It’s said that necessity is the mother of invention. But in the mortgage industry, one might say that she’s the mother of adoption. From remote notarization and digital closings, to borrower-assisted valuations, the mortgage industry is moving from “someday” speculation to “how soon can we get it?” urgency.
In NEXT’s exclusive series on the ways COVID-19 will change the mortgage industry forever, we’re getting the experts’ take on the “new normal,” including which aspects will become our new way of doing business post-crisis and which solutions were just Band-Aids.
Today’s guest is Darius Bozorgi, the CEO of Veros Real Estate Solutions, a provider of real estate data, predictive analytics and a pioneer of appraisal delivery portals and decision-management systems. Here’s his take.
1. Parts of our temporary relief measures will become permanent fixtures
There is a healthy discussion and debate around the implementation of temporary relief measures related to property valuations for mortgages directed to the agencies (e.g. Fannie Mae, Freddie Mac, FHA, VA, USDA). Each agency is offering its version of modified appraisals that will be accepted during this period of time where interior inspections are often not possible. And while each is doing it a little differently, the approved modifications generally fall into two categories: desktop or drive-by appraisal products. We will learn quite a bit about the performance of loans backed by these products and, in a post-COVID-19 lending environment, parts of these varying alternatives will likely take on more uniform solutions. The products that pass muster will become the standard for alternatives to traditional full interior appraisals. They will also set the bar for the next series of events that may require appraisal alternatives due to social distance requirements – for example, if we experience a second or even a third wave of COVID-19.
We will also experience the greater introduction of tools that present alternatives, where appropriate, to the interior inspection itself by a third-party. Before COVID-19, the markets were already exploring “bifurcacted” or alternative appraisal processes. COVID-19 is forcing us to think even further. Adaptive real estate transactions are already letting homeowners take photos inside the property using approved apps designed to control the process and minimize fraud. This concept is nothing new and these apps have been around prior to COVID-19. But this crisis is forcing stakeholders to consider new and innovative solutions to the obstacles presented by this pandemic and implement them faster to help consumers and the mortgage industry.
2. This tragedy forces people to reevaluate the status quo and question their processes
If there is a silver lining to this terrible tragedy and crisis, it’s that those who may be normally resistant to change are now being forced to evaluate the efficacy of their own processes. We’ve seen this before, so there is a bit of comfort and confidence that in the face of adversity, comes innovation. In 2007 to 2009, the housing market and related mortgage products were the cause of the problem and led the country into financial distress. One silver lining from that tragic period of time and its aftermath was we appropriately adapted the way loan-level data flowed into the secondary markets; out of that came the Uniform Collateral Data Portal (UCDP), the Uniform Appraisal Dataset (UAD) and the entire Uniform Mortgage Data Program (UMDP). The U.S. Housing Finance system is now much stronger for these paradigm shifts born out of tragedy.
During this current crisis, many of the challenges facing us are unprecedented, and different markets will be uniquely impacted. For example, we’ve already seen an expected stalling of the traction that was beginning to build in the private-label securitization (PLS) market a decade after the Great Recession. While the gains have been relatively small, up until the start of COVID-19 the residential mortgage-backed securitization (RMBS) market was in fact growing and showing signs of promise. However, and as a direct result of COVID-19, we have seen products such as the jumbo and other non-QM mortgage suffer having a direct impact on the PLS markets. This begs the question of what can be done to protect and safely facilitate these and other aspects of housing finance in the face of a shock to the system. It is a type of business continuity planning exercise for the market. So could the market build or leverage systems and policies to be responsive to similar threats going forward?, In other words, “How can we address the issues that put the market at risk?” Fortunately, much of the infrastructure is already in place to help answer that question.
3. COVID-19 will force us to use big data to reinforce remote valuation
In the short term, there is very direct impact on mortgage lending specifically on the property valuation side. Valuation needs and appraisal processes are evolving. Data and technology will have to play a more prominent role.
Looking for ways that Veros can put its data expertise to contribute to both the mortgage industry and society in general, we created a COVID-19 tracker at the county level. We observed a void of more granular data around the spread of COVID-19. Early reporting was only at the national and state level. There were few resources for aggregated county-level data. Our primary and immediate goal was simple: provide insight to better understand the human impact of COVID-19 in local communities. As we continued to track the cases, we began exploring and reporting on the correlation of the COVID-19 impact to home values. This will take a long time to quantify, especially if there are second or third waves or if COVID-19 becomes a seasonal illness. Since we launched our county-level reporting and visualizations, several similar offerings have emerged in mainstream media and other outlets which is great for the public. More granular, more accurate and more actionable information is the goal. We look forward to the day when these trackers are no longer needed, but for now, it is just one way we are supporting the global effort to solve the COVID-19 crisis using available data and technology.
Similarly, data and related technology will continue to drive insight and our way forward in both crisis and non-crisis periods for more effective risk management in housing finance. COVID-19 and its impact on the mortgage lending process will provide the opportunity to learn more about and realize the benefits of leveraging big data and deep machine learning to augment the valuation process with available technology, data and automated solutions such as proven automated valuation models (AVMs), valuation scoring, disaster monitoring & reporting tools, and related property-valuation risk management solutions. The themes around modeling tracking the numerous risks and threats associated with the COVID-19 virus and resulting pandemic are eerily similar to those that should be applied to housing finance or, for that matter, any complex system or process. Leverage available and new data, modeling, and technology to provide more granular, more accurate and more actionable information for better risk identification and management. Just recall one of the most common statements we have heard echoed throughout this pandemic – “let the science and data drive our decision-making”. While I certainly do not advocate for a completely blind reliance on any data set, the housing finance system needs to better leverage the proven resources at its disposal. It is times like this that only serve to underscore the gaps we still need to fill. But just as we will with COVID-19, we will tackle and solve these issues together. For if COVID-19 has shown us nothing else, it has reminded us how connected we all are and just how much we can accomplish when we all work towards a common goal.