Candace Caley is a partner at SolomonEdwardsGroup, she currently manages SEG’s Houston office and also established the firm's National Financial Services Practice. For this edition of In This Corner
, Caley talks the future without HVCC; robo-signing; and Dodd-Frank reform.
Do you see any major changes to valuations with HVCC sunset and the implementation of Appraiser Independence?
The question of independence is a good one. It should also be considered in the context of quality. An appraiser who satisfies the independence test may also have limited market knowledge or experience and therefore may not, be the “most qualified” to perform the analysis. The sun setting on HVCC has the potential to immediately impact the quality of the underlying analysis and appraisal reports that could indirectly affect valuations. But, until the Consumer Financial Protection Agency’s final promulgation of the independence rules for appraisers are fully known, how the new rules will potentially impact valuations is difficult to gauge.
HVCC generally served its purpose from the standpoint of ensuring greater appraiser independence by creating a firewall between lenders and appraisers. As a result, “value shopping” by mortgage originators was theoretically shut down.
As long as large lenders dominate origination, I don’t see an immediate impact. Remember, lenders hire appraisers and large institutions traditionally have outsourced to AMCs, even before HVCC. The question will be if other channels open up down the road, how will appraisal independence be handled then, and how stringently will that be policed?
With the recent robosigning allegations, how did your team mobilize to coordinate a response for clients?
Robosigning is one issue that is part of an industry-wide problem with the quality of documents.
SolomonEdwardsGroup has dealt with document quality issues and recognizing and remediating these problems for a long time. For example, our M&A practice has a specialty that consults with strong banks that acquire weaker ones. During the acquisition process, our clients often find that in addition to new assets and branches, they have unfortunately also bought portfolios that contain problem loans or loans that are backed by inadequately documented files.
Our response to the robo-signing issue has been to immediately mobilize more than 300 of our single-family servicing experts to be part of our foreclosure crisis response teams. These are the professionals who are experienced in reviewing files that are full of poorly documented loans and scrubbing them to bring them into compliance. We know these types of issues are not easily solved, and they are not solved through technology solutions. It takes detailed, manual file reviews. Banks and servicers interested in quantifying possible exposure levels and remediating documentation deficiencies need arms and legs: highly trained and experienced resources. Whether the issue is properly executed allonges, accurate attestations, or proper vetting of the chain of ownership, we have allocated our most capable resources to help clients augment their existing staff to navigate these challenges.
Two-thirds of investors oppose a series of new bank accounting proposals from the Financial Accounting Standards Board, according to a survey from the investment bank Keefe, Bruyette & Woods and Greenwich Associates, why do you think this is?
FASB's well-intended efforts to improve transparency in financial reporting through mark-to-market accounting of most loan assets would actually increase bank’s volatility to cyclical economic and market changes. This would make it much more difficult for investors to forecast and analyze financial performance. Essentially, this is applying a solution that worked elsewhere to a situation where it may not be a good fit.
Also, there is fairly broad latitude in how one calculates "market value." Calculations are very complex, and there is no easy way to standardize approaches. So how would investors be able to distinguish between Bank "A’s" approach and accuracy of determining "market value" versus Bank "B’s"? Will FASB attempt to standardize valuations? Rather than providing more granularity and insight into the bank’s books, the proposed changes would actually create more uncertainty for investors. Investors don’t like uncertainty.
What will be the largest challenges to face accounting and finance teams in 2011?
Because the Dodd-Frank Act left hundreds of issues to be finalized by the regulators, and since those issues are yet to be determined, it is hard to pick just a few that will have a big impact in 2011 and beyond.
Among the main hot buttons are fair value accounting and other implications of mark-to-market in inactive markets. Of course, the impact of the Dodd-Frank Act and the FASB Financial Instruments Project are great unknowns at this point.
There are going to be changes in protocols concerning risk-weighted assets and the amount of capital needed to support those changes. Basel 3 for those affected: capital allocation, reclassification of risk-weighted assets; liquidity management. And financial-reporting changes affected by Dodd Frank will also impact the industry on many levels.
If banks have purchased other institutions under FDIC loss-share transactions, what are the implications and practical application steps of the IRC 597 tax changes? Plus, there is the unknown of how regulators will react to the robo-signing saga, and how that might ripple through the industry.
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