The Collateral Risk Network (CRN) met in Sarasota on December 6th to discuss a variety of issues ranging from appraisal turn times to Fannie Mae’s economic outlook for 2023. Bill Rayburn, mTrade, gave a rousing and lively explanation of exactly what quality means in valuation. Lenders want a compliant document that allows the loan package to be sold as quickly as possible, while investors want an appraisal that allows for securitization or resale to another downstream buyer. Appraisers were encouraged to provide convenience as one aspect of quality. His figures show there is a holding cost of $200 per day on an unclosed loan and this hinges on the appraisal which is the last thing in the critical path to closing. He suggested we redefine quality to include a time element.
STRAAMTM Group, Inc.’s President, Tom Winant, and Dr. Alan Jeary, Partner and Chief Technology Officer, explained their process to assess structures. STRAAMTM is an acronym for Structural Risk Assessment and Management. Their name succinctly explains their mission. STRAAMTM has patented a method to assess structures through a quick measurement to gain insight into their capacity. It is delivered in a simple to understand index. The purpose is to provide an objective and accurate measure of capacity for the safety of the public, the investors, and insurers of real-estate. The rating, based on a 100 scale, allows people to understand capacity based on risk of damage as envisioned in the codes. It amounts to a simple health check to assure safety. After the failure of the Champlain Tower, banks and insurers are looking for an understanding of the structure’s physical condition.
Joe Minnich, a condo risk consultant, spoke on how loans secured by an individual unit in a condominium project have greater risk than found in typical SFR lending. Lenders must address the various layers of risk to ensure that the loan is of saleable quality and the likelihood the borrower can/will repay the loan.
Melissa Malpass, attorney for Alston & Bird, and co-author of the paper Appraisal Values and Lender Liability: Art, Science or Gamble? broke down appraisal bias and how to detect it. While the mortgage industry continues to evaluate the nature and extent of bias in the home appraisal process, no one has yet come up with a solution for detecting and addressing it. The article highlights the tension between the purpose and design of the appraisal process and its effect on borrowers and communities of color. In particular, it reviews how a lender can ensure that its loans are supported by adequate collateral while being mindful of potential appraisal bias; what steps a lender can take to eliminate fair lending risk, while working within the current appraisal framework; and how can the mortgage industry work together to eliminate potential bias via conscientious enhancements to the appraisal process? Click here to read the paper in its entirety.
Richard Koss, Chief Research Officer for Recursion, dove into market trends to illustrate waiver usage. The market is showing the decline in residential housing prices, the increase in interest rates, and the fall of housing demand and supply, with demand falling more quickly. He demonstrated how the impact of Hurricane Ian is beginning to be felt. Koss projects that “Mortgage Winter” is a purchase market. He showed how more than 60% of outstanding loans have note rates of 3% or less. The share of purchase loans eligible for a waiver is near the top of a three-year range. The share of loans eligible for desktop appraisals is steady. The share of purchase loans with waivers has risen with interest rates, with Fannie Mae’s share of these being higher. Naturally, waivers are more prevalent for borrowers with strong credit. For Fannie Mae, the share of bank use of waivers is bigger than nonbanks. For Freddie Mac, the opposite is true.
Mark McArdle, Assistant Director of Mortgage Markets for the Consumer Financial Protection Bureau (CFPB), discussed the conversation among Federal agencies around appraisal bias, how to mitigate it, and about their upcoming AVM rule-making. He spoke about how choosing comparables leads to a lot of the issues with appraisal bias.
Brian Montgomery, Former Deputy Secretary of HUD and Partner at Gate House Strategies, started by mentioning what a tough year it has been. In December of 2021, MBA forecasted rates being above 4% – that number seems quaint at this point. MBA estimates 30% reduction of mortgage related employment. This is the result of volumes of purchase loans and refinances falling off a cliff after interest rates more than doubled in a year’s time. The broader economy has been fortunate, thus far, in terms of overall unemployment, which has been near historic lows, and home price appreciation, which has squeezed affordability, nevertheless has provided a lift to many – or at least a cushion, along with a strong incentive for borrowers to keep making payments in order to preserve equity.
