David Rasmussen is senior vice president, operations, for Veros, a provider of risk management and collateral valuation services to the real estate industry. MortgageOrb interviewed Rasmussen to find out how new regulations will affect the valuations industry in 2014 – and how valuations services providers are reacting to those changes.
Q: What were the top factors that shaped the valuations industry in 2013, and what do you think will be the top factors that will shape it in 2014?
Rasmussen: 2013 was a strong year for electronic data valuation. The valuation industry was significantly re-shaped by the mainstreaming of the Uniform Collateral Data Portal (UCDP) that was mandated in 2012, but which ramped up during 2013. Its importance to the industry going forward really can't be overstated, as it not only highlighted the appraisal as the key document in the loan file, it also led the way to completely digitized submissions for both Fannie Mae and Freddie Mac. In doing so, it created a standard for the entire industry going forward.
The UCDP, which Veros built and operates for the government-sponsored enterprises (GSEs), is an initiative focused on using standardized electronic loan-level data that improves the quality of valuations and gives investors a pre-loan delivery look at the underlying collateral. The transparency this brings to the industry and the ability to analyze the wealth of information in the appraisal report is the foundation for a newly revitalized investor environment.
The Uniform Appraisal Dataset (UAD) is part and parcel of this effort and has been adopted broadly across the industry, bringing much-needed standardization to the DNA of the appraisal itself. Once in digital form, the individual data elements are made available to many forms of automated analysis that benefit investor decision making and influence strategies, increasing the industry's access to capital over the long run.
In 2014, we will continue to see electronic data on lending's main stage. We will see others adopt this portal appraisal submission strategy and the vast majority of the mortgage industry delivering into digital portals where standardized data can be put to work for the benefit of the industry and the economy as a whole.
The Consumer Financial Protection Bureau (CFPB) is among the mortgage business' top concerns for 2014, with quality mortgage (QM) implementation already upon us. Among the requirements is Regulation B, which affects transparency in valuations and requires a copy of the appraisal and all other valuations used in the mortgage process to be shared with the borrower at no charge. Time will tell how this affects the lending process, specifically how and when any form of valuation occurs. It will most likely limit the number of valuations that take place on a typical loan, which may further restrict lending abilities and strategies.Â
Regulation B should also encourage more lenders to seek greater control over their appraisal efforts in 2014. Lenders see new risks in handing over the entire valuation process to appraisal management companies (AMCs) in order to comply with appraiser independence standards. Fortunately, valuation management technology has become highly sophisticated over the past few years, and lenders can manage the entire process and lower costs at the same time.
The best platforms allow lenders to use their own appraisers, independent appraisers or multiple AMCs as they prefer. At the same time, they get performance analytics, quality control (QC) checks, automated ordering and delivery that remove the need to have large staffs to do the work. Veros' Sapphire and other valuation management systems aid in compliance and automate the processes around submission to the GSEs through UCDP, demonstrating how technology has stepped up to meet emerging needs for the lending community.
Q: There has been an explosion of ‘general data’ (beyond property data) in recent years that AMCs can use to arrive at more accurate valuations – whether for appraisals, broker price opinions (BPOs) or automated valuation models (AVMs). At the same time, the industry has had a ton of state and federal regulations heaped onto it in recent years that attempt to standardize appraisal, BPO and AVM methodologies. Are AMCs and their technology partners constrained by the new regulations as to which ‘general data’ sources are acceptable in arriving at accurate valuations? If not, then how does the freedom to mix and match different general data sources (which, for some, could be an important competitive advantage) intersect with the recent mandates for standardization and greater transparency?
Rasmussen: That's a complex question that includes some apples and oranges in the response. There has indeed been an explosion in data sources over the last decade. In the past, AVM providers and appraisers were pretty much limited to the mainstream public residential data sources, but that's no longer the case. AVMs are able to leverage broad national data sources and more localized and/or specialized ones, providing the opportunity for the best AVMs to achieve relevance and higher degrees of accuracy that were elusive before. At the same time, it means that lenders must also test the AVMs they use for the results they provide in order to meet transparency requirements of various regulators. Veros and others provide a mechanism to address these requirements in cascade comparisons and accuracy measurements that address the various strengths and weaknesses of both data sources and AVM methodologies with objectivity.
The regulations affecting appraisals, such as the Home Valuation Code of Conduct and the Federal Housing Administration rules, have brought about a measure of standardization in the sense that AMCs are more involved than ever in making sure appraisers are properly licensed and have the geographic familiarity they need to provide proper valuation quality. Though not a regulation per se, the UAD is a requirement that makes valuations more transparent and more readily analyzed.
The ways AMCs and their technology vendors differentiate themselves include cost, but are more about service levels – ease of use, ordering automation, turnaround time, accuracy of valuations under automated and human scrutiny, and conformance to standards required for GSE submission. The industry is far from homogenized, as these variables provide a great deal of differentiation. Veros is neither an AMC nor directly affiliated with one; therefore, the Veros Sapphire valuation management platform provides an element of objectivity so our integrations with AMCs and appraisers provide consistent and impartial QC analysis on all appraisals that come through the system. This is one of the ways Sapphire works differently from some of its competitors. All of these efforts ultimately provide greater "hands on" transparency, as regulations and policies surrounding valuations increasingly require.
