Magazine article Mortgage Banking

At the Late Night, Double Feature: As We Move Forward out of Yet Another Real Estate-Related Catastrophe, Will We Come Up with a New Script for Innovative Valuation Methodologies, or Simply Revisit Old "Plots" to Pacify Our Audience?

Magazine article Mortgage Banking

At the Late Night, Double Feature: As We Move Forward out of Yet Another Real Estate-Related Catastrophe, Will We Come Up with a New Script for Innovative Valuation Methodologies, or Simply Revisit Old "Plots" to Pacify Our Audience?

Article excerpt

OK, I admit it. I love old movies--especially those that pushed the envelope for their time, with characters brought to life by actor talent rather than computer enhancement, and scripts where little more than the spoken word would stimulate the senses or make you laugh out loud. Don't get me wrong--I certainly enjoy the off-the-charts cinematography of today, but find much of what we produce now is just another take on one of yesterday's greats. * After hanging around the mortgage industry for better than a quarter-century, specifically playing in the valuation and collateral risk space, I feel like we are currently living through a sequel of a bad movie that comes around every decade or so called We All Drank the Kool-Aid[R]--a blockbuster, if you will. * As of this fall, we're in the scene where there is endless pontification on the topic of "who is to blame," with a new character, known as Dodd Frank, entering from Stage East (er--Washington). While a complicated personality, the character leaves us wondering if the events of the past two years or so made enough of an impact on all of us to stop talking about true responsibility and start practicing it--like, say, the riveting conversation between Janette Scott and Kieron Moore in the 1962 film The Day of the Triffids, where they explore irresponsible science gone way wrong. Under the heading of true responsibility, let's look at collateral valuation for a moment. In today's very liquid single-family environment, how do you feel about the residential appraiser's ability to deliver an accurate, comprehensive depiction of the value and marketability of residential property?

[ILLUSTRATION OMITTED]

When banks ended up with thousands of real estate-owned (REO) properties that were worth only a fraction of what the appraisals in the original loan files said they should have been worth, everyone wanted to know what went wrong.

The Home Valuation Code of Conduct (HVCC), implemented by the government-sponsored enterprises (GSEs) as part of a settlement with the attorney general of New York, was supposed to be a holy grail that would solve the problem of bad real estate valuations being used in the mortgage loan underwriting process. After living with the sometimes very confusing outcome of that action (now supplanted by the Dodd-Frank Wall Street Reform and Consumer Protection Act), evidence suggests that HVCC didn't solve the problem. An analysis of fraud-risk data compiled by Interthinx in the company's quarterly Mortgage Fraud Risk Report indicates that the risk of valuation fraud actually increased during the time that HVCC was in effect (see Figure 1).

[FIGURE 1 OMITTED]

Additionally, mortgage servicers are seeing high variances among original appraisals, broker price opinions (BPOs) ordered during the default process, and the final appraisals ordered for REO purposes. Sure, some of that gap is due to the fact most of our markets have fallen as flat as the trucks crushed under Godzilla's feet. But there may be something else going on. Are some of the indexes pointing out flaws or antiquities in the process itself? I think maybe so.

Traditionally, appraisals have been performed a lot like old Harlan Howard songs, utilizing "three comps and the truth," where the truth is what a buyer is willing to pay for a property supported by historical sales evidence. During the latest lending boom, buyers were incentivized to pay more for properties than they were actually worth due to hollow inflation caused by "creative" lending that tilted the scales of supply and demand. The idea of leveraging also placed buyer groups into higher-value real estate than they could actually afford in the long run, fueling the inevitable adjustment that was to come.

Today's appraisers can provide a comprehensiveof the value and marketability of a property by leaving the "three comps and the truth" scenario behind and embracing a global examination of the market. …

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