The usefulness of broker-based valuationsWalter MorganBroker price opinions
For years, the servicing departments of lenders have known a
secret that has saved both time and money when dealing with
mortgages in default: local real estate agents. They have the local
market's understanding, proximity to subject properties and access
to local to MLS and public record data. These advantages enable
them to give servicing departments quick street-smart opinions of
the property value at a reasonable cost. The key to this process is
the need for someone with local experience to analyze the property
in question with a particularly sharp eye for poor conditions that
often accompany mortgages in default. The answer has been the use
of Broker Price Opinions (BPOs) in the default departments of many
servicers.
For many years, BPOs have proven themselves to be a very
reliable source of estimated property value, while avoiding the
higher expense and longer time-frames of conventional appraisals.
They are better than automated valuation models (AVMs) in a default
situation, where property conditions are so important, because an
AVM doesn't "see" the property. Even when non-performing loan
managers "shoot an AVM" for a quick sense of value, they still need
a knowledgeable source to see the property first-hand.
Over the past few years, home equity lenders have caught on,
working with real-estate-agent-based vendor network groups to
establish their opinions of property value. The use of these
broker-based valuations was stimulated by the Financial
Institutions Reform, Recovery and Enforcement Act (FIRREA) rule
changes in the mid-90s. High volumes and demanding consumer bank
clients have enabled some providers to perfect their agent-based
valuation services. The result has been widespread risk management
and investor acceptance.
Early adopters utilizing broker-based valuations in lending
applications faced many challenges and comparisons with appraisers.
Numerous "prove me" tests have been conducted comparing
broker-based valuations with appraisal-based valuations. As a
results of these tests, the reliability of real estate agents in
knowing the property values of their market was proved, and a new
industry niche was born.
They have succeeded in earning a significant position in the
valuation service industry and an increasingly dominant role in
home equity lending. While not as detailed as an appraisal, the
track record of these products has been good. For many lenders who
already accept automated valuations, site inspections and opinions
of value from real estate professionals adds an additional layer of
diligence on larger loans or higher loan-to-value applications.
For home equity lenders, broker-based valuations come into play
when an AVM doesn't work and an appraisal is more than they need.
Home equity lenders typically begin their collateral value
determination with an AVM. If the valuation works, the job is done
quickly and at a low cost. However, the AVM values do not always
find a hit. And even when they do, borrowers may not find the value
sufficient for their needs. It would be unusual for most lenders to
reject an otherwise qualified loan applicant on the basis of a
computer-generated value model. In these cases, broker-based
valuations can fill the gap between the high-speed AVM and a
longer, more-expensive appraisal. Having such a gap in a valuation
product is critical for home equity lenders, because they usually
bear the entire cost of valuation, and home equity borrowers
frequently apply to multiple lenders for the quickest deal. Hence,
speed and accuracy are the keys, and real estate agents can often
provide these keys.
Because the use of these broker-based valuations is relatively
new, lenders may feel uncomfortable in selecting a vendor to do
this. As early pioneers of these services, we know there are
certain critical success factors:
†Look for a provider that clearly understands the key
difference between a BPO for the servicing market and a
broker-based valuation for lending purposes. While the process may
seem the same from the outside, it is not. Most home equity lending
is, in large part, a credit decision. In default servicing, the
emphasis shifts to the collateral, and frequently to negative
condition or marketability issues. There is a cultural difference
between providers and real estate agents focused on the
non-performing loan segment, and those whose management and field
agents understand consumer lending.
†Search for a vendor that has experience in a
customer-driven environment. When lenders use broker-based
valuations, the emphasis has to be on what the customer wants; in
today's environment, that means speed. Borrowers are waiting for
the outcome, and business depends on a quick response. A new
relationship with the bank could be at stake. That client puts a
premium on an immediate and sensitive response to the question of
value. To meet the speed and emotional demands of a home equity
borrower, look for a vendor with a responsive customer service team
that's experienced specifically with broker-based valuations.
†Find a provider who understands the other aspects of the
servicing matrix, such as title, settlement and closing needs. You
want a firm that understands where the valuation fits into the
consumer lending experience. Look for a vendor that sees the whole
picture.
†Seek out providers that offer a complete package, whether
you need it or not. Such providers give you the option of using
electronic order management and delivery, and they know the
importance of a well-developed and user-friendly Web site. Also, if
you need it, you have the option of using their integrated AVM and
appraisal services along with your broker-based valuation. This
gives you access to a "one-stop shop" for valuations, thus saving
administrative time and expense.
†Finally, ask around. You're looking for a vendor with a
service reputation that's been honed over time. Ask for client
references, and check them out to make sure they are experienced in
the market and have a history of financial stability. Small,
inexperienced providers could create long-term quality and support
problems that could have a domino effect, holding up hundreds of
equity closings.
Broker-based valuations make financial sense. They help lenders
meet the warp speed required in today's home equity market. But,
there is a right and wrong way to do them, so pick your providers
wisely.
Walter Morgan is executive vice president of strategic
business development of integrated loan services with Fiserv's
lending systems and services group. He may be reached by phone at
(800) 842-8423 or visit www.ils.com.
