by Tanta on 11/10/2007 02:11:00 PM

My recent posts on WaMu’s Very Bad No Good Rotten Day involving inflated appraisals have drawn a lot of questions. One question I keep getting is a variant of “What’s so wrong with the alleged conduct anyway? Why is it such a big deal for WaMu to insist on a list of approved appraisers? Isn’t that just good risk management on WaMu’s part?”

Possibly it is just good risk management on WaMu’s part: an indictment is, after all, an allegation of misconduct, not a verdict. However, what WaMu is alleged to have done is itself the kind of conduct that is an automatic “red flag” for anyone who knows anything about how the appraisal management business works. Since most of you are fortunate enough to be entirely innocent of that, I thought I’d go through some issues here.

First off, I’m talking about how the business works, not about how the principles of appraiser independence are derived by the Appraisal Foundation or why they matter so much. I’m taking as a given that we accept the axiom that when an appraiser’s compensation is based on his or her willingness to come up with the answer an interested party wants, instead of the answer he or she thinks the facts of the subject property, the transaction requested, and the local real estate market warrant, an appraisal is nothing more than a ratification of the loan amount someone has already decided on, and that “someone” isn’t the ultimate bagholder. The real bagholder wants to know whether it is lending too much or risking owning an unsalable piece of REO. That an individual loan officer or broker just wants to know how high we can make the loan amount—and thus a commission—is an artifact of a business structure in which a lender’s own employees or agents are not aligned with its own corporate best interests. At some level the appraisal problem will never get solved until the compensation of loan processing employees and intermediaries gets solved, but that’s not today’s argument.

In the olden days of local lenders, you had either staff appraisers or “fee appraisers.” You could actually have appraisers on your payroll because you lent in a defined local area: you didn’t have to worry about needing an appraisal for a property six states away that your staff appraisers couldn’t get to, even if they were licensed in that state. If you relied on fee appraisers, possibly because it was too expensive to keep appraisers on the payroll during down-cycles in RE, you still worked in a local market, you got to know all of them, and you could order appraisals from people whose work was familiar. If you were smart, you worked with the best appraisers there were. If you were stupid, you channeled business to your golf buddies. A number of S&Ls did the latter, and they did not live happily ever after. We have this thing called FIRREA, which brought into being USPAP, in large part because of that second option.

Once local lenders became regional lenders and then national lenders, the distance between corporate headquarters, the Appraisal Department, and the actual properties and markets grew to the point that having staff appraisers was impractical and hiring fee appraisers was a crap-shoot. You can pick up the Yellow Pages to find an appraiser in a market you just entered, but this means you will learn by doing in terms of quality. That goes double if you entered this market via wholesale lending: you now have a broker you don’t know much about hiring an appraiser you don’t know anything about in an RE market you’ve never done business in before.

The early years of national wholesale lending supplied lots of excitement, as Podunk National Bank changed its name to Ubiquitous, Inc. and charged into market areas about which it knew nothing, on the assumption that, say, Miami is just like Podunk except the loan amounts are bigger. Sometimes this was actually retail lending: Ubiquitous, Inc. started buying up branches in all these new and exciting markets, with the plan of managing them long-distance from corporate headquarters. Often those branches (complete with their employees) could be acquired for amazingly cheap sums of money. The Lender Formerly Known As Podunk often didn’t ask itself why the current owner of that branch wanted out so badly, but that’s hardly a problem unique to mortgage lending or banking.

Eventually, everyone had to deal with the hard knocks. You might be able to justify taking risks on the unknown when you move into a new market, but you still have to do something about the problems that crop up. Everyone got at least some really bad appraisals from the Yellow Pages approach, and had to start making some lists. I really think that a major problem lurking in the industry happened right here, when wholesalers and correspondent lenders made a decision about what kind of list to make. Do you make an “Approved Appraiser” list of the ones you haven’t had problems with, or do you make an “Excluded Appraiser” list of the ones you have had problems with?

There is no question that logically, the most efficient thing to do is make the exclusion list. Even if you believe that there are more than just a few bad apples, you don’t get into the national mortgage lending business if you believe that bad appraisers outnumber good appraisers by a wide margin. Exclusionary lists are just shorter and easier to administrate.

If you’re still a retail lender (just a long-distance one), you can keep the shorter exclusionary list internal to your own organization. The major disadvantage of exclusionary lists developed for the wholesale and correspondent lenders, and for any lender in the “originate and sell” rather than “originate and hold” business. If you are contracting with brokers, correspondent lenders, third-party investors and servicers and other folks who need to conduct due diligence on your loans, you end up having to make your list available to all those parties. It becomes nearly impossible to keep it confidential.

