Dancing with Data

August 8^th & 9^th I had privilege of participating in an event entitled “Reengineering the Appraisal Process – A Return to Fundamentals”.  The conference, co-hosted by the Collateral Risk Network and the American Enterprise Institute in Washington DC, was attended by nearly 200 folks on-site as well as streamed live over the web.  The videos and presentations are available  at http://www.aei.org/events/2012/08/09/reengineering-the-appraisal-a-return-to-market-fundamentals/.  My comments were delivered as a part of Panel VI, “Reengineering Plan” as I am leading a subcommittee on data and technology for the CRN workgroup on appraisal reengineering.

A topic that received a lot of air play at the conference was the concept of confidence scoring of data.  In order for that idea to be feasible, the data to be scored must be unambiguous and the source of the data verifiable.  The MISMO version 3.2 Reference Model provides the necessary framework to bring an idea like that to life.

I feel strongly about the importance of open data standards and, many of you know me as “Ms. MISMO”. To that end,  I am happy to say that the MISMO Candidate Recommendation v3.2 Reference Model was posted August 8th to begin the obligatory 30-day Intellectual Property Rights (IPR) comment period.  This one has been a long time in the works!

Get it here:  http://www.mismo.org/Specifications/ResidentialSpecifications.htm - be
sure to scroll to the bottom of the page after selecting 3.2 in the table at the top of the page. 

New with this distribution is an official Release Notes document that highlights the enhancements and corrections in the new release of the Reference Model.  For the world of Property & Valuation Services Workgroup (PaVS), this release contains the final reconciliation of UAD items as well as several new data elements aimed to improve appraisal analysis and reporting.  The PaVS team has also added definitions across all of our interest areas.  And, since no moss gross under the feet of the PaVS!  We have a list of 75 new items that are being submitted to MISMO Core Data Structures committee later this month for approval and inclusion in the next release of the MISMO Reference Model, v 3.3 slated for the end of the year.

A new item on the horizon from the broader data standards community is the concept of a uniform property identifier.  This is an idea forged by the Electronic Commerce Code Management Association (ECCMA), an open standards group that has brought together thousands of experts from around the world and provides them a means of working together in the fair, open and extremely fast environment of the Internet to build and maintain the global, open standard dictionaries that are used to unambiguously label information.

The existence of these dictionaries of labels allows information to be passed from one computer system to another without losing meaning.  I am convinced that the on-going coordination and collaboration of open standards groups is vital to the long term growth of sustainable information exchange.

The ECCMA Natural Property ID (NPID) as applied to real property can truly be a galvanizing solution that can benefit all industry segments.  NPID would be generated from an algorithm built and maintained as a free, open standard.  Here are the highlights from my presentation:

• A federalized numbering system that could be adopted by all jurisdictions that eliminates the basic challenges in property identification.
• Use a spatially-aware, non-proprietary mechanism from a standards body like ECCMA International to provide a formula so that the number could be calculated and matched to GPS coordinates.
• Addresses both ground space and unit space.
• Objective of the number is to represent the actual location boundaries in any satellite image using GPS coordinates. 

What would this mean in the real world sense?  The ability to pinpoint a condominium unit on an interior floor of a high rise!  We could eliminate the reliance on the USPS as the only common, easily-accessible property location identification and end the tug-of-war calls between appraisers and clients over the “true” address of a property.   Seems like a no-brainer!

 

MISMO Preparing for the release of v3.2

I've been doing a lot of thinking about the next version of MISMO lately, partly because I chair a workgroup, but also because I just wrote a guest post about it for Tony Garritano’s Progress In Lending blog:  http://progressinlending.com/blog/2012/07/23/the-robustness-principal/#null

The main point of my post is about the power of a common reference for terms and definitions that can be used across the enterprise.   Its fairly well known that MISMO can improve communications between trading partners.  But, it can also be used internally to be the universal or master data layer between multiple systems and between departments.  Many organizations struggle with a lack of data quality and consistency. There's also usually minimal data governance and little collaboration between IT and business units. MISMO can provide a significant boost in designing and developing data strategies that stay pace with regulatory changes and technology modernization.  Why start from scratch when you can apply the benefits and strength of industry collaboration?

I'm always interested to hear what you have to say.  Please comment below.

RESPA & the Appraiser Full Fee Controversy

The news of the Supreme Court ruling yesterday in favor of Quicken in the case Freeman v. Quicken Loans is, I believe groundbreaking not only for the contentious topic of transaction fees for real estate agents and brokers.  But, it is also a precedence-setting decision relative to the topic of appraisal management fees.  Specifically, I feel it is yet another testament as to why appraisal management fees should be disclosed separately from the appraiser’s fee.  Two separate services, both provide legitimate consumer benefit and both should be paid in full to the provider of said service.  The CFPB apparently also sees merit in this concept and has indicated them separately on the samples of their two draft Good Faith Estimate Disclosure templates under consideration.  

