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Fannie Mae's Loss Risk

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David C. Johnson

Senior Member
Joined
Jan 15, 2002
The full body of the following article will remain on the New York Times website as hyperlinked below for about a week. If you have not, you should get a password and have their lead stories emailed to you for free early every morning. No way to beat that deal and it only takes about 30 seconds of your time to sign up. Discontinue any time you want, and also they do not Spam you at all that I can tell.

dcj
__________________

NYT: 8/7/2003

<span style='color:darkred'>Fannie Mae's Loss Risk Is Larger, Computer Models Show


By ALEX BERENSON

"Fannie Mae, the giant mortgage finance company, faces
much bigger losses from interest rate swings than it has
publicly disclosed, according to computer models used by
the company to estimate the value of its assets and debts...."


http://www.nytimes.com/2003/08/07/business...pagewanted=1&th

______________

Ooops. I had linked to the second page of the article. I am sure most figured that out, but it is corrected now
--dcj


</span>
 

Tawfik Ahdab

Senior Member
Joined
Feb 19, 2003
Professional Status
Certified Residential Appraiser
State
Oregon
Thanks for that excellent link.
 

Austin

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Virginia
David
Read this article from this morning:

Freddie Mac's new CEO pledges effort to correct books
By MARCY GORDON, AP Business Writer

http://www.adn.com/24hour/business/story/9...p-6742124c.html

WASHINGTON (August 6, 2:13 p.m. ADT) - Freddie Mac's new CEO, dogged by questions over his role in transactions that brought accounting and management turmoil to the mortgage finance giant, promised Wednesday to work to straighten out the company's financial reporting and change the culture of secrecy at the top.
 

David C. Johnson

Senior Member
Joined
Jan 15, 2002
Austin,

I will read this article and your posted article in the Watercooler this later this evening and probably have some comments tonight or tomorrow...

dcj
 

Austin

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Virginia
David:
Hope Freddie is covered with E & O. The sharks smell blood. Check out this morning's Freddie story:


Freddie Mac's accounting practices prompt Ohio lawsuit

http://www.adn.com/24hour/business/story/9...p-6754727c.html

The Associated Press

COLUMBUS, Ohio (August 8, 9:28 a.m. ADT) - Ohio's attorney general sued mortgage giant Freddie Mac on Friday over what he called the company's "deliberately misleading accounting practices."
 

David C. Johnson

Senior Member
Joined
Jan 15, 2002
Austin,

It is good to see the lawsuit. It offers a bit of deterrence for "do alikes" now and in the future. And there is no doubt that the manipulations effected the value of shareholder profits for that period -- and forever in some cases: Shareholders do not remain static -- they are not the same from quarter to quarter. They buy and sell, so Freddie's top brass were in fact ripping off one group to the benefit of another future group of investors in the stock. Our system is not set up like that. Kinda like the North Carolina Appraisal Board (NCAB) thinking it is OK to overcharge current State's appraisers by a full 100% to build themselves a castle -- ostensibly for the State's appraisers. Well, in the first place, we understand it is not "for the appraisers" at all -- most of whom will live and die and never even see this grand structure in Raleigh of which they were extorted into paying for, right? And that, of course, is if they are lucky -- because otherwise, such a trip to Raleigh implies "official business" with this largely unsavory group, right?

More to the point, this group has no business tasking current appraisers for the bills of all future appraisers (as if the overcharges were ever to be curtailed in NC). NC Appraisers around in the future should pay for their own regulatory "officing expenses" -- not current appraisers picking up the entirety of the expenses in advance for the next 50 years by being forced to pay for the property in cash -- their cash. (Correct, the building is to be bought outright with some of the millions in over charges accumulated over the last decade.)

Now with such an impressive financial advantage over all other appraisal boards in the Nation (as a function of ripping off appraisers in NC) our board had the resources to bully your State and any and all others into doing things "their way" -- you see, they were very nicely Self-Rewarded for their unethical, quasi-criminal activities. Being the boss is fun. To make a "free enterprise" analogy, they created for themselves a "competitive advantage" -- their cheating paid off.

