Transcript evaluation - Appraisal Institute
Evaluating the Evaluation
Bank Evaluation Programs
Doug Potts, MAI, VP Commerce Bank
•
A Few Questions
True/False?
– Most loan transactions require appraisals.
• True/False?
– Evaluations are killing the appraisal profession.
• True/False?
– Reg B will eventually create more business for appraisers.
• True/False?
– Reg B will - in time - increase available consumer credit.
• • •
A Primer on Bank Lending
Major Purposes • New Loans (new collateral) • Subsequent Transactions (existing collateral) • Problem Loan Management (“exiting” collateral) Major Loan Categories • Consumer purpose lending (GSE / HELOC) • Commercial business lending (C & I) • Commercial investment lending (CRE) Unclassified lending – the “junk drawer”
Bank Portfolios--Risks & Rewards
• • • • • Where does most of a bank’s workload sit?
Do renewals generate new $ for added cost?
New loans generate growth in profits 80/20 rule with a vengeance • Loan profitability sits in the 20% • But the workload sits in the 80% Renewed loans generate $0 added profit • But comprises the bulk of a bank portfolio
6 000 5 000 4 000 3 000 2 000 1 000 <$100M LOAN STRATIFICATION v PROFITABILITY <$250M <$500M Loan Size Bracket <$1MM > $1MM $4 000 $3 500 $3 000 $2 500 $2 000 $1 500 $1 000 $500 $-
Job Stratification by Function Appr Eval NM Eval Valid 23% 48% 29%
The Point Is ….
• • • When you combine the 80/20 rule with the $0 profit rule …… You need a cost-effective solution to meet • Underwriting need • Regulatory requirements The key is “adequacy”
The Purpose of Evaluations
• • • • Regulations require every loan get a value • Only some deals require an appraisal.
But they also provide for cost effectiveness • Spread thin but broadly Load balance tool • Balance risk & reward Risk sensitized • For loan size (e.g. <$250M de minimis) • For repayment reliance (CRE v C&I v Consumer) • For portfolio concentration & workload (new v renewal)
Program Basics
• • External Vendor Procured • Proliferating Options • • Growing array of vendors Growing array of evaluation styles & products • Coverage & Fulfillment Internally Developed • Licensed or Unlicensed Team Members • Qualifications & Training • Data Sourcing & Inspections • QA / QC Controls
Evaluation – Scope of Work
• • • • • Interagency Appraisal & Evaluation Guidelines Flexibility v rigidness When & where to use Defining the problem Creating the solution
What will your regulator permit?
• • • • • • •
2010 IAG Requirements
Should contain sufficient information Details analysis, assumptions, conclusions Should be documented in the credit file or reproducible. Identify the location of the property. Provide a description of the property and its current and projected use.
Provide an estimate of the property’s market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (that is, the date that the analysis was completed), with any limiting conditions. Describe the method(s) the institution used to confirm the property’s actual physical condition and the extent to which an inspection was performed.
• • •
2010 IAG Requirements #2
Describe the analysis that was performed and the supporting information that was used in valuing the property. Describe the supplemental information that was considered when using an analytical method or technological tool. Indicate all source(s) of information used in the analysis, as applicable, to value the property, including: – External data sources (such as market sales databases and public tax and land records); – Property-specific data (such as previous sales data for the subject property, tax assessment data, and comparable sales information); – – – Evidence of a property inspection; Photos of the property; Description of the neighborhood; or – Local market conditions.
2010 IAG Requirements #3
• Include information on the preparer when an evaluation is performed by a person, such as the name and contact information, and signature (electronic or other legally permissible signature) of the preparer.
Let’s Re-Arrange the IAG Ideas
• • • • • Evaluations have 5 major elements Define the problem to be solved Get needed research elements Make needed inspections as appropriate Selecting the right data Doing the math & calculations
Evaluation Scope -
Defining the Problem Calculating an Answer Research & Descriptions Selecting Appriorate Data Inspection & Descriptions
Eval Content - Preliminaries
• • Defining the Problem • Complexity • • Effective date(s) – what is this?
Limiting conditions • Can the premise be prospective?
• Can the zoning be prospective?