Since the promulgation of the Interim Final Rule, and perhaps to please a few national lenders, a few more AMCs have jumped on the band-wagon of a cost-plus (appraisal fee plus management fee) business model.  This fits the potential new disclosure requirements of the new GFEs under consideration.  But unfortunately, many AMCs still cling to limited, self-serving interpretations relative to unearned fees and controlled business arrangements which have origins that predate Dodd-Frank.  While these concepts, although clarified and expanded are in the latest Interagency Appraisal Guidelines, the original mindset still persist.  Further adding to this debate are the RESPA 2010 rules that add capped tolerance provisions for fee changes between initial disclosure and settlement.   And, the less publicized permissibility of an Average Fee for certain third party provided settlement services.  

Timely to the topic is a new white paper, "AMC Full Fee Hypothesis" by Jeff Schurman and Rick Grant also released yesterday, which explores the AMC fee controversy in a well-written and reasonable way.  Ironically, the industry's use the term “full-fee” seems to imply that those AMCs that pay the appraiser only a portion of the appraisal charge passed on to the consumer would be in violation of RESPA.  In fact, when the appraiser accepts an assignment, he is also accepting the fee offered.  Whatever that agreed to fee is, would actually be considered a “full-fee” for that portion of the process.  This is what fuels the debates around Customary and Reasonable Fee language implemented by the Interim Final Rule into TILA.

Some would say the real nature of the controversy is that disclosing AMC fees separately would expose business models and competitive details that most AMCs would prefer to keep private.  However, without such transparency, appraisers are being pushed by a new kind of pressure:  not the kind that attempts to influence the appraiser to deliver a value that meets the “target”, but rather, to deliver a high-quality appraisal report for a fee that is ridiculously low and unfair.  This is driving a mass exodus of qualified and competent appraisers out of the profession.  Appraisers are experts trained to measure value, including the value of their own services.  A lack of competency in the ranks not only harms the public trust but, it severely cripples the profession further by not being able to sustain apprenticeships for incoming candidates attempting to meet licensure requirements.

The appraiser is a critical, independent third party in the health and well-being of the real estate economy.  We cannot afford to allow them to become extinct.

QM & Reporting Availability of Financing

There is a lot of talk about the Consumer Finance Protection Bureau’s (CFPB) upcoming rules on the Qualified Mortgage or “QM”.  Most recently, a group of 33 trade groups from the financial services and housing industry sectors penned a joint letter to the CFPB.  They are advocating for a rule structure that includes a broad definition of QM and safe harbor language. 

"Our purpose is to reiterate our very strongly held view that the QM should be structured as a legal safe harbor with clear, well-defined standards," the trade groups wrote. "The standards must embody requirements for safe mortgages for consumers and specify the grounds on which there can be litigation or enforcement action as to whether those requirements have been met.” 

As I have read through the various news bulletins on this topic, I started thinking about what the QM would mean in the Appraisal Process.  Specifically, the appraiser’s ability and prowess in reporting the availability of financing and what the possible implications will be.

The QM Skinny

Dodd-Frank defined QM under “Ability to Repay”  which prohibits mortgage lenders from making residential mortgage loans without regard to a borrower’s ability to repay the loan.  Failure to comply would carry significant penalties to lenders that could last the life of the loan. The final QM rule from the CFPB is expected this summer and it is anticipated to clarify both the QM qualification requirements and the presumption of compliance details.  There are two hot button topics in the pending QM definition that are of interest to both consumer advocates and the lending industry: fee caps and down payment minimums.   

Down with Down Payments?              

On the surface, the argument seems fair and balanced. Mandatory rules for "high" down payment requirements would arguably cut-out a good number of credit-worthy home-buyers.  But, isn’t a lack of “skin in the game” a hallmark symptom of the borrowers who found themselves in distress as the markets turned downward?  Its also interesting that a 20 % down payment was considered an underwriting basic.

Snowy Fee Caps on the Horizon

Secondly, and perhaps a more worrisome detail to certain members of the industry is the cap on fees.  The new standard mandates that a mortgage cannot have points and fees that are more than 3% of the loan amount.  However, the trade groups argue that the 3% limit would restrict the availability of affordable mortgage credit as the fees are too low and would eliminate incentives to lend. Especially disconcerting to certain parties is the loss of revenues associated with “high cost/ high risk” loans where higher fees and rates are charged to compensate for potential losses since the borrower may default as he is “higher risk”. 

