The Collateral Risk Network (CRN) had their 3rd Quarter meeting on June 17th titled, “Collateral Matters.” For the first time ever, this meeting was open to all stakeholders throughout the appraisal industry – not just CRN members. The CRN hosted this thoughtful discussion focused on real estate valuations and collateral risk. The goal was to explore a variety of topics related to “reengineering the appraisal process.”
Frank Gregoire, an appraiser in the Tampa area, spoke on the 21stCentury Appraisal Assignment. Frank contends that the “modernization” of appraisals is the vision of making the entire process more efficient. Frank is an advocate for data transparency which would allow information to flow freely once the it’s been assigned to the appraiser to then analyze and reach a conclusion. Gregoire stated “once the information has been provided to the GSEs, it’s locked up in their systems, essentially forever. It’s a one-way wall of information. […] For example, when the information is already known, the appraiser won’t have to supply facts to fill dozens of fields with data already known and collected. Let’s be real; do you really need an appraiser to fill out fields of facts already known and reported by others? Reinventing the wheel here is useless. The GSEs and the client should autofill these fields.”
Josh Walitt, a certified appraiser in Colorado and the Compliance Manager for Property Interlink, spoke on Property Inspections. He states that considerations around the inspection should encompass a wide variety of factors including: competency of the inspector (a license doesn’t automatically equate to competency), training of the inspector, speed of the process, cost, security, methods of inspection, extent of inspection, status quo versus change, and risk associated with the particular lending scenario. The various industries are finding themselves at, as Walitt calls it, the “spaghetti on the wall moment.” What sticks and what doesn’t stick when it comes to the new and changing processes and what the appraiser needs to include is relates in part to the “subjective” versus “objective” data.
As Walitt stated, “there’s a lot of flexibility on the huge spectrum of valuation products that are possible. We need to take a look at what the clients ask for and what the clients need in certain situations for safe and sound lending.”
Lee Trice, a Certified General appraiser in multiple States and Principal of Valucentric, spoke on Analysis and Report Writing. Trice stated, “even when using the current system and tools we have now, it’s still very difficult to recreate what the appraiser knows and know why they reached their opinion about it. It just involves too much manual entry of data.” Changing the appraisal analysis and report writing to be consistent and standardized would allow for much better visualization and transparency of data. Lee discussed the cost approach and income approach as underutilized components to a “3-legged stool.”
Pete Carroll, who works in Public Policy & Industry Relations for Corelogic, touched on the Concept of a Central Repository of Data. Since 2009, regulatory exemptions and administrative standards allowed for the development of technological innovations. Public Utility Data Marts are looking to “level the playing field.” Carroll stated, “Decisive regulatory reform and industry collective action is necessary for all secondary market executions to be positioned to catch-up and compete.”
John Russell, JD, Senior Director of Government Relations and Business Development for ASA, spoke on using the “Three Artistic Proofs” and the rhetorical triangle to shape collateral valuation policy discussions. The three sides are logos (fact), pathos (appeal), and ethos (credibility). Using logos (facts), ethos (credibility and ethics), and pathos (appeal), these three approaches allows for balancing all points-of-view.
Under logos, Mr. Russell spoke about both those fact that are evident (such as improving data and modeling), as well as those established as law and regulation (like Title XIV of the Dodd-Frank Act). For ethos, Mr. Russell highlighted the gulf between real estate professionals and homebuyers and sellers, and the ethical obligation owed to buyers and sellers by professionals. In pathos, Mr. Russell discussed the real-world impact that our homes have on all other aspects of life, and the two sides of the American dream of homeownership.
Carmen Holly, the Supervisory Financial Analyst for the Federal Reserve Board (FRB), gave an Overview and Update on Appraisal Policies at the FRB.
Richard Koss, the Chief Research Officer for Recursion Co, discussed the Importance of the V in LTV. Koss stated, “determining the property worth is something that is highly uncertain since variables can change in a moments notice. Some of these variables include changes in physical environment, regulations, and personal preferences. While we tend to treat LTV as something static, it is a random variable with changing trends.” In addition, this uncertainty has the possibility of spilling over into financial markets.
Melissa Stegman, Senior Policy Counsel for the Center for Responsible Lending, gave the Consumer Focus in LTV. Melissa stated that the consumer is the least knowledgeable about the home buying process and the details of the appraisal. They are making the biggest investments of their lives and relying on others to ensure that the process is fair. As we saw in the lead up to the financial crisis, toxic mortgage products, predatory lending, discrimination, and fraud can create widespread economic devastation.
An example of this fraud that contributed to the crisis includes an appraiser hitting or exceeding a value for money or business in return. In combination with predatory mortgage products, inflated appraisals created a situation where consumers were suddenly underwater on their homes, could not refinance, and were more likely to experience foreclosure. The recovery from the Great Recession has been uneven among communities, with communities of color disproportionately impacted. The Dodd-Frank Act reforms were essential to establishing clear rules of the road and Melissa urged that appraisal standards must not be weakened.
Joe Tracy is the Executive Vice President and Senior Advisor to the President for the Federal Reserve Bank of Dallas. Joe spoke about Price to Rent Ratios and their Impact. Joe stated that current appraisal methods do not identify overheating markets; comparable sales and replacement cost appraisal methods only identify relative price.
The price to rent ratio is a useful tool to identify/signal and address housing speculations such as overheating markets. We can use these ratios to identify problems and potential crises, learn from our past mistakes, and so on for the entire mortgage system to remain safe and sound, beginning with the appraiser.
Jeff Bradford, CEO at Bradford Technologies, presented an alternative to the current GSE Appraisal Modernization initiative. The premise was that the appraisal industry needs to be transformed from a legacy business into a digital business so that it can meet the needs of the 75 million strong millennial generation. In doing so, it will also meet the needs of the GSEs. The definition of a digital business, intelligent supply chain, and steps to accomplish the transformation were presented. A 10 minute video summary of the presentation can be viewed at the link above.
Scot Rose, Chief Innovation Officer for Class Valuation, discussed the Importance of Thoughtful ChangeTM and How Technology Can Play a Role. Rose stated, “We need to adapt to the modern needs of our clients. Some of these include instant results (digital mortgages), mitigating risk, and fostering appraiser independence. The use of 3D property scanning far surpasses the data and transparency of the outdated tools we use today. Embracing the technology is beneficial to improving cycle times and should be seen as something appraisers should grow with rather than fear.”
Rose stated, “When we think about using mobile technology in a bifurcated process, we have a field provider collecting property data, which gets uploaded to the cloud and passed immediately downstream to the desktop appraiser. This is how we can deliver same-day service from the time of the inspection.”
Joan Trice, the founder of the CRN, acted as the moderator. Joan noted in summary, “every single stakeholder needs to get involved. Modernization of the Appraisal Process does not mean change for the sake of change. ‘For every action there is an equal and opposite reaction.’”
Trice concluded, “the concern by many within the CRN is that the primary focus is on fast and cheap. Let’s ensure the primary mission is one of safety and soundness as we forge ahead.”
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