PERSON OF THE WEEK: Jim Smith is president of Property Solutions, a division of the Computershare Group offering investors and residential lenders a suite of valuation products and other services for both residential and commercial loans nationwide.
MortgageOrb recently interviewed Smith to learn about how regulation and technology continue to reshape the home valuation industry.
Q: How do you evaluate risk in determining home price valuations?
Smith: Several issues come into consideration when evaluating risk. Valuation providers base their valuations on recent comparable sales in a particular area. If a property is located an active market with lots of sales inventory, there is less risk. In markets where there are not a lot of recent sales, you have less information on which to base a valuation, so there’s more risk.
Another issue is whether the subject property is similar to others in the neighborhood in both condition and style. When the valuation does not include an interior review, the valuation provider must make certain assumptions of the inside condition of the property based on observing its exterior. If the assumptions are incorrect and there are unseen interior conditions, the valuation result can be inaccurate.
It’s important to note that not all valuation companies performing valuation reports adhere to the same quality assurance standard. That’s why it’s so important for servicers and investors to ask plenty of questions when choosing a valuation company.
For example, does the provider use a staff expert to review 100% of its valuation reports? Does it offer performance metrics showing the valuation of an asset throughout the lifecycle of the loan, including REO? Answering “yes” to these questions is a good sign a provider takes these risks seriously.
Q: How does regulatory compliance impact asset and risk management and property valuations?
Smith: Regulatory oversight has a huge impact on valuations. Based on outdated standards pertaining to who can create a valuation, appraisal reports have become costly and time-consuming, which is why the mortgage industry is seeing newer, alternative valuation products become available.
For this reason, it’s critical to know who performed a valuation, the fee paid for each report, and whether the product was used for a lending or non-lending purpose. Valuations are much more tightly regulated than 10 years ago, so the ability to know and track this information is critical.
Q: Does new technology help for asset and risk management and, if so, how does it help?
Smith: Today’s valuation technologies have absolutely improved every aspect of property valuations, including accuracy of property data and risk management. Valuation providers have an ever-expanding number of tools that leverage new sources of data as well as previous valuation results and home price trending analyses. These tools allow faster, higher quality valuations and a more cost effective quality assurance process.
New technologies available to field agents, such as smartphone applications with detailed instructions and tools that help field agents capture more accurate data, have been a huge improvement in the industry. Such tools also help field agents identify areas of concern in their analysis much earlier in the process, even while they are still evaluating a property, which provides for a stronger conclusion of value.
In terms of future innovation, drones will be of increasing importance to our industry. Before drone technology, it was difficult to determine the condition of a property’s roof without climbing a ladder and seeing it firsthand. With drones, you don’t need a ladder. Plus, unlike satellite images, which can be a year or two old, drones provide a current and more detailed view.
Q: What are some of the mistakes lenders and servicers make regarding REOs and evaluating assets? How do lenders and servicers correct these errors? What are the risks?
Smith: The devil is always in the details. Servicers often don’t pay close enough close attention to ongoing property inspections and notes from the field agent.
For example, when a property becomes vacant, it is imperative for the servicer to gain access and obtain an interior valuation as soon as possible. So many times, we’ve seen that no interior inspection was performed until a property was referred to REO. That’s a huge area of risk that can lead to significant losses across a servicer’s portfolio that were otherwise preventable.
Another mistake that REO and asset management companies make is not using both a traditional REO sales model in addition to an auction solution. Many markets have tremendous success with auctions, particularly highly populated markets and those with low balance assets and high eviction timelines. By using both a traditional sales strategy in addition to auctions, asset managers are better able to demonstrate the correct liquidation strategy and minimize losses.
Q: What is your outlook on investors in the housing market? Will we continue to see investors purchasing homes and managing assets this year?
Smith: Due to low interest rates and higher yields, we’ll continue to see more investment activity in the housing market in general, but particularly with home equity loans. Even if the shortage of new housing stock continues, home equity lending will continue to rise.
More investors are also entering the non-QM market and introducing new loan programs. We manage a lot of the valuations on these loan conduit programs as well as the valuations on large capital market funds. More investors are putting their money to work in hedge funds than we’ve seen in years, too.
As the credit box loosens, I expect these trends to continue.