Mejappz
Elite Member
- Joined
- Dec 16, 2005
- Professional Status
- Certified Residential Appraiser
- State
- Florida
It's so sad Fannie and Freddie have destroyed the American dream for so many mostly African Americans and minorities. One-million-dollar starter homes are common in my area. The GSEs need to be removed from government oversight because they perpetuate misleading valuations and foster a distorted housing market.
HOW DEEP FAKES HAVE BURROWED INTO HOME FINANCE
VENTURA, Calif. (Oct. 11, 2024) – In the 1960s, technocrats at the Pentagon used the latest IBM mainframe computers to analyze complex data related to the Vietnam War. Planners fed punch cards into the machines and ran endless simulations, hoping to determine strategies for winning the war.
In 1967, analysts finally asked the computer, “When will we win in Vietnam?” The machine’s answer: “You won in 1965.” It exposed the hubris and naiveté of those who believed computer-generated models could capture and quantify millions of complex human interactions on the battlefield.
Fast-forward to July 10, 2007. Standard and Poor’s Rating Services, which had developed a similar computer model that valued mortgage-backed securities, dropped a bombshell on the markets: Its algorithm had failed to replicate the market’s “invisible hand.” It announced it was putting 612 formerly “investment grade” mortgage-backed securities on “CreditWatch negative” due to high delinquency and foreclosure rates.
The rating agency Moody’s dropped a similar bombshell later that day. Two days later, rival Fitch Ratings made a similar announcement. Many of the garbage securities were in the portfolios of public-employee pension funds and Wall Street players like Bear Stearns, Citigroup, JPMorgan, Merrill Lynch and Morgan Stanley.
The parameters and coefficients had been tinkered with to allow the credit ratings agencies to stamp “investment grade” on junk securities. Today, we might call these dishonest computer-generated ratings “deep fakes.” There was a strong profit motive involved. The ratings downgrades unleashed the 2007-2008 financial crisis.
Fast-forward again. This time to 2024. With the blessing of the housing lobby – the Realtors, homebuilders, nonbank lenders, banks and fintechs – and their friends in Congress and in the Biden administration, Fannie Mae and Freddie Mac have been waiving home appraisals in favor of computer models.
Fannie and Freddie, like the Pentagon planners in the ‘60s and the computer scientists at S&P, Fitch and Moody’s in the aughts, have been toiling at the coalface of “synthetic appraisals” – “black box valuations.” Hiding behind a wall of gibberish and acronyms, they call the practice “Value Acceptance + Property Data.” It has contributed to what we have today: a massive fraud-filled housing bubble in which starter homes in many markets are selling for over a million dollars and homes nationwide have seen a doubling and tripling of prices.
Fannie and Freddie, the silent partners in most U.S. home sales, have enabled it.
As early as 2017, the website HousingWire reported that Fannie would be following Freddie in guaranteeing mortgages without the appraisal of certain homes put up as collateral. While the Dodd-Frank Act curbed issuance of “liar loans” – so-called “stated income loans” – Fannie and Freddie have ushered in its equivalent for the new era with “the black-box appraisal.”
Black-box appraisals are like Zillow’s “Zestimates.” They can be generated quickly and cheaply. Because they are based on software and templates, they don't meet the IRS definition of a qualified valuation. Investors in Zillow, too, lost their shirts when the company began purchasing homes based on a version of its own Zestimates.
Ohio podcaster and appraiser Phil Crawford warns these synthetic appraisals don’t satisfy the terms of the appraisal contingency found in the standard home sales agreement. Some brokers advise their clients to waive the appraisal contingency outright. “Buyers deserve better counsel from their fiduciaries,” said Crawford. “Buyers need to be advised to get their own appraisals to protect themselves.”
Unfortunately, even if an actual appraiser is engaged to appraise a home prior to a sale, Fannie and Freddie have significantly distorted the data in certain markets through previous experiments in lax underwriting, the derivative effect of past synthetic appraisals, and the refusal to foreclose on homes, thus frustrating market corrections and price discovery. Crawford calls this effect “data cancer.”