Basic research & descriptions • Property specific records • Neighborhood & market trends • Current & projected use • Current zoning designation
Eval Content – Inspection Elements
• • • • • Methods to confirm physical condition Describe extent of inspection Evidence of inspection Descriptions inspection details - granularity Property photos
More on Inspections
• • • • • “Methods to confirm physical condition” “Describe extent of inspection” What about?
• Out of territory property • Borrower or lender representation?
• Shelf life of the representation/inspection?
Origination v Renewal?
• Flexible standard?
Credit Quality? Pass v non-pass?
Eval Content –Selecting Data
• • • • “As applicable” data External sales databases etc.
Local market conditions Comparable sales
Eval Content – Calculate an Answer
• • • • • Provide value in actual physical condition • Is that the only condition allowed?
Describe analysis performed Describe supporting information • Data sourcing & selection What valuation technique? What methods?
Analytical method or technological tool • Analysis performed & supporting information • Supplemental information
Eval Content - Fingerprints
• • • • • “When performed by a person” Name / contact info Actual signature Electronic signature Is the evaluator qualified?
• What about state restrictions?
Evaluation Scope -
Defining the Problem Calculating an Answer Research & Descriptions Selecting Appriorate Data Inspection & Descriptions
Limitations
• • • • Shelf life of evaluations Tailoring for loan-specific issues • LTV adequacy • Lease structures Environmental impacts & offsets As-is value v prospective value
Evaluation Options & Risk
What program to develop and use?
• • • • • “You get to pick your problems, you don’t get to pick no problems….” Internal Program External Vendor Program Appraisal Only – “no evaluations” Hybrid?
What about BPO?
The Nexus -- Risk v Regulation
• • Triangulating competing elements • Accuracy • Adequacy • Efficiency • Cost effectiveness Does an evaluation need to be accurate?
• Is accuracy always cost effective?
• Is precision always necessary?
• What about low LTV transactions?
• Using a shotgun to shoot a fly…
External v Internal Eval Programs
• • • Consider the business model - • Collateral class – conventional v oddball • Market coverage – urban v tract suburb v rural External Model • • Consistency & uniform product – predictable Within its limits – highly reliable system • Fulfillment failure risk Internal Model • Flexibility & adaptability • Precision subordinated to practicality of business • Disclosure Risks
External Products
• • • • • • Appraiser-centric or broker-centric Available options How to compare them?
How to review them?
Fulfillment issues E & O dynamics
Vendor List
• • • • Product type – residential v commercial Geographic coverage • National • Urban coverage • Rural coverage • Appraiser- v broker-centric Branch from national appraisal firm Local vendor based approach
Name Type
Some Options
Coverage Best Concentration
Comml Natl Urban/Suburb Boxwood Mountainseed Comml Clear Capital Comml & Res Collateral Analytics Res 1-4 Natl Natl Natl Urban/Suburb Urb/Sub/Rural Urban/Suburb Corelogic DataQuick First American Inside Valuation ProTeck Valligent ValueNet Veros Comml & Res Res 1-4 Comml & Res Comml & Res Res 1-4 Res 1-4 Res 1-4 Res 1-4 Natl Natl Natl Natl Natl Natl Natl Natl Urb/Sub/Rural Urban/Suburb Urban/Suburb Urban/Suburb Urb/Sub/Rural Urban/Suburb Urban/Suburb
Performed by
Appraiser Appraiser Broker AVM Appr Brkr AVM Appr Brkr AVM Appr Brkr AVM Broker Appr Brkr AVM Appr Appr AVM AVM
Order # Date Property Location Property Description Property Current Use Property Projected Use Property Market Value Est "As-Is" Property Zoning Designation Effective Date of Value
Comparison Methods
121026-52344A 130219-53537A 1334928.3
- 121026-52450A 2/21/2013 Y,N 10/26/2012 Y Y 11/19/2012 Sanitized, MN 2/12/2012 Y,Y - 2/12/2012 Y,Y Address; assmt tax ID Bldg size, bldg age, lot size, bed, bath Bldg Use Type (SFR, MFH, Condo, Offc, Retail, Ind, etc.) Proposed construction or renovation, change in bldg use Must state "value" not "price" Local zoning citation "as is" = Date of Drafting "as proposed" = Future Date Y,Y,Y,Y,Y Y N Y N Y Y,Y,Y,Y,Y N N Y N Y Y,Y,Y,Y,Y Y - narrative N Y N Y Y,Y,Y,Y,Y N N Y N Y Y,Y,Y,Y,Y N N Y N Y Limiting Conditions N N Y Y Y Physical Condition Confirmation Describe Method of Analysis Supporting Information - Sales Inspection or not; proof of inspect Unknown -- is a display grid sufficient?
