Featured news — posted November 10, 2004

Based largely on appraiser input, Fannie Mae has revised its series of proposed new test forms. The new Test 1004 provides additional narrative and comment space, restoration of standard format for cost and income approaches, an expanded sales comparison grid, and more, including appending what had been the test 1004b, Definitions, Statement of Limiting Conditions, and Appraiser's Certification, as pages 4-6.

Here are links to PDFs of the new forms from Fannie's website [Note: some forms require Adobe Acrobat Reader version 6.0 to view, we've found. You can download it for free here.]: 1004, 1004c, 1004d, 1025, 1073, 1075, 2000, 2000a, 2055, 2090, 2095. Some of the PDFs (as of this writing) are secured so as to prevent printing or text-copying. That's on Fannie's end, not ours (and hopefully will be fixed soon).

As you know, we drop everything when a major new form comes out (let alone 11!), and we plan to have the new test URAR out for beta testing by no later than next week. Others will follow shortly thereafter. We pride ourselves (justly) on getting these forms into WinTOTAL users' hands via ICU faster than any other vendor, and we don't plan to change that for this new round of Fannie test forms.

Fannie is still interested in your feedback, which it asks that you send it by December 15 — not much time! You can e-mail test_appraisal_forms@fanniemae.com with comments or concerns.

In our last now biweekly edition we told you how and why we were providing Mercury Desktop users with free upgrades to XSite Order Manager, and additionally, Standard XSites (functional primarily for branding and order management) to the more than 6,000 Mercury Desktop users who did not have an XSite. We alluded to an overall effort to phase out the Mercury brand in favor of the more individualized, personally branded XSites Network.

The Mercury Network was borne of the market changing idea that appraisers and their clients could find and do business with one another electronically for free. It was launched at a time when proprietary EDI systems were debuting or in the planning stages that sought to charge appraisers for the marketing advantages, ease of use and efficiency of EDI networks. It worked.

In fact, it worked so well that ours became the only network anywhere in the entire real estate sphere with the ability to maintain the branding of the participants while still providing backend ordering and collaboration tools. It grew to the point where it was better for our customers to allow their private branding and marketing to emerge from "underneath" what after all is called the "back end" for a reason. And with a growing population of other service providers and clients of your services sharing the same collaboration tools, it was a natural evolution to include them as well.

Today users of XSites number in the tens of thousands, and even before we produced some 6,000 more, appraisers made up the majority of all XSites owned. But we have many thousands of Agent XSites users, Inspector XSites users and now, Mortgage XSites users — your (direct) clients, small- to medium-sized brokers or loan officers responsible for ordering appraisals.

The rapidly growing XSites Network will now allow all of those professionals to collaborate on many documents and processes including but beyond appraisals throughout the listing-to-closing real estate cycle. The XSites Network will tighten the relationships lenders and their representatives have with their vendors, like you. Taking advantage of instant status updates, instant data retrieval and status messaging from the field, contact and schedule management and secure report delivery, small- to medium-size lenders, individual agents, inspectors and appraisers will all have the technology at their disposal that only their bigger competitors could afford until now.

Each XSite retains its own domain name and look and feel, yet the web services-based transaction management tools operating behind the scenes — formerly called the Mercury Network — provide the consistency and open-standards integration previously found only in monolithic, third party networks. As a result, the XSites Network allows our customers to provide services feasible previously only for larger companies, without losing the hard-won public brand identity often associated with linking to third-party network solutions.

In the future, we plan to offer credit, title, flood and other settlement services on the XSites Network, but that's getting ahead of things a little. Right now it's important to note that all of the benefits of the Mercury Network are retained for you in the new XSites Network, the disadvantages of ceding individual brand identity to a perceived monolithic Network are removed, and collaboration is increasingly possible with a number of players in the home selling, buying and mortgage processes.

We'll provide in this space as well as in our other customer communications in the near future with examples of how you can maximize your return on investment in your XSite under the new XSites Network.

ASC leery of lagging adoption of AQB criteria by states; Appraisal Foundation task force will help with newest criteria

Appraisal Subcommittee (ASC) Executive Director Ben Henson told a panel discussion at the Association of Appraiser Regulatory Officials (AARO) last month that prior to 2003, the ASC had warned six states about their appraiser licensing and certification programs, but in the past 18 months alone, 10 jurisdictions have been warned about some aspect of their regulatory program being out of compliance with a potential to affect ASC recognition.

Intuitively, a historic mortgage activity boom not accompanied (in most cases) by expansions of state regulatory boards would lead to longer timeframes for resolution of complaints against appraisers, which Henson said was a concern. But, to the consternation of some state regulators, he said the ASC was more concerned about states' failure to adopt revised Appraiser Qualifications Board (AQB) criteria in a timely fashion.

