The Collateral Risk Network (CRN) hosted a virtual Risk Summit on March 16th which had intended to focus on Climate Risk, Fair Housing Risk, and Residential Appraisal Quality Risk.
However, in light of the collapse of Silicon Valley Bank and Signature Bank the weekend prior, our climate risk speaker, Dr. Clifford Rossi, Professor of the Practice & Executive-in-Residence at the University of Maryland, Robert H. Smith School of Business pivoted to provide a breakdown of what happened with these lending institutions and the impact upon housing finance. Rossi was uniquely qualified to address this from his nearly 25 years of experience in banking and in regulatory oversight, having held senior executive roles in risk management at several of the largest financial services companies. Rossi has held senior risk management positions at Freddie Mac and Fannie Mae. He started his career during the thrift crisis at the U.S. Treasury’s Office of Domestic Finance and later at the Office of Thrift Supervision working on key policy issues affecting depositories.
Melissa Malpass, Senior Associate with Alston & Bird covered Fair Housing Risk. Melissa Malpass regularly advised financial institutions on compliance with federal and state consumer financial laws. And we finished up the program with Ken Dicks, MAI, Director of Appraisal Compliance and Initiatives with Reggora, who shared the results of a recent survey completed by a variety of respondents including lenders, AMCs and appraisers.
Dr. Rossi gave us the anatomy of a banking crisis and the implications for Housing Markets. In the case of SVB, on top of having poor risk management, they were in a business catering to tech and venture capital companies, a high risk customer profile. Ninety percent of their deposits were with these types of companies and were uninsured deposits. They had invested in mortgage-backed securities and US Treasury instruments at lower yields than today’s rates. In short, they experienced a liquidity crunch. When the bank started to sell off securities to cover the withdrawals in order to pay depositors, they realized a nearly two billion dollar loss. When the bank went out to get a capital raise, the depositors got wind of the trouble and started withdrawing their funds to the tune of 42 billion dollars in deposit runs in a single day. The FDIC stepped in and said they were concerned about a contagion effect and announced they would cover the uninsured deposits to try to shore up consumer confidence.
Rossi went on to explain what the likelihood is of more banks failing due to similar problems, after all, there does seem to be a buildup of unrealized losses on balance sheets that the FDIC Chairman recently commented on. The build-up of unrealized losses on these balance sheets of banks is significant. He stated the Fed will need to consider the ramifications of raising the interest rate again in light of what has happened with these two banks and others.
Melissa Malpass spoke to the government initiatives including the FHFA “Request for Information” on Appraisal Related Policies, Practices, and Processes and the White House Executive Order on advancing racial equity and support for underserved communities through the federal government. She addressed the initiatives of the interagency task force on Property Appraisal and Valuation Equity (PAVE). There have been several recent developments including the Appraisal Standards Board (ASB) of the Appraisal Foundation releasing its fourth exposure draft of proposed changes to USPAP. The Office of Management and Budget (OMB) released its Fall 2022 Regulatory Agenda indicating that an interagency proposed rule addressing quality control standards for AVMS is expected this Spring. FHA and VA are both taking internal steps to thwart discriminatory bias in home loan appraisals. The ASC held a hearing on appraisal bias where Director Rohit Chopra ended the hearing by articulating the objective that the “lodestar” of appraisals is an appraisal that is neither too high nor too low, but rather is accurate. Malpass gave an overview of lawsuits in federal courts that are garnering attention. She went on to expound on the Fair Housing Act and Equal Credit Opportunity Act which establish a legal standard for discrimination claims and liability. This led to a discussion on fair appraisal best practices for lenders and AMCs including fair appraisal risk management for lenders and fair appraisal monitoring for AMCs. The takeaway is that bias or discriminatory practices in the appraisal report are still being closely monitored by all the key mortgage stakeholders which means we’ll be seeing more in the way of oversight on these issues going forward.
Prior to the Risk Summit, Ken Dicks developed and launched a Residential Appraisal Quality Survey which was distributed to AMCs, lenders, appraisers, and other valuation professionals. The objective of his session was to review the Appraisal Quality Management (AQM) program of the Fannie Mae Risk Management Program, review Appraisal Quality Survey results, and invite open discussion about AQM interactions with appraisers. The main takeaways were that repurchase/refusal and demand for post-closing high-risk appraisal reviews are relatively low. The top three deficiencies cited in Appraisal Quality Monitoring processes are Condition & Quality Ratings, Comparable Sales Selection (physical attributes), and Market Conditions. Messaging is also being sent regarding the heightened risk of bias in the reporting of the appraisal results. And, while automated appraisal risk scoring systems are widely used, there is a disparity in perceived effectiveness. The intended users indicate appraisal quality has improved as a result of risk scoring systems, appraisal providers are less convinced. Support for a standardized approach to identify discriminatory practices is expressed by a majority of the AMC, lender, and other respondents, and split among appraiser respondents.
For those of you who are not familiar with the CRN, it is a non-profit, whose mission is to instill confidence in the housing market by creating an environment that promotes safe and sound collateral risk practices, policies, and procedures under all economic conditions through education and collaboration. A vibrant housing finance system is at its best when it works for all stakeholders. Their core values are transparency, integrity, and independence. The CRN has a holistic focus, bringing all stakeholders into our organization through various boards, committees, and councils necessary in order to build a dynamic and sustainable model.
If you have any questions, please contact Jim Morrison at Jim@CollateralRisk.org.