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     Jul 2, 2009
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Cheating still beats real work
By Julian Delasantellis

A colleague recently relayed a story about her experience as an observer at a faculty/student disciplinary hearing for a pre-law undergraduate charged with cheating.

Apparently, this young man had come around to the belief that, when it came to engaging in conduct that could get him expelled, in for a dime-in for a dollar. Just in the space of a single term, his teachers had found him copying from a test, rifling through the course's graduate assistant notebook looking for a test, and, word for word, punctuation mark by punctuation mark, lifting without attribution a large section of a Wikipedia entry on "jurisprudence" for a research paper.

"How do you answer these charges?" asked the earnest student prosecutor, who, both my colleague and I agreed, can be


expected to be next seen on TV in Kevlar helmet, flak jacket, frameless glasses and FBI windbreaker when the government takes down another religious compound in 2017 or so.

The accused finished texting a friend and put his i-phone away. Shifting legs over knees, he slouched back in his seat, hooked his thumbs in the belt loops of his Abercrombie & Fitch trousers and turned to answer. The legal and moral defense of "society made me do it" fell out of favor with the turn towards reaction and repression installed by the right in the 1980s, but, if anybody ever could make a valid argument as to its applicability, this young man's complete belief in his own innocence means that, in his case, an exception should be made.

"Well", the student said, and locked his eyes on his personal Roland Freisler, the Nazi German judge. "Beats working, doesn't it?"

With that, I would have voted to let him off. For it is so self obvious that, just through a perusal of the business section of any American newspaper in the two-plus years since the financial and economic crisis commenced, the ideology contained in the defense statement was so blindingly accurate as to, indeed, provide its purveyors with a lifetime "get out of jail free" card.

What else can you claim that middle-class suburban America has been doing recently to cause the current difficulties but following this philosophy, to at last sever the human race's eternal bondage to work. The book of Genesis tells that, for Adam and Eve's sins, the human race "by toil shall you eat ... all the days of your life.... by the sweat of your brow shall you get bread to eat, until you return to the ground". But lately, prosperous America, like a contestant on Deal or No Deal, is shopping around for a better offer.

Of course, it seems that the latest example of this age-old truism is the current financial crisis, brought about by the attempt to have bulldozers and US$7-an-hour Mexican construction workers use Chinese drywall to create Gardens of Eden amongst the edge cities at the far end of the Interstate highway system. That attempt ended with the real estate crash that commenced in 2007; when it was learned just how aggressively and extensively the entire financial system had attempted to piggyback on what was to be the proclaimed Book of Genesis gamechanger, it too, collapsed, last year.

But that's all over, right? Everybody involved has learned their lesson, and learned their lesson painfully and well, so that now and forever more, they're doing things the right way, nobody's going to be trying to see if the old dog will still roll over for all those bad-but-fun old tricks, right?

Not really. Much has been lost and even more foreclosed upon during the current calamities, but, still there in the gaze of every quick-buck operator and jumped-up door-to-door salesman is the image of America as John Winthrop's shining city on a hill, glistening not with morality and justice, but gold and riches. It was true in the glee that the banking industry accepted mark-to-model creative accounting of mortgage-backed securities this spring, and, a bit further down the real-estate industry's money pole, it's just as true with the continuing dishonesty of home appraisals.

Last November, I reviewed former subprime mortgage broker Richard Bitner's explosive mea culpa, Confessions of a Subprime Lender." In it, I observed that "Almost like a pandemic viral contagion, US real estate in the last decade seemed to attack the morals of anybody who came into contact with it; nobody seems to have had, or offered up, much resistance." (See Subprime - an (im)morality tale Asia Times Online, November 8, 2008).

The immorality virus found a particularly dark, warm and humid host environment in what is known in America as the real-estate appraisal industry, in which people are supposed to certify with their sacred honor that houses are actually worth what the banks are lending to prospective homeowners. I wrote about how Bitner described this dynamic in this way:
Integral to the moral collapse at the base level of these exchanges was the role played by real estate appraisers. Mortgages were not supposed to be made for more than the property was worth, so that the lender might eventually get his money back should the borrower default, and subsequently the property go through a foreclosure sale. However, it was no fun being a stickler to this rule, for the interest and fee income was determined as a percentage of the total loan package. The more the mortgage, the merrier the mortgage broker. Thus, the mortgage brokers offered the appraisal industry its cash for their virtue; the appraisers demurred, saying cash was not necessary - checks would be just fine.

Bitner described the collapse of the appraiser's moral core like this:

Appraisers rely on the lenders and brokers who hire them to make a living. Being true to their profession and pleasing the customer is a difficult balancing act. When a broker orders an appraisal, he provides an estimate or target value for the property to the appraiser. If the appraiser has problems consistently reaching this number, the broker will hire someone else. Any appraiser who goes strictly by the book can struggle to get repeat business.' Of course, once the artificial, inflated values got codified into actual appraisals, it only stoked the real-estate fire even hotter, for once people saw just how values were (artificially) skyrocketing, they jumped into the market, thus spurring even more demand.
When people started noticing that the small mortgage brokers central to the boom were disappearing, their premises perhaps reverting back to the hot-dog and ice-cream stands these great temples of 21st century commerce were just a few years ago, and the real great houses of money then tumbled in New York and everywhere else, it became clear that a lie can indeed cross the planet and come back in the time it takes for the truth to pull up its socks.

