Being part of a webinar panel for HousingWire recently the discussion revolved around AMC’s, fees and eventually technology. Some cogent questions were raised about who owns the data relating to an appraisal as well as how technology will change the industry. In my personal opinion and this is varied, the data belongs to the client.
This is a discussion for a different day but I’ll stand by “it belongs to the client” inciting no grey area.
Twenty five years ago a colleague and friend of mine told a group at a luncheon for the National Association of Independent Fee Appraisers that in 5 years technology would kill the appraisal industry. That was a bold statement 25 years ago and it’s just as bold now; however it might be a lot more plausible today.
One of the things that mires the advancement of real estate valuation is data. Some parts of the country are data rich while many are data poor. Gaining access to standardized and normalized data is the holy grail many within the industries’ hallowed halls clamor for because it means that not only would appraisals be consistent but the ability of the reviewer to validate the appraisal would be just as consistent and defensible. Defensible being the operative word for “accurate” and “compliant”.
Many of my conversations lately revolve around risk. Stratifying risk is a complicated adventure but one that needs to be more seriously considered. In that consideration is the question of property value and if it’s the most important variable or if a combination of other variables including down payment, FICO, reserves, location, borrower industry, local economic drivers, home price appreciation or any combination of variables are contributing factors. Analysis renders that multiple factors are at play and always have been; however now we’re in a place where we can measure them much more accurately than just 10 years ago.
Back in the day, underwriting/risk relied on the 4 C’s:
- Credit
- Capacity
- Cash
- Collateral
All of these basics still apply but there are so many extraneous market influences that also impact property values and the ability of the borrower to repay a loan that we can virtually predict a borrower propensity to default on a loan by some local econometrics in conjunction with the borrowers financial profile. Things like;
- Age
- Income
- Industry
- Local economic drivers
Valuation now becomes tied to local risk factors. Let’s say John Smith who has a College Education and is in his late 20’s works at a local auto manufacturing facility with 10% down, takes out a loan on a property within 1 mile of the plant making a decent salary. This long term risk seems minimal until you factor in that 4 years later, John is now married with a 6 month old and the local plant intends on laying off 15% of its workforce. The risk profile looks very different.
Of course this example is an oversimplification of the factors that would go into a valuation and risk model but it certainly drives home the point that we have this data available today and can use it to have the servicer/lender of John’s mortgage reach out and offer some possible solutions to his potential upcoming plight.
Overall it’s the measurement of risk that we need to be cognizant of as well as the remediation that can be deployed once the risk level reaches a critical point.
Technology has the ability to achieve all of these tasks and we need to engage all parties to utilize this technology to recognize and address these issues head on.
