THE BASIS POINT

Goldman Buying Jumbo Mortgages. More On Appraisals.

Per the FDIC, commercial banks and savings institutions insured by them “reported an aggregate profit of $29 billion in the first quarter of 2011, an $11.6 billion improvement (66.5%) from the $17.4 billion in net income the industry reported in 1Q2010. This is the seventh consecutive quarter of year-over-year earnings growth, although it is the sixth consecutive quarter where reduced provisions for loan losses helped to drive the improvement in earnings. Also banks are prioritizing cost control.

Goldman Sachs is buying jumbo mortgages: “Goldman has been stockpiling jumbo mortgages at a rate that far exceeds the buying activity of Bank of America, Barclays, Credit Suisse, RBS and other banks that are trying to revive their once-active conduit businesses.” I know that Goldman isn’t in business for their health and I am no investment banking insider, but if I was, I’d be wondering who picked these mortgages for Goldman to buy. I’ve also got a few other questions.

Is Goldman going to short the deal? Is the company trying to do a deal prior to any QRM restrictions? Will Goldman retain any risk, and if so, will it be horizontal, vertical, or both? The person running the plan is from Bear Stearns, which left the industry after gaining a reputation for giving investors AAA subprime deals that used over-collateralization structures? What has Goldman done to improve the reps and warrants, and is there an enforcement mechanism? Inquiring minds want to know.

But the jumbo market has been heating up.

SunTrust is blanketing e-mail airwaves with its Key Loan Program.

Other investors with intermediate ARM jumbo rates in the 4’s are touting their rates.

Prospect Mortgage is touting its 5/1 ARM.

Many investors are buying loans up to $2 million.

And why not – many of these loans, with solid documentation and decent LTV’s, are great credit risks. And they provide a good spread versus a bank’s cost of funds (whatever they’re paying you on your checking account…) In fact, it seems that most companies out there, especially in the wholesale channel, are advertising that they’re hungry for product.

More On Appraisals
Monday I discussed appraisal news, and received several comments (none of which are paid, by the way!). Linda Stern from Reuters wrote a piece a while back that pertains to the appraisal situation.

“Your analogy of ‘customary and reasonable’ appraiser fees to a 15-year old’s allowance is an interesting one. One must read the fine print connected to C&R appraiser fees to understand the ‘hall pass that the principal gave the student.’ The rule gave creditors and their agents (AMCs) a presumption of compliance if the appraiser’s fee was reasonably related to recent rates paid for appraisal services in the relevant geographic area – and in setting the fee – the creditor did not engage in any anticompetitive actions or violate a state or federal law. Very few lenders and their agents used the second presumption of compliance offered by the rule maker to validate a customary and reasonable fee through fee surveys. Solidifi’s full market rate model provides lender clients with several tests to ensure compliance and our model allows appraisers to set their fee by service type without fee splits – rather than providing a schedule which appraisers were required to use. (Terry Aikin, taikin@Solidifi.com)

StreetLinks uses an algorithm of proximity, quality rating, service rating and capacity to assign appraisal orders to the most qualified appraiser despite appraisers setting their own fees. Because we only use local appraisers and allow them to set their own fees, we can hold the appraiser to a higher standard of quality and service. This ensures quality reports for lenders and a positive working environment for appraisers, which results in greater client and appraiser retention. Our products and services are used by thousands of mortgage bankers and appraisers nationwide to simplify and improve everyday business operations.”

“Appraisers have a list of clients that pay a decent wage and give them enough work so that when another company or AMC sends over work for me I just ignore it because it is half the price of my regular banks. I trained a young guy a few years who still has little experience and is happy to have clients, and so the banks keep giving him the work because he does it for $200. His thought was that after he gets some experience he will be able to raise his rates but that has not happened yet but he keeps hoping. I told him as soon as he raises his rates and pushes for it they will find another rookie appraiser to do the job and push him out. Banks were paying appraisers a good wage a few years back and we got into this mortgage mess with good appraisers so why not pay them less?”

Another wrote, “I think one thing about the ‘customary and reasonable fees’ is that typically the appraisal industry lobbying effort and institute is relatively weak. They are not very centralized, and most appraisers don’t know each other and work alone. So who wants to step and protect the appraiser? Where is the benefit in that, politically speaking?

“As an interesting side note, lenders fees – those junk fees we all love to hate – have risen in the last couple of years because lenders argue that their compliance and disclosure issues have added to their work load and costs. Somehow the very same dynamic has not translated to the fees appraisers are paid.”

Mike Simmons with Axis Appraisal Management wrote, “It should be noted that there are lenders and AMCs that already follow reasonable and customary fees (AppraisalFees). And it’s a conceit to say there are no standards for an appraisal. Certainly there are standards, but uniformity doesn’t make standards; accuracy and market knowledge do. This twisted thinking is helping drive value determination to the lowest common denominator.”

“The central issue continues to be a lack of trust between appraisers and lenders. The rise of the AMC business model to manage the relationship was not by accident. Lenders used to train and retain large appraisal departments that were well suited to the existing business conditions, current technology and speed of execution. Increasingly the AMC model grew because of the labor intensive needs of appraisal assignment, tracking, reviewing and delivery to loan origination systems that had to be cost managed. The cost structure inside a lending institution was too high; there were plenty of AMCs who could provide the service at a much lower cost.”

“Appraisers generally view AMCs and lenders as not having a particularly good gauge of the complexity of an assignment; hence the issues with fees as most experienced appraisers do not accept low fees for complex assignments. This will only continue to be problematic as lenders are saddled with poor performing loans and growing inventory of REOs. Lenders and asset managers will question prior valuations and current valuations until they can find appraisers they can trust to deliver insightful analysis – and not just cheap and quick form filling.”