In most cases, adoption of new AQB criteria requires an act of the state's legislature, which is often less motivated to pass laws requiring compliance with the AQB than appraisal boards or the ASC would like.

This year, the AQB adopted its most ambitious change to its qualifications criteria yet, with a deadline for implementation and compliance of January 1, 2008. In response to concern at the state level (and from the ASC) that The Appraisal Foundation should provide support to the states in their efforts to square their state laws with the new criteria, we've learned that Foundation Board of Trustees Chair Nardie Vine is appointing a Qualifications Criteria Implementation Task Force. The Task Force will assist in the implementation of the new criteria through educational efforts, though any criteria policy related matters will continue to be addressed solely by the AQB.

The Task Force will be charged with developing documents in layman’s or practical terms which assist in clarifying the understanding of the new AQB criteria, to include an historical perspective as well as rationale for the changes. In addition, it will develop seminars to be provided to appraiser regulators and educational providers on a regional basis, and provide direct assistance to states that may request specific help in implementing the new criteria in their jurisdiction.

The deadline for documentation and seminars is March 31, 2005. The Task Force will be chaired by Lee Hackett, 2005 Vice Chair of the Board of Trustees, and will include two AQB representatives, the Chair of the Educational Council of Appraisal Foundation Sponsors, an AARO representative, a representative of the Foundation’s State Regulator Advisory Group, and the Chair of the Foundation’s Publications Committee.

In other Appraisal Foundation news, Sandra Guilfoil was re-appointed to a three year term to the AQB, and will serve as its 2005 Chair. Carla Glass will serve as 2005 Chair of the Appraisal Standards Board (ASB), and Peter Clark will Chair the Appraisal Foundation Board of Trustees.

AVM advocates have long hung their hats on the fact that lenders can't pressure an AVM. What they can do, of course, as noted by Fitch Ratings, a competitor to S&P, is cherry-pick different AVMs, which often have wildly different results, until they find the highest value. That's hardly "independent." What S&P is saying is that whether this or that AVM works or not, investors need to be sure that the valuation method that was used in the particular transaction was unadulterated by someone with a commission stake in the deal closing.

So S&P evaluated 13 AVMs. If one is found to be more accurate than the rest, how does an investor know that that's the one that was used in the particular transaction? The "future of AVMs," it seems to us (and evidently to S&P), lies in whether investors and secondary market players can be sure the valuation was objective and uninfluenced by a commissioned broker or loan officer. Competing AVMs have a hard row to hoe to make it to the point where a mortgage backed by an AVM will be acceptable to an investor over one backed by a full appraisal, for just that reason.

Appraisers are people, trained and educated on professional methods and ethics. It doesn't take a few mouse clicks to pressure an appraiser into reaching a desired value. The cost of appraiser pressure is significantly higher than the cost of trying different AVMs with different parameters until a desired value is "hit."

S&P is also correct to note that credit decision support is just as important, because it speaks to the likelihood of default in the first place. Where there is investor (or underwriter) concern about the creditworthiness of borrowers, they will always, 100 percent of the time, prefer full appraisals to AVMs.

S&P reported that "approximately nine percent of the first lien transactions rated by Standard & Poor's during the past year contained properties valued by AVMs," which it characterized as a symptom of an overall reluctance on the part of the mortgage industry to adopt new technology.

"These slow inroads into the first lien market are not seen in the second lien market," the report continued, "where approximately 94 percent of transactions rated by Standard & Poor's used AVMs. The historical use of AVMs in the second lien market has always been acceptable where assumed losses (or write-offs) are taken on defaulted loans, irrespective of valuation method."

When a certain write-off factor is built into the pricing, as in second liens, valuation method doesn't matter, so 94 percent of those transactions rely on AVMs. Where creditworthiness is a concern, as S&P correctly said is the case in first mortgages, not even 10 percent of loans rely solely on an AVM.

With "subprime" and "Alt-A" lending hitting an all-time high, and with Americans more debt ridden and less likely to pay their bills — see our article on that subject — the market for AVMs in first liens isn't growing, it's shrinking.

It's true that AVMs can improve over time (they face sometimes insurmountable problems of data age and availability, but that's another matter) to the point where lenders are more "comfortable" relying on them. But: As long as lenders can "cherry pick" AVMs till they get a value they like, all 13 AVMs tested will have to reach that point for investors (and underwriters) to be comfortable relying on them.

With appraisers improving their turn times every day using online and mobile tools, real-time statusing, better data gathering and secure delivery of work product, the primary attractiveness of AVMs — speed — is declining along with Americans' creditworthiness. We agree with what Standard & Poor's seems to be saying about the future of AVMs in the first mortgage market: They're likely to improve, but likely not to be as attractive to investors, secondary market players or underwriters.