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Predictive Methods: Reconciling Appraisal Outcomes

*Reconciling Appraisal Outcomes*
**By William E. King**

***It is common for lenders to get several valuations for a single property to ensure an accurate determination of value. These valuations need to be reconciled into a single, overall property valuation that will become the basis for the lending decision. Reconciliation is a method by which an appraiser or reviewer concludes a final, well-supported valuation of the property.

****In today’s environment of The Dodd-Frank Act, UCDP, and CFPB, managing appraisal outcomes can be challenging. Chief appraisers need to “see through” appraisal reports and challenge or dismiss valuations that aren’t well supported. In light of the highly regulated landscape, this requires greater objectivity than ever before.

****Key challenges that tend occur in reconciling estimations of property value include:

****>> Appraisal Reconsideration: If the property value is deemed unjustified by the owners or loan officer, an appraiser can be approached to reevaluate the value to determine if something was inadvertently excluded from the appraisal. Although rare, third parties will sometimes claim the property was over-valued given the comparables in the neighborhood.

****>> Avoiding Undue Influence: By definition, an appraisal is an unbiased opinion of value. USPAP requires that 1) an appraiser have no bias to the property; 2) appraisal results not be contingent on a predetermined result; and 3) the appraiser’s compensation not have any bearing on the outcome. Dodd-Frank has helped reduce undue influence on an appraiser, however, pressure does still exist.

****>> Mitigating Rep & Warrant Issues: When faced with a buy-back situation, one of the first areas of focus is the appraisal to ensure that it conformed to GSE appraisal requirements. If not, lenders may be faced with repurchasing a loan and dealing with the foreclosed property directly. Due diligence in appraisal review at loan origination, including reconciling multiple valuations can go a long way in preventing Rep & Warrant related buybacks.

****>> Managing Loss Severity: It is important that a property be correctly valued to minimize loss severity in short sale and REO situations.  Multiple valuations and a thorough reconciliation of those values can save lenders from more significant losses with defaulted/foreclosed properties.

****Many tools and practices are available to help ensure a higher level of accuracy and gap management in arriving at a property valuation conclusion. Thorough appraisal reconciliations must be supplemented with appropriate analytic tools. It is incumbent on lenders, whether through an AMC or direct panel management, to ensure the quality of the vendors utilized. AMCs derive their value through quality reviews and it is important for them to focus on the factors that really drive support for the value opinion. This topic will be discussed by a variety of industry experts in more detail during a panel at the 2012 Predictive Methods Conference June 4-6 in Southern California.

Predictive Methods: Using Data To Fight Mortgage Lending Fraud

*Using Data to Fight Mortgage Lending Fraud*
**By Chuck Rumfola**

***Mortgage loan fraud has always existed in the housing industry.  Unfortunately, many have either perpetrated mortgage fraud or fallen victim to it. This has happened in all economic cycles.  According to The Treasury Department’s Financial Crime Enforcement Network (FinCEN), instances of mortgage loan fraud spiked from 9,539 cases in 2001 to 93,564 in 2011. Given the prevailing need for awareness the industry is taking steps to combat fraud early on in the loan lifecycle. The industry must continue to fight this threat using a variety of increasingly sophisticated intelligence and tools that are more readily available to industry professionals than ever before.

****The Risk Takers

****There are many risk takers in the mortgage finance system that ultimately bears the weight of a fraudulent scheme. Credit guarantors play a critical role in uncovering fraud by having access to important loan data. Historically, loan-level data had not been leveraged by credit guarantors until long after the loan had gone bad. Discovering misrepresentations in the valuation for the first time at this stage is of little to no help – the damage is done. As we have seen, the absence of proper risk management has resulted in higher default rates that have left the taxpayer with a significant bill. Given this, the mortgage industry is moving toward a process where loan-level data will be used and analyzed during the loan manufacturing process, well before the loan closes and funds change hands.

****Fraud Solutions

****Electronic appraisal delivery initiatives and appraisal scoring are two solutions that can be used to help detect fraud in its early stages.

