Appraisal Waiver (Explosion)

[alebrewer]

And the risk/borrower performance has nothing to do with the collateral

Not quite... there is a direct, and quantifiable, correlation between LTV and default rates (for documentation, I suggest the paper DW alluded to yesterday). The reasons for this are obvious (high LTV often means taking on debt you cannot afford to take on, for example), as well as less obvious (easier to walk away from a property if the equity position isn't strong). But there IS a correlation...

 

[J Grant]

Not quite... there is a direct, and quantifiable, correlation between LTV and default rates (for documentation, I suggest the paper DW alluded to yesterday). The reasons for this are obvious (high LTV often means taking on debt you cannot afford to take on, for example), as well as less obvious (easier to walk away from a property if the equity position isn't strong). But there IS a correlation...

LTV and default rates is a loan decision wrt how much equity, correct? Which still has no blame wrt the collateral.
LTV is STILL a financing issue, (lender decision for high LTV% low down/low equity. A lender LTV % decision is still nothing to do with the collateral , correct? If a lender wants to make marginal loans with very little equity or people at the max of their debt to income ratio.

The only connection I see regarding LTV and collateral is what I stated in my post, lending on an over inflated /over priced property ( no matter what form of valuation of the property) that can put a borrower under water and thus a higher default rate. Seems like with waivers they build in a cushion for that with a norm of 20% down and perhaps in some cases 10% down, the 10% down idk how they will fare over time. But a property over valued in a waiver would have to steeply decline /over priced to lose all 20% of the equity.

 

[alebrewer]

A lender LTV % decision is still nothing to do with the collateral , correct?

Huh? Do you know how LTV is calculated?... hint - it's with the value of the collateral.

 

[J Grant]

Huh? Do you know how LTV is calculated?... hint - it's with the value of the collateral.

Right, but still, the value of the collateral is not at fault if the LTV ratio leads to greater risk. Example below:
32 Cherry street as collateral is valued at 300,000. A solid, credibly supported appraisal (or alt ) not over valued.

A) lender loans a 3% down LTV on 32 Cherry Street.

B) lender loans a 5% down LTV on 32 Cherry Street.

C) lender loans a 20% down LTV on 32 Cherry Street.

A) and B have a higher risk of default than C, correct ?

The fact that A and B) have a higher risk LTV % /less equity and thus a higher % of defaults has NOTHING to do with the quality of the valuation of the collateral. It is a result of lender decision how to structure the loans and LTV/equity. .

 

[DWiley]

Why are appraisals ( or waivers/alt valuations) tied to loan performance ?

Because it is loan performance that ultimately dictates whether the investor "wins" or "loses." Collateral evaluation is just one of the risk tools used to project probable loan performance.

 

[alebrewer]

The fact that A and b) have a higher risk LTV % Has NOTHING to do with the quality of the valuation of the collateral

Of course it does... read your post just above that, where you said, " A solid, credibly supported appraisal (or alt ) not over valued." You're saying, in one sentence, that the valuation is solid and well supported, and in another, you're saying LTV has nothing to do with the quality of the valuation... have you had your coffee yet, J?

 

[djd09]

Collateral evaluation

see how it is not called an "appraisal" anymore.

that is a clever word trick by a bunch of valuation visionaries and a army of lobbyist lawyers.

 

[J Grant]

Because it is loan performance that ultimately dictates whether the investor "wins" or "loses." Collateral evaluation is just one of the risk tools used to project probable loan performance.

Agree. But since collateral evaluation is a different "tool" ( see my post 104 ) it is unfair to hold the collateral valuation to blame for a performance of borrower it is not responsible for.

The purpose of the valuation is on the front end , whether the lender should loan at all ( property defects or other info ) and if property clears for a loan, what $ amount of the value. This collateral and its value is the reason for investors to participate at such favorable rates and terms to the borrower ( favorable because of secondary market and FF)

So it is unfair to hold the collateral assessment/valuation, the role on the front end, with what happens on the back end ( a possible default or short sale later ). Only exception (imo) is a deliberate over inflation of value or not disclosing/concealing adverse condition in the valuation

 

[J Grant]

Of course it does... read your post just above that, where you said, " A solid, credibly supported appraisal (or alt ) not over valued." You're saying, in one sentence, that the valuation is solid and well supported, and in another, you're saying LTV has nothing to do with the quality of the valuation... have you had your coffee yet, J?

Jeez what kind of decaf coffee are you drinking? READ my post # 104.

Read the three scenarios of the LTV%. THE LTV % WAS A LENDER DECISION , and certain decisions of LTV increase risk, and the increased risk of different LTV has NOTHING to do with the collateral valuation itself. In all three examples I gave, the valuation of the collateral of 32 Cherry Street was the same $300,000.

 

[DWiley]

see how it is not called an "appraisal" anymore.

that is a clever word trick by a bunch of valuation visionaries and a army of lobbyist lawyers.

Well, as the title of this very OP notes, an appraisal is not always used. So, that is not trickery - just reality. An appraisal is used the majority of the time, but not always. Other methods are used in the cases where the data shows that other tools perform better.

BTW, you going to answer the question posed about transparency?