How WaMu's Lawsuit Affects Countrywide Financial

So Washington Mutual (WM) was putting pressure on appraisers to inflate the "appraised value". Shock, horror!!

Actually it's a pretty big deal, but I'm not sure that it's WAMU that's most affected. Let's be honest, this has been going on for a long, long time. Glad the regulators are here to help when we need it most -- after the damage has been done. Still, better late than never. When I bought my house in 2000, it didn't measure up to the "appraised value", but the market was moving fast. There was pressure on the appraiser to get the price into the range to allow the deal to go through. Heck even I wanted him to change it, cause other buyers had bid above the appraised value too. He did, I became an owner and didn't think about it too much. I was mostly an idiot about money back then, as evidenced by my wonderful stock choices of the day.

So here we are in 2007 and finally someone with the power to do something is finally pointing a finger at one of the logical brakes in the system and wondering why it didn't work. But let's just make one minor leap here: WAMU is possibly not the only one who had pressure on appraisers and imagine that this might have been kind of widespread. Who would this impact the most?

One of the long little spoken about things about the securitization process is that there are loan guarantees and contingencies on the securities, which are basically protections to make sure the lending process was legal and involved no fraud along the way. If those are broken, do you think that a bunch of securities holders are literally frothing at the mouth to find someone to be forced to take them back? Countrywide Financial (CFC) has tons and tons and tons of exposure to this possibility. WAMU at least has a real deposit base to be able to withstand that kind of pressure and wasn't as big a mortgage pig. CFC doesn't have the deposit base and is the king mortgage pig around. They're operating on lines of credit now. No commercial paper market (and no hope of a return) and those lines of credit, I bet are a little stricter with their covenants (full disclosure, I haven't fully checked, but they usually are). If they see CFC having to take on a huge number of loans back onto the balance sheet, I think those lines of credit are balking. Of course, this will all take eons of time. Lawsuits normally do.

Here's the dumbest thing about SP lending. Subprime borrowers already have bad credit. In California, they can walk away; the ding is that it'll affect their credit. If they're limited on loss and walk away with bad credit, well, what's the difference from before they bought the house? I think the lawsuit damage on the ratings agencies misses the point, I think it's the securitizers who stand the possibility of really getting slammed.

The irony is I look at CFC with a small amount of drool on my face as a long. They're the biggest Mortgage originator in the country, selling for a pittance. Sometimes it's dangerous being a contrarian though. You do great until one day you get your head cut off and I like my head right where it is.

Note: This article in no way is meant to imply that there is direct evidence that Countrywide has done anything illegal. I surely don't know of any evidence of wrongdoing at this time.

Disclosure: none

Comments

[William Leo...:]

I am an appraiser. I did work for countrywide for awhile. I quite because they applied as much or more pressure than the worst in the group. Believe me, you can not control the greater market share in a corrupted system without applying corrupt controlling practices better than your competitor. In those periods, even when we complained to the state agencies of these practices we were summarily disregarded by virtue of both vagueness in USPAP and regulating appraisers that in their practices caved to the lenders in their desires to control the possibilities when they were in their private practices before becoming regulators. The majority of all appraisers appear to facilitate this type of illegal lender mentality and the practice grew worse each year as this last cycle beginning in about 2001 progressed. The industry year after year filtered and trained lending processors and appraisers that would cooperate in these illegal and preditory practices until in about 2004 the presence was epidemic. They bacame more effective and their filtering became more and more quick to kick out appraisers that would not change numbers or hit predefined numbers. I recently had an assignment from US Bank that came in low according to the corporate contact, an appraiser on staff as the reviewer. He said that I had to be wrong because the realtors involved and the buyer and the seller all disagreed with me. This is the type preditory lending that goes on. I told him I didn't know the appraisal process had now turned into a popularity contest. The appraisal was completed based on documented data and in a declining market trend. The lender called me in the field on the cell phone and by the time I got to the office I was fired from the company roster because I would not change and misrepresent the facts. My opinion is that the realtor had threatened the local loan officer that no more purchase work would be coming his way and that the realtor would make thise known as much as possible. Until the evaluation process is entirely isolated and insulated from influence and retribution improper evaluations will occurr as the rule rather than the exception. MAKE NO MISTAKE THIS PROBLEM OF SUBPRIME IS AN APPRAISAL PROBLEM. Yes it could have been mitigated by better qualifications of the buyers and borrowers but if the evaluations were correct even under those circumstances of poor credit proving the home could have been sold for a marginal loss at most but likely for enough to cover the loan and therefore no great loss to the industry. IT IS AN APPRAISAL PROBLEM, don't let the reporting mislead you.

2007 Nov 05 02:03 PM

[goo2know:]

great article.....

But it will just be too hard to prove that Countrywide was pushing for stretched appraisals. I would bet against that being proved. Wamu will get off as well.

It will be easier to prove that they did not review the appraisals closely enough. That would be a form of neglegence.

Pass the word to those who are fighting the good fight that they would be much better off with the neglegence approach.

2007 Nov 06 03:10 AM

[Bajatexas:]

I am a real estate broker. Just this morning I received a call from an appraiser. She wanted a copy of the purchase agreement on a house I recently sold.

I did not coerce her to come in at value. I did not imply that she should come in at value. I did nothing to initiate the process, and yet now she has the contract and knows what the house sold for and, since this isn't my first rodeo, I can tell you where the appraisal is going to come in.

It appears that in my neck of the Outback at least, nothing has changed.

2007 Nov 06 01:15 PM

[H2O:]

OHHH Countrywide owns there own appraised Landsafe - And I have proof they did something wrong .

They just love making up there own house price's ...

2007 Nov 06 02:07 PM