Current Myths about Alternative Valuations

REVAA is an alliance of member companies that is dedicated to the improvement and advancement of the real property valuation industry. Our association promotes high ethical standards, political awareness, and growth for the industry. Our members are companies that produce and utilize real property valuation products including Appraisals, Broker Price Opinions (BPOs), Automated Valuation Models (AVMs) and other innovative approaches to valuation that benefit mortgage investors, servicers, originators and borrowers.

At REVAA, we believe that financial institutions and investors should be able to choose from a wide variety of proven and reliable valuation tools. Unfortunately, the ability of our customers to order "the appropriate product for the appropriate purpose" is under enormous attack.

As you are likely aware, some state Appraisal Boards and appraiser groups are actively petitioning the federal government and state legislatures to enact regulations that will restrict financial institutions to a single valuation perspective, an Appraisal. In today's challenging economic environment, where real estate values are extremely dynamic, such a restriction poses a very real risk to the safety and soundness of our system of mortgage finance.

BPOs, AVMs and other alternative valuations are important and necessary tools which reduce costs, increase speed and strengthen overall accuracy. Their use benefits homeowners with reduced costs (reduced pass-through servicing costs), mortgage investors (decreased cost of due-diligence) and credit risk departments (to verify Appraisal accuracy).

There are a number of myths about alternative valuations that have resulted in a lack of clarity among legislators, regulators, consumers, and even some in our industry. Here are the top five:

Myth #1 - Alternative Valuations are taking away business that used to be performed by appraisers. This is not true.

  • This myth is fueled by a lack of information on the part of legislators, regulators and many appraisers about the increasingly important servicing, loan modification and loss mitigation processes that we perform every day.
  • Historically, Appraisals have had a limited and narrowly-focused utility and they are not typically the most efficient product for servicing, loan modification and loss mitigation purposes.
  • Loan origination valuations are visible products, so it is understandable that the general public might equate all valuations with being solely an origination product. However, the growth of alternative valuations is largely due to their efficiency and reliability for non-origination purposes. They have not supplanted Appraisals as the typical valuation tool for loan originations.

Myth #2 - The Federal Government prohibits the use of BPOs. This is not true, consider this:

  • FIRREA and the Interagency Appraisal and Evaluation Guidelines only require Appraisals for residential loan originations in excess of $250,000.
  • The Treasury recognizes the use of AVMs or BPOs to establish eligibility for HAMP and HAFA, the current federal mortgage rescue programs.
  • The Federal Reserve Board recognizes the use of BPOs, AVMs and new data-driven products to assist lenders in making decisions related to HELOCs in their Regulation Z (Truth in Lending) proposal.
  • The FDIC allowed for the use of BPOs in its loss sharing proposal for loan modifications (a precursor to HAMP).

Myth #3 - Even in situations where the Federal Government allows BPOs, their use is illegal in a majority of the states. This is not true.

  • Analysis of state laws needs to be fact-specific (and often depends on intended uses) so generalizations are not very meaningful.
  • Many states have generalized statutory language on what constitutes an Appraisal, which would require the services of a licensed or certified appraiser. Therefore, automated valuations, property inspections, even newspaper articles on housing prices could be read to require the services of a licensed or certified appraiser in some states.
  • Historically there have been two primary transactional situations requiring a determination of a property's value: for loan origination purposes (an Appraisal); and to establish a listing price for a sale (a BPO). However, the situation today is much different with countless back- end uses of valuation products for pre-foreclosure analysis, secondary market transactions and loan modifications, which are not often addressed in current legislation.
  • Rather than engaging in a turf battle over what product should be mandated for use in a given situation, the goal should be to develop current statutes and regulations based on a full understanding of the wide array of valuation tools available to aid in sound decision- making processes by lenders, loan servicers, investors and consumers. To otherwise limit the flow of valuable information based on aggressive interpretations does a disservice to all.

Myth #4 - BPOs are not accurate and there are no standards. Again, not true.

  • BPO providers are currently being held accountable and ranked against each other for accuracy (by comparing ultimate REO disposition values to previous BPO prices) helping providers and agents calibrate to the actual market value.
  • BPOs are performed by people who are experienced in the local market. They know if the local market is experiencing an influx of multiple offers, and they understand the effect of having listings that may be sitting on the market. They have their finger on the pulse of what is happing now, in addition to being armed with historical data.
  • BPO Standards and Guidelines ("BPOSG") have recently been introduced that provide a comprehensive framework for the preparation of BPOs on a national level. The BPOSG include suggested practices for the selection and utilization of comparable properties, pricing and the use of photographs. They also contain prohibitions on conflicts of interest and ethical and competency considerations. The BPOSG were developed by a BPO Standards Board comprised of BPO subject matter experts from leading BPO companies as well as experienced BPO practitioners.

Myth #5 - If BPOs were outlawed, appraisers could simply step in and replace all the BPOs with short-form 2055 Appraisals and drive-by Appraisal Price Opinions. Not true.

  • The truth is that 2055s are expensive, and in many cases it is important for the end-user to get the viewpoint of a sales professional who is active in a particular market. Further, the current demand for BPOs exceeds the number of valuations that licensed and certified appraisers could realistically deliver. As a result, if BPOs were eliminated the turn times and fees for appraiser valuation products would sky rocket, and servicing and investment due diligence would be greatly diminished, potentially reducing the flow of capital. Finally, removing real estate agents and brokers from the valuation equation could actually result in a reduction in quality as the remaining valuation suppliers (appraisers) would face less competition in providing quality products in an efficient and cost-effective manner.