Unknown -- is a display grid sufficient?
Unknown -- is a display grid sufficient?
Sep Rpt Y - inf/eq/sup Y - comps Sep Rpt N - no analysis Y - comps Y Y - ranking Y - comps Y Y - AVM Y Y Y - AVM Supporting Information - Listings N N Y Y Y Y Describe Supplemental Information Indicate External Data Sources Indicate Property Specific Data Indicate Evidence of Property Inspect Property Photos Sales history; assmt N N Y Sep Rpt Sep Rpt N N N Sep Rpt Sep Rpt Y Y - MLS Y Y Y Y Y - MLS Y Y Y Y Y - MLS Y Y Y Neighborhood Description Local Market Conditions Preparer Name & Signature Order portal avail?
Other banks using?
Independent 3rd party validation avail?
Validation Frequency?
Can product be upgrade to appraisal?
Compliance with C & R Optional items: N N N Y Sep Rpt Sep Rpt N Y Y Y Y PNC; Suntrust Y BOK, Soverign, Bank of West; State Farm No Yes extra fee No Monthly to Annual Yes extra fee NA Yes extra fee Y Y N Y Yes extra fee Y Y N Y 1004000579 12/23/2011 Y,Y Y,Y,Y,Y,Y Y N Y N Y Y Y Y - ranking Y - comps Y Y Y - MLS Y Y Y Y Y Y Cert Appr Signs non-appr revs non-appr revs Cert Appr Signs
Evaluation Review Needs
• • • • General v specific Checklist only?
Part of the purpose is speed/efficiency Drags on velocity • Secondary data confirmations • Secondary corroborating data • Secondary inspections
Evaluation Review Questions
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3.
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6.
7.
8.
Adequately identifies the collateral property (e.g. legal description, tax number, street address, etc.)?
Adequately describes the collateral’s current and (if applicable) projected use?
Provides an estimate of the collateral’s market value in “As is” condition & use & (if applicable) zoning as of the effective date of the Alternate Valuation?
Indicates all source(s) used in the analysis, as applicable, to value the property (e.g. external data sources, property specific data, photos, neighborhood description, description of local market conditions)?
Describes the analysis that was performed and the supporting information that was used in valuing the property?
Evidence of a sufficient property inspection (e.g. photographs, comments)?
Includes all other relevant information (described as needed in Comments below)?
Report includes preparer name and signature?
A Primitive Example
Here’s an Interesting Wrinkle
This review intends to fulfill Regulation B requirements for Residential 1- to 4-unit dwellings. Transactions secured by 1- to 4-unit dwellings that qualify for an evalution by law may be valued for xxxx by outside providers. The valuation document under review may be labeled “Appraisal;” but because of its limited content, it is reviewed under “evaluation” content standards outlined in the Interagency Appraisal & Evaluation Guidelines (effective Dec-2010).
Vendor Management
• • • Fulfilling possibilities • List of serviced counties • • How many active vendors How many jobs by county last year • Avg fee by county • How many fulfillment failures by county Contracts – NDAs - Processing The follow-up process • What changes can be incorporated to improve?
• Portals & ownership
To AMC or Not to AMC
• • • • • • • Geographic coverage Panel control Customary & Reasonable Fees Waterfall process - upgrades Portals Invoicing Compliance challenges • Would it just be cheaper to bring it in house?
Automated Valuation Modeling
• • • • • Products & Options Hit Rates Confidence Intervals & FSD AVM Cascades & Selection Tables Program Benefits • Speed – returns in moments • Cost effective – even in a cascade/waterfall
AVM Validation - Challenges
• • • • • • • Regulatory compliance – modelling policy Sample spread Sample size Sample cost Sample frequency Validations methods applied to each event Who owns the validation process?
Trends in Vendor Mgmt
• • • Fed management requirements are heavy • And getting heavier Escalating compliance costs Many banks are considering moving to in house programs • More product control • Compliance is no worse than vendor management • Cost is ≤ to vendor management
• • •
Internal Evaluation Risks
Adequacy of Facts • Sufficient documentation • Potential inaccuracies Adequacy of Opinions • • Recognize all needed elements?
