BLOG VIEW: Last month, many of the nation's mortgage loan servicers braved the winter weather to come together in Dallas for a major national trade show. While compliance continued to be a hot topic, budgets and the rising cost to service loans were also of key concern to attendees. Servicers everywhere are struggling to remain profitable in the face of rising compliance costs and the need to expend resources on customer service tasks that were judged less critical in the past.
If mortgage servicers hope to succeed in this environment, they must cut costs wherever possible, maximize fee income in a manner that does not negatively impact customer service levels and reduce loss severity on every default. In this short article, I want to talk about how some of this may be accomplished.
Cutting Costs Without Compromise
In most cases, reducing expenditures requires you to reduce the value you receive in return. Often, that means accepting lower quality. Unfortunately, in this highly regulated business, that's not always an option. In some cases, it can lead to higher costs in the future, especially in the area of noncompliance. One area where this is certainly true is in collateral valuation.
Servicers must know the value of the underlying collateral of the loans they service. It informs their decisions and, if done properly, allows them to meet all three of the objectives mentioned above.
First, by choosing the right collateral valuation product, servicers can effectively reduce costs without compromising the quality of the results. Secondly, by using a low cost tool to estimate the borrower's equity, the servicer can mine its own portfolio for home equity loan candidates, increasing its fee income by originating those second liens or selling the leads. Thirdly and perhaps most importantly for many servicers, the right collateral valuation solution can be a very valuable tool when it comes to reducing the loss severity during the default process.
Regardless of the tool chosen, quality has become and will likely remain a top priority for the industry. We're already seeing this on the origination side of the business with the launch of Fannie Mae's new Collateral Underwriter tool. When the industry's largest investor creates technology to solve a problem, there can be no clearer signal that the issue is of critical importance. Servicers must not compromise quality when it comes to their collateral valuations. The good news is that they won't have to do so.
The Right Tool For The Job
Fortunately for mortgage servicers, most of their collateral valuation needs can be met with tools that are significantly less expensive than full appraisals. While an appraisal may become necessary during the final disposition process for an REO property, just about everything else can be handled with significantly less expensive valuation products.
The workhorse for the servicing industry's valuation needs has traditionally been the broker price opinion (BPO). When real estate prices were uniformly depressed, it didn't take much of a BPO to tell a servicer where a property lay on the valuation spectrum. Unfortunately, as home prices have begun to increase, a poor valuation on a BPO has been increasingly responsible for industry problems. Specifically, we have heard servicers say they were surprised by the actual value of a property when the full appraisal was ordered and investors who have missed out on deals because a bad BPO led them to pass on a deal and miss an opportunity or, perhaps worse, to pay too much for a distressed property.
Professional appraisers have long warned that this would happen as the BPO is not nearly as detailed an analysis of a property as the full appraisal reports they provide. In our opinion, professional real estate brokers are experts at knowing the ultimate sales price of a property in their own markets. If there is a problem with the detail provided, it's because there is no universal standard for BPO production or delivery and because the forms most vendors use do not allow the real estate professional to tell the complete story.
There are BPOs available in the marketplace now that provide a great deal of detail, as well as hybrid products that see professional appraisers reviewing these tools. In our experience, it's not about a BPO versus another product, but rather the right BPO product versus anything else.
Where To Find Real Savings
One error we see some servicers make, and investors as well, is working very hard to reduce the cost of a BPO by a few dollars at the expense of making sure that the tool will actually meet their needs. That's not where the real savings are. Every client our firm works with is different – and their needs are different. While BPOs, as a product class, are pretty much the same wherever you get them, the professionals that put them together can be vastly different. The right vendor will work with you to make sure that all of these elements line up to deliver the product you need.
Servicers should spend time with their vendor in an effort to learn about their process and to explain how the valuation products they plan to purchase will be used. This isn't about directing value, something that is never acceptable. It's about working with your vendor to make sure that the tools you choose will meet your real needs, return high quality results and be the most affordable solutions possible.
A good value is important and reducing costs in all aspects of the servicer's operation is also essential, but care must be taken not to risk tens of thousands in pursuit of a few dollars. By focusing on unit cost instead of the quality of the results offered, the servicer or investor risks not knowing enough to price the collateral appropriately. Only with a very good idea of the actual valuation will you be able to price correctly, whether on the acquisition or the sell side.
Fortunately, servicers have an opportunity to know how well their vendors are doing in this regard, since the properties they are valuing with BPOs often go to sale, where a full appraisal is usually obtained. By keeping records of the values returned by BPOs and comparing those results to the final appraisal and ultimately the sales price of the property, it will quickly become apparent how much your current vendor focuses on the quality of the results.
Servicers have come to terms with the fact that incorrect valuations cost them far more than they can save by working with low-cost providers. Investors, likewise, have realized that bad valuations lead to lost opportunities – and there are still opportunities for investors in today's marketplace.
Tools like Fannie Mae's CU reinforce the idea that the quality of the collateral valuation used in the mortgage process is extremely important. But it's just as important on the back end. If properly utilized, collateral valuation tools can help servicers reduce costs, increase fees and lower loss severity. That makes this a key area of concern for any servicer hoping to succeed in this difficult environment and makes seeking out the right vendors and products time well spent.
Ron Ahlensdorf Jr. is president of Summit Valuations, which works with a national network that includes 20,000 active real estate professionals who provide BPOs to the mortgage industry.