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.