Tanta On WaMu vs. Cuomo
There was a great post by Tanta on Calculated Risk's blog about a legal battle involving Cuomo, Fannie Mae, and Washington Mutual.
For background information on the lawsuit please see WaMu Collapses Under Appraisal Probe. My ending comment was "If Washington Mutual has to buy back those loans from Fannie Mae, the patient will die."
Tanta took things further, looking at the entire appraisal industry itself, including some legal repercussions of what might happen depending on how the lawsuit progresses.
Tanta's must read post is called WaMu and The Rep War.
Following are a few snips:
Fannie Mae is saying that WaMu will take back any loans with dubious appraisals this "independent examiner" digs up. WaMu is saying that it will "rigorously" avoid doing so.
WaMu is also saying, in effect, that it signed a contract with eAppraiseIT that puts all liability for inflated appraisals on eAppraiseIT.
Fannie Mae is saying, in effect, that it signed a contract with WaMu that puts all liability for inflated appraisals on WaMu.
This is very interesting precisely because it isn't going to be about inflated appraisals. It's going to be about how far anyone can get away with two practices that are the lynch-pins of the mortgage industry: outsourcing regulatory liability to a third party bag-holder and doing business on a representation and warranty basis without pre-sale due diligence.
Trust me; all of that stuff is detailed and specific enough that it isn't that hard to find contractual grounds to declare breach and demand repurchase of a loan.
Anyway, this is why the whole flap is scaring the panties off everyone in the mortgage industry, far, far beyond any worry over stiffer appraisal regulation. The core issue here is a cornerstone of the whole "originate and sell" model that has created such a crisis.
If Cuomo's suit makes any headway at all, it will put eAppraiseIT out of business one way or the other. That's because if appraisal management companies are no longer willing or able to write these liability swaps into their contracts, they won't be able to offer what the lenders really want from them. The advantage of doing business this way isn't really about saving a few dollars on outsourcing administrative work for the lenders, it's about getting out from under a huge expensive compliance and legal risk.
No wonder Cramer's head is exploding again. This thing really isn't about appraisals, it's about stopping the game of risk-layoff.
Yes, WaMu (WM) will collapse if it has to take back those loans, but the bigger picture is the entire "originate and sell" model might collapse along with it. Won't that be fun?
The originate to sell model has taken a reputational hit as a result of subprime. Nevertheless, the old-fashioned retail-depository model had had its share of problems throughout its history; we shouldn't forget that securitization helped solve the savings and loan crisis. It would be a shame if in the midst of our current troubles we forgot about how the ability to sell mortgages has deepened the liquidity of prime mortgages, and enabled households to become attached to capital markets in a positive manner.