• Welcome to AppraisersForum.com, the premier online  community for the discussion of real estate appraisal. Register a free account to be able to post and unlock additional forums and features.

S & P Comments

Status
Not open for further replies.

Dennis J. Black ASA IFAS

Thread Starter
Senior Member
Joined
Mar 5, 2002
Professional Status
Certified General Appraiser
State
Florida
S & P requested comments concerning their rating process and one section related to appraisals. The following is what three organizations produced as a joint comment.





September 24, 2008


Standard & Poor’s
55 Water Street
New York, NY 10041

Re: Request For Comment – Incorporating Third Party Due Diligence Results Into The U.S. RMBS Rating Process

The undersigned professional appraisal organizations, representing several thousand real estate appraisers in the U.S., appreciate the opportunity to comment on Standard & Poor’s proposals for new ratings criteria using “loan-level third-party due diligence” results to rate various types of residential mortgage loans. Our comments are limited to provisions of the new ratings criteria which relate to “Property Valuation Review” and valuation aspects of “Regulatory Compliance”. Because of the very limited period of time we have had to review the criteria, this letter is a brief summary of our views (we may follow-up this letter shortly to provide a more detailed set of comments). We hope you find our comments informative, constructive and useful.


I. Executive Summary

• Our organizations strongly support S&P’s commitment to validating the fair market value of residential properties collateralizing mortgages included in pools of mortgage-backed securities (in connection with its U.S. RMBS Rating Process) by seeking a “report of appraisal review scores for each loan” to ensure that the third party due diligence firm properly validates “the stated appraised value of the property to actual values at origination.” We also believe it is prudent and necessary to assign risk factors to “pooled” mortgages based on the reliability of the fair market values of the collateral properties.

• While we strongly support S&P’s objectives, our organizations have concluded that the proposed criteria for property valuation review do not constitute meaningful third party “due diligence” and will not improve S&P’s ability to rate pools of mortgage-backed securities. We have reached this conclusion – reluctantly and respectfully – for the reasons set forth below.


II. Comments On Property Valuation Review Criteria

For the following reasons, our organizations do not believe that the proposed property valuation review criteria will in any way improve S&P’s ability to rate mortgage backed securities.

First, believe it is a relatively meaningless exercise to validate the actual property value at origination without first having a reasonable basis for believing that the original value was reliable. In today’s residential mortgage markets, federal and state laws generally require the use of state certified or licensed real estate appraisers to value such properties at origination; and, in our experience, most mortgage lenders – out of an abundance of caution for safety and soundness reasons – rely on professional appraisers to value residential collateral even when federal or state laws may not require it. Without knowing who or how the original fair market value was established, any review would be of dubious utility, at best. In many situations, S&P’s review criteria could produce automated valuation reviews of….automated valuations. We do not believe that is an acceptable way to bring greater reliability to valuing collateral properties in the mortgage markets.

RECOMMENDATION: We believe S&P property valuation review criteria should state that a Level C grade for valuation scoring (with an appropriate loss coverage adjustment) will be assigned for loans whose appraisals at origination were not performed by state licensed or certified appraisers. This policy, together with the changes recommended below, will ensure that the review process will produce meaningful information to investors.


Second, S&P’s property valuation review criteria permit and promote reliance on valuation processes which, by any objective standards, are either inherently unreliable (AVMs) or are performed by individuals with a financial interest in completing the mortgage transaction (BPOs).

AVMs: Automated valuation models (AVMs) have little or no reliability in communities where the homes are not of a like kind. AVMs cannot and do not produce values that reflect the condition of residential properties – a major factor in concluding fair market value. Finally, there are no generally accepted standards or even best practices regarding the design and use of AVMs. We accept the view that AVMs can be a useful tool in the hands of a valuation professional who can evaluate the information it provides and factor that information into a final appraisal report. But, AVMs, in and of themselves, should never be relied on as the exclusive or even a primary factor in determining the fair market value of residential properties;

BPOs: In addition to the fact that federal and state laws prohibit the use of Broker Price Opinions to value collateral in most mortgage originations, there are two other problems with BPOs. The first is that those who perform BPOs have little or no valuation-specific education, training or experience. They clearly have not demonstrated their valuation competency by obtaining state appraiser licenses or certifications; nor have they demonstrated their valuation competency in any other way. The second problem with reliance on BPOs – particularly for S&P or any other securities rating agency – is that the individuals performing them have a serious conflict-of-interest: they have a financial stake in seeing the mortgage transaction consummated and the adequacy of the collateral property often is a key component of whether the transaction closes or not. This inherent conflict-of-interest should be an automatic disqualifier with respect to obtaining an independent estimate of the value of the collateral.

