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[Fee Simplistic] Do We Need An Aspirin Or Major Surgery?

Fee Simplistic is a semi-regular post by Martin Tessler, whom after more than 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. This week Marty gives everyone a headache because the problem with underwriting is not a quick fix. …Jonathan Miller


Without attempting to belabor the obvious it should be apparent to all of us who toil in the various niches of the world of real estate that the sub-prime implosion and its impact on the credit markets calls for: major surgery or, for those with a different outlook, some over-the counter aspirin palliative. For those who remember my previous posting calling for companion legislation to FIRREA, namely FURREA-FINANCIAL UNDERWRITING REFORM & RECOVERY ENFORCEMENT ACT-it should be mentioned that there is already some legislative sparks as noted by President Bush’s call for relief to those homeowner’s who suffered from the flim flam come-ons of the mortgage originators but who have a decent credit history (speculators and investors need not apply). The fact that Sen. Chuck Schumer endorsed Bush’s proposal (an extreme rarity in this political climate) and which involves FHA, FNMA and FREDDIEMac marching to the rescue brings no comfort to this corner as it does nothing to remove any of the past industry practices that brought this problem on with the continuing phenomenal growth of securitization.

The problem is manifold and does not only stem from the non-verification of credit and income, along with introductory low interest rates and optional payment modes allowed borrowers but also has its roots in legislation that allows the financial industry to “game” the mortgage/credit markets by off-loading risk and mortgage portfolios from the originator/lender/packager underwriters and banking institution balance sheets to bond investors who are more likely to pull the trigger on delinquent borrowers and sell off their holdings at discount rather than wait out the market as banks formerly did up through the late 80’s before the advent of securitization. For those with institutional banking experience such as the writer you may recall the people who were in “workout”in the late 80’s through the early 90’s-a vanished undertaking in today’s world of securitization and maybe even a lost art as well.

Also for those of us who are in the lowest rung of the securitization “food chain”, namely appraising, I’m sure we all have stories of phone calls and other nagging requests for lowering fees, making the value, jiffy-quick turnaround times, and other horrors which the readers of Soapbox probably know by heart. Until Congress recognizes that having fixed the lowest rung-fraudulent appraisals coupled with banking institution lending back in 1989 with FIRREA it still needs to regulate a financial market that controls the originating, assembling, tranching of risk and underwriting and sale of the bonds collateralized by these mortgages. Not the least of this regulation awaiting enactment is the fact that the sellers (a/k/a Wall Street) retains and pays the appraiser and the rating agencies. Talk about conflicting interests-is it any wonder that a recent “Sounding Bored” by blogmaster Jonathan Miller addressed the issue of compressed or low appraisal fees (no relation to compressed cap rates).

We may have separated the appraisers from the borrowers under FIRREA but we have not separated the bond issuer/sellers from the appraisers and the rating agencies. Clearly. Congress must address this issue or else we will have history repeating itself probably about 20 years from now when all of the executives responsible for today’s crisis have either been downsized or retired and a new cadre of investment bankers is at the helm with no institutional memory.

Getting back to Bush and Schumer seeing eye-to-eye on the FHA, FNMA & FREDDIEMac Rangers coming to the rescue is the equivalent of taking an aspirin for temporary relief. It will help the poor honest home owner with decent credit who was enticed into a wrongful loan and that is certainly valid and it will leave the investor/speculator licking his wounds and bank account and that is as it should be. But what is called for is transparency in the marketplace, the removal of conflicting interests, and keeping the professional inputs of appraisal and risk rating at arm’s length from the people doing the hiring and paying the fees. For those of you who remember Economics 101-Gresham’s Law where bad money chases out good money-you may want to keep in mind that Wall Street at year end 2006 doled itself $36 billion (yes-with a”b”) in bonuses and that’s after congressional campaign contributions. Do you think $36 billion is “good” money or “bad” money? And the appraisers are complaining about “compressed” (a/k/a low) fees give me a break, Chuck.