Jeremy McCarty is the CEO and chief valuation strategist of Roseville, Calif.-based Valligent. Formerly known as EAS, Valligent operates in the areas of national residential valuation and collateral risk management solutions, including appraisal review, proprietary valuation, loan pool reconciliation tie-out services, and appraisal underwriting. Jeremy has over 20 years of experience in the real estate industry with extensive experience in appraisal operations, customer service, process re-engineering and quality control.
For this installment of In This Corner, Jeremy tells us what he thinks is wrong with the valuation industry, and how he believes the industry can grow consumer confidence again.
HW: The announcement of your rebranding campaign mentioned the mortgage industry's "crisis of confidence" when it comes to property valuations. What is fundamentally wrong?
Jeremy: "It’s a combination of several factors. Within the past 10 to 15 years, there has been a significant influx of new appraisers that have received little or no proper training, and little to no scrutiny was placed upon those responsible for training these appraisers. As a result, appraisers with little to no moral fortitude produced a large number of new appraisers with little to no understanding and/or concern for appraisal ethics.
"In fact, appraiser licensing has actually contributed to a decline in appraisal quality. Prior to licensing, lenders were very diligent about maintaining lists of approved appraisers and scrutinizing their panels. Increased use of automated underwriting and consistent upward value trends caused lenders to apply less scrutiny to appraisals."
HW: With this lack of "moral fortitude," how much fraud is out there?
Jeremy: "Appraisal fraud became rampant and mortgage brokers began placing pressure on appraisers to push values higher. When foreclosures began to surface, it became evident that many of the underlying appraised values were completely unsupportable at the time of appraisal. The resulting crisis in confidence has contributed to the almost complete shutdown of private capital market loan pool acquisitions, and remains a daily concern for lenders funding loans today. Strong leadership and careful scrutiny of valuation products are now needed to restore confidence to lending."
HW: Well, let's talk different options. How are valuations different from broker priced opinions? They're more prominent on the REO side of the business. Are they cheaper to use for lenders than valuations?
Jeremy: "Usually, BPOs are cheaper. Lenders take advantage of the fact that many real estate agents in this economy are desperate for listings, and implicit in the BPO request is the chance to obtain the listing and receive a sizeable commission. Brokers often end up working for less than minimum wage to complete the BPO, on the odd chance that they will receive the listing. More commonly, certain agents specialize in BPOs, and rush to complete these assignments as quickly as possible, given that they may only be paid $20 or less to complete these assignments.
"Yet real estate agents as a whole have little or no education or training in valuation methodology and have a personal vested interest in their valuation amount, as it can influence how fast they can sell the property if they do get the listing. The lack of standards and liability for errors and omissions within a BPO means that quality tends to be extremely poor and inconsistent."
HW: When you released your valuation tool, Collateral Cascade, you said it was like a medical triage unit, where the properties with the highest risk are matched with a valuation with the toughest scrutiny. Should valuations be based on the status of the loan or should a valuation of a property be the valuation of the property?
Jeremy: "Just as a complex valuation assignment – such as a rural farm house on 20 acres – requires more research and analysis than a standard subdivision home, properties in a higher risk market with a high foreclosure rate and plummeting prices require more scrutiny than properties in a highly desirable neighborhood with increasing values. Lenders are accustomed to using $15 automated valuations for their low-risk loans, as the minimal risk of a low LTV loan with a creditworthy borrower does not usually necessitate a higher cost valuation product. The complexity of these decisions lies in correctly identifying the low-risk properties.
"The difference with Valligent’s Collateral Cascade is a highly experienced review appraiser is analyzing the collateral risk of the property and its market, and is recommending and applying the appropriate valuation tool. This could be an AVM, a full appraisal, or one of several emerging gap valuation products. Many lenders are leaving money on the table by applying the wrong tool to a particular loan scenario, or taking on additional risk exposure by failing to pursue higher risk loans with more comprehensive products."
HW: With prices continuing to decline, how does Valligent place a value on a property when prices are expected to fall next week or next month? In other words, do you build in a variable that offsets dropping prices?
Jeremy: "It depends on the scope of the assignment. In some cases we are asked to provide the market value as of the date of the appraisal. If the property were to sell today, what would it sell for? Other times we are asked to provide a reasonable list price and a value the property would sell for under typical neighborhood market conditions. Valligent has access to some of the most sophisticated tools that analyze neighborhood price trends, absorption rates, days on market, and other factors. Our highly experienced appraisers utilize the most recent comparable sales, pending sales and current listings to support their conclusions. Even in downward markets, our expert use of industry-best collateral review tools delivers valuations that can be trusted and validated."