The Real Deal New York

An untold number of US homes are appraised by people just looking at Google Earth and Zillow

Wall Street uses "drive-by" appraisal loophole to value collateral in $20B in bonds
January 22, 2018 10:30AM

Jonathan Gray and Barry Sternlicht (Credit: Getty Images)

Thousands of U.S. homes are underwritten using “drive-by” appraisals — which are sometimes generated by overseas contractors looking at Google Earth and listings websites.

The assessments – known as broker price options or BPOs – are put together in a more hasty fashion than traditional appraisals. They also cost much less. BPOs have been used to value collateral in more than $20 billion worth of bonds sold by institutional landlords and to individual house-flippers, the Wall Street Journal reported.

BPO’s were banned by Congress on traditional mortgages in the wake of the financial crisis. But they don’t apply to investors like the Blackstone Group, who are buying tens of thousands of homes, and critics say they could leave debt holders with less value than they believe they have, the Journal reported.

“BPOs are a creature of financial institutions that want deals to close fast, and so they don’t have to use an appraiser,” said retired University of South Alabama professor Donald Epley, who had a hand in writing national appraisal standards after the 1980s savings-and-loan crisis. “You’re just dumbing down the standards to make the loan.”

The Securities and Exchange Commission is now looking into whether companies that rent out homes pushed for higher valuations on properties backing securities. People who perform BPOs don’t need much training or an appraisal license, and experts said the quality of BPOs has dropped since pricing fell from $50 or more per home to as little as $25. The process is often outsourced to contractors in India, according to the Journal.

Credit rating agencies usually discount BPO values, and proponents say that high and low valuations tend to balance each other out when pooling thousands of homes into an investment vehicle.

“BPOs have really taken hold as a way for lenders and investors to do evaluations en masse,” said Dennis Cisterna, chief executive of the rental-home services company Investability Solutions. “Using appraisals on every property usually isn’t financially or operationally feasible.” [WSJ]Rich Bockmann