LenderNews by Rob Chrisman
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Apr. 14: Readers notes on appraisal trends, affordability, production costs, and competition

April 14, 2018

Residential lending continues to evolve, or devolve, depending on one’s perspective. Let’s let readers check in with what they’re seeing.
 
Reads on the current environment
 
Rich Swerbinsky, COO of The Mortgage Collaborative, sent, “The Mortgage Collaborative conducted a survey of its lender members, taking their pulse on the industry. The results can be found at this link. “With all the large lenders trying to get larger, consolidation & M&A ramping up, and 2018 expected to be a modest year for aggregate mortgage originations, finding ways to compete with the largest lenders was viewed as the most important overall issue by our members. Not far behind were three other very pertinent issues in today’s mortgage market: executing on your loan sales, attracting new talent, and borrower facing technology options.”
 
Michael Kuentz, President of Lenders One, observed, “As we’ve met with our members across the country, the focus coming out of Q1 is on finding opportunities to cut costs to improve shrinking margins. For many, this has included a rigorous review of every line item of the business to uncover hidden costs, which we work closely with our members on to identify areas where efficiencies can be introduced.
 
“Some of the biggest strides, though, have been made in outsourcing core services. While outsourcing manufacturing has long been a tool for market fluctuations, many are focusing on new areas to tap outside talent such as compliance, which can represent hundreds of thousands in savings. We’re also seeing lenders turn to unique talent sourcing methods to reduce LO compensation, with some seeing success in recruiting and training non-mortgage talent. This strategy has the added benefit of discovering new tactics for attracting millennial homebuyers by testing new ideas from millennial employees.
 
“Compounding market pressures, there is a general sense that we are on the verge of a major shift in the industry as new entrants like Amazon are causing many to contemplate what smart investments in technology need to be made now to compete in the future. The digital mortgage landscape is fragmented, and managing multiple technologies requires more capital than many lenders expected. We’ve heard great success stories from lenders who narrow their focus on key technologies through rigorous upfront vetting and mandated usage across the organization. Above all, business leaders are looking to develop and refine a strategy that can guide the tough decisions that will need to be made in 2018.”
 
And this from a seasoned vet in Southern California. “Rob, great commentary on the unhinged, out of control costs on the production side, especially any owner’s intent on the distributed retail front. The brick/mortar risk coupled with the demands of the producers are completely unjustified. If we, as an industry, did not get these under control that it would ultimately destroy us. I include the wholesale side in this battle – as some well-known companies have discovered when they have attempted the ‘net wholesale branch’ environment.
 
“Even at some ‘100% consumer direct, based off leads we provide’ companies, the LOs feel untouchable and have a certain expectation. ‘The company ought to provide more leads, give us better pricing – and the best processing so we can do our jobs. But don’t you dare mess with our bps.’ I think I’m just getting too old and crotchety for this. I’m going to put fake grass in front of my office so I can yell at people to get off my lawn!”
 
Arch Mortgage Insurance’s Dr. Ralph De Franco sent out a quarterly Housing and Mortgage Market Review (HaMMR) report and proprietary risk index. With recent changes in housing policy, Federal Reserve’s upcoming raises on short-term rates, and continuing shortages on homes for sale, this report provides in-depth analysis on how these economic factors may impact the U.S. housing market over the next two years. “2018 is predicted to be one of the worst full-year deteriorations in affordability. Increased lack of affordability at-large and notable changes among specific regions, including Tacoma, Fresno, Baltimore, and Boston. More than 17 percent increase in monthly payments for cities, including Tampa, FL; Riverside, CA; Chicago; and Washington, D.C.; among others…”
 
Appraisal turmoil, or is everything just fine as it is?
 
Current thoughts on AVMs? Here’s a piece by Joan Trice and Ritesh Bansal on the state of replacing appraisers and appraisals with AVM product. “Weapons of math destruction?” Clever.
 
Bill Fall, CEO of Valuation Partners, has some thoughts on concerns with automated valuation models (AVMs). While technologies such as AVMs can help create an opinion of value, they can miss the mark and cause lenders and consumers a lot more in the long run. Bill noted that, “demand for AVMs has shot up since the GSEs loosened their appraisal requirements, but they could end up costing lenders plenty. AVMs cannot evaluate property nuances such as interior upgrades, defects, or changing market conditions, each of which can affect value. Instead, AVMs require many assumptions to be made, which often leads to valuation uncertainty. My concern is that replacing appraisals with AVMs will lead to an increase in manual underwriting, which will drive up costs for lenders and eventually consumers tremendously. Alternative appraisal products that blend strong analytics coupled with good data, an on-site inspection and a conclusion determined by a trained professional appraiser are a safer, more cost-efficient option over the long term. No ‘black box’ can evaluate poor curb appeal. The licensed appraiser needs to be part of the mix.”
 
Appraisal companies certainly aren’t immune to mergers, consolidation, and contraction. Earlier this month, for example, Dart acquired Valuation Management Group.
 
I received this note from Michael Simmons, Co-President of AXIS Appraisal Management regarding the FHFA working paper regarding the findings on AMC managed and non-AMC managed appraisal assignments. “The authors go to some care to describe this exercise as a working paper to promote thought and debate – and then title it Stylized Facts from AMC and non-AMC Appraisals.
 