And that started the defamation fear. Too many lenders faced real or imagined threats of lawsuits from appraisers who did not want their names appearing on what had basically become a public hall of shame list. (I hasten to add that these things were not “public” to you, the consumer. They were an open secret to everyone in the business except the consumer.) So even though an approved appraiser list was a much more expensive, time-consuming, cumbersome way to get there, more and more big operations started keeping one. (Why not go to the regulators and beg for a "safe harbor" against defamation liability for exclusion lists? Because lenders are almost never long-sighted enough to ask for regulation that benefits them. They're too afraid that it always comes with the wrong strings attached. Then after the criminal probes and class actions and general shirt-losing, we look back wistfully on those strings we were so afraid of, wondering why we didn't snap that deal right up.)

The alternative to exclusionary lists opened up the problem of what it means to be “approved.” The handy thing about the exclusionary list was that its criteria were easier to understand: anyone on that list gave me at least one bogus appraisal, or a series of very weak appraisals, or did some other bad thing like turning in all assignments late and never answering the phone. The lender would have documentation of this, since that’s where the exclusionary lists came from: a review of the lender’s internal notes and logs and quality control reports and so on. The approved appraiser list, however, didn’t just include appraisers whose work you really liked; it included appraisers whom you hadn’t yet caught red-handed, at least in theory. Many people became a bit queasy about the potential liability of appearing to put the Good Housekeeping Seal of Approval on a bunch of appraisers when the actual purpose of the list was just to indicate ones that could still be hired by the branches or brokers because we don’t know any reason why not yet.

Furthermore, these lists were (and are) huge work projects. It’s not just that a national lender has thousands and thousands of appraisers to deal with. It’s that if you’re any kind of conscientious about risks, you don’t limit your internal appraiser management functions to sitting around waiting for your QC department to find an obviously bogus one. You get a giant database going of all your appraisals, including the appraiser’s name and license number and a bunch of other facts, and you manipulate that information looking for patterns. A lot of lenders actually started stratifying the approved appraiser list: there was the A-team, whose appraisals got normal review, and the B-team, whose work could be ordered by a branch, but which had to undergo an extra layer of review or an AVM backup or something. The results of that had to be fed back into the model to see if anybody qualified for upgrade or downgrade. Plus you had to have a “probationary” list or some way of dealing with a new appraiser you’d never done business with before. Plus somebody had to monitor state licensing boards and other sources to pick up on appraisers with invalid or expired licenses or insufficient certification to handle large jumbo loans and so on.

Even worse, every big national lender was doing the same tedious expensive administrative work independently. This is why companies like eAppraiseIT exist. It didn’t take all that long for the lenders to figure out that this work could be outsourced, and for some enterprising party to offer to do it. Besides offloading the liability onto the vendor, the big lenders offloaded a whole bunch of those back-office corporate mouths to feed in the appraisal analysis department.

So fast forward to the specific allegations about WaMu and eAppraiseIT. It is utterly normal in the current environment for a big national wholesaler/correspondent buyer like WaMu to outsource appraisal administration. It is not usual for a lender to pay a vendor to make up a list of approved appraisers, and then for that company to continue to make its own list, and to demand that the vendor use the lender’s list. The whole idea is getting out from under having to make and maintain these lists, not to pay someone to do something and then incur all the expenses of doing it yourself at the same time. This would be a bug, not a feature.

I am theorizing that this is one reason why what WaMu wanted struck at least one manager at eAppraiseIT as out of line. It doesn’t have to involve any evidence anywhere that any individual appraisal is bad: you have to wonder what’s in it for WaMu to do business this way. From the facts alleged in the indictment, it sounds like eAppraiseIT asked why this was happening, and WaMu admitted that it was happening because WaMu wanted to make sure that one criterion for the “real” approved appraiser list was “the ones who hit the numbers we like,” not the ones eAppraiseIT’s database shows are not subject to documented lender or licensing board complaints.

