FNM decides to get tough, AFTER horses get let out of the barn:
Dow Jones Business News
Fannie Mae Gets Tough on Inflated Mortgage Appraisals
Tuesday January 13, 12:50 pm ET
By Christine Richard and Julie Haviv
NEW YORK -- Cash-out refinancings have been a dream come true for many homeowners and mortgage bankers. But some of the cash individuals took out of their homes may be, in fact, a fantasy as the booming market led some appraisers in the rush for business to overstate home values.
Exaggerated appraisal values have raised concerns at Fannie Mae (NYSE:FNM - News) , the largest buyer of mortgages in the nearly $7 trillion mortgage market.
That's set off a scramble to reappraise property values that could leave banks on the hook for inadequately backed loans sold to Fannie Mae. It also means individuals may have borrowed against equity in their homes that doesn't exist.
"We have seen a trend toward inflated appraisal values on cash-out refinancings," said Alfred King, director of communications at Fannie Mae. "That has resulted in Fannie Mae requiring lenders to review loans for excessive valuation."
In a cash-out transaction, the homeowner pays off an outstanding mortgage loan by taking out a new, larger loan and pocketing the difference in cash.
The number of these transactions has skyrocketed in recent years and hit an all time record of $2.2 trillion in 2003, according to the Mortgage Bankers Association, an industry trade group.
Falling interest rates and rising home valuations often allowed individuals to take out cash, while their monthly payments on the new mortgages in some cases remained unchanged or were even lower than before.
Inflated appraisals have been a bane of the mortgage industry, and there have been calls even from within the industry to tighten regulation of appraisers. In cash-out mortgages, the scope for inflated appraisals is larger because the homeowner may be unwilling to accept a lower valuation while the lender may be reluctant to forego business.
Mr. King declined to provide details on the trend, citing the confidentiality of contract agreements between Fannie Mae and the lenders with whom it does business.
"But, clearly we do have options up to and including requiring repurchases of loans we find, through quality control processes, don't meet our standards," Mr. King added.
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.
Mortgage bankers say the stepped up review of appraisals is no surprise given the flood of refinance transactions over the last year.
"It is a typical problem in a post-refi period since there is a lot to clean up after a bulge of activity," said Doug Duncan, senior economist at the Mortgage Bankers Association.
In late May 2003, a widely watched gauge of refinancing activity, the Mortgage Bankers Association's refi index peaked at 9,977, a record high. It has since plunged to 1,755, indicating a decline of nearly 80% in refi activity.
The unprecedented surge in refinancing has put some strain on the mortgage industry, agreed Kevin Kennedy, vice president of capital markets at broker MortgageIT in New York, which originated around $12 billion in mortgages last year. He said it was inevitable that some loans are now being sent back to originators with questions.
More Than Just A Backlog
But some appraisers say there's much more going on here than a backlog of reviews.
Andrew Picarsic, a certified residential appraiser in North Carolina, says that based on the number and type of review requests he has been receiving, he suspects Fannie Mae is getting more aggressive with lenders over questionable loans.
Some reviews have involved foreclosed Fannie Mae properties. Mr. Picarsic cited an example of a home in South Charlotte, N.C., that was foreclosed and vacant. The original appraisal -- in this case for a purchase -- was for a value of $540,000. Mr. Picarsic's appraisal put the value for the same effective date as the original appraisal at $365,000.
That difference of $175,000 represents a likely minimum loss on that loan.
"The original appraiser used only one sale from the small subdivision (in which the property was located) even though there was a total of sixteen current sales available," said Mr. Picarsic. "He then went to a nearby subdivision to get three other sales of higher value to produce the flawed opinion."
Mr. Picarsic has also seen requests for reappraisals on foreclosed Fannie Mae- owned loans through intermediaries as the original lenders don't want to have to cover the losses.
"It appears that these different parties are attempting to defend their defaulted loans so as to keep this loss with Fannie Mae," said Mr. Picarsic.
On most of these reviews, "the collateral was insufficient to cover the substantial loss," Mr. Picarsic said.
And, 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. Now it's 16%," said Mr. Rose, referring to the $500,000 median home price in the area.
"I am convinced that inflated appraisals during the refi boom are the major ingredient," he added. |
