Q: How would you categorize the state of today’s appraisal scoring efforts?
Charles Rumfola: In many ways, appraisal scoring is a new frontier for lenders, one where the true benefits have yet to be fully explored and appreciated. Appraisals have been scored for quite a long time in one way or another, but scores were generally not an indication of the valuation’s accuracy so much as they were a measure of completeness and compliance with required field data standards.
It was clear, however, that appraisal scoring tools could do much more to reduce risk and accelerate decisions in the lending process, not unlike the way credit scores have served those purposes for over a generation. In a collaborative effort by many in the industry, the UAD, or Uniform Appraisal Dataset, was created to standardize the information contained in the appraisal report. The UAD paved the way for the digital initiatives that followed, including the development of advanced appraisal analysis.
The valuation industry, and specifically Veros, is now applying more scientific approaches in order to come up with scoring technologies that truly deliver on the concept’s promise. Our VeroSCORE product is the latest achievement in that effort.
Q: How can investors regain confidence through improved appraisal scoring solutions?
Charles Rumfola: Appraisal scores that are thorough and granular, created and delivered by a qualified and impartial third party, bring a great deal of transparency for investors. Unlike previous appraisal scores that were overly simplistic, the new generation of scoring tools explores multiple relevant dimensions of the valuation process, with detail that truly brings light to how the appraiser arrived at the value estimate, adding greatly to investor confidence levels.
The familiar dimensions of completeness, to make certain no necessary fields are left out, and compliance, to ensure that data is in the correct format, are a given. The addition of the more critical dimensions of credibility and complexity, pioneered by Veros, make the advanced scores truly useful for lenders and investors alike.
Veros’ credibility scores assess the quality and applicability of the data used throughout the appraisal report, along with measurements against reliable data sources regarding fine details on the comparable sales used in the valuation. Our complexity scores look at the degree of difficulty involved with the particular appraisal, scouring data for unusual property characteristics and other elements in the transaction that affect the challenges the appraiser had to deal with in coming up with the value estimate.
These elements give investors the ability to drill down, bringing new capabilities for informed investment while summarizing with numerical scores as a guide for decision-making. This extensive scoring ability has not been available to the industry until recently, with VeroSCORE.
Q: How are the FHA and the GSEs using digital appraisal submission technology as part of their operations?
Charles Rumfola: The GSEs are using electronic appraisal submission for all the loans they buy across their entire operations, and FHA’s adoption is under way. This is a major improvement, as before the creation of the UCDP (Uniform Collateral Data Portal) and FHA’s EAD (Electronic Appraisal Delivery) portal, everything was analog and valuations were not analyzed prior to loan submission.
The creation of the UAD was a milestone, but it needed the portal in order to begin to realize its full potential. When you create policy in business or government, you need a means to enforce that policy in order to make it effective. The portal accomplished that, and with digital submissions now the standard procedure, the agencies have the ability to perform multiple analyses to root out appraisal concerns before they accept complete loan files. Transparency is enhanced, repurchases are reduced and risk control is improved.
Veros was very pleased to have been selected to build and operate these portals by the GSEs, and to have been similarly selected to build EAD for FHA. The result was an important milestone for Fannie Mae, Freddie Mac and the industry they serve.
Consider for a moment what this technology has led to. Digital submissions, first of appraisals and later of complete files, have had many positive implications, not the least of which is the most pristine portfolio of quality loans in the agencies’ history. Transparency is at its height, and the GSEs are seeing increased quality and have reduced their reps and warrants requirements. The discussions are shifting toward evolving the GSE model rather eliminating it altogether, particularly since there is no obvious replacement at hand to provide liquidity for housing.
Conversations at this year’s MBA Secondary Conference centered around what it will take to bring private money back to mortgage investments on a large scale, and whether it can even happen. We believe that it will take many things, including greatly increased transparency for investors in the process. A private sector version of the UCDP and the EAD is an obvious start to creating the needed visibility into loan quality and it is one that is not difficult to achieve since the technology is in place.
Veros’ technology has touched nearly 18 million loans through these portals, and the approach has clearly proved itself sustainable and beneficial. Once the spreads increase sufficiently for RMBS to become more economically attractive, private investors will require an industry standard for appraisal and loan file submission, very much like that currently available to FHA and the GSEs. We are already working on making that happen.
Q: The appraisal process has been under criticism for being too subjective. How can technology reduce the level of subjectivity in appraisals?
Charles Rumfola: The short answer: through science and data. We have been in a data-rich environment for years now, following an era where data was in short supply and we lacked the benefits of the UAD. But having so much of it means the quality and veracity of the data has to be questioned and closely examined. Creating analytics that can help understand, interpret and validate data is part of the solution for making valuations more objective, along with a thorough understanding of the appraisal process.
Appraising is inherently subjective and that’s not a bad thing, since you want an appraiser’s local knowledge and years of experience brought to bear in the process. At the same time, you want to make certain the appraiser interprets the data available in a fashion that plays to his or her professional strengths and doesn’t result in a valuation that is inadvertently influenced by flaws in the information they are using.
Technology has the ability to look at tremendous amounts of data quickly and pick up on trends, probabilities and anomalies. The portal technology has enabled the GSEs (and soon FHA) to look at 100% of the appraisals pre-purchase and make informed decisions, resulting in better risk management and more accurate valuations.
Applying the right technology helps reduce incorrect assumptions and empowers users to make stronger, more supported decisions. This is what our next-generation appraisal scoring technology is designed to do, reducing risk for all parties involved, from originators to investors, whether public or private. In the final analysis, it takes great science to produce great results. That’s where we focus our efforts.
Veros is online at www.veros.com.
Phil Hall has been (among other things) a United Nations-based radio journalist, the president of a public relations and marketing agency, a financial magazine editor, the author of six books and a horror movie actor. Also, as you will discover, he is not shy about stating his views.