The Honest Appraisers' Petition Exposed the MBA's Lie in 2000 (Hint: it is now 2013)
Recall that the honest appraisers began to warn the FBI and DOJ in 2000 about the growing epidemic of appraisal fraud led by the lenders who blacklisted honest appraisers who refused to commit appraisal fraud by inflating their appraisals.
From 2000 to 2007, a coalition of appraisal organizations " delivered to Washington officials a public petition; signed by 11,000 appraisers". [I]t charged that lenders were pressuring appraisers to place artificially high prices on properties [and] "blacklisting honest appraisers" and instead assigning business only to appraisers who would hit the desired price targets (FCIC 2010:18).
Surveys confirmed that appraisal fraud was pervasive and endemic and that the fraudulent lenders retaliated against honest appraisers and caused them severe economic injury. Many honest appraisers were driven out of the profession by the "Gresham's" dynamic that the fraudulent lenders' controlling officers deliberately generated by blacklisting honest appraisers. When cheaters gain a competitive advantage market forces become perverse and bad ethics drives good ethics out of the markets and professions.
As I explained in my first column about the FBI's 2010 report on mortgage fraud one of the principal demonstrations of why there have been no prosecutions of the elite (or even middling) controlling officers of the fraudulent lenders that drove the crisis is that it never mentions the appraisers' petition, the surveys confirming endemic, fast-growing coercion of honest appraisers by the fraudulent lenders, or the investigations (e.g., N.Y. Attorney General Cuomo's of WaMu) confirming the reality of the blacklists by the fraudulent lenders of the honest appraisers. Having ignored the evidence of endemic mortgage fraud by lenders, the FBI failed to reach the three critical conclusions it would have adopted had it received any expert advice from the financial regulators instead of the trade association of the perps.
- Only the lenders and their agents can cause widespread appraisal fraud
- No honest lender would cause appraisers to inflate their appraisals
- Therefore, mortgage lender origination fraud was widespread and could be successfully identified, investigated, and prosecuted by demonstrating the coercion of appraisers
The MBA Exposed the MBA's Lie in Early 2006
In early 2006, the MBA's own anti-mortgage fraud experts issued five vital warnings about "stated-income" lending. The MBA sent that warning to every member of the association. If the FBI had received the benefit of the financial regulatory agencies' expertise it could not have missed the MBA's own warnings of endemic fraud in stated income loans. Equally importantly, it could not have failed to understand the significance of the accounting control frauds' reaction to the warnings of endemic loan origination fraud -- they frequently increased their fraudulent originations substantially. The MBA's experts were (then) called the Mortgage Asset Research Institute (MARI). In early 2006, MARI issued these five warnings.
Stated income and reduced documentation loans " are open invitations to fraudsters.
It appears that many members of the industry have little historical appreciation for the havoc created by low-doc/no-doc products that were the rage in the early 1990s. Those loans produced hundreds of millions of dollars in losses for their users.
One of MARI's customers recently reviewed a sample of 100 stated income loans upon which they had IRS Forms 4506. When the stated incomes were compared to the IRS figures, the resulting differences were dramatic. Ninety percent of the stated incomes were exaggerated by 5% or more. More disturbingly, almost 60% of the stated amounts were exaggerated by more than 50%.
These results suggest that the stated income loan deserves the nickname used by many in the industry, the "liar's loan."
Federal regulators of insured financial institutions have expressed safety and soundness concerns over these loans.
The MBA Fought to Aid the Control Frauds
In 2006, after MARI's five warnings, the MBA was invited to testify at a regional Federal Reserve hearing on nonprime lending abuses. The MBA chose as its representative a top officer of IndyMac -- one of the largest originators of fraudulent liar's loans.
The MBA fought tenaciously in 2006 to prevent the federal banking regulators from issuing even an unenforceable guideline discoursing the making of liar's loans because they produced endemic fraud. The MBA claimed that financial markets were self-correcting and that the secondary market produced rigorous private market discipline that promptly ended any unduly risky loan origination.
The primary influence [sic] for lenders are the signals received from secondary mortgage market investors. A lender originating a large number of mortgages with an unacceptable level of risk will find itself facing significant price disadvantages in the market. These signals prompt lenders to alter product features, introduce new features and remove features that do not work. These product changes are immediate. In this manner, the private market can and does correct for excess risk more quickly than can a regulator who necessarily must move at a more deliberate pace. MBA believes that market signals have already addressed many of the concerns expressed by the Agencies in the Proposed Guidance.