You Deal With It

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Feature It's Complicated Challenged by discordant relationships, strict regulations, and general reluctance, the valuation space is a difficult place. By Tory Barringer W hen broken down to its most rudimentary definition, the job of a valuations professional might seem simple: give an educated, professional opinion of a property's market value. Unfortunately, as it is with most things, "simple" is a far cry from "easy." While most analysts working in and around the housing finance industry are discussing how the future looks for loan origination and servicing, the fact is that the valuations side of the equation looks equally cloudy. Mending Fences T he snags start with the fact that assigning a value to a home is a much trickier prospect than the average borrower or seller can understand. Most consumers don't seem to be aware that a home's value and the price at which it can sell aren't necessarily the same number. "When you're looking at a property, you're trying to put together succinctly lots of different pieces of information about that piece of real estate," said Steve Gaenzler, principal of Five Bridges Advisors, LLC, an analytics and advisory firm. "Realistically, it's what are the market conditions of the area where the property is located, what are the supply and demand metrics, what are the elements of macroeconomic info: unemployment rates, per capita income. 24 | The M Report "All of those things will impact where a property transacts, and that, I think, is different from looking at where a property is from an appraisal perspective," he continued. Once a value is settled on, it must stand up to the scrutiny of the lender, who stands to suffer if issues are raised and a repurchase claim is made by investors. Because so much is at stake, underwriters keep a vigilant eye open—creating frustration for the appraiser whose reports are kicked back. In a valuations discussion at the 2013 Five Star MPact conference, one expert working on the lending side voiced dissatisfaction: "We're looking for tons of documentation and comments that are unique to a data field that explains how they got to that value, but that is not often what we get." If the fence separating valuation and origination is to be mended, those operating on each side must recognize that there is a shared goal between them: to generate a solid loan product that minimizes risk and puts someone in a home. "There's really no conflict between the two . . . both are positions that are designed to risk-manage the origination process," said Alice Sorenson, chief investment officer for LRES, a valuations and asset management company. "The underwriter is supposed to take a look at all the component parts of an origination, figure out if those component parts meet the lending guidelines of whatever program they're working on, and come to a loan amount conclusion. The valuations professional is taking a part of that and saying, 'OK, I want to make sure the collateral supporting this loan is in fact worth the amount of the loan that they're asking for.'" The Cost of Doing Business T he problems don't stop at lender/valuations relationships. Like every other aspect of the mortgage field, the valuations sector has been pulled into the huge regulatory world created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Most of the Dodd-Frank guidelines revolve around a core goal of protecting consumers from inordinate or unfair pricing, setting up conflicting goals and creating a "very difficult economic picture" for many companies already dealing with tight margin compressions, Sorenson said. "How do we give the proper independent management that we want to have at a price that we can make a profit on without tacking it all onto the consumers? It's a very tight balancing act . . . and it makes it very difficult to be able to perform your business at the high levels that we want to perform at . . . at barely a profit or even a loss," Sorenson said. As of right now, he says, the best way to build your business model around these issues is simply to focus on making sure the originator is able to perform his or her function as smoothly as possible. That means putting a laser focus on key performance indicators, like turnaround times and quality control. Late Adopters M any of those costs can be mitigated with the proper use of automated valuation models (AVMs) powered by technology, but that itself is sort of a tricky subject. Often thought of as one of the influences behind the buildup of the housing bubble, AVMs have a reputation to overcome. "Automated valuation models got a pretty bad rap back during the fallout of 2007–2008 as being one of the perpetrators of what happened to the industry back when lenders and appraisers were relying on them too much. There is an unjustified fear of using technology as part of the collateral valuations process," said Phil Huff, CEO of Platinum Data Services, a company providing tech solutions for financial services firms.

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