Interthinx: Are Valuations Tempting Fate?

In the current mortgage landscape, valuation can be an adventure, but the right strategies and methods can help ensure quality control. To assist professionals navigating today's valuation concerns, _MReport_ tapped ""Interthinx's"":http://www.interthinx.com/ chief valuation officer, ""Mark Chapin"":http://www.youtube.com/user/ReutersVideo?blend=2&ob=4#p/c/AAEA5C7CC7B65F1B/14/FYd4v5ZTAVs, IFA, for his expert opinion, which we included in our publication's October issue. Today, we're sharing his exclusive article and related case studies, as we examine a critical component of the mortgage marketplace.

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*ARE* *VALUATIONS* *TEMPTING* *FATE?*

I have finally progressed to the point in my life where one of my offspring is experiencing the adventure of higher education; my daughter, specifically, who attends one of the Commonwealth of Virginia's better liberal arts schools situated in the scenic Shenandoah highlands. I couldn├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ót be a prouder dad for a multitude of academic and family reasons. However, another slightly off-kilter one is that visiting her provides me with an excuse to hit the road astride one of my favorite sport-bikes and take in all of that beautiful scenery. If you haven't traversed the Skyline Drive, make time to do it ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô you won├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ót be disappointed. Today however I'm sitting under a bridge waiting for one of Virginia's summer showers to dry up. Yeah, I know the cavalier thing to do is power on through it but why tempt fate? I've experienced what happens when too much water gets under a motorcycle tire and am certainly not anxious to relive that occasion.

Sitting here waiting for drier pavement, I find myself philosophizing about today's mortgage industry and some of the things I'm seeing and hearing. After just three years, are we getting cavalier and tempting fate?

When the market was booming, we abandoned most of our well-tenured conventions and safeguards, consistently lowering the bar until we hollowed the system to the point of failure. The market crashed and we seemingly overreacted by reinstituting those systems with monster truck force looking for perfect where perfect is rarely achieved. Then, after some practice, it appeared that we were well on our way to a balance utilizing those well-tenured conventions leveraged by technology to achieve a reliable result.

But lately, the phone is ringing more and more with conversations that are working their way around to lowering the due diligence bar again, even in the light of continued market maladies and repurchase volumes that are challenging those of arms length sales. Sure, there is a lot of frustration out there. I totally feel it, but here will provide some well worn words from a familiar tune ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô ├â┬ó├óÔÇÜ┬¼├àÔÇ£you don├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ót tug on superman's cape; you don't spit into the wind; you don't pull the mask off the ole Lone Ranger ├â┬ó├óÔÇÜ┬¼├é┬Ø; and you don't mess around with your future in an economy that remains the textbook definition of chaos.
Remember, unlike yesterday, all of our markets are in a state of constant change. Properties, once relied upon to always appreciate, are struggling to simply maintain current value positions.

So, let's look at some of the things that work and don't work in today's marketplace with the idea of instituting non-stifling safeguards that will help to mitigate repurchase issues as we go forward.

*COMMUNICATION*, *REPORTING* *&* *VALUATION*

Many years ago, a gentleman named Harlan Howard, who wrote some of the more memorable tunes performed by the icons of country music, was asked for his opinion of what made a great song. He replied, ├â┬ó├óÔÇÜ┬¼├àÔÇ£Three chords and the truth.├â┬ó├óÔÇÜ┬¼├é┬Ø While that methodology certainly worked for Johnny Cash, Waylon Jennings, and Patsy Cline, the parallel tenant of three ├â┬ó├óÔÇÜ┬¼├àÔÇ£comps├â┬ó├óÔÇÜ┬¼├é┬Ø and the truth has certainly seen its useful end in the residential valuation business.├âÔÇÜ├é┬á

For years, the markets were simple enough that the exhibition of three current, proximate, and statistically similar sales sufficed as support for residential property value. However, as the 2000s rolled around with the onset of creative financing, a new housing boom, and unprecedented overall transaction volumes, this methodology quickly fell short because it didn├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ót encompass or forecast for complexities in the marketplace.├âÔÇÜ├é┬á
Appraisal forms, mostly designed in the 1970s, took a ├â┬ó├óÔÇÜ┬¼├àÔÇ£check the box├â┬ó├óÔÇÜ┬¼├é┬Ø approach to valuation and were too rigid to deal with the pertinent issues of the day. To further complicate things, the sheer volume that the market was generating necessitated a ├â┬ó├óÔÇÜ┬¼├àÔÇ£throw bodies at the process├â┬ó├óÔÇÜ┬¼├é┬Ø approach to staffing.