It’s that equity, at least for now, that is keeping 2023 from not looking like 2008. There are a number of headwinds such as whether there will be a war in Ukraine, supply chain deficiencies to include microchips and transformers, persistent inflation, and the likely prospect of broader job losses that many experts believe to be a necessity to tame excess spending, a major inflation contributor. We are seeing household savings crater and credit card usage way up, which cannot go on forever. How much has it gone up? At the end of Q3 ’22, Americans had more than $925 billion in credit card debt – $38 billion more than Q2 ’22.
There is some indication inflation has peaked, though again, not conclusive yet. We heard Chairman Powell last week, who has been very intent to signal the Fed will not stop until they break the back of inflation and reduce it to their 2.0% target. This suggests they are ready to moderate the pace of rate increases while they measure how effective recent increases have been in slowing the economy and inflation. The Fed and others expect unemployment to rise from the current 3.7% to 5% next year. MBA estimates 5% unemployment a year from now, with inflation falling significantly, below 3%, and mortgage rates returning to the 5.4% level. But none of this will happen overnight.
For the housing market, one of the key issues continues to be supply. We’re having a lot of challenges. Home price appreciation and interest rates are pricing more and more people out of buying a home but underlying this affordability crunch has been underinvestment. Demand for single family will continue, even as the economy potentially takes a turn for the worse. Seriously delinquent loans are down from the height of the pandemic but are higher than they were before 2020.
Montgomery goes on to say the data is telling us a story right now. Credit card debt, interest rates, and inflation are all up while savings are down. Approximately 345,000 homeowners are still under covid forbearance plans. 156,000 who exited forbearance have now become delinquent again.
The changes in Congress won’t alter the Administration’s strong emphasis on appraisal bias. It seems to be full steam ahead. There is no doubt the racial wealth disparity reflects a legacy of past discrimination and there are lingering effects. Race and equity are critically important issues for our country. We all need to address it head on and with great purpose, because we want to be one country, we all want to live up to the ideals on which our system rests. So, it will be important in the year ahead, arguably more important for this group than ever, to stay engaged, to address the issues, and to ensure the appraisal industry is part of the solution when it comes to fair lending.
Ed DeMarco, President of the Housing Policy Council, Joe Tracy, formerly of the Federal Reserve Board of Dallas, and Joan Trice, President of the Collateral Risk Network, asked key questions related to developing a practical plan for valuation reform and modernization. Should The Appraisal Foundation (TAF) and Appraisal Subcommittee (ASC) be consolidated into a single entity, the New Regulator? If yes, what should the functions be? Should data be democratized and accessible by all stakeholders? Should this New Regulator develop forms/reporting formats or should a nonprofit be responsible? And finally, should all agencies use a standard appraisal process/form/report that gathers the same information? The discussion was opened to the audience for debate. The CRN will be completing a follow up questionnaire to its membership to get input from a wider cross section of the key stakeholders.
Last but not least was Mark Palim, Fannie Mae Vice President and Deputy Chief Economist, giving an economic forecast for 2023. He stated the Fed is raising rates to fight inflation but risks a recession. In times when the Fed has managed a “soft landing,” they were generally moving preemptively. Employment measures have continued to show a tight and expanding labor market, with more than 4 million jobs added in 2022 alone. Purchase managers’ indices (PMIs) and business sentiment are weakening at home and abroad. Consumer confidence, yield curves, and RFI are pointing to an imminent recession. However, look for shelter and services costs to remain elevated. Amid a global slowdown, energy prices have fallen, food prices have flattened, and supply chains have improved, but the CPI calculation has not yet fully captured recent home price growth and the tight labor market may keep wage growth elevated. Most borrowers are “locked in” at low interest rates, creating a financial disincentive to move. Home purchase sentiment hits survey low as respondents grow concerned about home price growth and the direction of the economy. The pace for home sales is now below the 2019 level. The months’ supply of existing homes remains low which is helping to limit price declines. The rising inventory of new homes suggests future discounting but is less relevant to first-time homebuyers. The supply of completed homes is slowly rising, possibly leading builders to begin discounting prices. In the long term, they expect demand for new homes to return as underbuilding since the Global Financial Crisis has created a housing shortage. Home price growth is slowing, and they expect year-over-year growth to turn negative next year. Nearly half of the top 100 metros experienced quarter-over-quarter home price declines in Q3. Mortgage originations are expected to sink further in 2023 but improve somewhat in 2024.
If you’d like more information on the CRN and future meetings, please reach out to Jim Morrison at jim@allterragroup.com