You have to be aware that eAppraiseIT and its competitors do not base their management of individual appraisers on just one lender’s experience: that’s the beauty of the service they offer. To an individual lender, the sales pitch is something like this: why should you make the same mistakes Ubiquitous, Inc. has already made? With a third-party vendor, you get the benefit of the collective experience of every client. No appraisal management vendor expects a client to pipe up and say we want an “approved panel” that includes appraisers we know will wag their tails, roll over, and show us their bellies when one of our loan officers or correspondents or brokers asks for a certain value. Or if they do, they expect some circumspection about it. I don’t know if WaMu’s request was unusual because of its nature or because of its brazenness, but it seems to have struck someone at eAppraiseIT as a downright regulatory violation. Given the amount of interpretation and so on of a lot of regulations, many practices can be considered kinda squirrelly but allowable. It’s not that common for an outfit like eAppraiseIT to baldly assert that what’s going on is a clear violation of FIRREA.

That’s actually why I find those emails quoted in the indictment to be so explosive. I have spent a lot of years learning to decipher coded language about regulatory-not-exactly-improprieties-but-perhaps-areas-of-concern and other corporate-speak ways of putting it that I’m utterly blown away by the unvarnished language being used here. You just don’t accuse a major account like WaMu of out-and-out violation of safety and soundness regulation unless the conduct is egregious in the extreme, or you think it is clear that you are being lined up for bagholder duty, or both. It sure sounds to me like WaMu wanted to tell eAppraiseIT what to do, while having eAppraiseIT do the scut work plus the small matter of making all the relevant warranties in the utterly certain event it backfired. Mortgage market participants can be so amazingly short-sighted sometimes it’s hard to believe, but somebody at eAppraiseIT seems to have figured out who the sucker at the table was. No doubt they wouldn’t be on the receiving end of a civil suit from Mr. Cuomo if someone higher-up had listened to whatever internal employee called bull on this one.

Why didn’t they listen? Why doesn’t any corporation ever listen? Because the WaMu account is huge, and nobody wants to stop a gravy train. The indictment also includes snippets of emails suggesting that WaMu dangled other business relationships outside the appraisal management function in front of First American if it rolled over. Which is more or less exactly what lenders to do appraisers all the time: offer repeat business if they play ball, or being kicked off the team if they don’t.

I don’t want to sound too terribly nostalgic for the old days. Was it impossible to manipulate a staff appraiser? Of course not. They worked for you. You could saunter down the hall to their cubicles and make their lives a living hell in a very direct and personal way. As long as you didn’t think of yourself as the bagholder. And staff appraisers would roll over because you do that for the party paying your health insurance premiums. Especially when you believe that if it blows up, your employer, not you personally, is going to be liable.

These days appraisers have the same pressures to play ball and absolutely none of the protections of being employees. I wonder if we haven’t gotten to that point where someone with nothing left to lose has nothing left to lose. The lenders are asking appraisers to take personal liability for inflated appraisals, while offering them no salary (protection from falling volume cycles), no benefits, no institutional legal or compliance support. Even the per-deal fee we pay has become typically paid only out of closing proceeds. (We used to pay for the appraisals up front out of an application fee, so the appraiser got paid even if the loan didn’t close. These days the appraiser often never gets paid if the loan doesn’t close because the broker has nothing to pay it with.) And guess who is the target of the Cuomo indictment? Not the lender doing the bullying. At some point these appraisers have to realize that they don’t lose much by going state’s evidence and providing the other half of those email chains. And that would mean a Very Bad No Good Rotten Day for everybody.

by Tanta on 11/09/2007 09:01:00 AM

See end of post for update.

The plot thickens on the WaMu/eAppraiseIT front. Yves at naked capitalism runs it down: James Lockhart, head of OFHEO, fires off irritated letter to Cuomo about the latter's public involvement of Fannie and Freddie in the mess without conferring first with OFHEO. The money quote (for which I have not seen anyone include the full context in the letter, alas): Lockhart says Cuomo "may not fully understand the difference between mortgages issued by government sponsored enterprises (GSEs) and those issued by other entities."

Yves runs down a preliminary list of what this might be about. I tend to assume that Lockhart is annoyed mightily because the way in which this was handled by Cuomo did, in fact, lead many people to think that Fannie and Freddie were targets of a criminal probe. That didn't help GSE share prices and it won't help calm the troubled bongwater of the credit markets. I also think it's plausible that Lockhart is responding to Cuomo's at least rhetorical linkage of the GSEs and the investment banks, and by extention prime conforming mortgage paper and subprime goofballery.

But I also suspect that Lockhart knows perfectly well that having a large seller/servicer go up in flames isn't any kind of good news for Fannie and Freddie, whether they're "innocent" or not. Seller/servicer concentration is a huge problem for the GSEs, in my view. One result of "800 pound gorilla" industry consolidations is that you have a handful of large operations not only servicing the majority of Fannie and Freddie's loans, you have that same handful making all those repurchase warranties that limit the GSEs' risk of covering guarantees on fraudulent stuff.