I wasn’t familiar with the term, so I looked it up. Here’s two definitions. (1) "In social sciences, especially economics, a stylized fact is a simplified presentation of an empirical finding. While results in statistics can only be shown to be highly probable, in a stylized fact, they are presented as true. They are a means to represent complicated statistical findings in an easy way. A stylized fact is often a broad generalization, which although essentially true may have inaccuracies in the detail." (Wikipedia). (2) Stylized facts are observations that have been made in so many contexts that they are widely understood to be empirical truths, to which theories must fit. Used especially in macroeconomic theory. Considered unhelpful in economic history where context is central." (About.com) … I added the italics. And for the authors original disassociation with their conclusions as representing the FHFA’s policy or perspective; labeling conclusions as ‘facts’ and affixing the FHFA logo to the study gives an entirely different impression to readers.
 
“Reading this paper is a reminder of the power of language. The authors (and they’re not alone in this regard) use terms like overvaluation and super overvaluation to essentially denigrate an appraiser’s opinion of value because it doesn’t agree with the contract price in a transaction while at the same time posturing that a high percentage of appraisals (30%?) that support the contract represent conformational bias. By the way, the term overvaluation apparently reflects a statistical difference of up to 5% greater than a contract price. Parenthetically, 5% is generally considered the gold standard in the appraisal industry when comparing two qualified appraisers addressing the same assignment. Far better ways to delineate the difference in value conclusions than using terms that basically gas-light a discussion and adds little to understanding the underlying issues. But it gets worse.
 
“This paper references and piggy-backs on a paper done by an economist at the Philadelphia Federal Reserve. I was present to hear this economist speak on his work at an industry conference in South Carolina recently. One of the fundamental premises is that “low appraisals are killing deals”. This is 2018 – and one would hope that those who purport to understand an industry that they pontificate about would possess a basic understanding of it. There are no ‘low appraisals’. There are any number of appraisals that don’t support the contract price. Why … how? Because they represent that appraiser’s opinion of value. That doesn’t make them ‘low’ – or wrong.  There is nothing sacrosanct about a contract price in terms of value. It may reflect what certain parties believe a property is worth, but that may not, upon considered review, constitute value. Just go ask the folks in Secondary at any lender how comfortable they’d be at predicating their loans based on the concept that a contract price is an accurate representation of a property’s worth versus an independent assessment of a property’s value by someone with no interest in the (financial) outcome of a transaction. Yet these assumptions (i.e., ‘facts’) are what become the very foundations that their conclusions are built upon.     
 
“But let me finish by honoring the author’s request to stimulate questioning (I already weighed in with the critical commentary piece) with the following:
 
“Statement: AMCs “typically charge lenders about the same amount that independent fee appraisers would charge lenders when working with them directly” and absorb at least 30 percent of this fee. (my emphasis) Response: Many AMCs charge less than 30% – have you analyzed their outcomes to see if their results are different?
 
Statement: If AMCs serve successfully as firewalls, they should be able to correct the established appraisal confirmation bias and lower the degree of overvaluation. Response: this argument suggests that the role of the appraiser is to validate contract prices. This is precisely not the role of an appraiser. Example: just this week an appraisal came in $90,000 under the sales contract, effectively ‘killing the deal’ per the lender. As I penned a detailed explanation of ‘why’ back to the lender, their very own internal process supported the appraiser’s same opinion of value. Was that a ‘low’ appraisal? Did it ‘kill a deal’ – or did it protect the buyer, the lender and the community from overpaying?
 
Statement: the paper notes “scant evidence of any systematic quality differences between appraisals associated and unassociated with AMCs.” Response: given that, as a control group, you utilize the same subset of appraisers (with a minimum of 20 AMC and non-AMC assignments) and yet see little difference between the two channels. Why would you expect there to be a notable difference in conclusions? Wouldn’t one expect those biases to be vendor-provider (appraiser) specific rather than process (AMC or non-AMC) specific? This might also help ‘explain’ the consistency in ‘mistakes’ you chart.
 
Statement: ‘AMC’s set unrealistic deadlines and AMC’s set the fees’. Response: Neither of those statements are accurate in my experience. Lenders establish assignment deadlines as part of their SLA and ultimately determine the fee structure. What the better AMCs have done is to help communicate what is (and what should be) a customary and reasonable fee range. The customary and reasonable fee is what an appraiser should receive, and the AMC fee should essentially be on top of that fee. The AMC portion of the fee charged the lender (or more accurately the borrower in most cases) is for the services the AMC provides the lender and should not constitute a reduction to the customary and reasonable fee that the appraiser is properly entitled to receive for their efforts.
  
I think this only begins to touch on many of the issues raised here. I’d lobby for better diversity in the data sources, more rigor in the analysis, more primary research (i.e. speak with both appraisers and AMCs before making blanket assumptions) and a better understanding of the terms employed – and a humble recognition that our non-conforming collateral universe may be about to experience another tectonic shift if we’re indeed rising out of a low rate environment. In fact, maybe start with an industry wide query as to what questions we should all be asking…”
 
 
A father told his three sons when he sent them to the university: "I feel it’s my duty to provide you with the best possible education, and you do not owe me anything for that. However, I want you to appreciate it; as a token, please each put $1,000 into my coffin when I die."
And so it happened. The sons became a doctor, a real estate agent, and a financial planner, each very successful financially.
When they saw their father in the coffin one day, they remembered his wish.
First it was the doctor who put ten $100 bills onto the chest of the deceased.
Then came the financial planner, who put a $1,000 bill there, too.
Finally, it was the heartbroken agent’s turn. He dipped into his pocket, took out his checkbook, wrote a check for $3,000.
He put it into his father’s coffin and took the $2,000 cash.
 
 
Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “How Good is Your Company’s Cyber-Security?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
Rob
 
(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are over 300 mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2018 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)