****Mortgage originators are using automated appraisal scoring tools to immediately review and evaluate appraisal data. This enables the originators to manage the collateral risk prior to the loan closing. These automated tools provide lenders with more confidence in their lending process as well as minimize the repurchase risk down the road.

****Similarly, the electronic appraisal delivery initiatives, mainly used by secondary market participants Fannie Mae and Freddie Mac, require appraisals to be delivered in MISMO-compliant electronic format during the loan manufacturing process and prior to the loan delivery. These agencies have positioned themselves to check, analyze and evaluate appraisals electronically in order to identify appraisal-related mortgage repurchase candidates before the mortgages are securitized.

****Combating mortgage fraud will continue to be a challenge for all industry professionals. There must be an effort by all to stop fraud through the use of sound and reliable tools and data. While this column spoke at a high level of early detection of lending fraud, the topic clearly warrants a deeper dialogue.  Be an active part of this discussion at the 2012 Predictive Methods Conference June 4-6 in Southern California and hear other industry experts present their ideas and vision for collateral risk management.

Predictive Methods: UMDP Post Mandate

*UMDP Post Mandate: Signals for Current and Projected Industry Change*
**By William E. King**

***The 2008 financial and housing market crash exacerbated the need for greater accountability and transparency in gauging the risk inherent in a property, and cautioned investors not to limit focus to consumer risk alone. As the economy grappled with the ramifications of the crash, there is no doubt that significant change was necessary for the U.S. finance and housing system to effectively recover.

****A major change came in the form of the Uniform Mortgage Data Program (UMDP) and its core initiatives UCDP, UAD and ULDD. UMDP was created by the government-sponsored enterprises Fannie Mae and Freddie Mac (GSEs) under the direction of their regulator, FHFA, to enable the GSEs to capture consistent data, drive improved loan quality and manage risk effectively. It does so by developing and implementing uniform appraisal and loan delivery data standards, and a joint appraisal data delivery system allowing the GSEs to evaluate clear and meaningful data about the property pre-delivery, which had not been previously available.

****This initiative marks the first time in recent history that an effort of this magnitude has been implemented to reform the U.S. housing finance system. The scope of UMDP marks a cornerstone for success in continuing to positively evolve the U.S. finance and housing markets. It calls to mind such noticeable housing system shifts as the creation of the GSEs themselves or the subsequent creation of the mortgage-backed securities market.

****March 19, 2012 marked a significant milestone as UCDP was effectively implemented, requiring all lenders to electronically submit UAD-compliant appraisal reports for conventional mortgages delivered to the GSEs. This effort took just 22 months from introduction to mandate, which equates to moving mountains in the mortgage world in a relatively short timeframe, especially when one considers the vast and fundamental changes which had to first take root. Beginning with the process of information gathering and working with appraisal software providers and educating appraisers and lenders alike, it is clear the change was significant and one can only assume has come with a unique set of challenges.

****The current discussion is centered on how this change, now fully implemented, will evolve within the GSEs and how the lenders and other affected appraiser/appraisal service providers will adapt their business to maximize the benefits intended under UMDP. Questions remain such as, “As the industry moves toward total adoption of XML, will PDFs continue to be relevant;” and “How will the availability of standardized data in such greater quantity impact the way the mortgage industry moves toward recovery”? These questions and others prevailing in the industry all seek to encourage the further understanding of UMDP and its core initiatives as the industry forges ahead. Join us at the 2012 Predictive Methods Conference June 4-6 in Southern California to discuss UMDP’s implementation and projected evolution in greater detail.

