by Calculated Risk on 4/19/2009 09:52:00 AM

Starting on May 1st, Fannie Mae and Freddie Mac will not purchase mortgages from Sellers that do not adopt the The Home Valuation Code of Conduct (HVCC). The intention of the code is to insure the independence of the appraiser.

From Kenneth Harney at the LA Times: Mortgage industry changes throw new hurdles in borrowers' way

[B]eginning May 1, Fannie and Freddie are refusing to fund loans with appraisals that do not follow a set of new rules known as the Home Valuation Code of Conduct. Among the procedural changes: Mortgage brokers no longer can order appraisals directly, but instead must allow lenders or investors to use third-party "appraisal management companies" to assign the job to appraisers in their networks.
...
Starting April 15, all good faith estimates provided to applicants must indicate a flat $455 charge for appraisals arranged through the appraisal management company. The broker previously charged $325. Consumers will now have to pay the appraisal fee upfront -- before any inspection or valuation is completed -- using a credit card, debit card or electronic fund transfer.

What happens if the appraisal comes in low and the applicants can't qualify for the refi or purchase program they sought? Tough luck: They'll have just two choices: Pay another $455 for a second appraisal -- with no assurance that it will solve the problem -- or cancel the application.

The Center for Public Integrity has a good dicussion of the appraisal process and the HVCC: The Appraisal Bubble

Richard Frank, an appraiser in Vero Beach, Florida, started appraising homes in 1998, when values were climbing. From the beginning, Frank said he stepped into a business arrangement in which lenders forced appraisers to abandon their standards if they wanted work.

Frank said lenders commonly gave appraisers an estimated value for a home on each appraisal order. Appraisers, who usually determine values by comparing homes to recent sales of comparable properties, often worked backwards from that estimated price to find recent real estate sales that would “make the value,” he said. Working backwards from the estimate was faster. Everyone made money. And since appraising homes is subjective — both an art and a science — it was easy to fudge numbers.

“The [supposedly comparable] houses might be bigger and better, but who’s going to know?” Franks said. “In an increasing market, your sins are buried.”

If an appraisal came in lower than the purchase price, the loan likely would be denied. Since loan origination staff is typically paid by commission, a failed deal meant no paycheck for them. If that happened too many times, Frank says, lenders stopped sending the appraiser work. “Put out, and you will get more dates. It’s just that simple,” he said.

For more, here is some info from Freddie Mac:
The Home Valuation Code of Conduct fact sheet [PDF 88K]
The Home Valuation Code of Conduct [PDF 25K]
Frequently Asked Questions

by Calculated Risk on 4/18/2009 09:10:00 PM

Note: I will be at this event tomorrow night.

From Tom Petruno at the LA Times: NPR's 'Planet Money,' live from Santa Monica

Fans of NPR's Alex Blumberg and Adam Davidson, who produced the award-winning housing-crisis explainer "The Giant Pool of Money," will want to tune in to KCRW on Sunday from 6 to 7 p.m. PDT: The two will be broadcasting their "Planet Money" show live from the Broad Stage in Santa Monica.

Following on the success of "The Giant Pool of Money" in May 2008, Blumberg and Davidson launched Planet Money in early September to blog on the nation’s economic crisis. Their timing was perfect: Planet Money began on Sept. 7 -- the day the government seized Fannie Mae and Freddie Mac, the first dominoes to fall in the financial-system collapse.

by Calculated Risk on 4/18/2009 03:04:00 PM

From Dow Jones: Heavyweights Kohn,Volcker Spar Over Inflation Goal

Paul Volcker grilled [Federal Reserve Vice Chairman Donald Kohn] over the Fed's apparent effort to convey that it considers a roughly 2% inflation rate to be appropriate for the economy in the long term.

Former Fed Chairman Volcker ... questioned how the Fed can talk about both 2% inflation and price stability. ...

In the minutes of its January policy meeting, the Fed said ... 2% inflation would be ... price stability.

"I don't get it," Volcker said ... By setting 2% as an inflation objective, the Fed is "telling people in a generation they're going to be losing half their purchasing power," Volcker said. ...

Kohn responded that by aiming at 2%, "you have a little more room in nominal interest rates ... to react to an adverse shock to the economy."

"Your problem is 2[%] becomes 3 becomes 4," Kohn told Volcker. But other central banks with a roughly 2% target haven't had that problem, Kohn said.

Fed officials, he added, "need to be clear about why we're choosing the number we're choosing."

And Volcker on Congressional oversight of the Federal Reserve, from Bloomberg: Volcker Says Fed’s Authority Probably to Be Reviewed

“I don’t think the political system will tolerate the degree of activity that the Federal Reserve, in conjunction with the Treasury, has taken,” Volcker [said] ...

U.S. lawmakers from both political parties have expressed concern in recent months that the central bank has overstepped its authority by creating several emergency credit programs aimed at reviving lending and ending the recession.

“I think for better or for worse we are at a point where the Federal Reserve Act, after all that has been happening in the last year or more, is going to be reviewed,” Volcker said.

by Calculated Risk on 4/18/2009 08:51:00 AM

At least we know when: May 4th.

From Bloomberg: Bank Regulators Clash Over Endgame of U.S. Bank Stress Tests

The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests ... with some officials concerned at potential damage to weaker institutions.

With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements ... If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers.
...
A statement on the methods is scheduled for release April 24. ...

While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said.

Maybe we can help Geithner and put together a list of what we think should be released ...

by Calculated Risk on 4/18/2009 12:08:00 AM

On March 30th, GM was given 60 days, and Chrysler 30 days, to avoid bankruptcy. That means an April 29th deadline for Chrysler to reach a deal with Fiat, and a May 29th for GM to present an acceptable restructuring plan agreed to by all parties.

