THIS IS A CRITICAL TIME IN THE MORTGAGE INDUSTRY. As we shift from a refinance to a purchase market and look at developing stronger relationships with real estate professionals, it is crucial that we do not repeat the valuation mistakes that most recently--in the mid-2000s--brought the industry to its knees.
Now imagine, if you will, an industry in which the professionals associated with the home-buying process--including the loan originator and appraiser-are all on the same valuation page without violating any regulations. This would be the ideal valuation scenario.
It is really not that far-fetched, and can actually exist in the not-too-distant future.
By using automated regression analysis--a mathematical process of estimating the relationships among variables-each of these interested parties could consistently expect accurate housing values, which in turn would allow more hassle-free loan closings and therefore lead to a more stable market.
As an example, while traditional appraisals usually consider three comps an adequate sample, the automated regression analysis process tends to include a larger group of comps, 250 or more, to determine what features are driving housing values in a specific geographic area.
It requires a tremendous amount of data and statistical expertise to explain the effect of changes that occur, such as the condition of the property, the amount of time it has been vacant, distance, location, and so on. This valuation approach provides quantifiable evidence on properties and can eliminate many of the questions regarding values down the road.
If we start to think about the valuation process with the following three factors in mind, we could make problem valuations a thing of the past.
How we approach value
Historically, the real estate professional and the loan originator have already pre-determined what they want the property value to be before even involving the appraiser. Real estate professionals are looking at value from the standpoint of square footage while loan originators are considering the product types and the borrower's financials.
This approach tends to cause the transaction to go sideways when the appraised value does not match the desired value.
Regulations such as the Home Valuation Code of Conduct (HVCC) and industry standards such as the Uniform Appraisal Dataset (UAD) have made the valuation process a far more scrutinized piece of the origination puzzle. In order to have accurate values from the...