So it's one thing for a state AG to kick around somebody like American Home, whose agency servicing book is fairly small (and can be transferred, at least theoretically, to one of the gorillas if it fails). Kicking around a gorilla could put the GSEs in the position of feeling the effects of the concentration risk they have willingly allowed to build up over the years.

And, as I indicated yesterday, I do think part of what's being dragged out into the light of day is not just inflated appraisals but the whole "post purchase due diligence" model that the GSEs depend on (and that they "risk manage" by, exactly, doing a lot of business with big fat depositories who are, presumably, good for those warranties in the way some relatively small-change REIT isn't). Given this structural way of doing the business, there's nowhere an investigation of appraisal risk-offloading (as opposed to mere individual appraisal fraud) can go except to the parties who write the industry-standard rules on appraisal practices and whose upfront due diligence, or back-end due diligence, is or is not structured in a way that can catch bad appraisals before they, and other loose lending practices, wreak havoc in the housing and credit markets.

So I'm not sure what would be "worse" for the GSEs: that Cuomo does not understand how they operate, or that he does. Yesterday we were meditating on the problems created by relying on shallow-pocket counterparties to cover your liability. Today we are meditating on the risks of relying on deep-pocket counterparties to cover your liability. The latter is the classic "moral hazard" problem and it's worth asking whether Fannie and Freddie aren't hip-deep into it.

UPDATE:

Thanks to bacon dreamz, I have the link to Lockhart's letter to Cuomo (see post below [ed note: it's "above" for those of you who aren't standing on your heads]), which was hiding in plain sight on the internet (um, it's early . . .)

I have always had a lot of respect for Lockhart. This paragraph is making me stare in wonder at my monitor. Is it possible for anyone to be that naive about the mortgage business and still be alive? Here's the whole paragraph in question:

After reviewing these materials, I feel that you and your staff may not fully understand the differences between the mortgage-backed securities (MBS) issued by the GSEs and those issued by other entities. In particular, unlike the issuers of private label MBS, when Fannie Mae or Freddie Mac issues an MBS, they retain the credit risk on the underlying mortgages by guaranteeing repayment to MBS holders. Consequently, they have no economic incentive to knowingly purchase or guarantee mortgages with inflated appraisals. The two firms already have programs in place to prevent this and other types of mortgage fraud as well as contract terms to put back mortgages in such situations to the primary lender. For the past several years, OFHEO has been working with the two firms as they have continued to improve these anti-fraud programs.

Well, yes. Nobody has any incentive to knowingly purchase or guarantee fraudulent mortgages. If you know about it, you are party to it, and that put-back thing doesn't work. Does Lockhart seriously wish us to believe that there are no economic incentives for anybody to work extremely hard on not knowing what is going on, while still allowing it to go on because there's money in them transactions?

You do not have to accuse the GSEs of collusion in appraisal fraud to recognize that they have an economic incentive to allow a big counterparty like WaMu to push the envelope on appraisals, and they have a economic incentive to avoid having to "mark" the LTVs of their current outstanding MBS and retained portfolios to a new market (less the "fraud adjustments" on these bad appraisals).

In Lockhart's logic no one would ever have an economic incentive to request inflated appraisals, because no one is ultimately safe from having to cover the loss. Even nickel and dime mortgage brokers face disgorging loan premia that can bankrupt them, not to mention doing some time in the county jail, which is not "economic" for a small self-employed business person.

I argued a while back that the real problem with stated income lending--which the GSEs are implicated in as well as those private issuers Lockhart doesn't want the GSEs to be lumped in with--is that it allows lenders to make very high-risk loans without having to admit they're doing it, and it sets up a bagholder: the borrower who lied. To the accusation that lenders obviously allowed themselves to be lied to, the retort is that "we have no economic incentive" to be lied to. Sure you do.

Low processing costs. Inexpensive due diligence practices. Lower reserves based on "stated" DTIs and LTVs. Ability to compete with other lenders by offering "faster approval" (no hang-ups over the appraisal!) or lower closing costs (no expensive charge for an experienced independent appraiser when you get some appraisal-mill product for cheap). And on and on. How are these not "economic incentives" for the whole industry to know what is going on while not "knowing" what is going on? It's like no one ever heard of the concept of plausible deniability.