However, by you and a few others assisting in "getting the word out," and explaining what was occurring -- partly through endless repetition and examples provided in the Improving the Profession sub-forum over the past few years, the NCAB's extreme power and influence has subsided a good bit, and the profession has not been successfully "highjacked from within" for the benefit of a very few. One major killer problem has been "effectively contained," at least for now, it appears -- and appraisers everywhere are much better off for it, and of course, so is the Nation as a whole.

Punishing individuals at fault, such as the top brass at Freddie, who were fired to happily leave with their multimillions in "platinum parachutes," is a bit less of a concern than hopefully getting the company back on course. Unfortunately however, all the massive incentives remain the same for those moved to the top to do the same in the future, or right now. It has been well-demonstrated in recent years that enronish behavior pays -- real well. In fact many times better than "more traditional" business models and behavior -- which, conversly, has been demonstrated to be for chumps, and will remain so unless we can effectively remove the temptations with effective regulation, enforcement and/or punishment...

And unfortunately, to some degree, there remains the absense of the first vital step: The media -- that was you and me and several others in the case of the NCAB -- appears to be pulling its punches about the real reasoning for the "accounting irregularities." The accounting tricks were devised by the devisers to increase their own personal financial positions -- not any altruistic concerns for the company, the stockholders or the Country (and actually, unlike all others perhaps, looking out for the Country actually IS part of this particular corporation's "mission statement").

Here is an example from your article of what I am talking about. We are seeing a lot of the following type of journalism to explain away the real rationale of the few real decision makers recently at Freddie (and elsewhere) where in reality, the motivation for the manipulation was/is to increase cash and/or stock bonuses to top brass -- a now classic, enronish move. There is little indication of this in the following -- which actually appears to make their actions look like some sort of personal sacrifice, if anything!):


"...An internal investigation made public last month
found that Freddie Mac, the country's second-
largest mortgage buyer, breached accounting
rules and manipulated internal accounts in a drive
to smooth out volatility in earnings and meet Wall
Street's forecasts.

As a result, the company under-reported its profits
by between $1.5 billion and $4.5 billion in 2000-2002..."


I did read the two articles you posted. They were good and informative. Here is one I read this morning which may suggest some more damaging economic fallout from this type of "doing business" in our Country:

http://www.nytimes.com/2003/08/09/business.../09INSU.html?th


To Insurers, a Long, Free Ride Is Looking Risky

By Joseph B. Treaster


"It has been a wonderful business for insurers: tens of million
of dollars in premiums collected over 30 years, and not a single
claim paid.

So why, suddenly, do the insurers want no part of it?

The business is writing insurance that American brokerage
houses buy to protect clients' accounts against the possibility
that the brokerage firms will go bankrupt and that the clients'
assets will go missing...."


dcj
______________

PS. Pardon the rant. I may come back to edit-out a few major grammar, spelling errors, and fatal faux paus (sp?) and stuff later on...
 

Austin

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Virginia
David:
First, I know where the NCAB got the millions to construct that new office building. One example: I was licensed in NC for about 10 years. In NC they renew licenses every year as you know. About the second year as part of my renewal application was a $45 bill for the Federal Registry Fee. Well, I had already paid the $45 fee in Virginia, so I wrote then a kindly letter explaining that I did not think I should pay two $45 fees for one entry in the Federal Registry. I received a very curt letter in reply that said: “Send the $45 fee if you want to renew your NC license.” In my book that is pure extortion. Follow the money trail as they say.
What is $45 times 80,000 appraisers? Answer: $3,600,000. Where do you suppose that money ended up; in some cases like mine paid multiple times in different states? The last USPAP class I took had 60 people at $225 per head for the two day class. How much is $60 x $225? Answer: $13,500. But these instructors are not doing it for the money they are doing it because they love people and the profession. They just want to hep their fellows. Lets take the new USPAP class. What is 80,000 times lets say $150? Answer: $12,000,000 allocated among 400 certified instructors or $30,000 each. Not bad for teaching 4 classes of 50 students every two year cycle. That averages out to $7,500 per USPAP one day class. No wonder some of those dudes are taking the national test for the 5th time.
Lets say $12,000,000 every two years on that one. How about CE in general? Must have two classes per year on average at say $150 per pop. What is 80,000 times $150? Answer: Another $12,000,000. Lets say the average yearly license fee in $100 to the state boards. There goes another 80,000 times $100 or another $8,000,000. That averages out per year to approximately $25,000,000 per year. Who is benefiting from that landfall regulation of the appraisal profession? Do I need to spell it out? You can follow the logical trail to see where this stream is leading. I think they call this a case of the tail wagging the dog.

