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Lender Mortgage Insurance

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nauthead

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Senior Member
Joined
Nov 26, 2004
Professional Status
Certified General Appraiser
State
Florida
It is my understanding that one of the provissions in the bailout bill is a requirement for lenders to carry insurance on risky mortgages. The insurance is to be patterned after the FDIC model. Is it possible that insurance companies may provide employment for ethical appraisers? Insurers will no doubt scrutinize these loans to a higher degree than the other parties involved because they will be responsible for them. Thus the need for accurate appraisals will be a critical part of the insurance process if I am correct.
 

Mztk1

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Joined
Dec 3, 2006
Professional Status
Certified Residential Appraiser
State
Florida
The way I understand it the insurance will be to back mortgage portfolios (bundled loans) and not loans on an individual basis. This deal is 99.99% a Wall Street Handout. If anything, there will be a decline in the number of appraisals to value a portfolio.

If you were lucky enough to get the work, over the past several years you'll remember the driveby appraisals completed to value portfolios. Investment firms preferred to do this when values were going up because it could give them more leverage.

But with a re-evaluation of the portfolio, during declining markets, the assets of the company would have to be marked down. This re-evaluation is known as "mark to market". A drop in assets reduces the amount of money that can be borrowed against it for overnight lending and other purposes. It was precisely this mark to market procedure that prevented AIG from getting the funds necessary to make ends meet. Many "supply-side" type of economists believe the mark to market accounting is the reason for the mortgage collapse all by itself.

The new proposal puts a freeze on the mark to market process. The basic argument for the freeze is that the present value of the portfolio, on a long hold asset like real estate, is not material especially when there is a positive cash flow. The proposal allows a study period on the mark to market method to determine if it should be discarded. If the supply-side guys are right, this measure alone should be enough to fix the problem.

So for now, the value of the portfolio that will be insured, is based on the value of the real estate at the inception of the mortgage, at least it will be for the foreseeable future...we will have already have done the appraisals (or an AVM) to determine that number.
 
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Laughing Heir

Senior Member
Joined
Oct 16, 2007
Professional Status
Certified General Appraiser
State
Pennsylvania
The way I understand it the insurance will be to back mortgage portfolios (bundled loans) and not loans on an individual basis. This deal is 99.99% a Wall Street Handout. If anything, there will be a decline in the number of appraisals to value a portfolio.

If you were lucky enough to get the work, over the past several years you'll remember the driveby appraisals completed to value portfolios. Investment firms preferred to do this when values were going up because it could give them more leverage.

But with a re-evaluation of the portfolio, during declining markets, the assets of the company would have to be marked down. This re-evaluation is known as "mark to market". A drop in assets reduces the amount of money that can be borrowed against it for overnight lending and other purposes. It was precisely this mark to market procedure that prevented AIG from getting the funds necessary to make ends meet. Many "supply-side" type of economists believe the mark to market accounting is the reason for the mortgage collapse all by itself.

The new proposal puts a freeze on the mark to market process. The basic argument for the freeze is that the present value of the portfolio, on a long hold asset like real estate, is not material especially when there is a positive cash flow. The proposal allows a study period on the mark to market method to determine if it should be discarded. If the supply-side guys are right, this measure alone should be enough to fix the problem.

So for now, the value of the portfolio that will be insured, is based on the value of the real estate at the inception of the mortgage, at least it will be for the foreseeable future...we will have already have done the appraisals (or an AVM) to determine that number.


Very insightful. Thanks Jim.
 
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