This approach diluted the level of competency in the valuation and underwriting communities, and the lack of savvy reporting technologies opened loopholes for potentially unscrupulous types to walk through virtually unnoticed with the freedom to bypass sound rules and methodologies.├âÔÇÜ├é┬á

Today's appraisers are faced with challenges on many fronts that require skills well beyond the ability to analyze three comparable sales. From our desks at Interthinx, we see both current and dated loan files and are in the unique position to see what worked then, what works now, and what got folks into trouble.

We see repurchase as a game where your opponent looks for what you failed to mention, something that leaves you open to question, even more than a game of blatantly missed values. From that angle, here are a few tips that we should all keep in mind as we develop new processes going forward.

*ANALYSIS* *&* *REPORTING*
├âÔÇÜ├é┬á
*Subject Property*

*_Physical condition._* As mentioned, properties are struggling to simply maintain position in the marketplace. So the overall condition and marketability of a home is more essential than ever in this age, where no one has a lot of spare cash lying around for fix-me-ups. Know that a deviant will detract exponentially from a home├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós market position in this time when choice is on the side of the purchaser. If there are deviants, make sure the appraiser details both the cost to repair and the impact of the deviant to value and marketability.

*_Compatibility with area/neighborhood._* While tastefully unique properties will still command preferred value in the market, properties that push that envelope or are so unique that their design narrows the overall purchaser group will suffer.

With any of these unique properties, it is important to make sure the appraiser has detailed the expected level of acceptance in the area and defined any discount applied for ├â┬ó├óÔÇÜ┬¼├àÔÇ£weirdness.├â┬ó├óÔÇÜ┬¼├é┬Ø

*_Appeal against competition._* Whether typical or unique, any update, special feature, or performance upgrade will help a subject property├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós chances of commanding premium value in the marketplace. Homes that lack what

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the marketplace interprets as required in a particular housing class will likely require exponential discounts to make them appealing to potential purchasers. Look for comments on the value of updating, especially in gentrifying areas.├âÔÇÜ├é┬á

*Neighborhood* *&* *Area*

*_Ratio of arm's-length to ├â┬ó├óÔÇÜ┬¼├àÔÇ£other├â┬ó├óÔÇÜ┬¼├é┬Ø transactions._* Today├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós neighborhoods contain a plethora of sale types (arm's-length, short, into REO, out of REO, non-arm's-length). Make sure any appraisal provides detail on all of them, especially what is predominant in the area and how value and marketability is impacted if the predominant sale type is problematic.├âÔÇÜ├é┬á

*_Ratio of owner to tenant._* With many neighborhoods selling for half of their former values, savvy investors are, at times, purchasing blocks of homes and sitting on them as rentals until the market turns. Knowing details of this sort are key to forecasting the probability of considerable shifts in available inventory due to an investor liquidation. That may impact the value of the subject property in the near term. Of note is the need to pay particular attention to goings-on in this area in 2012 as the industry is abuzz with talk of ├â┬ó├óÔÇÜ┬¼├àÔÇ£if ya can├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ót sell it, rent it├â┬ó├óÔÇÜ┬¼├é┬Ø in the institutional sector.

*_Ratio of occupied to vacant homes._* The Realtor's vehicle turns a corner with potential purchasers in the backseat heading for a subject property at the end of the block. The purchasers notice that most of the block's homes are for sale or vacant. Are they buying property or thinking that they are in a Stephen King novel? Make sure comments in the file cover the influence of vacancy on marketability.├âÔÇÜ├é┬á

*_Ratio of overall number of listings, their respective exposure times, and trends in both areas._* The mundane checkboxes of old generate a huge number of repurchase requests. Details in the form of comments or perhaps trend graphs from acceptable sources will assist in properly understanding the market and documenting the file.├âÔÇÜ├é┬á

Also, the proper identification of submarkets within an overall neighborhood area (both positive and negative) will assist in showing the primary user or investor details on activity in the form of renovation or the lack thereof.├âÔÇÜ├é┬á

*_Area_* *_Influences_*. It's nice to know the subject is located in a neighborhood close to schools, shopping, and freeways. But it is nicer to know that the onramp to that freeway is next door. Items that are offsite can influence value in both positive and negative ways. Cover details and lock up any and all possible close proximity sales to substantiate subjective adjustments in the appraisal. Detailing now will eliminate head scratching a year or two from now.

