Be the Driver, rather than just a passenger of your appraisal practice

[J Grant]

I am engaged to appraise 41 Cherry St. by the client. I do the appraisal and deliver it. The info in appraisal is the house is a 40 year old C4 quality construction of wood frame in C 4 condition, market et value opinion $200,000.

The lender decides to loan on the property. Three years later, the borrower defaults. My appraisal gets reviewed. If the appraisal was credible, my appraisal stands. The fact that borrower turned out to be deadbeat ( poor risk ) has nothing to do with the appraisal.

But, if on review, it turns out I misled on the appraisal - such as I stated CBS construction and not wood, or if I over valued it at $200,000 when it was really worth $150,000r , then my appraisal led to a risky decision by the lender.- apart from the borrower behavior. At least that is my understanding of it.

I just find the term risk management weird, since the only increased risk an appraisal (or any other valuation ) represents is if the information is faulty/misleading and led to a decision the lender might not have made about the property otherwise. Beyond that, the appraisal is just information. Their call to green light or not wrt the property. If a lender loans on many marginal quality C 4 , forty year old wood houses to 3-5% down borrowers, and a wave of defaults happen but the appraisals were fine, the risk was in the lender decision, not anything in the appraisal itself.

 

[Tiffany Gibbons]

Walk through the very scenario you present. You are the lender, and you have the loan on your books. You did the loan based on a value of $1,000,000, but the value is now $900,000. What the home is worth now does not change the fact that you already have a loan.

If you can do a rate/term refi and lower the payment, then you have lowered your risk - because now the borrower is less likely to default. If you get an appraisal and refuse to do the refi because the value is now only $900,000, you are just increasing your odds that the borrower defaults.

A cash out refi is a different story, as there is more risk involved, But for a rate/term on a loan that the lender already has, what does an appraisal report bring to the risk management table?

In this scenario, how are you as the Lender deciding exactly that the value of the property is $900,000? An AVM? The loan officer? WF recently got in trouble for that didn't they? Besides, we all know they are packaging and selling off the risk and betting on it. And gearing up for as many waivers and Desktops as possible for the next rate drop even if it takes F and F a few years to wipe out residential appraising and rates to go back down. The GSE's and Banksters have no risk. We watched all of you get bailed out. Do you realize people still get cash out refinances even when the rates are higher? Nobody ever tells these borrowers how long it takes to recoup those closing costs or what it costs them. That's why there are "sales teams" and "Enablement Managers" at these companies. I just read a post on Linked In that said the "waiver" cost their parents $550. What's that for? Pushing a button? Googling Zillow? What? Who gets the blame now that values are decreasing? Lenders don't like bad reviews, will have to be somebody. The "Waiver"? Nope. The new line will be that biased appraiser must have appraised it too high last time,

 

[Tiffany Gibbons]

I don't know. Danny should know. But that is more on administrative side than where Danny works.

Idk. Maybe Danny can recommend this loan be bought back. I have no idea on buy back authority by GSE's.

No. They package that risky stuff in with enough good stuff to make it attractive and sell it, also all these mergers going on. They just play hot potato with it. Have you seen the movie " The Big Short". It's back up on streaming for free somewhere. I met the guy Steve Carrell played in the movie a couple of years ago. He said it will all happen again, but this time it won't be strippers owning 3 rental houses getting foreclosed on. It'll be average folks taking the hit (again). And our heros F & F will ride off into the sunset, with even less checks and balances, somehow, probably out of conservatorship.

 

[DWiley]

In this scenario, how are you as the Lender deciding exactly that the value of the property is $900,000?

You missed the very point of the post - to an entity that already owns the loan what the property is now worth is irrelevant.

 

[DWiley]

I am engaged to appraise 41 Cherry St. by the client. I do the appraisal and deliver it. The info in appraisal is the house is a 40 year old C4 quality construction of wood frame in C 4 condition, market et value opinion $200,000.

The lender decides to loan on the property. Three years later, the borrower defaults. My appraisal gets reviewed. If the appraisal was credible, my appraisal stands. The fact that borrower turned out to be deadbeat ( poor risk ) has nothing to do with the appraisal.

But, if on review, it turns out I misled on the appraisal - such as I stated CBS construction and not wood, or if I over valued it at $200,000 when it was really worth $150,000r , then my appraisal led to a risky decision by the lender.- apart from the borrower behavior. At least that is my understanding of it.

I just find the term risk management weird, since the only increased risk an appraisal (or any other valuation ) represents is if the information is faulty/misleading and led to a decision the lender might not have made about the property otherwise. Beyond that, the appraisal is just information. Their call to green light or not wrt the property. If a lender loans on many marginal quality C 4 , forty year old wood houses to 3-5% down borrowers, and a wave of defaults happen but the appraisals were fine, the risk was in the lender decision, not anything in the appraisal itself.

Risk management starts before the loan is even made. Recall the last loan you applied for - all that information on your income, your assets, and yes, your collateral, that is collected before the loan is made is all part of risk management. The primary point of the appraisal is to assist with that front end risk management.

 

[J Grant]

Risk management starts before the loan is even made. Recall the last loan you applied for - all that information on your income, your assets, and yes, your collateral, that is collected before the loan is made is all part of risk management. The primary point of the appraisal is to assist with that front end risk management.

I dislike the term risk management. Imo, risk evaluation is a better term because the lender uses an appraisal to evaluate the property ( says the URAR ). The lender and UW qualify the borrower for X $ loan amount based on income, credit, down payment, which is a first component of loan decision.

As you said, the primary use of the appraisal is assist with front end risk management /lender decision - yes or no , per the information in the appraisal we will, or will not, green light the loan on this property as collateral. Obviously the value is either there or not there.. Then the decision would involve does the property meet quality, condition and other lending standards.

But once the lender makes a yes for the collateral of the property, I fail to see where the appraisal has a relation to risk - unless the appraisal was substantially deficient or misleading thus resulting in the lender making a faulty risk decision to loan on the property (for X $ amount).

 

[Zoe]

The appraisal is usually the last risk decision made. The appraisal can kill loans on collateral risk management. An over inflated appraisal or deflated appraisal can hurt all parties involved. Yes it bleeds to risk after the effective date of the appraisal for the lender and borrower and everybody involved as of effective date of appraisal. Appraisals have an impact on interest rates also.

 

[Long Walk]

No. They package that risky stuff in with enough good stuff to make it attractive and sell it, also all these mergers going on. They just play hot potato with it. Have you seen the movie " The Big Short". It's back up on streaming for free somewhere.

Margin Call was another movie that did a good job showing the response to the market crash by a fictional investment bank. Absolutely cold-blooded. The clip from YouTube is the emergency partners meeting when the firm realizes the market is crashing. This was the end of firms marking assets to market for lending purposes, according to our CPA back then.

 

[Tiffany Gibbons]

Margin Call was another movie that did a good job showing the response to the market crash by a fictional investment bank. Absolutely cold-blooded. The clip from YouTube is the emergency partners meeting when the firm realizes the market is crashing. This was the end of firms marking assets to market for lending purposes, according to our CPA back then.

Yes, I saw this recently. I don't know how I missed it when it came out. Good movie!

 

[Tiffany Gibbons]

You missed the very point of the post - to an entity that already owns the loan what the property is now worth is irrelevant.

So, how is the borrower going to feel? I think the "entity" if it's a lender will have off loaded it to avoid being left holding the bag. That's only because I remember all those FIrst TN CLD loans that got sold to Metlife just in the nick of time last cycle. There were some risky loans in there for sure, then a rebranding. Then, um AMC's, etc.