Valuation for Mortgage Lending in North America and Lessons for Europe. Presented to The European Group of Valuers Associations Berlin -- April 2015

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1 Valuation for Mortgage Lending in North America and Lessons for Europe Presented to The European Group of Valuers Associations Berlin -- April 2015

2 Home Ownership in the U.S. 14% of the U.S. population moves every year 59% are local moves 19% move to a different State Typical homeowner buys/sells every 5 to 7 years Average American will move 11.7 times during their lifetime 6% own a second home Appraisal Institute Valuation for Mortgage Lending Slide 2

3 Home Ownership Rate in the U.S. 70,0% 69,0% 68,0% 67,0% 66,0% 65,0% 64,0% 63,0% 62,0% 61,0% Home Ownership Rate, Seasonally Adjusted Source: U.S. Census Bureau Appraisal Institute Valuation for Mortgage Lending Slide 3

4 Size of the Mortgage Market U.S. Outstanding Mortgage Debt, in millions of US$ $ $ $ $ $ $ $ $ $ $ Source: Federal Reserve Bank Appraisal Institute Valuation for Mortgage Lending Slide 4

5 Size of the Mortgage Market Mortgage Debt by Property Type 18% 1% 7% 74% Residences Multi-family Non Residences Farm Appraisal Institute Valuation for Mortgage Lending Slide 5

6 The Three Underwriting Criteria The Lending Decision Credit Capacity Collateral All Equally Important??? Appraisal Institute Valuation for Mortgage Lending Slide 6

7 U.S. Bank Regulatory Structure There are many regulators. Federal Reserve Bank Federal Deposit Insurance Corporation Office of the Comptroller of the Currency National Credit Union Administration Office of Housing and Urban Development Federal Housing Finance Authority Consumer Financial Protection Bureau Federal Financial Institutions Examinations Council Appraisal Institute Valuation for Mortgage Lending Slide 7

8 Government Sponsored Entities (GSEs) Federal National Mortgage Association (Fannie Mae) Formed 1938 Private entity, but with government guarantee Purpose is to buy loans to increase liquidity Packages the loans into marketable securities Placed into conservatorship after 2008 financial crisis Federal Home Loan Mortgage Corporation (Freddie Mac) (1970) Others Appraisal Institute Valuation for Mortgage Lending Slide 8

9 Appraisal Regulatory Compliance GSEs Each State FFIEC & ASC Valuer DOJ FHWA Appraisal Foundation IRS Appraisal Institute Valuation for Mortgage Lending Slide 9

10 Mortgage Crisis in the U.S. It s complicated. Much debate remains. Mostly centered around residential real estate Long run up in housing prices Prices paid exceeded fundamentals Poor/lax underwriting standards Rating agency incompetence on securities Fraud Conflicts of interest in the Mortgage system Point in time valuation issues Appraisal Institute Valuation for Mortgage Lending Slide 10

11 Conflicts of Interest in Mortgage Lending Extreme pressure on appraisers from many parties such as real estate agents, buyers, and lenders Pressure to make the deal Agents, lenders, others paid on commission Parties ordering the appraisal were paid on commission And the loan was sold! (so who cares if it went bad) Appraisal Institute Valuation for Mortgage Lending Slide 11

12 Fraud Fraud ongoing problem Some lessons have been learned, but many things remain the same Ex. Some mortgage brokers now own appraisal management companies Many highly qualified appraisers choose not to do mortgage appraisal work Appraisal Institute Valuation for Mortgage Lending Slide 12

13 The Rise of Appraisal Management Companies Appraisal Management Companies: An intermediary between valuer and credit department Concept is to reduce pressure Cost Plus model Flat Fee model Appraisal Institute Valuation for Mortgage Lending Slide 13

14 Beware of Licensing Laws On one hand, licensing brings everyone to a common bar On the other, that bar has a tendency to become a standard Promote your credentials and programs as the standard Appraisal Institute Valuation for Mortgage Lending Slide 14

15 The Problem of Point-in-Time Valuations Real Estate Market Cycles Market Peak Expansion Contraction Equilibrium Equilibrium Recession Recovery Market Trough Appraisal Institute Valuation for Mortgage Lending Slide 15

16 Beware of Point-in-Time Valuations Coincident with the boom in home prices was a loosening of lending standards, led by minimal to zero down payments Appraisals based on point-in-time comparable prices promoted and enabled this trend. Continuing to calculate the V in LTV based on point-in-time comparable prices while fundamentals are lagging will cause a bubble every time. Edward Pinto, Resident Fellow, American Enterprise Institute, former chief credit officer for Fannie Mae flawed-property-valuation-practices-responsible-for-home-price-boom-bust/ Appraisal Institute Valuation for Mortgage Lending Slide 16

17 Two Types of Real Estate Markets Capital Markets (Buy/Sell) Fundamental Markets (Users) Debt Equity Owner Tenants Appraisals have reported values in this market for many years. ( Point in Time Valuations) Customers Appraisal Institute Valuation for Mortgage Lending Slide 17

18 Appraisal Institute Guide Note 12 Appraisal Institute Valuation for Mortgage Lending Slide 18

19 Thank You

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