Disregard elements?
• Value precision?
Does adequate alone = misleading?
• Misleading to whom?
• Potential inaccuracies acceptable – big picture • Risk is internal business decision
• • • • •
Disclosure Risks
Does it matter if an opinion is not disclosed?
Can a consumer recognize the difference between an evaluation and appraisal?
Consumer wounded ego.
What about credit denial? Consumer uses a disclosed eval in unintended ways • Eval walks to another bank – portability • Divorce litigation or tax appeal • Price representations & negotiations • Personal financial statement • Estate planning or donation
• • • • • •
What About Fed/State Compliance
The enforcement referral The court subpoena The patchwork quilt of state regulators • Mandatory v non-mandatory states • Scope of practice Issues State enforcement risk to an internal program • Built-in exemptions Fed requirements for qualified evaluators What about AI Ethics/Standards?
Comparing possible programs
• • • • Outside vendor appraisal Appraisal-centric eval Internal team eval – non licensed Internal team eval –licensed
Vendor Appraisal – Conventional Research Intensity Inspection Intensity Results Precision Delivered Cost Fulfillment Probability Threat to State Licensure Research Intensity Inspection Intensity Results Precision Vendor Appraisal-Centric Eval Delivered Cost Fulfillment Probability Threat to State Licensure
Internal Eval – Licensed Staff Research Intensity Inspection Intensity Results Precision Delivered Cost Fulfillment Probability Threat to State Licensure Research Intensity Inspection Intensity Results Precision Delivered Cost Fulfillment Probability Threat to State Licensure Internal Eval – Unlicensed Staff
• • • • •
Can BPOs Help?
Shifting risks from in-house to …..
• Out-house?
The importance of broker/agent skill • Local knowledge & customary thinking Can BPOs function as in-lieu evaluations?
• The IAG restriction?
• Work arounds?
State brokers regulatory prohibitions NAR lobbying in the States
• • • • • • •
What is NAR Up To?
Challenges from Zillow’s sometimes misleading zestimates RealtyAlliance v Local MLSs The RET server: – Who owns the MLS data? What level of access?
RPR – the NAR AVM – 600 MLS servers feed it.
– Not making money. Trying to grow New NAR rules allow broker developed AVMs in all markets Issuing rules to keep MLS data from being proprietary by local MLS systems NAR pursuing inroads to allow brokers to prepare evaluations for financial institutions without a potential listing.
What are Peers Doing? from CART
CART -- How many internal evaluations last 0 1-100 year?
2013 2014 20 15 10 5 0 45 40 35 30 25 CART - What does Bank permit for eval 101-1000 Volume of Evals 101-5000 >5000 CART -- do you use the tax value w adj factor?
support?
2013 2014 50 45 40 15 10 5 0 35 30 25 20 2013 2014 Never Up to $250M Up to $500M Up to $1MM Up to $5MM Over $5MM Other
• • •
Dodd Frank & Reg B / ECOA
Key New Definitions • Borrower • • Transaction Collateral – what is a dwelling?
Notification v disclosure • Consumer purpose or • Secured by 1-4 Unit Dwelling The Dwelling Trump Card • Mission creep from law to rule-making
Reg B Notice & Disclosure
COLLATERAL CLASS LOAN PURPOSE V COLLATERAL CLASS PROBLEM
Consumer LOAN PURPOSE Business Reg B Mandated 1-4u dwelling Notice & Disclosure No Notice & Disclosure Reg B Exempt Everything else Notice / No disclosure No Notice / No disclosure
Is This a Dwelling?
• •
Reg B Impacts Community Banks
Increases financing & liability risk • Forces disclosure of potentially inaccurate but otherwise adequate analysis • Requires deal restructure – financing unsecured to avoid documentation of value • Potentially inaccurate but otherwise adequate can be misconstrued or misused by borrower • Alternative is to order more vendor product to deflect risk Limits credit access to community borrowers • Inflexible rules don’t sync with the physical collateral world • Added cost of vendor product • Added delay of vendor product
Reg B Impacts Consumers
• • • Increases confusion • Blurs distinctions from consumer to biz deals • Treats all “valuations” equally for disclosure Increases cost • Vendor products more costly than internal products • Prioritizes precision over adequacy Increases delay • Vendor products take additional time • Risk of fulfillment failure
Homebuilder Impacts
• • Reg B intended to give each of thousands of individual consumers an individual appraisal.
but instead ….
