Over the last couple of months, as I've been dealing with analyzing, publicizing, and trying to affect the final "look and feel" of the HVCC, I've been surprised frankly at the near-irrational venom directed by appraisers toward mortgage brokers. There's nothing wrong with criticizing the problems of another cog in the huge real estate machine, but when it's done to our own niche's detriment, then I begin to wonder if we've lost our minds and are just looking for a scapegoat.
I know, this will be one of my less popular editorials. Oh well. Please just read all the way to the end before thinking I'm the one who's lost my mind. (pq)
Let me get a couple of things out of the way by starting with the headline in reverse order. Let's start with the "ugly". I've seen and heard a lot of really ugly - and true - stories regarding "bad behavior" by some mortgage brokers. It makes sense. In most states, there's been no licensing and virtually no oversight of mortgage brokers. A less-respectable snake oil salesman and his or her buddies could start up a large unregulated business almost overnight, buy a bunch of online loan application leads, and start spamming and calling, and placing borrowers in exotic loans on properties which they acquired during bouts of "irrational exuberance". In a matter of weeks, a new mortgage broker could be driving a Hummer and buying all the champagne at the local bars, because there was an endless line of those all-too-eager borrowers banging on the door. It wound up attracting some of the worst of the worst, as cheap and easy money often does. Now those con artists have moved on to another gig.
But where did that cheap and easy money come from? Not from the brokers. They only were selling what the lenders were tripping all over each other to offer. Lenders and the GSEs and everyone in between knew full well that unqualified borrowers were being placed into loans designed for a different financial profile. The last time I checked, mortgage brokers didn't do the underwriting of all these fraudulent and unsupportable loans. They did their "brokerage" jobs, by putting borrowers in front of as many lenders as they could, getting them a shot, and the lenders opened their doors wide and said "Come on in, the water's fine". Of course it's fine, because when the water gets hot, the lender won't be in it, since they didn't have any skin in the game. Loans got sold upstream, bundled into blocks of mortgage backed securities, and out of the lender's hands as quickly as they came in.
All the while, the AVMs used by Wall Street and the ratings agencies and the automated underwriting systems used by the lenders made nary a chirp. If appraisers and mortgage brokers are all so corrupt and compliant, I wonder why the "objective" underwriting systems from Fannie and Freddie and the "objective" AVMs didn't raise alarm bells all day long.
Actually, I know why. Because any "objective" analysis would show that neither appraisers nor brokers were to blame for the problem, and nobody at the GSEs or the lenders wanted that really "ugly" part to come to light. In the end, it was unvarnished underwriting negligence and pure consumer greed and fraud that drove the market to the edge, and beyond.
Mortgage brokers didn't do any more than anyone else to make that happen. In fact, even the statistics that indicate that they were neither better nor worse get interpreted to make it seem like they were to blame. Case in point, the Mortgage Banker's Association recently publicized a headline stating 58% of all mortgage loan applications which were later found to be fraudulent had been originated by a mortgage broker. But the same organization had often included articles showing 60% to 70% of all loan applications, good and bad, came through mortgage brokers. If brokers originated more than 60% of all the loans, and they were involved in only 58% of the fraud, then the lender's own loan officer employees were actually more likely to engage in fraud than brokers.
In the end, 100% of the fraud involved borrowers and lenders. That sounds trite, but think about it. No matter how many people are involved or what their agendas may be, the fundamental underlying assumption should always be that lenders will not loan money to someone who is likely to default, and even if so, that there is a hard asset of sufficient quality and value to cover the loss when it happens. But with lenders offering "no doc" loans to everyone with a pulse, and even some without, and the media encouraging everyone to get in on the feeding frenzy, is it any surprise that there were borrowers who were willing to say and do just about anything to get in on the "flipping" frenzy?
And that brings me to my real point about what went wrong here and where the pressure on appraisers - from mortgage brokers and others - came from. While lenders were eager to move loans and overstepped their bounds in doing so, and mortgage brokers and Realtors and everyone else wanted their commissions, the most unlikely of players, the borrowers themselves, were the ones putting the most pressure on everyone in the transaction regarding the appraised value. They usually forced loan officers and mortgage brokers to be their mouthpieces to pressure you, though it's obvious that they also sometimes proudly took on the task themselves.
I personally have a hard time grasping that. Decades ago, when I bought my first house, I remember wondering if my loan would go through, and whether the house was worth what I thought. Had the appraisal come back below what I offered, I would have been inclined to thank the appraiser for helping me avoid a potential disaster as opposed to screaming and yelling at my broker to keep getting new appraisals or AVMs until the amount I offered magically becomes fair market value.
The part that just escapes me is how borrowers could possibly believe that it's bad when an expert warns them that they're about to overpay for something. Sure, I understand the greed aspect and the emotional factors that come into play, but that's secondary to the logic that's supposed to drive economic activity on the scale of a home purchase. For the vast majority of Americans, the equity - real or imagined - in their home is the largest asset they have. The payments on a home or investment property dwarf their other bills. That should cause some pause on their part before jumping in at all, much less pressuring others to make it happen even when they're being told it's a mistake. Clearly, it didn't. But that's not completely the mortgage broker's fault either.
So, if that's the ugly and the bad of a mortgage broker-centric lending system, what's the good? Why am I defending brokers?
Fundamentally, the "good" thing about brokers is that they're your clients. Anything like the HVCC that removes your access to all of your clients with the stroke of a pen and replaces them with a middleman taking 50% or more of your fee must be stopped. Yet, in their rush to condemn mortgage brokers, many appraisers literally said "I don't care what's wrong with the HVCC, if it gets rid of brokers then it's fine with me". That's a knee-jerk reaction that doesn't help appraisers at all.
The other good thing about brokers is their activism. Brokers are salespeople; they're comfortable making calls and asking people to do things. They're vocal and willing to act to get what they want. By and large, appraisers aren't the same psychological profile. Brokers are even more motivated to stop the HVCC than appraisers are, apparently - they had a 107% higher likelihood to act than appraisers did when we sent out e-mails alerting everyone to the HVCC's problems.
By setting aside differences and working with brokers, locally and nationally, appraisers are more likely to be able to modify the HVCC and influence Congress than by working alone. Appraisers and mortgage brokers together form a one-two punch with complementary strengths. And back to what I said in our first issue, "The enemy of my enemy is my friend".
Right now, the enemy is the HVCC. If we can focus on that and work together, we'll achieve far more than we will by just complaining about mortgage brokers.
Editor's Note: To do something to help fix the HVCC, visit www.alamode.com/action.