Double Bubble

On the other hand, defining QM too narrowly would have a whipsaw effect and throw many of today's loans and borrowers into the non-QM markets, putting lenders and investors at a high risk of an “Ability to Pay” violation.  As a result, it is unlikely that these loans would even be made and if they are they will be far costlier, burdening those families least able to bear the expense.  In addition, these higher priced loans would NOT be exempt from including important protections against the very practices and loan features that drove the highest failures in the mortgage boom, features that are defined by the QM. Which of course would add more cost.

Availability of Financing

But back to my original thought, the impact of QM to the residential real estate appraiser in the field.  The appraiser is supposed to report on the availability of financing in the market for the subject property as a factor which may indicate the reasonableness of buyer/seller activity.  Will QM have the protective features its authors hope and thereby be a stabilizing force?  Or, will QM be as illusive of a factor in reporting present market conditions as equity-takeout refinances were during the boom?  And, even if it reported by the appraiser, will the underwriter recognize the merit or relevance of the QM market activity to the transaction being adjudicated?

GSE PRINCIPAL REDUCTIONS – A ROSE BY ANY OTHER NAME…

I was mystified when I read this morning about FHFA’s Ed DeMarco’s reason for not supporting Fannie Mae and Freddie Mac doing principal reductions.  In his view, it would be just another big bank bailout.   Here’s his quote: 

"If you do principal forgiveness, who is it benefiting? ... Doing principal forgiveness is what would protect the big banks,"

His reasoning is based on the premise that the banks would be forced to write off second mortgages they hold which are subordinate to first mortgages guaranteed by the GSEs (as they would be wiped out by a principal reduction).

Yet he is in favor of rate/term loan modifications and points to the success of the agencies efforts in this regard since the inception of TARP.

Ironically, the same reasons to support to loan modifications apply to  principal reductions as well.  Specifically, if you also reduce principal as a part of a loan modification, not only you do increase a homeowner's ability to repay their loans, but you are also increasing their ability to stay in the home longer.  Offering a loan modification only on rate and term only quells the bleeding for a short time.  It is not a cure.  Besides, if there is a foreclosure, the second lien holder is most certainly wiped out anyway.  So why does Mr. DeMarco feel that principal reductions on GSE loans are tantamount to a bank bailout?  I suspect that he feels the write-downs would be treated as more reason to support the banks with taxpayer dollars.  The answer to this problem is not to further punish homeowners, but, to improve transparency in reporting losses from a regulatory perspective.

But, I think a bigger TARP question remains unanswered.  Regardless of the type of modification transaction, why are full appraisals not required on any government-incentivized homeowner relief programs?  Many argue that a modification of just the loan terms is a risk change limited to the investor who holds the note.  But what about the borrower’s right to informed consent?  Are distressed homeowners just so overwhelmed that relief at any cost is worth it?  And on the flip-side, what is the impact on the local market when such loan modifications are executed?  Should the home values on purchase transactions in those markets be affected?   Can the appraiser adequately reflect the impact of homeowners who ”re-upped”?   Without a lien amount change, can the market really determine how vested the homeowner is after the modification?  Certainly, three sales and three listings will not tell the whole story. 

THE RISE OF VALUATION TECHNOLOGY

I have been thinking a lot lately about the dilemma facing residential mortgage lenders in evaluating valuation technology.  Many are looking for faster, cost-effective alternatives to traditional appraisal products or to augment underwriting analysis, quality assurance or loss mitigation. Most established technology-based products, such as commercially available AVMs, rely solely on statistical analysis and are void of the professional judgment a qualified professional appraiser adds to the analysis. 

New valuation technology-based products and services are emerging that do provide a role for the appraiser.  These are often referred to as "assisted AVMs" or AAVMs.  Additionally, new tools for appraisers to incorporate tools that provide them computing power in statistical analysis are continuing to develop, improve and make their way to market.  Unfortunately, many appraisers are not yet convinced that incorporating technology-based econometric techniques into their daily practice is necessary.  In part, I think this is due to an overall lack of education on the topic and cost-benefit awareness as it relates to these tools.

The market demands of today are desperately in need of property valuation processes that include the objective benefits and scientific rationale that statistical techniques and tools provide.  Further, such techniques provide a common understanding of the underlying business case supporting the opinion of value offered by the professional appraiser from which safer, more comprehensive lending decisions can be made.

It is my firm belief that the appraisal profession must develop a stronger base of professional individuals competent in both appraisal theory and practice that is intrinsically fused with technology to increase the depth of data analysis and expand the reach of reporting the appraisal results.  Mathematical pictures are worth a thousand words.