Understanding The News: Some Good Market News

*Some Good Market News*
**New Data Emerges**

***Veros Real Estate Solutions has released its VeroFORECAST real estate market forecast for the 12-month period from March 1, 2012 to March 1, 2013. The quarterly report shows that the recovery in the housing market is forecast to accelerate. The national home price index (HPI) forecast improved significantly from last quarter’s 1.3 percent depreciation to this quarter’s slight depreciation of 0.85 percent. Here’s the scoop:

****VeroFORECAST shows fewer significant drags across an increasing number of markets, many of which are beginning to emerge with initial signs of appreciation for the first time since the market’s decline. On a national level the gradual recovery in house prices is finally forecast to start accelerating, although the forecast projects the recovery to be market-by-market with not all areas expected to do well. Unemployment and housing supply remain key discriminators between the top and bottom 10 markets.

****Phoenix is predicted by VeroFORECAST to be the top performing market with a forecasted five percent appreciation. Its revival is based on the drastically reduced housing supply, great affordability and low interest rates. Also creating demand is Phoenix’s 7.9 percent unemployment rate, which is less than the national rate of 8.3 percent.

****For the third consecutive quarter, Bakersfield, Calif. stands at the bottom of the housing market with depreciation of 6.3 percent, which is a slight improvement from 6.8 percent in the previous quarter. Unemployment is at 14.3 percent and although housing inventory is coming down, the market is still experiencing a high rate of foreclosure and mortgage delinquency which continues to keep the pressure on pricing.

****The strongest areas in the United States can be still be found in the Great Plains, including regions in North Dakota, Texas, South Dakota, Nebraska, and Louisiana. Housing markets that continue to perform well and see improvement include regions in Washington D.C., Hawaii, and Alaska. Although not ready yet ready to crack the top ten, hard hit housing markets in Florida are starting to see signs of appreciation.

****Inland California and Nevada markets make up seven of the top bottom 10 markets. Recoveries in these areas will be a long time in coming due to extremely high unemployment rates that vary between 11 and 16 percent, as well as high foreclosure and mortgage delinquency rates. Additionally, Chicago, Philadelphia and Seattle are three big cities not expected to fare well in the next year.

Market Analysis: You Got To Have Fun

*You Got To Have Fun*
**By Tony Garritano**

***I want to start today’s column by saying that I am not a football fan, but when I got this today I could not resist sharing it because I know a lot of people love football. Veros Real Estate Solutions (Veros), a collateral valuation technology, enterprise risk management, and predictive analytics provider, said that it can’t predict whether the New England Patriots or the New York Giants will win Super Bowl XLVI on Sunday, Feb. 5. However, its real estate market forecast tool, VeroFORECAST, can provide some insight into the housing market where the stadiums for each team resides for the coming year, ending February 1, 2012. Here’s the story:

****New England Patriots

****Gillette Stadium, home of the New England Patriots, resides in Foxborough, Mass., approximately 21 miles southwest of downtown Boston. VeroFORECAST foresees a relatively stable and flat market with only 0.7 percent depreciation forecasted for the Foxborough area over the next 12 months due to favorable interest rates. Housing supply is currently down by more than half from the peak of the housing crisis and unemployment rates are in the mid six-percent range, which is better than the national average at 8.7 percent. Thus, there is not an expectation of significantly depressed housing prices.

****New York Giants

****MetLife Stadium, home of the New York Giants is located in East Rutherford, New Jersey and is the most expensive NFL stadium ever built, as well as the largest stadium in the NFL in terms of permanent seating capacity. A part of the New York Metropolitan area, East Rutherford is forecast to see depreciation during the next year of 3.6 percent in its market. Housing supply has remained constant for an extended period of time without significant declines. The unemployment rate has stayed near the national average, previously stated to be at 8.7 percent.

****As host city to Super Bowl XLVI, Indianapolis’ housing market is forecasted to appreciate 0.9 percent in the coming year. The market did not experience the big run up in prices associated with many other still struggling markets and housing supply overall appears healthy. Affordability here remains steady with the unemployment rate hovering around the national average. Thus the outlook for home prices looks positive for the future with no significant upward or downward pressures.

****Veros’ most recent VeroFORECAST for the national housing market for the 12-month period ending December 1, 2012 can be found in the company’s online newsroom.

****What a hoot. There’s great information here. I hope you enjoyed this as much as I did.