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High-risk lending fallout creates heightened demand for appraisals

We’ve all heard about it in the news. America is in the midst of a sub-prime mortgage crisis. But what exactly does this mean – and why does this bad news create an upside for Zaio?

First let’s identify the players. In the United States there are two types of lenders: conventional banks and mortgage companies, which focus on higher-quality, less risky loans; and sub-prime lenders, which lend to those who do not qualify for loans from mainstream lenders. In general terms, sub-prime lenders are dealing with riskier loans to working-class people. Many sub-prime borrowers are in a precarious financial position. They were hit hard when the real-estate market went down, and interest rates went up, resulting in an exceptionally high number of loan defaults and foreclosures.

Fortunately for Zaio, the impact is positive, because the default/foreclosure cycle creates a need for multiple appraisals. Sub-prime lenders’ poor appraisal practices are also a factor. Banks are regulated by federal government agencies with very strict operating rules. Sub-prime lenders are regulated at the state level by 50 different agencies with an equally diverse number of rules and regulations. Many states do not require that sub-prime lenders obtain appraisals before advancing funds. It’s ironic that in cases where collateral is very important, many lenders cut corners by not getting appraisals. As a result, properties are not valued properly in the first place, or the appraisals are outdated and reflect boom-market prices.

Once borrowers get behind in their payments, appraisals become a key factor. Here’s a look at what has historically happened in the lending industry.

• When the borrower is behind 60 days or more, lenders often re-value the property. The federal government requires that lenders establish reserves to cover losses in the event of a default. The lender needs to know the accurate value of the property, and the most recent appraisal may be out of date. At this point, the lender does not have the legal right to go into the property, and can only request an exterior appraisal.
• Once the loan hits 90-day delinquency, the lender’s chances of repayment are minimal, and the lender usually initiates a pre-foreclosure process, which triggers the need for a new appraisal. This is now the second appraisal.
• Typically at 120 days the foreclosure process is initiated. The lender claims the property, which then becomes known as a real-estate-owned (REO) property. The lender is now entitled to enter to the home, and may request a more comprehensive third appraisal.
• Before marketing the property acquired through foreclosure, the lender’s board of directors will require another appraisal (the fourth) to ensure the full value of the property is realized.
• Of course, the people buying the property need their own appraisal in order to secure a loan. This means that a single property could have three to five appraisals in less than a year.

According to Zaio Chief Executive Officer, Thomas Inserra, “During a similar, but worse, banking crisis in the 1990s, during the first six to nine months, appraisal volumes declined due to a drop-off in new home sales and refinancing activity. After about nine months this trend starts to be replaced with an even greater appraisal demand from financial institutions involved in refinancing and foreclosure proceedings.” Zaio Chief Financial Officer Rod Mitton expects that we’ll see the bottom of the cycle in the next 90 to 120 days, adding that these conditions typically result in a notable increase in demand for a wide range of appraisal products, including those offered by Zaio through its national network of appraisers.

Lending institutions can choose from a range of appraisal options. In all 50 states, Zaio is ideally positioned to provide the full spectrum of appraisal products – Automated Valuation Models (AVM), Broker Price Opinion (BPO), Drive-by (a visual inspection from the street), GeoScore™, and comprehensive, in-depth, on-site appraisals.