What we do know is that our current economic situation was predictable. According to a New York Times article published in 1999, as well as several “senior” appraisers that I have been fortunate enough to be associated with, it was. Lowered credit thresholds combined with lower thresholds for appraiser training heavily contributed to the Perfect Storm that resulted in the mortgage meltdown of 2008.
Below is an excerpt from an article written in 1999, a copy of which was obtained from the New York Times web site? Please visit their site to read it in its entirety. The foresight reflected in this article is fascinating.
September 30, 1999
By STEVEN A. HOLMES
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
“From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
Again, the foresight reflected in the NYT article is fascinating. Equally as fascinating is that many of my mentors also saw the “writing on the wall” with the “Real Estate Appraisal Reform Act of 1987”.
Prior to state licensing and certification, appraisers became qualified by meeting the standards of private appraisal organizations that required a significantly greater level of formal education, appraisal education, and appraisal experience. The process typically took several years to complete.
The Appraisal Reform Act of 1987 was well intentioned. However, the threshold for qualifications was so low that it flooded the market with appraisers many of whom were not qualified. To compound the issue, many unqualified licensed appraisers were now the mentors for appraiser trainees. And, the ethical oversight lacked “teeth”.
I began my career in the appraisal industry in1986 and vividly recall many of the appraisers that I was associated with that had achieved a designation from one of the private appraisal organizations accurately predicting a dumbing down of the industry. Their foresight has come to fruition. Poorly trained appraisers providing poor valuations can accept a share of the blame for this mortgage debacle. As can many appraisers who were simply unethical and succumbed to lender pressure for higher valuations.
Where do we go from here? Fortunately, many positive changes are already in place. In Kansas, thresholds for education and training, including a formal education component, were increased earlier this year. Requirements for supervising appraisers were also increased. Our state appraisal board placed increased emphasis on disciplinary actions for those appraisers who produced poor appraisals due to either a lack of training or ethics. A Home Valuation Code of Conduct is being considered for implementation next year aimed at improving appraiser independence. More needs to be done, but these changes are a good start.
The current economic crisis, resulting in large part from a mortgage meltdown, was predictable and avoidable. As in any life experience, we as a nation need to learn from our experiences, take the necessary steps to ensure that we do not repeat our mistakes, and move forward.