Rolling With The Punches

The real estate market, and the appraisal industry specifically, has been in unprecedented upheaval during this correction, especially in these last few months. Every time you think you’ve seen it all, another bombshell comes along to rattle what you thought was your strong understanding of the system and the depth of the problems facing the real estate sector — not to mention the economy as a whole.

A quick glance at the highlights since the beginning of the year reads like a worst-case scenario class project cooked up by a college business professor (or is it a history professor, perhaps?):

  • Real estate values plummet by 25% or more in major population centers across the East and West coasts, causing hundreds of thousands of property owners with perfectly good credit to simply walk away from homes before even falling behind on payments.
  • Builders and developers who once reigned supreme leave behind a landscape dotted by unfinished luxury condo buildings and gated neighborhoods. Massive national developers like WCI begin bleeding so badly that even Carl Icahn wants a piece of the action.
  • In a classic case of pushing on a string, the Fed makes an emergency 75 basis point cut in January as fears of a full recession in the U.S. cause domestic and international markets to start unraveling.
  • The HVCC is dropped on the appraisal industry after New York’s Attorney General forces Fannie Mae, Freddie Mac, and OFHEO to sign a settlement agreement to a lawsuit that never was even filed. The industry wonders what “smoking gun” New York found, buried in the documents discovered in its suit against Washington Mutual and eAppraiseIT, to cause Fannie and Freddie, and OFHEO, to roll over so obediently.
  • Bear Stearns disappears as billions in shareholder equity evaporates overnight. The Fed is directly involved and engineers an unprecedented use of its discount window funds as a stop-gap attempt at preventing real estate hedge fund nightmares from spilling over into the broader financial sector.
  • IndyMac is declared insolvent just a week after showing asset values of over $30 billion. It’s the largest bank failure since the S&L crisis, and one of the largest ever, even including the Depression.
  • Fannie and Freddie wind up in such bad financial trouble that the government has to rescue them too. OFHEO is kicked to the curb and replaced by the Federal Housing Finance Agency (FHFA) formed as part of the Housing and Economic Recovery Act.

And that’s just a list of a few key moments in 2008, following on the heels of an “interesting” subprime mortgage meltdown and credit crunch in 2007. Even the most skeptical bubble theorists didn’t really think we’d wind up in this position, so quickly. But here we are, with predictions by everyone from the local barber to Harvard economists that the real estate market won’t improve till 2010 or 2011.

What ’s your plan?

I’m not trying to scare anyone by recapping the tumultuous year we’ve all had. Instead, I think it’s important to note what’s happened and what the ramifications are, so that a real plan of action can be formed — and aggressively undertaken — to counteract the effects of the broader market in your own business.

The simple fact of the matter is that “business as usual” isn’t going to work anymore, because things are far from “usual”. While that sounds obvious, step back a moment and critically evaluate your game plan, and focus especially on how different it really is from what you’ve done all along.

If you’ve got a plan in the first place — not just a wish list — then you’re already better off than most. But the odds are that even the plan you have isn’t a far cry from what you’ve done during the boom times. There may be some marketing and advertising thrown in, and you’re looking to go after non-lender business, but how much has your core mindset changed? Is it incorporating the notion that even after this boom-and-bust cycle swings back around to boom (or at least gets out of bust), things will be permanently altered, much like they were after the S&L debacle? Is it taking into account the role that technology, both on your desktop and in the market at large, will play in the new world financial order?

Is it dealing with the very real likelihood that a sizable percentage of appraisers, agents, and loan officers will leave the business over the next couple of years, possibly never to come back? That’s not even speculation, as nearly all of you know people who have already left the real estate business. There will be fewer appraisers, agents, and loan officers chasing after fewer real estate transactions done in radically different ways than they were in 2003 to 2007. All of the “who, what, when, where, and why” aspects of your business will change as the industry contracts and adapts.

The good news

Of course, there’s good in all of this too. As free-wheeling lending has disappeared, the risks to the economy have decreased going forward. To get a home loan now, a buyer has to have an actual down payment, has to have a job capable of paying the mortgage and bills at the same time, and has to be subjected to credit checks which begin with a skeptical eye instead of an automatic rubber stamp of approval.(pq)

And, best of all, lenders will once again care about the actual, realistic market value of the property that’s being used as security for a mortgage, and full appraisals of the type preferred by ratings agencies and investors will dominate the market for the foreseeable future.

