Ever look at the word analogy? It’s an interesting word that isn’t directly used all that often but its meaning is a mainstay of American chat and storytelling. I’ve always had a number of analogies to share over a good glass of wine but I think the one that gets the most grins as of late is looking at our industry as analogous to action video games like Doom or Halo in that “things will always attack you when your back is turned.”
Let’s take a look at the recent go forwards in the mortgage business. We eradicated spectres, Cacodemons and Arachnotrons by passing the all-encompassing Dodd-Frank financial reform bill thus placing a new era prohibition on the alleged reckless and lackadaisical practices of the early 2000s. The bill is designed to ferret out all of those lacking practices and redundancies of the past and create new more effective practices and redundancies so the economic crash of 2008, and the mid-1990s, uh—and the mid-1980s—would absolutely not happen again, or at least until the public turned its back and…hmmm.
And, while I do think that the bill illuminates a reasonable amount of problematic issues in our industry, it lacks, shall we say, an instruction manual on how to execute many of the new practices and redundancies thus allowing some of the creatures of the netherworld to survive waiting for the right time to return.
My corner of our world at Interthinx concentrates on helping companies prevent, or at least mitigate, fraud in the valuation space of their daily business practice. In the past couple of years, Interthinx has also assisted in the reparation or disposition of deals that were wrought with fraud. So, we’ve seen a good bit of what folks are capable of in the name of the almighty dollar. The good news is that in the aftermath of the latest Armageddon, it appears that all of us are now more concerned about not getting burned by those fraudsters whose sole job is to find loopholes in our business practices and exploit them. The precarious news is that, just like the creatures in the aforementioned video games, fraudsters continue to invent new ways to termite into our professional lives.
So, let’s look at a few suggestions that will assist in keeping your guard up.
Choose a weapon that provides adequate recon to make informed decisions both on the front end and throughout the processing of your deal. Interthinx Valueguard is a tool that provides a myriad of helpful data elements, easy to understand alerts that illuminate potential problems, and multifaceted analytics and intelligence on fraud and factors that influence markets, allowing you to cross reference factual data and know where your collateral stands in comparison to its competition. In that overall activity has been stifled for a couple of years now, knowing the real story about any sales volume that occurs is essential in understanding how valid an estimate of value really is.
Work through each case scenario with the diligence this market deserves. Your “weapon” will provide you with tools. However, it’s not enough anymore to simply rely upon a score from a model. From a valuation standpoint, we see less diabolical fraud and more fraud from negligence creeping up as of late. A few examples to watch out for are:
Ignored market factors such as the influence of oversupply, REO and short sales on value, and the propensity for value to remain at least stable for a defined period of time.
The mishandling of the influence of competition. While historical sales were the mainstay of the valuation industry for years, it is imperative to consider active listings in your subject’s marketplace as the “now” is actually more indicative of current trends than the “then.”
The missing of submarkets, positive or negative, in a marketplace. Is there an area that is doing better than the bulk of a neighborhood? How does that influence your property?
Boilerplate commentary. With the new awareness of customary and reasonable fees, appraisers should provide insightful narrative comments for each report. Reading that the subject is in a nice neighborhood near shopping, traffic arteries and places of worship is good. However, not reading that the subject is next door to an active landfill isn’t.
Be realistic. Sure, we all want the growth we saw in 2003 to 2006 and, knowing the durability of our markets and way of life I feel we will see it again, but for the present use ample amounts of pragmatism when assessing your deal utilizing an approach that most of our folks taught us, “if it appears too good to be true, it probably is.” None of us wants to be the poster child for “what not to do.”
Our industry will survive and prosper. However, the decisions we make and measures we take to initiate best practices now will be the difference between making it through the maze of the near future or having something sneak up and attack us when our back is turned.
Mark Chapin is the chief valuation officer at Interthinx.