I am not suggesting that the GSEs intentionally colluded with anyone to produce bad appraisals. I actually do think they try harder than most other parties to weed that stuff out, precisely because they are motivated to limit their credit losses. But Lockhart himself names the major mechanism in play: put backs. That means that the GSEs manage their risks to the extent that their counterparties will agree to take the risks instead. And that means that if and when a counterparty gets in trouble over the risks it's taking, the GSEs have to put back nuclear waste at the exact time that doing so could conceivably ruin the counterparty, whose warranties on the other eleventy-jillion loans that don't have bad appraisals are now worthless.

Of course Fannie and Freddie don't want to participate in what could potentially be the ruin of WaMu or any other of their major counterparties. I have to think that Cuomo knows that and intentionally created this situation where they now cannot not participate in the investigation. If so, that's because he recognizes an "economic incentive" that Lockhart apparently wants to not know about.

by Calculated Risk on 11/07/2007 01:29:00 PM

Here is the press release from NY AG Cuomo. A couple of excerpts:

“Our expanding investigation into the mortgage industry has uncovered that Washington Mutual improperly pressured appraisers to provide inflated values that best served the lender’s interest. Knowing this, Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals.”
Attorney General Cuomo, Nov, 7, 2007

And from the Appraisal Institute:

“I wish I could say I am shocked by the discoveries made by the Attorney General and his staff. Sadly, what allegedly happened between First American and Washington Mutual is not an isolated incident. Rather, it is symbolic of a problem that has plagued the appraisal industry for years. As the allegations against First American show, the mortgage industry’s dirty secret has been that banks exert tremendous pressure to extort appraisers.”
Terry Dunkin, President of the Appraisal Institute Nov 7, 2007.

by Tanta on 10/23/2007 10:01:00 AM

I guess we can only hope that the credit crunch cramps the style of identity thieves. From the Wall Street Journal:

Last month, Waldell Thomas, a maintenance worker at Montego Apartments in Atlanta, made a discovery inside the complex's Dumpster: a cache of 40 boxes of loan files containing Social Security numbers, credit reports and other data on customers of Ameriquest Mortgage Co.

Next time you talk to a mortgage broker, you might want to ask about their file retention/destruction policies. As a general rule, "I keep them in cardboard boxes in my basement until I take them to the dumpster of some condo project" is not the right answer.

The worst part of this is that there do not seem to be criminal penalties for file dumping in Georgia. I guess it's not a crime until the dumpster-divers find your credit report.

by Calculated Risk on 10/03/2007 01:23:00 PM

From the San Jose Mercury News: Home appraisers pushed to inflate values

Pushed to exaggerate home values during Silicon Valley's real estate run-up, appraisers say agents and homeowners are now pressuring them to prop up those values as prices decline.

People "are trying to refinance to get their butts out of trouble, and the values aren't there," said Mike Terry of MK Terry Appraisals, who appraises homes in San Mateo County.

... Many appraisers say they routinely feel some pressure to inflate home values. A national industry survey shows that the number reporting such pressure has grown by more than half over the past four years.
...
"Exaggerated appraisals are not the entire reason these agencies and financial institutions are in financial distress, but they are a piece of the puzzle," said John Brenan, director of research and technical issues for the Appraisal Foundation.

..."What a lot of them do is what I call dialing for dollars," said Jim Manning, a semiretired appraiser with 32 years in the business who lives in Half Moon Bay. "They get on the phone and start dialing appraisers, asking, 'Who can come up with this value,' and 'We don't want it if you can't.'

by Tanta on 10/01/2007 05:06:00 PM

So there I was, minding my own business, when a press release with the title "MBA Study Examines Fraud Committed Against Mortgage Lenders" shows up in my inbox. How very interesting, right?

Well, the MBA is lucky that the terms "study" and "examine" aren't defined in any law I know of, or I'd be tempted to sue. It's no less than a 20-page lobbying effort that could have been a three-pager, given the redundancies, repetitions, white space and giant margins. Its burden of wisdom is that mortgage fraud is on the rise, mortgage lenders are victims, not perpetrators, of mortgage fraud (insider fraud being a case of "a lending institution [being] deliberately deceived by . . . one of its own employees"), that fraud is clearly conceptually and practically distinct from predatory lending, and that no new legislation battling mortgage fraud is necessary, as current laws are more than sufficient. Its recommendation for action: to increase enforcement and information-sharing, all at the taxpayer's expense.

