Seeing the Need for Transparency–and Independence
- Mar 31, 2008
In recent months, a number of individuals have called for increased regulation of Wall Street–and it looks like we might get it.
After the recent government bailout of Bear Stearns, it appeared regulation was more necessary than ever for the financial industry. And today, the government announced a new plan to do just that. Although it’s been criticized for being too lax, it’s at least a start.
News also broke today that the U.K. and U.S. are teaming up to better monitor the international banking system, according to the Financial Times.
But why stop there?
According to the Times, one major reason for implementing such a group was the growing concern that the ratings agencies didn’t really consider the exposure of mortgage-based products or a housing drop-off.
That helped get us where we are today–in the midst of a financial crunch and a housing crisis, which both have fed off each other as both situations intensified.
Almost all the presidential candidates have called for greater transparency in the mortgage market; so has Treasury Secretary Henry Paulson.
The new financial industry plan proposes getting rid of overlapping state and federal regulators, according to BusinessWeek, and allowing the federal bank more liberties in looking at investment bank and brokerage firms’ books.
And yet, as the housing crisis rages on, there is a clear need for regulation in that industry, as well.
Appraisals that Add Risk
Take, for instance, any of the lawsuits in the past year that involve home appraisals. One was just filed in the Los Angeles Superior Court against KB homes in February by Debbie Bolden, her husband and neighbors.
- According to the San Francisco Chronicle, the suit alleges that KB Home (Bolden’s builder), Countrywide Financial Corp. (her lender) and affiliated businesses and two appraisers conspired to overstate home prices using fixed appraisals. The plaintiffs are seeking compensatory and punitive damages.
- Bolden feels she may have paid more than $60,000 over the home’s market price. And the lawsuit could get much bigger–the plaintiffs are trying to get class-action status for all California KB Home buyers who used Countrywide to finance home purchases from Aug. 1, 2005 to July 31, 2006.
The truth is, buyers who agree to use internal appraisers, lenders and other parties are asking for trouble–and so are companies who offer to provide them. Even those working with the most legitimate appraisers and most well-meaning lenders are opening themselves up to criticism–and potential lawsuits–as the slump deepens.
Yet some still do. Buyers are losing home value as prices slide across the country, and they’re not happy about it: Expect them to get more frustrated and more litigious until the market improves.
There have been some positive signs that the market is moving toward better practices–Fannie Mae and Freddie Mac, for instance, agreed earlier this month to only purchase mortgages from lenders that use independent appraisers.
Part of a deal with New York Attorney General Andrew M. Cuomo, the new rules–which go into effect next year–also prevent Fannie Mae and Freddie Mac-friendly mortgage brokers and real estate agents from choosing appraisers.
The agencies also will front $24 million to establish the Independent Valuation Protection Institute to register consumer and appraiser complaints and monitor enforcement of the new rules.
The new agency rules should help the industry–but regulating Fannie Mae and Freddie Mac alone won’t fix everything. Maybe it’s time for additional lenders, mortgage companies and others to become more independent; it’s definitely time for them to employ appraisers with no connection to their business or its success. Even appearing to have influence over an appraisal is a dangerous position to be in these days.
After all, sketchy loans and predatory lenders helped get us into the current housing situation; ignore that problem, and we’ll never fully get out of it.