The real estate market meltdown has exposed many painful and game-changing weaknesses in how business was conducted in the years past. In the quest to make as much money as possible scores of mortgage files were pushed through with incomplete or doctored information. Now, with foreclosures the topic of the day, mortgage lenders are receiving growing demands from investors like Fannie Mae and Freddie Mac to buy back loans they originated haphazardly. That can be devastating to the bottom line.
To deal with the costly buyback menace many mortgage shops have commenced tinkering with appraisals, of all things. As an appraisal comes in some home loan providers will run an electronic valuation model based on public records - it involves no actual physical inspection - to see how close the two numbers are. They are double checking on the appraiser's work, is what they are doing. If the appraiser's report is higher the underwriter can randomly cut back on the value, so that the lender can't be blamed for using inflated figures should the loan go bad. Of course, many a deal has blown up into many little pieces as a result. This likely happens more in the hard-hit areas - Las Vegas comes to mind, as does Arizona, California and Florida - where values have eroded the most and where all the mortgage foreclosures and short sales can seriously trample with the price structure.
Mortgage brokers, real estate agents and builders are howling injustice at such a practice. Home buyers and sellers whose transactions disintegrate don't know whether to cry or laugh. Part of the housing market has indeed turned into an unpredictable mystery.
But things are about to change for the better. Fannie Mae is tackling the electrifying issue head on. The GSE will not accept mortgages where the appraisal numbers have been altered, the policy going into effect September 1, 2010. It requires home loan providers to get in touch with appraisers to work out any disputes over values. If plan B is needed, a second appraisal should be ordered.
The housing industry is raving about Fannie Mae's decision. Despite having withstood some genuinely tough times during this real estate chaos the GSE can still manufacture sensible policies. It can only strengthen its position as a key element in the mortgage marketplace. It wouldn't be a big surprise if Freddie Mac followed suit in the near future.