Friday, March 13, 2009
No Appraisals?
What's with the reliance on unregulated broker-price-opinions in the Administration's loan modification proposal? I would think that in this market, an objective, independent appraisal would be absolutely necessary. Who is lobbying the Admin on BPOs?
UPDATE (3/16 1:20PM)New York Post with the scoop over the weekend:
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UPDATE (3/16 1:20PM)New York Post with the scoop over the weekend:
Another aspect of Geithner's plan that is being questioned by lawmakers involves the house-appraisal mechanism the White House proposed using to modify existing troubled loans.
In the run-up to creating the subprime nightmare, the unregulated assessment process used the Broker Price Opinions (BPO), which uses comparable sales but has built-in biases. Among those, appraisals tend to be high because brokers don't earn a commission if a mortgage is unfunded because of a low assessment.
Also, the Automated Value Model (AVM), which relies on comparable sales, uses a computer algorithm to come up with a final assessment.
"Appraisal independence is of great importance to all homebuyers and homeowners who own or want to own a home. I have therefore fought to improve appraisal independence for many years and I am continuing to do so. Next week, the Housing Subcommittee will hold a hearing to address mortgage modifications, and I expect that home valuations will be discussed," said Rep. Paul Kanjorski (D-PA), a ranking member on the Finance Committee.
According to mortgage industry sources, the Obama administration is planning to rely on these two models to rescue homeowners from foreclosure.
According to RealtyTrac, foreclosure filings in the US climbed 30 percent in February.
"Going forward, reforming the appraisal process to prevent inflated pricing will be critical to ensure we don't repeat the mistakes of the past," said Rep. Carolyn B. Maloney.
"These two models were instrumental in creating the housing bubble," says James Amorin, president of the Appraisal Institute.
According to a report sent to finance committee members, using these assessment tools could cost Fannie Mae and Freddie Mac $500 billion in potential losses in inflated valuations based on 4 million reworked loans.
In the case of loan servicers, using the AVM or BPO models to reset the existing troubled loans could add a staggering $3 trillion in potential losses to Uncle Sam's coffers based on the existing 20 million troubled loans, according to the report.