This is not to say employees of Freddie and Fannie are bad people. Some suffer from what Polish philosopher Zygmunt Bauman refers to as a hyperrational systemic thinking that enables people to detach from the implications of their actions. Like the Pentagon technocrats during the fog of war, many of the people promoting black-box appraisals in federally backed mortgages are ideologically committed to tech.
Some political appointees assigned to oversee Fannie, Freddie and the FHA are openly contemptuous of free markets. They believe modern-day politburos like Fannie and Freddie – opaque organizations with limited accountability – should be used as agents to redistribute housing, to create a “universal basic home value.”
The nation’s state-licensed appraisers, who tend to be experts in the geographic areas they cover, report Freddie and Fannie sending computer-generated complaints to their state boards over the selection of individual sales used as data points in their appraisal reports.
Of course, as in all spheres of human endeavor, there are those who are in it for personal gain and to secure powerful positions. Some, like former HUD Secretary Marcia Fudge, appear to have simply been auditioning for a lucrative lobbyist position all along. Fudge, now a lobbyist, commutes between Cleveland and Washington, D.C. This group is closely related to the forces seeking to privatize profits while collectivizing losses. The latter have been in the background of the government-backed housing game since time immemorial.
The current embrace of black-box valuations has brought together a perfect storm of odd bedfellows. The black-box appraisal has become the ultimate deep fake for the home lending industry. It needs to be investigated by the new Congress. And Freddie and Fannie need to be booted out of government for good.
Jeremy Bagott is a real estate appraiser and former newspaperman. His most recent book, “The Ichthyologist’s Guide to the Subprime Meltdown,” is a concise almanac that distills the cataclysmic financial crisis of 2007-2008 to its essence. This pithy guide to the upheaval includes essays, chronologies, roundups and key lists, weaving together the stories of the politics-infused Freddie and Fannie; the doomed Wall Street investment banks Lehman and Bear Stearns; the dereliction of duty by the Big Three credit-rating services; the mayhem caused by the shadowy nonbank lenders; and the massive government bailouts. It provides a rapid-fire succession of “ah-hah” moments as it lays out the meltdown, convulsion by convulsion.
** FOR IMMEDIATE RELEASE ***
HOW DEEP FAKES HAVE BURROWED INTO HOME FINANCE
VENTURA, Calif. (Oct. 11, 2024) – In the 1960s, technocrats at the Pentagon used the latest IBM mainframe computers to analyze complex data related to the Vietnam War. Planners fed punch cards into the machines and ran endless simulations, hoping to determine strategies for winning the war.
In 1967, analysts finally asked the computer, “When will we win in Vietnam?” The machine’s answer: “You won in 1965.” It exposed the hubris and naiveté of those who believed computer-generated models could capture and quantify millions of complex human interactions on the battlefield.
Fast-forward to July 10, 2007. Standard and Poor’s Rating Services, which had developed a similar computer model that valued mortgage-backed securities, dropped a bombshell on the markets: Its algorithm had failed to replicate the market’s “invisible hand.” It announced it was putting 612 formerly “investment grade” mortgage-backed securities on “CreditWatch negative” due to high delinquency and foreclosure rates.
The rating agency Moody’s dropped a similar bombshell later that day. Two days later, rival Fitch Ratings made a similar announcement. Many of the garbage securities were in the portfolios of public-employee pension funds and Wall Street players like Bear Stearns, Citigroup, JPMorgan, Merrill Lynch and Morgan Stanley.
The parameters and coefficients had been tinkered with to allow the credit ratings agencies to stamp “investment grade” on junk securities. Today, we might call these dishonest computer-generated ratings “deep fakes.” There was a strong profit motive involved. The ratings downgrades unleashed the 2007-2008 financial crisis.
Fast-forward again. This time to 2024. With the blessing of the housing lobby – the Realtors, homebuilders, nonbank lenders, banks and fintechs – and their friends in Congress and in the Biden administration, Fannie Mae and Freddie Mac have been waiving home appraisals in favor of computer models.
