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.