgage servicers to treat PCS orders as a hardship when considering modification or other loss mitigation options, and covers military borrowers who purchased a house on or before June 30, 2012. Previously, many service members felt their only option was either to maintain financial obligations on two residences or to default on their mortgages.
“It is in everyone’s interest for the men and women serving in our armed forces to focus on the important job they are doing defending our country, rather than worry about the maintenance and leasing of a property in another jurisdiction,” FHFA Acting Director Edward DeMarco said in the news release. “These Fannie Mae and Freddie Mac policy changes, in combination with related guidance last fall, should now provide military homeowners with access to the immediate and automatic full range of foreclosure alternatives.”
Under the new policy, Fannie Mae and Freddie Mac will be required to waive any deficiency judgments against the borrower. The borrower also will be able to sell a primary residence for less than the balance on their mortgage without first being in default.
The guidance also protects military homeowners with PCS orders against practices that may mislead or cause harm, such as asking them to waive their rights under the Servicemembers Civil Relief Act before evaluating their eligibility for assistance or providing them with information about additional options.
The guidance also warns mortgage servicers not to advise military borrowers who are current on their loans to intentionally skip payments to create the appearance that they are in a distressed situation, which may allow them to qualify for other programs.
The guidance, which is part of a wider set of rules for mortgage servicers dealing with military homeowners, was released jointly by FHFA, the Consumer Financial Protection Bureau, the Federal Reserve, the Federal Deposit Insurance Corp., the National Credit Union Administration and the Office of the Comptroller of the Currency.
Read the full guidance report.
The Federal Reserve announced June 20 that it will extend Operation Twist to further push down already record-low long-term interest rates in an effort to spur consumer spending and economic growth, USA Today reported.
The Fed said it will extend its purchase of long-term Treasury bonds through the end of the year, continuing its program to shift investments from short-term securities to longer-term ones. To date, the Fed has bought $400 billion in long-term Treasuries while selling a like amount of short-term bonds, USA Today reported. The agency anticipates transferring another $267 billion to long-term notes.
The regulatory agency said its reasoning comes from a revised forecast projecting that the 8.2 percent jobless rate will be little altered by year’s end and that even by the end of 2013, unemployment likely will still be at 7.5 to 8 percent.
Fed policymakers said they expect the economy to grow 1.9 to 2.4 percent this year, a half percent downgrade from the agency’s April forecast. USA Today reported that the economy has averaged 2 percent growth in the last four quarters.
While the Fed’s move is unlikely to spur more home buying, it could spur more corporate borrowing and hiring, USA Today reported.
If the hoped-for economic boost doesn’t materialize, Fed Chairman Ben Bernanke said, “We’re prepared to do more,” USA Today reported.
The U.S. Department of the Treasury announced more aggressive action to move the rest of the small banks out of the Troubled Asset Relief Program, American Banker reported June 19. The Treasury is planning to auction pools of securities in almost two-thirds of the banks still in TARP.
Treasury announced its intent in a letter to some 200 banks on June 19, noting it would include them in an upcoming series of auctions to unload the last of its bank investments. The auctions are scheduled to begin in early fall and may continue into next year, American Banker reported.
Treasury already has held two auctions this year to sell its stakes in 13 individual banks.
The banks that received the most recent letter represent about $2 billion of Treasury’s remaining $11 billion investment in TARP’s Capital Purchase Program. American Banker reported that 335 banks remain in the program.
Treasury noted that it expected these upcoming auctions to help wind down TARP, recover taxpayer dollars and help banks attract private capital to replace government support.
American Banker reported that pooled securities in the upcoming auctions will be awarded to a single, highest bidder. However, Treasury will give banks the option to opt out of the pool if they want to bid on their own remaining shares, though they will have to get regulatory approval to do so. Banks also can get a single outside investor to bid on the shares. In both instances, bids have to be placed by Aug. 6 and meet Treasury’s minimum price levels.
Moody's Investors Service downgraded some of the world’s largest banks — lowering the crediting ratings of 15 financial institutions by one to three notches — The Associated Press reported June 22. The ratings agency said that the banks’ long-term prospects for profitability and growth were diminishing.
Bank of America, Barclays, Citigroup, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase and Morgan Stanley were among the downgraded banks.
Moody’s Global Banking Managing Director Greg Bauer said in a statement that the banks “have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities,” AP reported.
The downgrades mean Moody’s is becoming more concerned about the ability of the banks to repay debts. As a result of a downgrade, it typically becomes more costly for a bank to raise money by selling its debt, and investors tend to demand higher interest rates for riskier debt. However, with rates currently hovering near historic lows, the downgrades may not dramatically affect the cost of funding.
Although the struggling banks are major international players in the extremely volatile stock and bond markets, Washington, D.C.-based banking consultant Bert Ely noted that the stock market is positioned well for any negative impact from the ratings downgrades. In addition, Bauer said that some of the institutions have buffers in place that are designed to help them during a crisis.
