I just read a blog from a friend of mine, Mike Linkenauger of the Short Sale Specialist Networkand I completely and utterly concur with his argument. So much so, that I decided to add my own experience as testimony to his points.
First off, he "takes a step back" to "set the stage" and I think this is very important as many people are already starting to forget what got us into the 2007 housing crisis in the first place. As I don't agree with him in his opinion about how the Federal Government had no choice but to take over the mortgage securities giants, Fannie and Freddie or, what the potential outcome would have been if they were allowed to fail, it doesn't change the fact, it occurred. This is the part that many people don't seem to understand. Before the real estate crisis of 2007, the Federal Government didn't have a means of direct control over mortgage backed securities. Sure, they had regulatory controls in place, was able to investigate fraud and all that sort of stuff but, they had no way of actually dictating loss mitigation policy to individual servicers like Bank of America...for example. When the Federal Government took over Fannie and Freddie, that all changed.
Another piece of the puzzle many people don't see is who actually owns their mortgages. Many people believe that the bank who services their loan, in other words the person they make their mortgage payments out to, owns their mortgage but, that is far from the case, the vast majority of the time. If you have a government backed mortgage, which is the majority of Americans, then it's almost 100% likely that Fannie, Freddie, HUD, VA, or another Government Supported Entity actually owns your mortgage. This is why when you are upside down, asking to short sale in order to avoid foreclosure, we have to wait on approval from your Investor. The Investor is who owns your mortgage and that is not the bank you write your check to, it's typically a GSE. Just to give you an example, the last report I read, back in 2009 said that Fannie and Freddie, combined lost approximately $265 billion dollars in single family mortgages due to high risk loans they backed. This number, this loss of security is what destroyed our housing market because it left the market with a credit crisis based on affordable housing goals placed on Fannie and Freddie. Ultimately, Fannie and Freddie didn't have the money...that's right folks, they didn't have the cash on hand to pay that debt. In other words, it caused them to go bankrupt but, the Federal Government couldn't allow this, they argued it would cause the entire economy to collapse and people like Henry Paulson came out telling the world, Fannie and Freddie were being placed in conservatorship. What this means to you, the person paying the monthly mortgage on a government backed loan is that now you are paying off a government OWENED mortgage.
Maybe you are thinking to yourself...not a big deal, who cares, my monthly payment isn't changing, nothing has really changed.....um, not so fast action Jackson.....keep reading.
You see, all of this conservatorship action required a new Federal agency. You see, the Federal Government wasn't going to let a good crisis go to waste, they saw it as an opportunity to take more control...more direct control of the real estate market. They created the FHFA or Federal Housing Finance Agency. This agency is the successor resulting from the merger of the Federal Housing Finance Board, the Office of Federal Housing Enterprise Oversight and the US Department of Housing and Urban Development. Hearing that this was a merger, you might be thinking, well....that's a good think, less red tape, think again. The FHFA created a GSE (Government Sponsored Entity) "Mission" team where they essentially took on the powers and regulatory authority of both Fannie and Freddie. In other words, this gave President Obama direct control with all the regulatory and legal authority he needed to make decisions as he sees fit. The real estate and housing market in the US just became nationalized. Something many would say is completely un-American but, this great institution of our liberty was herald in with thunderous applause.
Once again, a part of this mystery that many of you don't see is something called the FHL Bank System of the Federal Home Loan Bank System. Once the FHFA was created, the FHL Bank System was at the mercy of the FHFA. What this system does is allow banks to borrow money at really low rates through discount notes, term debt or aka, consolidated obligations. What you might not know is this is how banks make money. Sure, they charge you over draft fees, interest rates, etc.... but, the big money is made here, within the FHL Bank System. It's so profitable to banks that over 7,700 banks and financial institutions are members and as such, are regulated accordingly. Chances are, your bank that holds your mortgage is a member. What happens is, the Federal Government wants to make a change in the mortgage market, dictates it to the FHFA, who then turns around and dictates it to the FHL Bank System who then turns around and dictates it to the individual banks. In essence, creating a chain of direct command, from the top, to the bottom. The best part of this is, the whole time, the fall guy will be the FHFA. The politicians get to keep their hands clean, even though, they are the ones pulling the strings.
Now that you understand how this is set, how the market isn't free or true, let's get back to Mike's blog. He talks about how he had seen many headlines recently how home prices are on the move up and you may have seen the same news articles yourself...I have however, he brings up a sticking point that should have all of you who own a home, very concerned. As an active short sale agent myself, one who negotiates short sales on behalf of distressed homeowners, I find myself fighting unbelievable odds, most of the time. My biggest complaint, as Mike outlines in his blog, is the appraisal. When you start a short sale, the banks wants to be assured that the price they are selling at, even though short the balance you owe, is market value. In other words, they want to limit their loss by not selling too low. This is fine and makes perfect common sense however, what many of us in the market have been noticing is that appraisals these banks are doing are coming in 10%, 20%, 30% high. In fact, it's happening so often and prices are coming in so high, it's got us noticing a trend, a unmistakable trend. Yes, I know, a trend is by no means evidence of wrong doing and I understand that however, it also doesn't change the fact, we are seeing it.
To prove my point, let's take the most recent short sale I closed on....closing on it at 11:00am cst today in fact. I listed the home, at what I thought was reasonable based on market sold comparables and subject property condition to have the bank call me up and tell me that I had to change my list price to nearly 70% over what I had it listed. Now, I am no spring chicken to doing property evaluations and I was so ticked off by this request I filed a appraisal dispute. I provide the bank with pictures, inside and out, repair bids, all in all, my dispute was about 13 pages long and was exhaustively detailed. I even had an appraiser friend of mine look it over and I won his support before he even got to page 3, seriously. So, I submitted it to the bank and 48 hours later, my dispute was found to be "un-substantiated". Defeated and bewildered, I ended up telling the homeowner to stay in the home, pay what you can when you can and hopefully, in a couple months, the bank will clue in and start dropping the price. 8 months later, we got an offer, it was for 75% less than what the bank listed and only about 5% less than I asked to originally list it. After haggling, providing adjustments, 6 total appraisals...yes, I said 6 actual appraisals, we got an agreement and will hopefully be closing in 2 hours from now. So, what in the world is causing these hugh problems with appraisals?
The biggest problem with these "appraisals" are that they are not independent. You see, they are "in-house" to Fannie. Fannie even has their own methods of appraisal, their own rules, independent from the appraisal state licensing boards. On my network, REOPro, you can log into the forums and read about hundreds, if not thousands of complaints from Realtors across this country complaining of this same issue. Are you wondering who makes these rules up, who tells these appraisers how to evaluate properties, who signs off on these negligently inflated appraisals? Well, you aren't the only one, we all want to know. If I was a betting man.....I am a betting man, I would suspect that it's all coming for the FHFA, or better yet, the Federal Government, to the FHFA, to the FHL Bank System, to the individual banks, or in this case, Fannie and Freddie.
It's a sad world we live in when the very entities in place to protect consumers are so broken, so corrupt, so mismanaged that they break to the will of political gain and end up hurting all of us. You see, if anything we learned from the mortgage melt down of 2007, it was that we need honest valuations of home prices however, based on what I am seeing and what I know, we haven't learned a darn thing. In fact, we are repeating mistakes.