Fannie and Freddie, like the Pentagon planners in the ‘60s and the computer scientists at S&P, Fitch and Moody’s in the aughts, have been toiling at the coalface of “synthetic appraisals” – “black box valuations.” Hiding behind a wall of gibberish and acronyms, they call the practice “Value Acceptance + Property Data.” It has contributed to what we have today: a massive fraud-filled housing bubble in which starter homes in many markets are selling for over a million dollars and homes nationwide have seen a doubling and tripling of prices.
Fannie and Freddie, the silent partners in most U.S. home sales, have enabled it.
As early as 2017, the website HousingWire reported that Fannie would be following Freddie in guaranteeing mortgages without the appraisal of certain homes put up as collateral. While the Dodd-Frank Act curbed issuance of “liar loans” – so-called “stated income loans” – Fannie and Freddie have ushered in its equivalent for the new era with “the black-box appraisal.”
Black-box appraisals are like Zillow’s “Zestimates.” They can be generated quickly and cheaply. Because they are based on software and templates, they don't meet the IRS definition of a qualified valuation. Investors in Zillow, too, lost their shirts when the company began purchasing homes based on a version of its own Zestimates.
Ohio podcaster and appraiser Phil Crawford warns these synthetic appraisals don’t satisfy the terms of the appraisal contingency found in the standard home sales agreement. Some brokers advise their clients to waive the appraisal contingency outright. “Buyers deserve better counsel from their fiduciaries,” said Crawford. “Buyers need to be advised to get their own appraisals to protect themselves.”
Unfortunately, even if an actual appraiser is engaged to appraise a home prior to a sale, Fannie and Freddie have significantly distorted the data in certain markets through previous experiments in lax underwriting, the derivative effect of past synthetic appraisals, and the refusal to foreclose on homes, thus frustrating market corrections and price discovery. Crawford calls this effect “data cancer.”
This is not to say employees of Freddie and Fannie are bad people. Some suffer from what Polish philosopher Zygmunt Bauman refers to as a hyperrational systemic thinking that enables people to detach from the implications of their actions. Like the Pentagon technocrats during the fog of war, many of the people promoting black-box appraisals in federally backed mortgages are ideologically committed to tech.
Some political appointees assigned to oversee Fannie, Freddie and the FHA are openly contemptuous of free markets. They believe modern-day politburos like Fannie and Freddie – opaque organizations with limited accountability – should be used as agents to redistribute housing, to create a “universal basic home value.”
The nation’s state-licensed appraisers, who tend to be experts in the geographic areas they cover, report Freddie and Fannie sending computer-generated complaints to their state boards over the selection of individual sales used as data points in their appraisal reports.
Of course, as in all spheres of human endeavor, there are those who are in it for personal gain and to secure powerful positions. Some, like former HUD Secretary Marcia Fudge, appear to have simply been auditioning for a lucrative lobbyist position all along. Fudge, now a lobbyist, commutes between Cleveland and Washington, D.C. This group is closely related to the forces seeking to privatize profits while collectivizing losses. The latter have been in the background of the government-backed housing game since time immemorial.
The current embrace of black-box valuations has brought together a perfect storm of odd bedfellows. The black-box appraisal has become the ultimate deep fake for the home lending industry. It needs to be investigated by the new Congress. And Freddie and Fannie need to be booted out of government for good.
# # #
Jeremy Bagott is a real estate appraiser and former newspaperman. His most recent book, “The Ichthyologist’s Guide to the Subprime Meltdown,” is a concise almanac that distills the cataclysmic financial crisis of 2007-2008 to its essence. This pithy guide to the upheaval includes essays, chronologies, roundups and key lists, weaving together the stories of the politics-infused Freddie and Fannie; the doomed Wall Street investment banks Lehman and Bear Stearns; the dereliction of duty by the Big Three credit-rating services; the mayhem caused by the shadowy nonbank lenders; and the massive government bailouts. It provides a rapid-fire succession of “ah-hah” moments as it lays out the meltdown, convulsion by convulsion.
