Thursday, June 25
Written noon EDT
UP BY A BIT: Mortgage rates went up this week, but not by much. The benchmark 30-year fixed went up 4 basis points, to 5.8 percent, this week. In the Rate Trend Index, a plurality of our experts predict that rates will fall in the next few weeks.
Yesterday was a quiet Fed Day. Here's my translation of the rate-setting panel's policy statement.
HVCC WATCH: They say a little knowledge is a dangerous thing, and Salon.com's Andrew Leonard proves it in his blog post, "Mortgage brokers go back on the warpath." I'm going to explain why Leonard is wrong because I fear that his interpretation will become the conventional wisdom.
Like a lot of people whom I talk to, Leonard seems to believe that mortgage brokers deserve more blame than anyone else for the housing bust. This leads him to some uninformed conclusions about the usefulness of the Home Valuation Code of Conduct.
(For what it's worth, I place the blame more on Wall Street investment banks than on anyone else, but they share culpability with many people and organizations.)
Leonard says the HVCC arose out of an investigation by New York's attorney general into collusion between Washington Mutual and appraisers. Not exactly. The alleged collusion was between WaMu and an appraisal management company called eAppraiseIT. That might sound like nitpicking but it's not. It's an important distinction to make.
"The clear purpose of the HVCC is keep mortgage brokers and appraisers from getting get together and inflating home values," Leonard writes. He's correct. But in his blame-the-broker myopia, Leonard doesn't ask whether that was the original purpose, or whether there were other problems that the HVCC should have fixed, too. And he doesn't question whether it's wise for a national appraisal policy to be decided by New York's attorney general rather than by Congress or the Department of Housing and Urban Development, which have committee systems and comment periods that are designed to reduce the impact of unintended consequences.
Before HVCC went into effect May 1, a mortgage broker could phone up a friendly appraiser and ask, "Do you think the home value will support a refinance for such-and-such an amount at such-and-such an address?" Now that call can't be made. As a result, people apply for loans that they can't get.
Instead, a broker has to hire an appraiser though an appraisal management company. The management company assigns an appraiser to visit the property and review comparable properties. This is where the myriad problems are cropping up.
Think of a barbershop or hairdresser where the hair cutters officially are independent contractors who rent their chairs and share a portion of their income with the shop. That's similar to the relationship between appraisal management companies and appraisers. Now, let's say you call the hairdresser and the receptionist says you can't make an appointment with a specific hair cutter. You have to take whoever is assigned to cut your hair. Appraisal management companies have similar power.
Independent appraisers and mortgage brokers complain that, under this system, appraisers are assigned to jobs that they're not fully qualified for. An appraiser who specializes in condos in Fort Lauderdale, Fla., might end up being assigned to appraise a single-family home 80 miles away in the small city of Stuart. That might not be the best appraiser for the job.
Independent appraisers complain that their fees are being cut by appraisal management companies. Meanwhile the appraisal management companies are charging higher fees to consumers. Borrowers are paying more for less service.
Why is this happening? Well, take a look at what I wrote seven paragraphs above: "The alleged collusion was between WaMu and an appraisal management company called eAppraiseIT." The New York attorney general initially probed business ties between lenders and appraisal management companies. But the legal settlement says these ties should be encouraged. Now a bank can own a stake of as much as 20 percent of an appraisal management company. From what I understand, this part of the settlement was added to the final draft over a weekend.
Think about that. Banks, always hungry for fee income (especially now, when they're reluctant to lend), are allowed to own minority stakes in appraisal management companies -- and suddenly, the appraisal management companies are charging higher fees to consumers while paying less to appraisers.
It makes you wonder. If New York's attorney general investigated a huge bank and an appraisal management company for collusion, why did the investigation result in a legal settlement that allows banks to partially own appraisal management companies? If the targets of the investigation were a big bank and a big appraisal management company, why did the settlement restrict the activities of small mortgage brokers and independent appraisers?
The legal settlement was supposed to result in creation of a watchdog agency called the Independent Valuation Protection Institute, with a hot line to field complaints about improper pressuring of appraisers. The hot line has been yet to be created.
My suggestion to Andrew Leonard and any other reporter looking into the HVCC is this: Don't assume that a policy is wise just because mortgage brokers complain about it.