[u]REQUIRED READING[/u][/i][/b]: [b]Broker price opinions (BPOs) – by most estimates, the dominant valuation tool in pre-foreclosure scenarios – are not without their detractors.[/b] This was made abundantly clear months back, when four appraisal trade groups wrote to U.S. Treasury Secretary Tim Geithner, urging him to revise the federal short-sale program's guidelines to prohibit BPOs. Allowing the use of BPOs, the group argued, could exacerbate fraud. This has long been the main knock against the BPO, a product that has gradually settled into a slot on the valuation spectrum midway between automated valuation models (AVMs) and full appraisals. As indicated by their very name, BPOs contain some level of subjectivity. And unlike appraisers, brokers might be motivated to skew values, critics say. As a result, several states have placed tough restrictions on the use of BPOs. But BPOs also have their share of supporters, and for good reason. BPOs are less expensive and carry shorter turn times than appraisals, and they're more detailed than favorably priced AVMs. In response to the appraisal groups' concerns about federal guidelines permitting the use of BPOs in short sales, both the National Association of Realtors and the Real Estate Valuation Advocacy Association (which represents a wide swathe of valuation providers) essentially stated that BPOs serve a valuable role in a specific niche in the marketplace, helping to lower costs for all parties – servicers, investors and borrowers. "All of our customers really love appraisals," says Kevin Marshall, CEO of Clear Capital, which offers appraisals, AVMs and BPOs. However, he adds, servicers are not making foreclosure decisions based solely on a BPO value. "All they're really doing is tracking [a property's] condition and value, so to reduce the cost burden on the borrower, a BPO is a great tool." Servicers usually order a BPO within the first 60 or 90 days of a loan's becoming delinquent. That value might be updated as often as every four to six months, depending on the market, as well as at the time of a foreclosure sale. Both interior and exterior options exist, though interior reviews are not always feasible for occupied properties, especially if the borrower's relationship with the mortgage company has deteriorated. Most valuation providers – even companies not currently engaged in BPO marketing – observe wide quality disparities among BPO providers, which might not be surprising for a product that is said to have evolved out of the commonplace lender request of asking a listing agent to weigh in on an REO's value. Some brokers offer their services at basement-level prices in the hope that they can win listing rights; others view property valuation as a process completely independent of listing. BPOs came of age when foreclosure levels were low and most markets were experiencing price gains. The validity of their comparable-sale choices has been put to the test as markets undergo severe dislocations, and it is not uncommon to hear servicer horror stories about comp selections gone horribly wrong. The hardest time for any real estate valuer is when a market is turning, Marshall says, because that is when there is the greatest risk for choosing faulty comps. Today's markets are no exception, featuring at least three tiers of pricing, according to Jeremy McCarty, CEO of Roseville, Calif.-based Valligent. In the lowest price range are foreclosure sales that are selling at fire-sale rates. Investor transactions constitute the middle tier. Atop the pricing pyramid are traditional home sales. "Where it used to be, a few years ago, that all of your sales were pretty consistent in terms of being market transactions, now, it's very complex and really requires a lot of analysis and expertise to appropriately value these properties," McCarty says. Several valuation providers, including Valligent, have recently brought to market BPO alternatives featuring appraiser reviews. McCarty describes the company's latest offering, DRiVE, as an appraiser price opinion that goes beyond property valuation to include analysis of foreclosure and fraud activity in the subject property's market. Another example of appraisers making greater inroads in default valuations is the Collateral Valuation Report (CVR), offered by San Jose, Calif.-based AppraisalWorld. According to the company's executive vice president of education and analytics, Mark Linne, the CVR aggregates information from a variety of contracted data providers, combines the data with an analytics module and presents a package for appraiser review. Linne says the product works as a stand-alone appraisal, but because the company is able to take advantage of its partnerships with data providers, the CVR can be produced more quickly and less expensively than a traditional appraisal. Both the DRiVE and the CVR tools seek to fill a void that the appraisal industry was too slow to recognize, McCarty and Linne say. In the absence of a quick and affordable appraisal product, servicers were left with two choices: AVMs and BPOs. Because AVMs lack property condition notes, BPOs seemed the most reasonable choice for default purposes. Appraisers missed the boat. "Unfortunately, the appraisal industry, which is best suited for doing valuation work – because they are regulated and licensed, trained and educated in valuation – has not really come up with products that really fit the needs of lenders for this situations,’ McCarty says. Linne adds, "We felt, ultimately, that the traditional valuation – the 1004 appraisal that we normally do for lending purposes and which appraisers have come to rely on as the only tool they can provide to a client – was simply not a solution many users wanted." East Providence, R.I.-headquartered Equity National, meanwhile, has taken a different tack to distressed-asset valuations. The company private labels a proprietary system from strategic partner Residx under the product names PACE and PACEplus. Real estate analysts monitor distressed-sale values that are generated by Residx's technology using data from a variety of public-record and private data providers. The PACEplus version of the application includes a physical inspection of the property by licensed property inspectors. Equity National's clients are using the products for early-stage delinquency work, foreclosure and REO, Tom Frunzi, the company's executive vice president of sales and chief marketing officer, says, adding that the products enable lenders to compare a distressed-sale value with a projected fair market value, providing them an opportunity to understand how long it will take to get a property back into a fair market scenario. "I consider [PACEplus] to be much more objective than the traditional BPO, because the data that goes in is from public records and/or other sources of usable data that are appropriately scrubbed and not necessarily just from a real estate broker who's looking at the property and making certain assumptions," says Frunzi. BPO alternatives and hybrid solutions have been around in some form for several years, notes Clear Capital's Marshall, who says his company has played with various valuation approaches in its Skunk Works laboratories. But because so few hybrids – whether broker-, appraiser- or AVM-based – have been embraced by lenders on a wide scale, alternative products haven't truly grown their market share. "Over the last eight years or so, we've seen a lot of attempts at hybrids, accompanied by a lot of marketing and hype," Marshall says. "But the key is, nobody really adopted it. Nowadays, there is more of a willingness to talk about that adoption. But, ultimately, for a lot of these tools, the adoption needs to drive the development." Still, despite the re-emergence of alternative valuation tools, BPO providers say their products have evolved a long way from their roots as one-off service offerings from listing agents. Marshall points to industry attempts to create uniform standards regarding photo choices, broker competency and comp applicability. In May 2009, the BPO Standards Board released version 3.1 of its BPO standards and guidelines. Furthermore, BPO providers insist that added layers of quality control have improved BPO comp consistency. ServiceLink, which also offers AVMs and appraisals, runs all BPOs through a series of tests in which reviewers examine comps. If questions arise during the review process, the BPO gets kicked back to the broker for explanation, explains George Scwhartz, the company's executive vice president and division president in charge of default servicing. Clear Capital has similarly implemented quality-control steps in its review process. Both companies say they additionally audit their BPO values, comparing actual sale prices with BPO prices once a property has been sold. In regard to BPOs' hard-to-shake reputation for providing values that are too subjective, providers say that as long as servicers keep different broker pools for property valuing and property listing, BPOs are no more prone to manipulation than any other type of valuation. "If you keep them separate, I don't see a conflict at all," says Schwartz. "We have a whole separate panel of agents who know what they're doing for us is getting values. They're getting compensated based on timelines and accuracy, and they're constantly being monitored." [i]John Clapp is the editor of [b]Servicing Management[/b]. He can be reached at clappj@sm-online.com or (203) 262-4670, ext. 2
