Crucial to bringing investors back to the private secondary mortgage market is convincing them of appraisals’ soundness, and there has been a lot of effort on the part of both government and private market entities to make that happen. But confidence—while considerably improved—
As FNC chief analytics officer and co-founder Robert Dorsey has noted, among other things, in order for the secondary market to come back, “the investors are going to have to have confidence in the underlying collateral, the underlying property valuations.
“To do that there’s going to have to be a much more data-centric view of the properties,” he said. “In the past, when they sold mortgage-backed securities, there was essentially zero information about the property itself, so all you knew was what it appraised at and the particular point in time and that it was located in a certain ZIP code. You didn’t know where the house was you didn’t know the specifics of the house. That’s all got to change.”
Dorsey said in an interview earlier this year that he does think progress has been made since then. FNC, for example, has had a data-based appraisal score for several years that it recently obtained a patent for.
When asked if regulation has been a catalyst for recent improvement in appraisal quality, he noted that it has probably played a role. But he added that interest in protecting the value of mortgage-related investments, which has been shown to be vulnerable to home price fluctuations, has also compelled change.
Lenders and investors “used to be able to get out of the house and get out of the loan by simply reselling the property, and even borrowers made that assumption. So if [borrowers] had credit problems...the markets were sufficiently active and values were climbing sufficiently that they were generally able to sell their house without having to worry about default.
“When the market crashed all that changed, and all the lenders realized that they needed to refocus on the collateral...So I think that some of it had to do with regulation but also a lot of it had to do with the due diligence the banks had to do in order to protect other investments.”
Although there has been a lot of regulation, Dorsey said in many cases he feels it has been “essentially re-emphasizing a lot of things that many of the lenders were already doing, maybe it made it more pervasive.”
To achieve a sound appraisal, “You have to look for a lot of things beyond what the regulations require,” he added.
While appraisal processes and due diligence have gotten better, Dorsey said he thinks there is “still room for improvement.” He added that he thinks it is something lenders and other market participants are working on, but also one in which they face operational and cost constraints.
“A lot of lenders are constantly struggling to identify areas where they can improve the quality of their review process,” he said. “You can have an outstanding review process. The only difficulty is it becomes very time consuming and very expensive. So the trick is to have a very good review process, minimizing your risk of loss, and do it in an economical way, and that is a big challenge.”
Automation may help but manual processes and expertise are also necessary, he said. “We have automated ways of reviewing and looking for an awful lot of things in the appraisal. The appraisals are available as data, so that you can actually do that analysis,” said Dorsey. “The challenge, however, is we don’t have an automated way, for example, to look at the pictures and determine whether or not those are the best types of comps for the property.”
Data can be used to help verify manual processes, he noted. It has been used, for example, to check whether or not appraisers assigned by AMCs have the local market knowledge needed to assess values in particular areas.
“One thing we do for our clients is we have roughly 60,000 appraisers using our systems, and we track every appraisal that they’ve ever done across all clients historically. Therefore we know where there’s expertise and we can tell when and if an appraiser is being assigned to a job that is outside where their expertise is.”
Even if the housing market recovers and the emphasis shifts as it has historically back toward credit instead of collateral, Dorsey believes the market will continue to improve the qualitative review process for appraisals. “In my estimation, it is only going to improve over time,” he said.
