Thursday, November 08, 2007

Offloading Risk Liability Into the Ether


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. The weakest (financially and politically) party in the chain, eAppraiseIT, appears to have taken on all the residual risks from WaMu and Fannie Mae, and now Cuomo is going to force those losses to materialize. You can bet that every General Counsel at every mortgage lender still operating is busy reviewing many, many contracts right now. The results will be very, very ugly.

Short version of the story: Fannie offloads its risk onto WaMu, and WaMu offloads its risks onto eAppraiseIT, an independent appraisal company. Of course an entity such as eAppraiseIT likely doesn't have even an infinitesimal fraction of the assets needed to actually cover potential liability here (or, presumably, sufficient or any insurance), so they may as well have offloaded all their liability onto my cat Gizmo.

...adding, it doesn't mean that the liability has successfully been disappeared. We'll have to wait and see who ultimately holds the bag at the end of the day.