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The Scary $160 Million Bonus Problem

The opinions expressed by columnists are their own and do not necessarily represent the views of

The best news about the $160 million business bonuses is the chance we have to see our government in action. You would have thought that somebody got into Fort Knox and seized the keys to the vaults the way Representatives, Senators and the President of these United States are acting. If you look really closely, you can see the blankets and sheets being readied to "pull the wool over our eyes"! What was the whole thing about? It was the public outcry that shook the government officials to their quick. Why? Because as per usual, the government gave away billions of dollars without any conditions, including the granting of these bonuses. So what do our elected officials do? Attack the company and get the public eye off the ball! Mission accomplished!

The reason I even bring this up is because it appears that the government messes up everything they get involved in. And they always have. This includes my industry, the mortgage and real estate industry, where they apparently cannot figure out a simple solution to a problem that has rocked the nation: how to dispense mortgages to qualified borrowers across the nation. The government's problem: defining "qualified" and through some fuzzy thinking, creating a "red lining" policy within and among states. It didn't have to happen.

In the past, I have talked about three similar cities within one state, California, having three different conforming loan limits under the expanding conforming jumbo program. The three are Beverly Hills, La Jolla and Santa Barbara.

Realistically, why the difference?

I have mentioned the self employed problem, which was exacerbated on December 15, 2008 when the government's companies, Fannie Mae and Freddie Mac, would no longer accept their own findings from their automated underwriting system. Prior to that date, if you had a low loan to value, a high credit score and good liquid assets, you needed only to prove that you were self employed for two years and you would get the loan. No more!

I stated previously that many lenders are forcing appraisers to change the actual comp sales (price of a house when it sold) that took place and put a declining factor on the price to reflect the property is in a declining market. This of course, to the naked eye, will insure that the declining market will continue to decline until houses reach a price of zero.

Now we have another rule about to commence, brought to you by the "rocket scientists" who rule the mortgage industry. It is a rule about who can hire the appraiser. Currently, the loan originator hires the appraiser. After the appraisal is done, it is sent to the lender and is used for the value of the subject property. The problem the powers that be are trying to alleviate is the communication between the originator, who has a vested interest in making the loan, and the appraiser who determines the value. Generally, the loan originator tells the appraiser what the loan amount is going to be and the appraiser works to arrive at the value needed to support the amount of the loan. The problem only comes up in refinances, not purchases, because the appraiser will know the purchase price and can use the actual sale as one of the comps.

The lenders have two ways to guarantee the value is correct and have always had these options: a desk review of the appraisal or a field review. A desk review is usually done by the underwriter who checks the comps in the appraisal and can even pull their own comps from public records to decide if the appraisal is decent. The field review is actually a new appraisal done by another appraiser who has seen the first one and either confirms it or shows the errors in the first appraisal. Many lenders failed to use either method and got caught with some fallacious appraisals. So now we all have to suffer, loan originator and borrower, because of their lack of good business practices. Let me show you how this can turn into a real nightmare.

The property value arrived at by an appraiser is a subjective value, unless every comp the appraiser uses is an exact model match, with the same upgrades and amenities in the same condition. That, of course, is what you call a "long shot". When a loan originator orders an appraisal, he now tells the appraiser what the loan amount is so he can try to get the value, which is usually a range from a low to high amount (ex; $200,000 to $215,000) to come in on the "right side" of the range. Under the new system, the appraiser is hired by a management company who tells the appraiser the address and the lender's name and that is it. If the appraiser comes in too low, the loan is generally over. The loan originator loses his potential loan. That is considered a missed opportunity. But what happens to the borrower? The borrower pays the appraiser when the appraiser does the inspection and then what happens if the value comes in too low and the loan is cancelled? The borrower loses his or her money. That is called "roulette". I have never dealt with a borrower who wouldn't get really upset if they paid for an appraisal that came in too low and nullified their refinance.

The second problem is having an appraiser go to an area that they do not know. Every area in the country has their special quirks that affect the price of homes. In the San Fernando Valley in California, houses are worth more south of Ventura Boulevard than they are north of the boulevard. Ventura Boulevard runs about 17 miles through the valley and it holds true for the entire distance. I have lived here for my entire adult life and can't tell you why this is, but if you didn't know that, then you wouldn't be able to arrive at a true appraised value.

I recently had a borrower in a lake community in Southern California have his property reviewed by a company in Texas. They lowered the value 26% because they found a neighboring community with lower prices for similar houses. Fortunately, I was able to point out that the neighboring community didn't have rights to the lake and therefore was less valuable for a reason. I was able to save the loan which wouldn't happen under this new plan.

I guess the answer is for the public to be forced to endure until enough public outcry emerges and someone from the government recognizes an opportunity to point out an inequity. Some of us, however, will know how that inequity came about and simply smile and shake our heads.

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