Reg B requires a handful of homebuilders to receive thousands of appraisals
• • • •
Hybrid Product – the BPO Eval
Can it “shift the risk” ?
How to qualify the valuation elements?
• Opine price or value -- both?
• IAG limitations • • Review based qualification of BPO opinion?
Separate opinion using BPO elements only?
Convert into bank-issued estimate of value • Who inks it?
• Qualification v state compliance risk • Wiggle words - disclaimers E & O need?
BPO Vendor – Evaluation Hybrid Research Intensity Inspection Intensity Results Precision Delivered Cost Fulfillment Probability Threat to State Licensure
Appraisers Re-enter the Eval Space
• • • USPAP & state restrictions Economics E & O coverage
Techtonic Shifts
• • • • • • • • AI Standards v USPAP FRTs v RET? Where do evaluations fit?
Should we cage USPAP into FRT only?
HR 5148 (Leutkemeyer TILA High Risk Mortgage Bill) Federal pre-emption – supremacy clause See Gibbons v Ogden 22 US 1 (1824) See Gade v National Solid Wastes Mgmt Assoc 505 US 88.98 (1992) See Florida Lime v Avocado Growers Inc v Paul 373 US 132, 142-43 (1962)
The Pre-Flight Evaluation
• • • The good-housekeeping seal of approval Post-eval changes to loan – Impact on eval reliability Ordering a subsequent appraisal – Valuation priority of place
Foreclosure Evaluations
• • • • • What is allowed – de minimis rules.
Risks v benefits of use • Can you manage the inspection?
How to manage accounting needs • Fair Value • Liquidation / Distress Value Pre-foreclosure requirements Post-foreclosure surprises
The Forensic Evaluation
• • • • • Multiple evaluations over time Same asset Allows a measure of market change Retrospective analysis to test an appraisal Showing editorial selection process • What comps were uncovered but not used
• • •
Evaluation in Portfolio Monitoring
The Nexus of Accuracy v Adequacy • Existing collateral & the subsequent transaction • Transaction cost v flat profitability shift Floor values on file as adequacy filter • • Against current balance? Increasing balance?
Declining value? Physical deterioration?
Methods?
• Owner occupied class • Investment class • Special cases
Inc
Our Friend IRV
Value
Rate
Capitalization Modeling
$9 000 000 $8 000 000 $7 000 000 $6 000 000 $5 000 000 $4 000 000 $3 000 000 $2 000 000 $1 000 000 $0
7.9% R O
Annual Expenses NOI 2011Q1 Appraisal Data 2012 Prior Actual 2013 Prior Actual
7.0% R O
Forecast
IRV Example
$70,00 $60,00 $50,00 $40,00 $30,00 $20,00 $10,00 $0,00 Orig Sales Orig Avg Value Opinion @ Orig Update Sales Update Avg Suggested Current Value
Sales Trends Date
Trend Tech Specs
Address
Sales Low Sales High Sales Median Sales Avg Sales COV
Address
Sales Low Sales High Sales Median Sales Avg Sales COV
APPRAISAL DATA IN FILE -- BUILDING SALES -- UNADJUSTED Sale Date Sale Price Land Area (sf) Bldg Area (sf) Year Built $/SF Com m ents
3/27/07 $13,600,000 834,012 2/8/08 2/5/08 0.8% 16.2% 41.6% 330,190 500,000 403,960 408,151 16.6% 1981 2007 2007 1998.2
0.6% $ 41.19
$ 53.50
$ 44.79
$ 46.02
10.3%
Sale Date
12/1/09 1.6%
UPDATED BUILDING SALES Sale Price Land Area (sf) Bldg Area (sf) Year Built
$7,657,546 583,704 57.8% 76.0% 226,576 500,000 368,944 366,116 37.4% 1961 2009 1988.5
1986.75
1.2%
$/SF
$ 28.12
$ 50.54
$ 41.15
$ 40.24
25.8%
Com m ents
Gas Station Validation
Gross Profit Multiplier Value
Gas Station Performance
Multiplier Trending
Experiences
• • How is Reg B working for you?
How are evaluations working for you?