How the GSEs view collateral risk — and how lenders should be adjusting.

Leveraging the right appraisal technology is critical.

The GSEs are taking a closer look at how they evaluate collateral risk. Appraisal modernization is vital. Gareth Borcherds, managing director Ascent Software Group outlines the three categories to be aware of, how appraisal modernization can help scale new initiatives and more in this executive conversation.

HousingWire: What should lenders consider in 2024 for collateral risk?

"Collateral risk is an area where we’ve seen a lot of renewed focus and attention. The GSEs are focusing much attention on how they go about evaluating collateral risk. If we are paying attention to how they talk about it, I think we can categorize their thoughts into three categories." - Gareth Borcherds, managing director, Ascent Software Group

Reduction in reliance on full appraisals. Many reasons given for appraisal modernization stem from appraisal turnaround times. But it’s more than just dealing with the appraiser shortage and the longevity of the industry. Collateral risk is a component of the loan that takes into consideration the credit risk of the borrower in addition to the collateral. I think that we are going to see more lenders continue to introduce more appropriate collateral evaluations relative to the credit risk. Appraisals are a high cost for borrowers and are not always needed.

Higher quality appraisals. On the flip side, when a credit risk decision needs to have a very accurate collateral risk decision, we are going to need better quality appraisals. The benefit of reducing the number of full appraisals required is that, when we do get an appraisal, we can push for a higher quality and more accurate report. Appraisal quality is a problem the GSEs are deeply concerned about and are putting a lot of focus on trying to address. Lenders should be careful with trying to enforce appraisal quality after they get a report back. Appraisal quality starts the moment an appraisal is requested and the biggest factor that will determine success is who the appraisal goes to. 

Collecting better data on collateral. To enable the two points above, the GSEs know they need more data. The two initiatives around appraisal modernization really serve one purpose and that’s getting more data over time to the GSEs about properties. The property data collection and Universal Appraisal Dataset 2.0 update serve this one goal of providing better property data. Property data in its current state is a big barrier to a lot of technology companies. They are in a unique position to make sure they get the data they need.

HW: How have recent appraisal modernization changes such as ACE + PDR affected collateral risk management?

GB: Appraisal modernization is about two things.

  1. Getting better property data to improve automated collateral risk decisions in the future
  2. Better aligning collateral risk decisions to credit risk decisions so there are more options available.

There is still an abundance of work to do to help the industry understand what appraisal modernization means and how it affects them. I think the most important aspect to understand is that the reduction in full appraisals is a good thing for most lenders. When you order a PDR/PDC report, you’ve essentially gotten an appraisal waiver. Anything that comes from the property data collected will not be any different than any of the problems that would come from an appraisal, but you don’t have to worry about the value.

The problem we currently face is this: How do we scale these new initiatives so they can be fulfilled with the same level of efficiency as appraisal and other things? We need more technology and vendors to be in the space and capable of fulfilling these products. An effort Jaro is heavily invested in making a reality for our customers.

HW: How can AMCs and appraisal desks improve their vendor selection and management?

GB: Part of our JaroDesk platform is built specifically to help do this. Finding the right vendor for an assignment is the No. 1 factor in the success of any collateral risk order. With the updates, I believe the clarifications to Appraiser Independence Requirements (AIR) draw renewed attention to the required focus of picking the right vendor.

We’ve written and talked about appraiser quality and selection before, and I still think this is an area that (if given the attention it requires) will drive a lot of improvements across the entire process. The inconsistency in appraisal quality is a staggering problem, but until lenders are required to pick the best appraiser or vendor rather than picking based on relationships or preference of a loan team, we aren’t going to force the appraisal industry to improve their ability to deliver higher quality reports.

The most important thing a lender can do right now is make sure they are defining criteria and tools to make sure they are only using the vendors that are delivering quality collateral reports to them.

HW: What tools does Jaro offer to help AMCs, appraisal desks and lenders manage risk?

GB: Jaro is more than just an order management platform. We have a full end-to-end product suite that allows us to have a hand in the entire collateral risk process and report. Our platform consists of three products, JaroDesk (Order & Vendor Management), JaroKit (Report Writing Tools) and JaroInspect (Property Inspection Data Collection). Within our platform, lenders, AMCs, and even appraisers can get all the tools they need to obtain property data and valuation reports.

Our vendor management capabilities are constantly growing. We have ways of identifying which appraisers are updating their appraisal practices to be better data driven analysis rather than relying on outdated appraisal techniques. We can then use these items to predict the likelihood of an appraiser delivering an appraisal report that is going to have quality issues. We hope to put these tools in the hands of our customers and drive the conversation with appraisers in the industry that it’s time we start improving our processes and quality.

Through this entire platform, we inject a slew of data collection and overlay that with artificial intelligence (AI) and machine learning tools to help inform the next decision. Our goal is to provide collateral risk parties to get access to everything they need to make the right decisions throughout the entire process.

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