*EXAMPLES* *FROM* *THE* *FIELD*

In an interview with CNET, John Carmack, the creator of the action video game, ├â┬ó├óÔÇÜ┬¼├àÔÇ£Doom├â┬ó├óÔÇÜ┬¼├é┬Ø was asked how he kept the game so successful for all of these years. John's response wasn├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ót all that different from what we face in today├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós mortgage market. He makes sure that the bad guy always sneaks up on you when your back is turned. Let's take a look at and learn from a few classic examples of files that snuck up on originators.

Through three key case studies, we can observe valuation challenges that those in the industry are likely to deal with regularly. Review the full reports by visiting the following links via TheMReport.com: ""Case Study One"":https://themreport.com/articles/interthinx-case-study-1-2011-10-21, ""Case Study Two"":https://themreport.com/articles/interthinx-case-study-two-2011-10-21, ""Case Study Three"":https://themreport.com/articles/interthinx-case-study-three-2011-10-21.

*_Case_ _study_ _notations_.* Notice the difference between the file labeled misrepresentation and the file labeled fraud. To call something ├â┬ó├óÔÇÜ┬¼├àÔÇ£fraud├â┬ó├óÔÇÜ┬¼├é┬Ø, the evidence has to be pretty black and white like, in this case, the fabrication of a ├â┬ó├óÔÇÜ┬¼├àÔÇ£sterile├â┬ó├óÔÇÜ┬¼├é┬Ø location map and what appears to be purposely ignoring neighborhood REO and other negative trends. What I want to point out here is that some of the main causes of repurchase can sneak up subtly and wreak havoc long after a file is closed ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô reinforcing the need for good documentation.

*_Critical_ _case_ _study_ _observations_.* While there are no guarantees that every appraisal produced will be excellent, there are practices that can be instituted that form a good safety net.

First, utilize quality appraisers in the process. Just because an appraiser holds a license doesn't mean they are competent. Look for Certified appraisers, especially those that have taken the time to earn designations from reputable institutions such as The Appraisal Institute or The National Association of Independent Fee Appraisers. These institutions require education and testing well beyond that of the federal government prior to awarding their designations.

Second, use one of the many automated tools available in the marketplace today in the initial review. Choose a collateral risk tool rather than just an AVM as it provides insight into market trends as well as value. Better tools also provide MLS listing and distressed property data to help get a more accurate picture of the entire market. Match the solution with the risk present in the deal. If after taking these steps, there is still uncertainty, move on to the services of a review appraiser. Technology linked with the honed skills of qualified appraisers produces the most credible results in our constantly moving marketplace.

*TIPS* *TO* *GET* *YOUR* *MOTOR* *RUNNING*

While there are no guarantees that every appraisal produced will be excellent, there are practices that can be instituted to form a good safety net.

First, utilize quality appraisers in the process. Just because an appraiser holds a license doesn't mean he or she is competent. Look for certified appraisers, especially those who have taken the time to earn designations from reputable institutions, such as the Appraisal Institute or the National Association of Independent Fee Appraisers. These institutions require education and testing well beyond that of the federal government prior to awarding their designations.├âÔÇÜ├é┬á

Second, use one of the many automated tools available in the marketplace today in the initial review. Choose a collateral risk tool rather than just an AVM as it provides insight into market trends as well as value. Better tools also provide MLS listing and distressed property data to help get a more accurate picture of the entire market. Match the solution with the risk present in the deal.

If after taking these steps there is still uncertainty, move on to the services of a review appraiser. Technology linked with the honed skills of qualified appraisers produces the most credible results in this constantly moving marketplace.

Speaking of moving on, the pavement is looking pretty dry at this point. So with a grin on my face and a tip of my helmet, I think it├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós time to swing a leg over this 1400cc rocket on wheels and finish my ride. I wish you good luck and hope that what you read enhances the scenery along the way.

*_About_ _Mark_ _Chapin_*

As Chief Valuation Officer for Interthinx, Mark Chapin oversees all value related activities. His diversified background includes federal government and conventional lending experience, independent specialty valuation experience and decades of marketing, solution development and sales experience in the U.S. and Canada.