Of the many plays one can visualize in any football game, the "prevent defense" is one that likely causes some of the most "what the" moments. Essentially, the standard defensive line is abandoned trading rushing for coverage with seven or more players in a defensive back role, the goal of which is to prevent the opposing offense from completing a long pass by ensuring that no receiver can get behind the defense. John Madden preferred the blitz to this somewhat ballet-like play, however many aren't sold on that option because the blitz often leaves holes that can be easily exploited with disastrous results where the prevent attempts to tackle the situation at hand from a more global point of view.
While I will certainly never match John Madden in football savvy, I suggest that we take a lesson from the NFL and apply it to our industry. Take for instance our current residential lending game. Just like a football field where players are required to navigate through an ever-changing environment to achieve their goal, the rules of the day require us to do the same with moving obstacles like cost of funds, multi-layered government regulation, and a liquid marketplace with housing situations that we haven't seen before, all of which invite the unexpected to our respective doors.
A good defense requires respect for the game and a good strategy—one that allows production speed but covers the x-factors well enough so that we are protected throughout our entire “play”, in our case from the onset of a loan through its sale to an investor.
In that the ticket to the game if you will is a qualified borrower, and much more weight than that of yesterday hinges on collateral, I suggest equipping the defense with a good process that looks at value in a number of ways. Like a good game strategist, I believe that the premise of collateral value isn't just a snapshot of what a property is worth at a finite moment in time but rather a more thoughtful look at where the property stands in its marketplace and where its marketplace stands overall. Examining trends in current markets will assist in answering important immediate questions but also aid in protecting your interests as the loan moves through its lifecycle.
Let's begin regulation play. Assess the scoring opportunity. Is there enough value or equity in the property to make the deal? Sure, one could argue over a few percentage points but if the data indicates that you are in a “third-and-very-long” situation, why waste time trying to close a lost cause while at the same time missing a call on a deal that might be a winner?
Once you find a potential winner, throw up a defensive line that doesn't blitz through the process but rather makes sure you have solid collateral value and that you are well protected from any obstacles in the field of play. Acquiring detailed answers to the pertinent questions of the day by utilizing solutions like Interthinx Valueguard will assist you in getting safely down the field. Are most sales arms length, into REO, out of REO, short, or something else? How long does it take to sell a property in the subject marketplace and is that time rising or falling? Are values stabilizing, sporadic, or still down-trending? And, from a purchaser's perspective, is the subject at the top or bottom of the desirability scale? Understanding competition from an active market listing perspective is also imperative today as it provides clarity in markets where sales can be lacking or trends appear to be open-ended.
Just like football has special teams, set up a matrix where risk is assessed and handled based on its potential severity. For instance, a fully electronic tool may suffice when assessing a tract home in a neighborhood that is holding onto stability but fall short or mislead in a specialty, rural, or considerably distressed market situation. When I'm in those situations, I engage my special teams at Interthinx Review Appraisal Services that utilize a certified appraiser whose special touch of hands-on market knowledge will save you in the long run and the documentation added to the file will block fakes or stunts that might trip you up down the field in a potential repurchase situation.
So, imagine Hank Williams Junior belting out “all my rowdy friends” as the lights are coming up over your “field”. You lace up your cleats, jump into position and go for it. The game's afoot and it's time to get out there—be tenacious in process, and cross the goal line a winner!
Mark Chapin is the chief valuation officer at Interthinx.
