Now that the housing bubble has gone down as quickly as ill-fated Hindenburg, what made all of that "appreciation" so illusory is now being slowly exposed.
And while most of the Monday morning quarterbacking has focused primarily on the idiocy of the loan programs that are blowing up in the faces of the banks that made them, an important leg of process has gone largely under the radar.
That’s because while making sure a borrower can actually afford to pay the note back is critically important, the biggest piece of the puzzle has always been the appraisal.
Without it, loans just do not close.
So "hitting the number" with a good appraisal has always been critical to getting a loan approved with a reasonable margin of safety for the lender.
That is, of course, until the bubble came along.
You see, when the mania hit its greedy heights the lenders even threw this piece of the puzzle away, along with all of those pesky guidelines that had worked without a hitch for over 40 years.
It was all part of a new paradigm in lending.
And its close-deals mantra was pretty simple: It was "whatever it takes."
So as we all sit around surrounded by housing rubble, it’s monumentally important for everyone to realize that this crash was no accident.
Instead, it came from countless and massive acts of carelessness as the pigs rushed to the trough. Of course, we all know who they are now.
One of them was Washington Mutual, one of the nation’s biggest lenders.
And as we have come to find out, WaMu also cut massive corners when it came to the appraisal process—a huge mistake.
After all, an accurate appraisal has always been the strongest fall back position for lender in the event of a foreclosure. Mistakes here cost lenders big time.
Of course, WaMu shareholders have been paying for those and other mistakes ever since—shares of the company are down over 77% since last year.
In fact, the company recently announced that it would layoff up to 3,000 employees, cut shareholder dividends and close its free-standing home-loan operations. Moreover, Wamu has set aside about $6.4 billion to cover loan losses, while financial analysts say the bank could lose up to $16 billion more.
But to fully understand what was going on with WaMu’s shaky appraisals, you need to read this story in The Seattle Times to get a grip on the insanity that swept over the business.
Wamu, by the way, was hardly alone. Everybody was doing it. Countrywide and KB homes are being sued for it.
By Susan Kelleher entitled: Appraisers say WaMu cut corners to increase its mortgage business
"Washington Mutual’s mortgage woes come as no surprise to Graham Albertini, a real-estate appraiser who worked at WaMu’s Bellevue office when its mortgage business was going gangbusters.
Over eight years, Albertini said, he watched the bank trade safety for speed in its home-lending operations. The trade-off, he said, eroded fundamental safeguards put in place to protect WaMu from lending more against homes than they were worth.
When Albertini began working for WaMu in 1999, most mortgages were supported by a complete appraisal, which included an on-site property inspection, detailed measurements of the house and a physical drive-by of comparable homes by bank appraisers to determine if the house was worth what the buyer was willing to pay for it.
Every appraisal was given a cursory review, while pricier homes and houses with unusual features or circumstances were given an even closer review by a second certified appraiser. If everything checked out, the loan was sent to the bank’s underwriting department for completion.
"Up until 2001, it was a pretty good system. Every appraisal was looked at by a human being," said Albertini, who now works for American Home Appraisals on Mercer Island.
But as loan volume increased, so did the pressures – and the incentives – for WaMu appraisers to work faster and bypass safeguards that could have protected the bank against the high-risk mortgages now dragging it down, Albertini and other appraisers say.
"It’s the elimination of oversight in pursuit of profit. … That’s a formula for a breakdown," said appraiser Richard Hagar, who works with Albertini and regularly trains other colleagues and law-enforcement fraud investigators on appraisal standards.
The entire home-financing system, Albertini and Hagar said, was geared toward closing the deal, and appraisers who were willing to play along could make a lot of money.
Those who didn’t want to play complained loudly to federal banking regulators through professional organizations. By the thousands, they also posted their names on an Internet petition, warning as early as 2001 that undue pressure from aggressive brokers and lenders to bend the rules was endangering the nation’s banking system and the economy."
So as you can see, all of this mess was perfectly predictable. In fact, in the absence of raw greed it wouldn’t have happened at all.
Of course, it wouldn’t have hurt if the regulators would have stepped in and done jobs either.
Remember that the next time you hear the word bailout. Companies like WaMu don’t deserve to survive.
Great story Susan. Of course there’s more to it….. so read it in total.