The downgrades come as markets around the world continue to struggle and investors fear that the global economy could be heading for another slump.
Mortgage companies approved as seller-servicers with the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation that are found by a court of law to have engaged in fraudulent activity will be reported to the government, with firm employees also feeling the impact, Mortgage Daily reported June 21.
The Suspended Counterparty Program was created to ensure that Fannie Mae and Freddie Mac are not exposed to unnecessary risk due to dealings with individuals or businesses with a proven history of fraudulent conduct, Mortgage Daily reported. It takes effect when a lender or its employees are found to have committed fraud or other financial wrong-doing.
The initiative also impacts the Federal Home Loan Banks, according to the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac. FHFA will decide whether an individual or company should be suspended from conducting business with the regulated organizations. Information obtained from other government sources also will factor into the determination.
“In appropriate cases, FHFA will issue orders directing the regulated entities to stop doing business with the individual or company based on a history of fraud,” the notice stated, Mortgage Daily reported.
Impacted parties will be allowed to show cause why they should not be suspended.
The initiative takes effect Aug. 15.
San Bernardino County, Calif., is considering using eminent domain to seize ownership of loans of underwater borrowers, Mortgage Daily reported June 19. The county, along with the California cities of Ontario and Fontana, believes the move could help stem the mortgage crisis.
San Bernardino County, which has one of the highest foreclosure rates in California, is in talks with Mortgage Resolution Partners, a group of venture capitalists looking to help the county acquire the loans. Once acquired, the loans would be restructured to reflect the homes’ current market values, which in turn could help homeowners lower their monthly payments and possibly regain equity in the properties.
“It is the first realistic opportunity, in bulk, to lower the amounts that people owe on their mortgages, which would be a tremendous benefit to the homeowners,” John Husing, chief economist for the Inland Empire Economic Partnership in San Bernardino, told Mortgage Daily.
Eminent domain typically is used to seize private property for neighborhood revitalization or major infrastructure projects, but in this case it would be used to seize private-label mortgage-backed securities.
While Mortgage Resolution Partners would help the county find private investors to finance eminent domain, the county would hold control of the loans.
According to Mortgage Daily, 150,000 homeowners in San Bernardino County are underwater on their mortgages, and 20 percent of those are held in private-label MBS. Another 50 percent are held by Fannie Mae or Freddie Mac, while 30 percent are held by banks.
The Massachusetts Supreme Judicial Court ruled June 25 that foreclosure sales in the state can be valid even when the entity foreclosing on the home doesn’t hold the mortgage note as long as it has proper authority, Bloomberg reported.
The decision, which reversed a lower court’s decision, said that it is enough that the foreclosing party is acting on behalf of the note holder and therefore doesn’t need to physically possess the note.
The case involved a Boston homeowner who claimed that the foreclosure on her home was invalid because the mortgage servicer didn’t hold the mortgage note and therefore lacked the authority to foreclose, Bloomberg reported.
The property in question was sold at a foreclosure auction in 2009 to mortgage servicer Green Tree Servicing, which then transferred the property to Fannie Mae. However, a lower court had blocked the homeowner’s eviction saying the transfer most likely would prove to be invalid because the foreclosing entity did not hold both the mortgage and the underlying mortgage note, Bloomberg reported.
The Supreme Judicial Court’s decision applies only to future foreclosures and not to past home seizures, the court ruled. Fannie Mae argued in court papers that a retroactive ruling would damage title to properties that were subject to earlier repossession.
“Today’s ruling will hopefully bring clarity and certainty to the foreclosure process in Massachusetts,” Andrew Wilson, a Fannie Mae spokesman, told Bloomberg.
The Supreme Judicial Court remanded the case to the Superior Court and said that the homeowner has the right to argue that Green Tree had not acted on behalf of the note holder.
The case is Eaton v. Federal National Mortgage Association (FNMA), 11041, Supreme Judicial Court of Massachusetts (Boston).
A Texas community bank filed suit June 20 against the Consumer Financial Protection Bureau, alleging that the bureau’s authority as granted under the Dodd-Frank Act is largely unconstitutional, American Banker reported.
The State National Bank of Big Spring filed its suit in the U.S. District Court for the District of Columbia. Two groups joined the banks lawsuit — the Competitive Enterprise Institute, a nonprofit public policy organization dedicated to advancing the ideas of limited government, and the 60 Plus Association, a non-partisan seniors advocacy group.
“No other federal agency or commission operates in such a way that one person can essentially determine who gets a home loan, who can get a credit card and who can get a loan for college,” State National Bank’s Chief Executive Jim Purcell said in a news release, American Banker reported. “Dodd-Frank effectively gives unlimited regulatory power to this so-called Consumer Financial Protection Bureau…with a director who is not accountable to Congress, the President or the courts. This is simply unconstitutional,” he said.