Q: In your opinion, are recent state and federal regulations stifling innovation in the valuations industry (for AMCs, technology vendors, or both), or in fact, driving it?
Rasmussen: Any required change to the status quo is meant to shake things up and therefore requires new process and procedures. The regulations are driving the industry to innovate and to create standards. Look at the Mortgage Industry Standards Maintenance Organization (MISMO) as an example.
The industry-wide standard gives everyone in the space a common ground for submission, reporting and evaluation of risk for investors, all of which are needed to bring private capital back to mortgages. Everyone benefits, from the GSEs to lenders, servicers and providers: Appraisers and technology vendors benefit in efficiencies they find in using, storing and maintaining data on a common standard. Lenders reap tremendous benefits when other parties present standardized data, especially given the thousands of vendors the industry deals with on a daily basis. QC checks are improved, as the tools have common language to build from, and there is a standardized baseline when lenders mark-to-market. Secondary marketers understand what they are buying before transactions execute when standards are in place.
Technology is demonstrating a continuing commitment to innovation, as illustrated in the valuation space by appraisal scoring tools that have now far surpassed their original role as mildly helpful adjuncts for appraisals. Tools like VeroSCORE can conduct upfront checks as the report comes in and address key issues automatically, while the report is in the queue waiting to be reviewed. Scoring tools can look at more complicated aspects of the report and provide insight as to whether concerns are present that merit manual scrutiny, or if a specialty reviewer is required. They can also provide supporting data for the loan file and have the capacity to validate information in the appraisal against outside data sources. That is innovation directly driven by the regulatory environment.
Q: It's been said many times that no two appraisers ever give the exact same valuation for any given property. Given the aforementioned explosion of data and regulatory push for greater accuracy, in addition to advancements in technology, would you say that appraisals are truly less ‘subjective’ than in the past? With increased data and advanced analytics, is the ‘accuracy gap’ of appraisals closing (and if so by how much)? Do you see an end-game to this, where human subjectivity and emotion is ultimately eliminated from the appraisal/BPO process? And what does this mean for competition?
Rasmussen: Every innovation has its benefits and drawbacks. Smart phones keep us in touch 24/7, which is great, but the common complaint is also that they keep us in touch, 24/7. It will always be important to know when to use each valuation tool and when not to.
I don't foresee appraisals ever achieving complete objectivity and losing the inherent subjectivity of human input, particularly when you remember that a property is only truly worth what someone will pay for it, regardless of what a third party says it is worth. There will always be some degree of subjectivity in this field, and valuations will continue to be part art and part science.
Automated valuation tools are highly sophisticated now, and that is why we see such strong performance and accuracy from AVMs, as well as why they are such important tools in understanding portfolio values and market trends. Aspects of some appraisal scoring tools, like our VeroSCORE's complexity rating, for example, can identify some of the subjectivity present in the valuation and enable the lender's reviewer to have a clear understanding of the approach and detail the appraiser used to come up with the appraised value. In some cases, the subjectivity factor may become more relevant for an assignment in a nonconforming neighborhood or other area about which the appraiser has unique knowledge. In other cases, it may identify risk that the lender needs to resolve prior to funding.
In my view, the future is not about eliminating subjectivity in valuations but rather identifying it so it can be applied appropriately. Taking it a step further, this is another advantage to using valuation management platforms such as Sapphire in tandem with VeroSCORE to track appraiser performance and help reveal where subjectivity and risk levels are not properly aligned.
Q: If the economic crisis of 2008 happened all over again today, do you think real estate appraisers and the valuations industry at large would face the same criticisms today as they did then? What's changed in valuations since then that would cause things to play out differently?
Rasmussen: Those criticisms would generally not hold much water today. The lack of transparency and the focus on meeting lender valuation targets contributed significantly in the mortgage side of the economic crisis, and today we have checks in place to avoid repeating those situations.
Initiatives like the UCDP and UAD were created to shed light on appraisals and their data, and the appraiser independence standards help to insulate valuations from undue influences.
Now that UAD standards exist and UCDP is channeling electronic data, the GSEs have the opportunity to look at everything up front, and this is an excellent safeguard that will be part of the process for investors going forward. Data standards will continue to evolve and improve, and the GSEs have already begun implementing progressive changes to the UAD warning messages and hard stop errors to continue to drive appraisal quality and automate efficiency.
As additional agencies work toward the development of UCDP-like systems, the digitalization of the appraisal portion of the loan submission will come full circle, encompassing virtually all of the residential first mortgages made. This important progression would represent a quantum change from the largely opaque way things were before the mortgage crisis and would set the stage for private investment capital to become a major factor once again.
But to fully ensure lenders have protected themselves from the transparency and ‘value shopping’ issues that plagued the industry not too long ago, lenders need to be looking toward their own valuation management practices. One of the best practices to adopt now is to act like your own regulator (or investor) and implement the systems and/or QC tools that will help you weed out the non-compliant, non-UAD, non-supportable valuations that are likely to be called into question if they were to leave the lender's shop.
We are working day-by-day with lenders to leverage tools like Sapphire and VeroSCORE so that manual, error-prone and cumbersome appraisal-related tasks can make way for valuation practices more in line with the current era, and we're seeing extremely positive impacts to efficiency, compliance and the bottom line.