Valuations: A Work In Progress
Hope that the country is getting out of the current recession is somehow thwarted by concern about what many insiders see as an immediate problem in need of better solutions: the performance and evaluation of distressed loans.
David DeMello, executive vice president and chief appraiser at Clear Capital, sees changes and a developing trend in appraisals.
"Overall appraisers are expected to do more and report more data. If you look at the 1004 report today it is much longer than it was a few years ago. I don't think that trend is going to stop. Because of the clash of the real estate market professionals from the valuation community are going to be expected to do more and very often to also do it more quickly. "Each time that Fannie comes up with a new requirement the forms change slightly. It's very rarely taking something away."
Due to regulatory changes appraisers are under pressure to produce more supportive and verifiable reports faster than ever before, which requires the use of more data, time-efficient technology and analytics.
"There's greater price pressure as well, since the attitude is: We need it cheaper, we need it faster, we need more data in the report," Mr. DeMello says. "The requirements have not really changed, but typically the deadlines are shorter and if you ask most appraisers their fees have gone down in the last year."
The 1004 residential appraisal report is the most required, standardized Fannie Mae report, while the 1004 MC, or the market conditions appraisal report that became a requirement in 2009, requires that appraisers report on the influence of the REO transactions in their market, whether or not the percentage of the properties that are REOs influences values in the subject neighborhood and if so to what degree.
According to Joe Filoseta of DepotPoint, if there is a new dynamic in valuations it entails solutions that combine collateral intelligence and collateral analytics that provide a traditional BPO product but at the same time create a collateral intelligence report with data analytics that, depending on the case, support or do not support the BPO.
This approach offered by DepotPoint has certain advantages compared to automated valuation models, he said, because the collateral intelligence approach uses real-time data and is not dependent on past sales history. Past history in a market like the current where values are "moving quickly either up or down" is not as valuable.
"You want to know what is going on today. More importantly, you want to know what's going on within 10 blocks of that house.
Real estate-owned property management costs -both short sales and REO transactions - add to the challenge of maximizing the return on delinquent and foreclosed loan portfolios.
"It all relies on how efficient a particular operation is and how precise the analytics surrounding one of the most critical elements of the process that is [asset] valuation. The closer one can come to the right balance between what a property is worth and how long it will take to sell it is a key consideration related to maximizing portfolio value."
REOs influence a market in different ways, Mr. DeMello says, yet most buyers assume that they are sitting vacant, held by the bank, and usually are more neglected, which is not necessarily true. At least on a national scale there is "some real improvement" of REO saturation compared to yearend 2008, he says, a fact that is critical for appraisers to see while at the same time gather all the supporting data.
This year may be a very good year once the market gets to a stage where devaluation is stopped or at least curtailed says the president of MOS Group Inc., Greg Hebner. "If loan values improve, the government has less writedowns, financial institutions need less capital infusion and the whole system starts to recover - and that helps everyone." Among others, he adds, the $4,500 mortgage servicer benefit and the $8,000 first-time buyer tax credit, or factors like low interest rates and federal assistance funds that promote refinancing help the effort to protect home values.
At least these industry insiders agree that from a macro perspective the Obama administration continues to generate new programs designed to facilitate a maximized asset recovery by avoiding foreclosures. Furthermore, from the process perspective the Obama effort has created the conditions for home values to recover even though the industry is still looking at the fine print about how to proceed.
"Even though new underwriting standards are tight, underwriting mortgages still is a very profitable business with a very good spread, very good origination and securitization revenue opportunity," Mr. Hebner says. "Long term, I'm bullish on real estate, but it is not going to be quick and easy."