State National Bank and the other plaintiffs in the suit are targeting Title I and Title X in Dodd-Frank, the sections that created the new monitoring agencies, including the CFPB.
While the plaintiff bank, with only $294 million in assets, largely is exempt from many of the new regulations, the plaintiff’s attorney, C. Borden Gray of Boyden Gray & Associates, claimed that the bank could be harmed by the act and that, as a result of Dodd-Frank, State National Bank pulled out of the mortgage business entirely due to concerns about unpredictable regulations and potential lawsuits, American Banker reported.
State National Bank’s portfolio is mostly in commercial loans; only 2.3 percent of its loans are residential.
Responding to the lawsuit, CFPB Spokeswoman Jen Howard told American Banker, “This lawsuit appears to dredge up old arguments that have already been discredited. We’re going to keep our focus on the important work Congress created us to do — making markets work for consumers and responsible providers.”
After ticking up last week on the heels of a six-week record-setting streak, mortgage rates headed down again, Freddie Mac reported in its weekly Primary Mortgage Market Survey released June 21.
The 30-year fixed-rate mortgage edged down 0.05 percentage points from the previous week to 3.66 percent, a new record low (down from 4.5 percent a year ago). The 15-year fixed-rate decreased 0.03 percentage points to 2.95 percent (down from 3.69 percent a year ago).
The five-year Treasury-indexed adjustable-rate mortgage slid 0.03 percentage points from the previous week to a new record low of 2.77 percent (down from 3.25 percent a year ago), while the one-year rate fell 0.04 percentage point to 2.74 percent (down from 2.99 percent a year ago).
“Treasury bond yields eased somewhat this week on some worsening economic indicators bringing mortgage rates back into record low territory,” Freddie Mac Chief Economist Frank Nothaft said in a news release. “However, there were also some positive indicators on the housing market. Construction on one-family homes rose for the third consecutive month in May to an annualized pace of 516,000. Furthermore, homebuilder confidence rose in June to its highest reading in over five years,” he said.
View Freddie Mac’s weekly Primary Mortgage Market Survey.
Moody’s Investors Service reported that recent improvements in the apartment market have leveled off, continuing a trend of weak performance as property prices fell 0.6 percent in April from the previous month, National Mortgage News reported June 20.
Moody’s tracks prices through its Real Capital Analytics Commercial Property Price Index, which measures value changes based on repeat sales.
According to April’s RCA CPPI, declines were due to an unexpected downturn in prices for apartment buildings, a market sector that had been recovering since commercial real estate prices hit bottom in late 2009, National Mortgage News reported.
Retail and industrial properties, however, continued to show slow improvements in April, while properties in major markets such as Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C., have recovered to 91 percent of their peak levels. Prices in non-major markets, however, continued to decline despite improvements in performing property sale prices.
“Property price increases over the past year have been driven by major markets,” Barclays’ analyst Keerthi Raghavan told National Mortgage News. “These markets are already at fairly high levels and price increases here have slowed down.”
The index also showed that recovery for distressed properties in major markets has continued alongside performing properties over the past 18 months, National Mortgage News reported. As a result, the average distressed discount was reduced from 32 percent in mid-2011 to 22 percent this year.
Appraisal Institute President Sara W. Stephens, MAI, was featured June 22 in a nationally syndicated article defending appraisers who are accused of failing to recognize appreciation. The article said that in some instances, appraisers fear they will be accused of potentially overvaluing a property.
In the story, which ran in the Washington Post, Los Angeles Times, Seattle Times, Miami Herald, Boston Herald and San Diego Union-Tribune, among other print and online publications, columnist Kenneth Harney wrote that a growing number of mortgage loan officers and real estate agents say appraiser reluctance to report local appreciation is becoming a significant complication in sales transactions.
Speaking in defense of appraisers, Stephens told Harney that it is every appraiser’s professional duty to arrive at valuations that “reflect the market,” including recent changes (whether positive or negative) if they can be verified with authoritative and accurate data.
This story is among the recent media coverage included in the “AI in the News” feature on the members-only section of the Appraisal Institute website.
Appraisal Institute members appearing recently in local media coverage include Mark Abissi, MAI, Burlington (Pa.) Times News; Mark Sussman, MAI, Bergen County (N.J.) Record; Steve Albright, MAI, Ocala (Fla.) Star-Banner; Rick Lussy, MAI, SRA, and Laurel Kelly, Associate member, Stuart (Fla.) News; KC Vigoren, Associate member, New Mexico Business Weekly; Fitzhugh Stout, MAI, Charlotte (N.C.) Observer; and John Forsythe, SRA, Des Moines (Iowa) Register.
See the latest media coverage about the real estate valuation profession, the Appraisal Institute and its members. Media coverage at “AI in the News,” found on the member log-in page of the Appraisal Institute’s website, is updated daily and also includes the latest news releases from the Appraisal Institute.