There is no "examination" of fraud--how it happens, how it goes undetected, what industry practices might enable it. There is, therefore, no examination of what the industry could do, on its own dime, to prevent fraud. Even better, the "study" keeps hammering the point that fraud and predatory lending are separate, for the purpose of making sure that no new anti-fraud legislation that also includes anti-predation components gets passed. That's the whole agenda in this little piece of special pleading, which uses the term "so-called predatory lending" several times:

[S. 1222] inappropriately conflates mortgage fraud with predatory lending. Indeed, several of the provisions have little, if anything, to do with mortgage fraud as that term is understood by law enforcement officials and the mortgage industry. For example, S. 1222 would:

• Impose heightened foreclosure requirements on subprime loans containing a variety of terms;
• Create assignee liability in vague and undefined cases of “deceptive practices” — a term that, in context, appears to mean something different than “fraud”; and
• Require the provision of housing counseling services to borrowers regarding “any other activities or practices that… are likely to increase the risk of foreclosure by such individuals” without providing any guidance as to what such “other activities or practices” may be.54

Whether one believes such provisions have merit as a matter of public policy, they are not directly related to mortgage fraud. Instead, these provisions clearly are intended to address concerns related to “predatory” lending.

Mortgage fraud and predatory lending differ in many important respects in terms of the actions, methods and targets involved. As discussed above, mortgage fraud, as the term is understood by federal law enforcement officials and the mortgage industry, is the intentional enticement of a financial entity to make, buy or insure a mortgage loan when it would not otherwise have done so, had it possessed correct information. In contrast, predatory lending is an undefined term that generally describes negative practices that are harmful to consumers. Clear definitional boundaries around the term predatory lending have yet to be drawn. Because the actions and targets of mortgage fraud and predatory lending differ, actions taken to remedy one rarely, if ever, will remedy the other. Conflating the two creates the danger that solutions appropriate only to one will be applied to both. While there are actions federal law makers can take to address each, the numerous and essential differences between them make their conflation, as well as their simultaneous treatment, inappropriate.

In other words, the MBA wants you to believe that fraud is only a matter of the industry being defrauded, that mortgage fraud is conceptually, practically, and legally distinguishable from predation, and that no bill that tries to clamp down on both things at the same time is acceptable. You get the impression that the industry is so frightened by anti-predation laws that it simply will not accept them even if they provide for more penalties or easier enforcement of fraud against lenders.

There's a lot of hand-wringing over "unintended consequences" of legislation in here--which you may or may not find compelling. There is no attempt to address the opposite problem, of refusing to regulate at all because regulation might not be perfect. What's truly amazing is that the MBA argues that mortgage fraud is actually on the rise--not just reports of fraud, and not, apparently, just proportionally to the increase in mortgages originated in recent years--but then argues that existing laws are sufficient, requiring only more taxpayer dollars poured into the Justice Department for task forces and databases. There isn't even a perfunctory recognition that industry practices, like "no docs," third-party originations, appraisal ordering practices, stripped-down internal controls, could have anything to do with any of this.

That might have something to do with the fact that the "study" keeps insisting that there is no widely-agreed definition of predatory lending, and that predation has nothing to do with fraud. I have argued before that during the bubble, lenders were happy to accept fraud as the "cost of doing business" with practices that were reckless but that threw off tons of money, like no-doc no-down loans, brokered and outsourced processes, skimpy due diligence, and incestuous and conflict-riddled "affiliated business arrangements." In fact, I gather from this MBA effort that the industry is still happy to pay the fraud toll; what has it worried is that anti-predation legislation will chip away at those money-spinners.

The MBA quotes the FBI as estimating that industry-wide fraud costs for 2006 ranged from $946 million to $4.2 billion. That's quite a range, and I frankly am deeply suspcious of those numbers. For one thing, they are based on Suspicious Activity Reports (SARS), which have the problem of multiple-counting (several categories of suspicious activity can be reported for a single loan application) and also that the dollar amount reported is generally the transaction amount, not an actual, after-the-investigation-trial-and-conviction assessment of the actual fraud loss. But even taking that $4.2 billion number seriously means that fraud costs for 2006 were a whopping 18 bps on 2006 gross mortgage production (~2.37 trillion). Could it be that the MBA doesn't want to define predatory lending because it doesn't want to address how revenues on grossly overpriced mortgage loans and reliance on fly-by-night brokers might function to offset fraud costs?

Shorter MBA: We're willing to invite fraudulent behavior and pay for it as long as you let us continue to prey. But we'll help out by asking the taxpayers to fund some "task forces" if you need us to appear to be doing something about it.