by Dan Krell (c) 2009.
The Standard and Poor’s/Case-Shiller Home Price Index for February 2009 (published April 28th) indicated a composite home price decrease of 18.6% as compared to the previous year (standardandpoors.com). The good news is that the current index did not continue the record setting pace like the previous sixteen months’ indices. While local home prices did not fare as well as the Dallas metro area (prices decreased only 4.5% from the previous year), the Washington DC metropolitan area home price decrease of 19.2% was much better than the Phoenix, Las Vegas and San Francisco metro areas (where home prices decreased more than 30% from the previous year).
Certainly, home price indices are just an indicator of the real estate market; and although the factors contributing to market conditions are complex, it does not stop us from trying to understand the causes of the steady decline.
Since the large increase of recent foreclosures and short sales have captured our attention, the loss mitigation process and the use of Broker Price Opinions (BPO) have received some blame for eroding home values. So much so, that one national columnist recently posed the question by portraying the use of BPOs as an easy way for real estate agents to make money in a tight market. Unfortunately, the article appeared to represent the sentiments of real estate appraiser groups and did not accurately portray BPOs.
A BPO is not a substitute for an appraisal. A BPO (like a market analysis) is data provided to assist a buyer or seller in deciding a home’s list, offering, or sales price. Mortgage lenders and servicers have used BPOs for many years. BPOs are used for many reasons that range from quality control to making decisions on mortgage portfolios and loss mitigation.
BPOs have also been used as a due diligence tool to control appraisal quality and investigate property valuation fraud. Additionally, BPOs have been used by the lending industry to evaluate the performance of their mortgage portfolios (mortgages bundled together typically used as financial instruments) for internal and secondary market purposes.
The use of BPOs in loss mitigation is not a recent phenomenon, lenders have used BPOs as one tool in their loss mitigation process for several decades. In order for lenders to obtain the best data for their decisions, they typically do not rely on one BPO; multiple BPOs are usually ordered at any given time as well as over a period of time to provide a snapshot of market trends and control for data variance.
Additionally, it is common for lenders and servicers to compile BPO data throughout the loss mitigation process. BPOs are usually ordered when the home owner initially becomes delinquent on their mortgage payment and continues until the delinquency is resolved (either brought current, short sale or foreclosure). Prior to delivery to the lender, the BPO company conducts a quality assurance review for all BPOs to ensure that the data provided is valid and consistent.
Market forces are complex; to blame eroding home values solely on the use of BPOs in the loss mitigation process is just as silly as blaming a bubble real estate market on artificially inflated appraisals. Although a BPO is not an appraisal and should not be confused as such; BPOs have an established role in the industry.
This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of May 4, 2009. Copyright (c) 2009 Dan Krell.