Second: About the law suite against Freddie Mac: This is not what you think it is. Remember the tobacco suite and settlement? Here is what is going on. The government & lawyers have run into a funding crisis. The government has reached the tax limit without destroying the economy and the lawyers saw gold in them there hills. So, the lawyers sue the tobacco companies, get billions in legal fees, and what is left of the settlement money is used to supplement public needs that the government doesn’t have the funds to allocate.
Neat trick. Where does this ruse go next? Heard of McDonald’s Big Mac? Cause of fat kids so we sue McDonald’s. Then the alcohol industry, then the gun industry, etc., and instead of taxes the bills are paid by cigarette smokers, fat kids paying $10 for a McDonald’s veggie burger, law abiding gun lovers, and those that consume fire water.
Where does this stop and who is next in the pecking order? If the bottom falls out of the real estate bubble, whom can you name that has insurance called E & O to cover the supposed loses? Lots of big bucks in those big insurance companies just laying there waiting for the taking.
Does any of this make you wonder why we get a new version of USPAP every few months? Hey! You have to keep new products coming out to justify the USPAP class every two years. Right? $25,000,000 ain’t chicken feed. We need these appraisers to keep those prices going up so we can create new money with the equity creation racket.
 

David C. Johnson

Senior Member
Joined
Jan 15, 2002
Austin,

You probably meant to say you were asked to pay $45 for the Registry in NC, but only $25 in Virginia, like in every other State. That is the amount the Registry gets per appraiser. The extra $20 in NC is an NCAB special -- it's the Boards cut of the action. The ASC asked the NCAB (in print) several years ago that the NCAB cut it out, but no dice. They will continue extorting the cash and blaming it on the Registry by referring to it as the Registry Fee. Why? because they can. There is little the ASC can do about the fraud.

"That averages out to $7,500 per USPAP one day class. No wonder
some of those dudes are taking the national test for the 5th time."

No joke! I see where you are coming from...! <_<

"Lets say the average yearly license fee is $100 to the state boards."

Ummm... Let's not. In NC, it is $200 each and every year plus the $45 for a total of $245 per year. It should be even less in NC than in Virginia as we have more appraisers while fixed costs, the greatest percentage of the total costs, for operating such a board should be very similar regardless of the number of appraisers.

"Does any of this make you wonder why we get a new version of USPAP
every few months? Hey! You have to keep new products coming out to
justify the USPAP class every two years. Right? "

Hmmm...that maybe a new one -- planned obsolescence for regulations.

If you are right, you have to give them credit -- pretty decent racket. :D

dcj
_____________

I know you are aware, but for the sake of others, my previous (long) post today was for the benefit of a few newbies who hopefully will read this thread...

I guess the only modification I am inclined to make to it for now would be the following "parenthesis addition" in the following sentence:

"One major killer problem has been 'effectively contained,' at least for now,
it appears (and regime change, while slow, appears to be ongoing) -- and
appraisers everywhere are much better off for it, and of course, so is the
Nation as a whole."
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
If i read this right, Fannie mae and Freddy are holding back cash profits in the face of record profits to use in years when those profits are less. This depresses the stock price and is simply manipulating the stock price illegally.

