Are you appraising the appraiser? Appraisals are commonly used in various aspects of our business. There are real estate appraisals, business valuations and mark-to-market of assets held for sale, among others.  The adoption of FAS 156 accelerated the demand for third-party valuations. Additionally, the Securities and Exchange Commission (SEC) has consistently indicated a preference for third-party valuations because of the inherent conflicts involved in managers valuing their own assets. This has led to the adoption of more stringent valuation standards for these valuers and requires much more diligence in hiring the third-party appraiser.

Third-party valuations require that appraisers be more thoroughly vetted than they might have been in the past. At a minimum, the following criteria should be explored:

• Qualifications: Is the appraiser well-grounded in valuation theory and methodology of this very complex asset?   Is their experiential and educational background supportive of such a discipline?  Are they “analysts” or simply “model-runners”?
• Model: Which model does the appraiser use? 
• Is the model thoroughly tested?
• Does the appraiser have adequate experience in using it?  Just because you own a Steinway does not mean you are a great pianist.  
• Can the user tailor it to facilitate any idiosyncrasies in your portfolio (e.g. prepay penalties, step-loans, payment deferrals)?
• Has the model been validated by an outside party?
• Are enhancements to the model fully vetted and SOC compliant?
• SOC audits should be required from the appraiser to demonstrate that internal controls are working.
• References: Other clients should be willing to attest to the appraiser's knowledge, experience, and integrity.  The timeliness of reporting is another very important consideration.
• Conflicts of interest: Is the appraiser compensated for brokerage activities related to portfolios being valued? This occurrence can give at least the appearance of a conflict of interest and is viewed negatively by professional appraisal organizations.  USPAP, the Uniform Standards of Professional Appraisal Practice (as published by the Appraisal Foundation, a subcommittee of FFIEC) has defined valuation standards and minimum code of ethics for the valuation of these asset classes.  Can the appraiser state that they have “no present or prospective interest in the asset being valued”?
• Market knowledge: Appraisers need to have the ability to keep abreast of trades occurring in the marketplace, not just from one brokerage firm but from all.
• Assumptions: These should be comprehensive, transparent, visible, and rule-based as opposed to guesses. It should be easy for management, as well as accountants, regulators, and examiners, to compare and reconcile assumptions over time and among different portfolios.

The servicing asset is a material component of the balance sheet of many financial institutions.  Accordingly, auditors, examiners, investors, and regulators scrutinize the results. Now is the time to lay the groundwork for credible appraisals to ensure that these results are supportable. 

With zero conflict of interest, a proven methodology, and a commitment to accuracy, transparency, and compliance, Level1Analytics delivers credible, defensible third-party valuations you can trust. Don’t leave your servicing asset valuations to chance—partner with a team that meets the highest industry standards.

Get in touch today to see how we can support your valuation needs.