The basic problem was that, much like a mafia initiation, the system was set up to reward wrong and punish right. The banks said they wanted honest, "clean" appraisals, but the system was designed to reward not virtue but value. Everyone involved in the game of suckling fat percentages off the mortgage businesses' sodden, parturient teats, and of total, bottom-line compensation of the construction companies, of the real-estate agents and of the bank loan officers, and even the local politicians shaking the trees of the process for campaign cash - they all depended on houses going for as much as possible.

"Praise the Lord! It's a miracle" the business cried out, when after hiring and paying a respected real estate appraiser, the desired $900,000 appraisal turned out to be, yes, $900,000, and the bank funded the loan.

It was obvious that, when homes in foreclosure started to be sold for fractions of what they had been appraised for just months previously, there were severe problems with system integrity. In this and in most other public-policy matters, with Washington politicians of both parties long ago castrated by the points of the fountain pens the industry uses to write checks to them, it fell to local governments, particularly the states, to try to bring some moral order back to the process. In particular, it fell to New York State Attorney General Andrew Cuomo.

In November 2007, Cuomo announced that his office was suing a subsidiary of the First American Corporation, a nationwide home appraisal service, for colluding with Washington Mutual, then the nation's largest retail mortgage lender, to drive home appraisals up.

From Cuomo's office press release:
In a scheme detailed in numerous e-mails, eAppraiseIT [EA], a subsidiary of First American Corporation, caved to pressure from Washington Mutual to use a list of preferred "Proven Appraisers" who provided inflated appraisals on homes. The e-mails also show that executives at EA knew their behavior was illegal, but intentionally broke the law to secure future business with WaMu. 'The independence of the appraiser is essential to maintaining the integrity of the mortgage industry. First American and eAppraiseIT violated that independence when Washington Mutual strong-armed them into a system designed to rip off homeowners and investors alike,' said Attorney General Cuomo. 'The blatant actions of First American and eAppraiseIT have contributed to the growing foreclosure crisis and turmoil in the housing market.

By allowing Washington Mutual to hand-pick appraisers who inflated values, First American helped set the current mortgage crisis in motion.' As First American acknowledged in its 2006 annual report, appraisal fraud can damage the entire housing market, including consumers and investors alike. Consumers are harmed because they are misled as to the value of their homes, increasing the risk of foreclosure and hindering their ability to make sound economic decisions. Investors are hurt by such fraud because it skews the value and risk of loans that are sold in financial markets.

In April 2006, EA began providing appraisal services for WaMu, which became EA's biggest client. Within weeks, WaMu began complaining to EA that its appraisals were not high enough. WaMu pressured EA to employ exclusively a new panel of appraisers that WaMu hand-selected as "Proven Appraisers." This set of appraisers was chosen by WaMu specifically because they inflated property appraisals. WaMu profited from these higher appraisals because they could close more home loans, at greater values.

Over the course of their relationship, between April 2006 and October 2007, EA provided approximately 262,000 appraisals for WaMu. Attorney General Cuomo's investigation uncovered a series of e-mails between executives at EA, First American, and WaMu that show EA officials were willingly violating state and federal appraisal independence regulations to comply with WaMu's demands ... eAppraiseIT's president told senior executives at First American: "We have agreed to roll over and just do it ... ' E-mail evidence also shows that WaMu pressured EA to inflate appraisals as a condition for doing future business together. On September 27, 2006, First American's vice chairman reported that a WaMu executive told him: "If the appraisal issues are resolved and things are working well he would welcome conversations about expanding our relationship ... "
The copper had the perps down cold; they soon agreed to a settlement that involved the creation of a "Home Valuation Code of Conduct" (HVCC) to try to put some measure of truth back in the process. When, last December, mortgage giants Fannie Mae and Freddie Mac agreed to abide by HVCC rules with their mortgage properties, with Fannie and Freddie now possessing unprecedented dominance over the market with the collapse of private mortgage insurance, HVCC, scheduled to go into effect on May 1 of this year, became the appraisal industries' law of the land.

HVCC is simplicity itself - honesty usually is. It's opening paragraph states that:
No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner including but not limited to: ...
After that follows about 1,000 words detailing how the industry is going to stop doing the things it so loved to do and which brought the entire financial system to the brink of extinction.

The practical application of HVCC was intended to be a fairly radical change in the process of appraisal generation in American residential real estate. Previously, after buyer and seller had come to an agreement on a sales price, either the real-estate broker or bank/mortgage broker intended to ultimately get the mortgage business would hire a supposedly independent appraiser to make sure that the bank was not lending more than the property was worth. The appraiser was usually a friend with whom the broker or banker had a long time commercial relationship - and what a

Continued 1 2  

US senators call for Chinese drywall probe (Jun 30,'09)

Principal over principle
(Jun 6,'09)

Developing China with sovereign credit (Sep 4,'08)

Obama creates a deadly power vacuum

2. Obama faces a Persian rebuff

3. Up, down, out and doomed

4. China doesn't want Iran unstable

5. Lessons from the revolution

6. Bernanke still a speed demon

7. Requiem for a revolution

8. Iraq celebrates a victory of sorts

9. Google challenged in India

10. Leadership in the eye of the beholder

(24 hours to 11:59pm ET, June 30, 2009)



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