The lawyers will suck that extra up easy enough. That's the trouble with our tort system.

Tulsa filed a suit against some chicken companies complaining the companies were polluting the watershed of Tulsa's water supply with phosphorus, which is not a pollutant, but a nutrient that was aiding an overgrowth of algae.

The end result is the chicken companies are waiting for some agreed upon rules to be formulated while paying out $7.3 million. $200,000 went to Tulsa, the lawyers 'fessed up they had spent $600,000 in the negotiation, and the rest? Just plain old simple law fees, $6.5 million to a pack of jackels with connections to the Tulsa political machine.

That $6.5 million exceeds the cost of Tulsa treating the water, which normally only has a taste problem (never a pollutant problem) during the late summer dry period. OSU reports suggested that ponds to catch the nutrients, and repair of an aging treatment plant in the small town of Decatur, Arkansas would reduce the phosphorus by as much as 50%. The agreement is a serious matter for one poultry company, which is already in financial difficulty. If a sister suit comes to the same end, this company will almost certainly go bankrupt.
 

Austin

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Virginia
David & Terrell:
Do you guys see the parallel I was trying to draw between Fannie & Freddie with their corporate officers milking the agency of millions of dollars at the detriment of the shareholders with the lawyers profiting off the situation and the ASB with their requirement of taking a USPAP class taught by their certified instructors at the detriment of the practicing appraisers? Aren’t all of these parties essentially government service enterprises or GSE’s?
What is the underlying source of the problem with Fannie & Freddie? The answer is accountability or rather a lack thereof. Fannie and Freddie are not accountable to any entity as I know of and they insist on it being that way and that is what got them into trouble. Same goes for this CE & USPAP racket brewing. Somebody is taking in millions of dollars without any accountability to any entity. Where is that $12,000,000 going? Where is all of that money going being extorted by boards like the NCAB? Look at the results beginning to emerge. The NCAB is building a castle to house their scam operation and just read some of the post on this forum about teaching USPAP classes like for instance “teaching at sea on a cruise ship” or “see you guys in Vegas.”
It seems to me that one GSE agency cannot require the people they regulate to take a course with that agency furnishing the source of the material and requiring that the only teachers must be certified by them resulting in a $12,000,000 cash flow just from tuition alone without any accountability. To whom is this GSE accountable? The thing that brought this to mind was another thread running on this forum concerning the role of the state boards. It was pointed out that the boards are not there representing the appraisers they are there to regulate the appraisers. So, to whom are these state appraisal boards accountable if not to the appraisers? Apparently no one because as David pointed out the NCAB is extorting huge sums by charging $20 for collecting a $25 registry fee, the ASC told them in writing to cease, and the NCAB essentially told them to buzz off.
Can’t you see where this is leading? The lid is going to blow on this scam sooner or later. This entire regulatory process is out of control with no financial accountability as I am aware of. You cannot take money from people by requiring them to pay for something and then not be accountable for the money. I would like to see a complete accounting of where this $25,000,000 per years is going and I would think any responsible appraisers would like to know too. If the ASB is going to require us take CE and pay for it, then they must account as to whom is receiving the money and how it is being used by the people receiving it like for instance: How much for teachers, how much for books, how much for facilities, etc. Is it asking to much for basic honesty? Will this situaton just be another cash cow for the laywers to milk?
About 18 months ago on this very forum some of us tried to establish an entity to be named FAIR to represent the appraisers to look into these abuses. I sent them $100 and a lot of other people sent them money too. The last I heard about 16 months ago was that the founders were working on setting up the bank account and writing the constitution. This discussion is all in the FAIR forum on the main forum board. I specifically told them that any such organization had to be accountable and had to have a proper governing body. Some one (David if I remember correctly) e-mailed me and told me to buzz off and let the founders, self appointed I might add, handle the matter. Well, I am still waiting for the founders to account for what is going on.
 
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