We are greatly troubled by the fact that notwithstanding the essential unreliability of AVMs and the conflicts-of-interest inherent in those performing BPOs, Standard &Poor’s property valuation review criteria promote reliance on them to ensure the reliability of the values assigned to residential properties included in pools of mortgage-backed securities.

RECOMMENDATION: We reiterate our recommendation above that valuations established by AVMs or BPOs be assigned a Level C grade for valuation scoring with meaningful loss coverage adjustments. We also strongly recommend that S&P require the performance of “Appraisal Desk Reviews” by state certified or licensed real estate appraisers (an inexpensive, rapid and provably reliable system for reviewing original appraisals) as the basis on which due diligence firms validate the stated appraised value of the property to actual values at origination.



III. Comments On Regulatory Compliance

S&P’s proposed rating criteria state that it “expects a due diligence review of each loan’s compliance with any applicable federal, state, and local laws and regulations. Loans that are not in compliance generally violate the representations and warranties included in the transaction documents, and thus should be removed from the collateral pool.” Over the past decade or so, dozens of federal and state laws have been enacted and federal regulations (having the force and effect of law) issued which directly cover appraiser qualifications and adherence to appraisal standards (i.e., the Uniform Standards of Professional Appraisal Practice or USPAP). Most of these laws and regulations govern the performance of real estate appraisals, including the appraisal of residential properties which collateralize mortgages.

RECOMMENDATION: We urge S&P to carefully examine these requirements so that it will be in a position to enforce its regulatory compliance criterion.


Our organizations would be please to work with you to establish appraisal standards and property valuation review criteria in connection with the important work S&P performs. If you have any questions or would like to discuss these issues with us in detail, please contact the Washington, DC representative of the American Society of Appraisers, Peter Barash, at 202-466-2221 or at his e-mail, [email protected].

Sincerely,

ASA
ASFMRA
NAIFA
 

J Grant

Elite Member
Joined
Dec 9, 2003
Professional Status
Certified Residential Appraiser
State
Florida
Interesting!! thanks
 

athome77

Member
Joined
Apr 1, 2008
Professional Status
Certified Residential Appraiser
State
Illinois
"RECOMMENDATION: We reiterate our recommendation above that valuations established by AVMs or BPOs be assigned a Level C grade for valuation scoring with meaningful loss coverage adjustments. We also strongly recommend that S&P require the performance of “Appraisal Desk Reviews” by state certified or licensed real estate appraisers (an inexpensive, rapid and provably reliable system for reviewing original appraisals) as the basis on which due diligence firms validate the stated appraised value of the property to actual values at origination."

I agree with the following additional suggestion: remove inexpensive and rapid from the equation. In my experience, these terms actually mean faster and cheaper, resulting in loss of reliability. Oh, and how about performance of desk reviews by geographically competent appraisers? just an idea.
 

athome77

Member
Joined
Apr 1, 2008
Professional Status
Certified Residential Appraiser
State
Illinois
Forgot to say thanks to the OP for posting. My bad. Thanks
 
Status
Not open for further replies.
Find a Real Estate Appraiser - Enter Zip Code

Copyright © 2000-, AppraisersForum.com, All Rights Reserved
AppraisersForum.com is proudly hosted by the folks at
AppraiserSites.com
Top

AdBlock Detected

We get it, advertisements are annoying!

Sure, ad-blocking software does a great job at blocking ads, but it also blocks useful features of our website. For the best site experience please disable your AdBlocker.

I've Disabled AdBlock
No Thanks