...and the bleak shall inherit the earth?
09/05/2009
"philistines!"
--William Rufus Wright when learning his housemates had rejected a prospective member for reasons unrelated to her worthiness.
Previously I've mentioned the heuristics and cognitive biases that often rule our behavior and lead to decisions which reflect a false reality. Since the financial crisis began, the lending institutions who supply credit (and whose subliminal--or maybe not so subliminal--greed along with their disregard for regression toward the mean contributed to the crisis) have now adopted overly strict policies fueled by loss aversion. Embracing panic as intensely as the irrational exuberance that got them there in the first place, they've come to focus on a new set of attentional biases and illusory correlations that ignore probabilities and inhibit the economic healing process. To make matters worse, some public advocates, too, have tightened the reins to such an extent as to choke the economic horse or make it walk backwards. We totally agree with the need for intervention (always have), but overreaction is counterproductive, lacks sophistication and ignores the objective solutions that are available.
Two recent changes in particular come to mind: the institution of the HVCC (Home Valuation Code of Conduct) in May of this year; and certain poorly constructed policies being imposed by Fannie Mae whose past decisions have been called into question. The first is a noble effort that attempts to reduce the collusion that no doubt occurred between some lenders and appraisers leading to inflated property valuations, but does so in a manner that's introduced a whole new set of problems. The second involves placing restrictions on buyers' and properties' eligibility for financing that are reactive to past failures but neglect taking into account the more valid reasons for those failures.
The main problem with the HVCC is the severing of communication between the banks and the appraisers. Granted, this will stop any collusion or undue influence that may occur between the two, but all the productive elements which accompanied this interaction and helped move the process along efficiently and in an accurate manner have also been lost. Surely a better solution that specifically addresses bad behavior is possible, and in a way that would avoid the slowdowns in loan processing and prevent hiring the wrong appraiser for a particular property. A more appropriate solution would also prevent the already increasing tendency for qualified borrowers to seek out less regulated portfolio lenders who have less onerous requirements but who also possess the potential to continue the old ways that got us into this mess.
As to Fannie Mae, their policies seem to be in a continual state of flux, a condition that doesn't offer stability, and depending on the policies themselves, offers conditions that are poorly devised and unconnected to reality in a real world looking for real solutions. One of these which is expected to be more strictly enforced, is the requirement that all condominiums, in order to be eligible for Fannie Mae approved financing, must have a formal written budget that contains a line item equal to 10% of its income to be allocated to the condo's reserve fund. This is required without consideration of the reserves already present or any established lines of credit that may have been put in place to accommodate future repairs and improvements. (We will note however, depending on the building and/or the bank, there may be some relief from this requirement, but only upon being granted a waiver by Fannie Mae). Otherwise, for a building well covered in the event of unanticipated cost to be forced to increase its maintenance charges to meet such a requirement creates an unnecessary financial strain on its tenants and ultimately the economy itself. Here, too, and as with the case of the HVCC, there are more appropriate ways to address the concerns that inspired this new policy without the negative effects it brings with it.
--Leigh Zaph. (any comments can be emailed to us at webitorials@manhattanhomesinc.com, thanks).
--William Rufus Wright when learning his housemates had rejected a prospective member for reasons unrelated to her worthiness.
Previously I've mentioned the heuristics and cognitive biases that often rule our behavior and lead to decisions which reflect a false reality. Since the financial crisis began, the lending institutions who supply credit (and whose subliminal--or maybe not so subliminal--greed along with their disregard for regression toward the mean contributed to the crisis) have now adopted overly strict policies fueled by loss aversion. Embracing panic as intensely as the irrational exuberance that got them there in the first place, they've come to focus on a new set of attentional biases and illusory correlations that ignore probabilities and inhibit the economic healing process. To make matters worse, some public advocates, too, have tightened the reins to such an extent as to choke the economic horse or make it walk backwards. We totally agree with the need for intervention (always have), but overreaction is counterproductive, lacks sophistication and ignores the objective solutions that are available.
Two recent changes in particular come to mind: the institution of the HVCC (Home Valuation Code of Conduct) in May of this year; and certain poorly constructed policies being imposed by Fannie Mae whose past decisions have been called into question. The first is a noble effort that attempts to reduce the collusion that no doubt occurred between some lenders and appraisers leading to inflated property valuations, but does so in a manner that's introduced a whole new set of problems. The second involves placing restrictions on buyers' and properties' eligibility for financing that are reactive to past failures but neglect taking into account the more valid reasons for those failures.
The main problem with the HVCC is the severing of communication between the banks and the appraisers. Granted, this will stop any collusion or undue influence that may occur between the two, but all the productive elements which accompanied this interaction and helped move the process along efficiently and in an accurate manner have also been lost. Surely a better solution that specifically addresses bad behavior is possible, and in a way that would avoid the slowdowns in loan processing and prevent hiring the wrong appraiser for a particular property. A more appropriate solution would also prevent the already increasing tendency for qualified borrowers to seek out less regulated portfolio lenders who have less onerous requirements but who also possess the potential to continue the old ways that got us into this mess.
As to Fannie Mae, their policies seem to be in a continual state of flux, a condition that doesn't offer stability, and depending on the policies themselves, offers conditions that are poorly devised and unconnected to reality in a real world looking for real solutions. One of these which is expected to be more strictly enforced, is the requirement that all condominiums, in order to be eligible for Fannie Mae approved financing, must have a formal written budget that contains a line item equal to 10% of its income to be allocated to the condo's reserve fund. This is required without consideration of the reserves already present or any established lines of credit that may have been put in place to accommodate future repairs and improvements. (We will note however, depending on the building and/or the bank, there may be some relief from this requirement, but only upon being granted a waiver by Fannie Mae). Otherwise, for a building well covered in the event of unanticipated cost to be forced to increase its maintenance charges to meet such a requirement creates an unnecessary financial strain on its tenants and ultimately the economy itself. Here, too, and as with the case of the HVCC, there are more appropriate ways to address the concerns that inspired this new policy without the negative effects it brings with it.
--Leigh Zaph. (any comments can be emailed to us at webitorials@manhattanhomesinc.com, thanks).
