The GSE Report, a watchdog of the housing agencies, keeps a close eye on these government-subsidized agencies that are fueling the housing bubble by packaging mortgages into “riskless” assets with the implicity promise of a government guarantee. Fannie purchases mortgage-backed securities that are packaged by banks, then underwrites them and resells or holds them.
According to this this story, Fannie intends to hold the banks responsible for exaggerated appraisals. The irony of this is that stories abound of collusion between the lender and the appraisor and the buyer. Everyone involved participated with a “nudge, nudge, wink, wink” to generate whatever appraised value the home owner wanted in order to get their cash out. For Fannie to suggest that they haven’t been aware of this all along is difficult to believe.
Fannie gets tough on inflated mortgage appraisals
In this period of cash-out refinancings, some of the cash borrowers took out of theirhomes may be, in fact, a fantasy as the booming market led appraisers in the rush for business to overstate home values. Exaggerated appraisals values have raised concerns at Fannie Mae, which has set off a scramble to reappraise property values that could leave banks on the hook for inadequately backed loans sold to Fannie Mae.
“In the past, we have seen a trend toward inflated appraisals on cash-out financings,” said Alfred King, director of communications at Fannie Mae. “That has resulted in Fannie Mae now requiring lenders to review loans for excessive valuation.” He added, “…clearly, we do have options up to and including requiring repurchases of loans we find, through quality control processes, don’t meet our standards.”
Lenders that are forced to buy back mortgages sold to Fannie Mae may have to take a charge because they may have already booked the sale. What’s more, in the case of banks, they will also have to hold more reserves than expected to cover possible losses on those mortgages.
Bill Rose, an appraiser who works in California’s San Diego County, believes the problem of overly optimistic appraisals has had a widespread impact on the housing market. “Six months ago, only 20% of the population could afford a home here.” He added, “ Now it’s 16%,” referring to the $5000,000 median home price in the area. “I am convinced that inflated appraisals during the refi boom are the major ingredient.”
Quoted in The GSE Report, from Dow Jones Newswires, Christine Richard and Julie Haviv, 01/13/04