Here is an update from Reuters: GM readies all-equity offer for debt-sources

The Obama administration has directed General Motors Corp to prepare a new restructuring plan that would pay off bondholders and the automaker's major union in stock in exchange for $48 billion in debt ... The U.S. Treasury ... has indicated that it could also convert ... taxpayer-backed loans into GM stock ...

[GM Chief Executive Fritz] Henderson said it was still feasible for GM to avoid bankruptcy, but said the automaker was also working on detailed plans for a filing if it is forced to take that route.

This might seem like a never ending story, but Chrysler only has 12 more days, and just 42 days left for GM.

Best to all.

by Calculated Risk on 4/17/2009 09:31:00 PM

Prognostication?
Great Basin Bank Nevada:
Seven, crapped out.
by Soylent Green is People

From the FDIC: Nevada State Bank, Las Vegas, Nevada, Assumes All of the Deposits of Great Basin Bank of Nevada, Elko, Nevada

Great Basin Bank of Nevada, Elko, Nevada, was closed today by the Nevada Financial Institutions Division, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

As of December 31, 2008, Great Basin Bank of Nevada had total assets of $270.9 million and total deposits of $221.4 million. In addition to assuming all of the deposits of the failed bank, Nevada State Bank agreed to purchase approximately $252.3 million of assets. The FDIC will retain the remaining assets for later disposition.
...
The FDIC estimates that the cost to the Deposit Insurance Fund will be $42 million. Nevada State Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Great Basin Bank of Nevada is the twenty-fifth FDIC-insured institution to fail in the nation this year, and the second in Nevada. The last FDIC-insured institution to be closed in the state was Security Savings Bank, Henderson, on February 27, 2009.

by Calculated Risk on 4/17/2009 07:19:00 PM

Sterling does not shine...
It's bright luster has faded...
"Suits" swarm it today.
by Soylent Green is People

From the FDIC: Metcalf Bank, Lee's Summit, Missouri, Assumes All of the Deposits of American Sterling Bank, Sugar Creek, Missouri

American Sterling Bank, Sugar Creek, Missouri, was closed today by the Office of Thrift Supervision, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Metcalf Bank, Lee's Summit, Missouri, to assume all of the deposits of American Sterling Bank.
...
As of March 20, 2009, American Sterling Bank had total assets of approximately $181 million and total deposits of $171.9 million. ...

The FDIC estimates that the cost to the Deposit Insurance Fund will be $42 million. ... American Sterling Bank is the twenty-fourth FDIC-insured institution to fail in the nation this year. The last FDIC-insured institution to be closed in Missouri was Hume Bank, Hume, on March 7, 2008.

Friday is here.

by Calculated Risk on 4/17/2009 04:00:00 PM

While we wait for the FDIC ...

Here is a link to Jim the Realtor on Nightline last night.

Click on graph for larger image in new window.

The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

This is still the 2nd worst S&P 500 / DOW bear market in the U.S. in 100 years.

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The second graph shows the S&P 500 since 1990.

The dashed line is the closing price today.

The half off sale is over (for now), and the market is only off 44.4% from the peak.

by Calculated Risk on 4/17/2009 03:30:00 PM

From MarketWatch: Pessimistic scenario gains stress-test influence

Banks ... are under pressure to disclose the results of their stress tests to shareholders. Banks are expected to sign capital-assistance documents upon the completion of the stress tests, explaining whether they are seeking out immediate government capital infusions or they plan to spend six months raising capital before re-evaluating.

The signing of those documents could be a material agreement, which means banks must file an 8-K with the Securities and Exchange Commission, explaining what they've agreed to.

"It's a material event," said Gary Roth, partner at Alston & Bird LLP in New York. "When banks are given their results, they would be under a lot of pressure to disclose. When one discloses, it puts pressure on the other banks to disclose."

SEC officials are in discussions with bank regulators about disclosure responsibilities.

If the stress test shows a bank needs additional capital, (update for clarification) and the bank signs the agreement, there is no question that is a material event and must be disclosed to shareholders. Also, it appears everyone now understands the "more adverse" scenario is the baseline:

Alston & Bird's [Jeffrey] Hare said he believes that bank regulators are now using the pessimistic scenario as their baseline forecast.

by Calculated Risk on 4/17/2009 12:38:00 PM

From Fed Chairman Ben Bernanke: Financial Innovation and Consumer Protection (ht Rex)

The concept of financial innovation, it seems, has fallen on hard times. Subprime mortgage loans, credit default swaps, structured investment vehicles, and other more-recently developed financial products have become emblematic of our present financial crisis. Indeed, innovation, once held up as the solution, is now more often than not perceived as the problem. I think that perception goes too far, and innovation, at its best, has been and will continue to be a tool for making our financial system more efficient and more inclusive. But, as we have seen only too clearly during the past two years, innovation that is inappropriately implemented can be positively harmful. In short, it would be unwise to try to stop financial innovation, but we must be more alert to its risks and the need to manage those risks properly.
...
[W]ith hindsight, we can see that something went wrong in recent years, as evidenced by the currently high rates of mortgage delinquency and foreclosure ... And the damage from this turn in the credit cycle--in terms of lost wealth, lost homes, and blemished credit histories--is likely to be long-lasting. One would be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be.
...
Where does all this leave us? It seems clear that the difficulty of managing financial innovation in the period leading up to the crisis was underestimated ...

With hindsight? Hoocoodanode?