Even with the efforts of AVM vendors and settlement service companies to hide it, and the HVCC’s skewed pro-AVM playing field, AVMs have thankfully been largely discredited in the industry as tools for individual lending decisions, and properly relegated to their role in doing broad-brush portfolio analysis. And while BPOs are used in disturbingly large numbers of REO jobs right now, they’re unlikely to become primary lending tools after the foreclosure wave begins to subside. Ultimately, the foreclosed properties will be mortgaged again, and in most of those cases a real appraisal will be used. That doesn’t mean the volume will ever reach the frenzied pace of 2004 and 2005, of course.

The challenge, as you already know and as we’ve covered extensively in this newspaper, is keeping as much of the traditional lender appraisal fee as possible, while finding alternative non-lender business as well. With the HVCC’s “firewall mandate” looming on the horizon, lenders are in the process of outsourcing much of their appraisal business to AMCs and similar vendor managers. In many cases, that means that fee cuts will be substantial even on the traditional work that remains, unless you act to keep the lender business coming to you via more favorable “firewall” systems.

Making Mercury part of your plan

The new version of our Mercury Network is one such system, with several twists differentiating it from both AMCs and from other appraisal portals (see “Mercury’s ‘Research Analytics’ Breaks New Ground”, on page 4). But to get the most benefit from Mercury, you’re going to have to incorporate some new thinking into your business plan.

The first change is making the leap of faith to believe that there’s actually a benefit to having Mercury between you and your lenders. In the past, even though more than 235,000 accounts were created by lenders, agents, homeowners, lawyers, and more as they ordered and managed millions of appraisals from Mercury members, it seemed that many appraisers viewed Mercury as a potential threat. That’s actually a big reason why we eventually downplayed Mercury and morphed it behind the scenes into the XSites Network. Lenders and others casually browsed for appraisers via the XSites directory, but then connected to an appraiser’s individually branded XSite to place orders. Appraisers were more comfortable with that approach.

Today, of course, the situation is different. You need your private XSite for consumer business and for general marketing, but you also need to be able to move your lenders to a large scale ordering and management system that preserves your fee, before they make the decision on their own to comply with the HVCC by using a management company. A lender managing an ongoing appraisal function won’t browse to a thousand different XSites to manage and place orders. It has to be centrally managed and compliant with all of the new regulations before they’ll consider standardizing on a process, and Mercury fits the bill perfectly. And with the fee to the appraiser being under $15 per report, it’s much better than the alternatives — either not getting the order at all, or getting it with a 50% fee cut.

More than just not fearing Mercury, it would be best for you and for us of course if you really pushed it to your lenders very proactively. Our advertising will be that much more effective when backed by dozens of calls and e-mails to loan officers and department managers from appraisers on their fee panels, recommending the switch to Mercury as the lender’s appraisal management platform.

After this upcoming January 1st, under the terms of the HVCC, you won’t be able to solicit or deal with any of the loan officers and contacts in your current database. Your business contacts will be worth zero then, but they’re a goldmine right now. If you pull them to Mercury Network, then you’ll get the same business you are now, with only a tiny under-$15 fee, as opposed to losing much of the fee if the lender goes to an AMC. And after that, if you hand the contacts off to us, we can have our professional salespeople working those lender accounts legally, since we aren’t an appraisal company. Again, that benefits you. But it only works if you change your thinking and make use of your contacts before it’s too late. Otherwise, you’re not rolling with the punches and adapting to the changes in the industry — you’re just taking the punches head on.

Mercury Network is Back

Step 1: Get your profile updated

All XSites users have a profile on the Mercury Network. Make sure it’s current in your XSite’s User Management area. The more complete your profile, the better. Then, tell your clients about Mercury.

Step 2: Lender places order

Lenders use Mercury Network’s web interface to order appraisals, or their own systems can connect to our management servers. They can search for appraisers meeting their specific criteria or use the soon to be released “double-blind” system.

Step 3: Manage your Mercury appraisals with
your XSite

Appraisers use our familiar XSites system to manage orders and status. It’s all at your fingertips and fully integrated with WinTOTAL to save steps. From one screen, you can see status, update orders, accept assignments, deliver reports and more. It’s the same infrastructure that has already delivered over 11 million reports for thousands of appraisers and lenders.

Step 4: Send automated status notices and delivery reports

One thing lenders appreciate about AMCs is not having to make phone calls to appraisers asking about a report’s status. Mercury Network delivers that same convenience with automatic alerts that go out at every milestone. When the report is complete, use the integrated plugins to seamlessly deliver your work in the lender’s required format.