Kenon Chen: Modernizing the Appraisal Process

Mortgage Media recently attended the MBA Servicing Solutions Conference in Orlando and had the opportunity to speak with Kenon Chen from Clear Capital. The two discussed Clear Capital’s unique approach to valuing properties, the impact of technology on the market and more.

Suresh Ramakrishnan: This is Suresh Ramakrishnan from Mortgage Media and I’m glad to have with me today, Kenon Chen, who is the EVP at Clear Capital. I’m at the MBA Servicing Solutions Conference. Kenon, thank you for taking the time to speak with us at Mortgage Media today.

Kenon Chen: Absolutely. Thanks for having me.

Ramakrishnan: So tell me what brings you to the servicing conference? What services does Clear Capital provide to servicers or are you here in another capacity?

Chen: Yeah. Absolutely we’ve had a longstanding relationship with servicers. Clear Capital actually was founded on Duane Andrews’s first business, which was REONetwork.com. And so we really started by building a network of real estate brokers that knew how to handle banking listings. We had worked with asset management departments and that platform allowed us to move into the space of doing broker price opinions, first of all as a technology platform and then expanded to be a full service evaluation provider.

Ramakrishnan: Oh, so your DNA was on the servicing side?

Chen: Absolutely. So, servicing secondary markets and then we just continued to follow opportunities from there and move more into the origination space as well. So, yeah, we love working with servicers and are here just continuing to meet with customers.

Ramakrishnan: What’s your role within Clear Capital?

Chen: Yeah, so my role is EVP of corporate strategy. I head up aligning what we do as a company, all of our products and assets with the market, ensuring we’ve got a good roadmap in front of us. I make sure that we’re understanding market trends and aligning our products and services and solutions to meet those needs.

Ramakrishnan: So, you look at it strategically not just as a servicing side but also on the origination side?

Chen: Absolutely.

Ramakrishnan: And given the market dynamics study, which we briefly touched on, prior to starting the interview, there is a lot going on macroeconomically, with the COVID-19/Coronavirus and the implications of that, and you know last year at this time, Servicing Right values were up and the origination side was weighed down. Today it’s flipped, with the rates just down almost a hundred basis point just today.

Chen: Yeah.

Ramakrishnan: How do you, looking at it strategically at Clear Capital…this changing dynamic because one side is down, the origination side is up. How do you counterbalance that? Because a lot of this can’t be predicted.

Chen: Yeah, absolutely. It really comes down to all of it as it involves the property. We are single focused on how we help our customers understand what’s going on in the properties, so the good decisions can be made, but also so that we can move very quickly, through expanding volumes on the origination side. 

Production wise and with rates being softened and impacted by the Coronavirus, it’s actually going to extend the refi boom. And so for us it means that we need to look at ways to really modernize the appraisal aspect of the process, modernize the decisioning around the property, so that we reduce friction in that process and allow lenders to provide even a better experience to their customers.

Ramakrishnan: So on that point, how have you modernized the appraisal process because there’s a lot of talk about property, appraisal waivers and so on. So when you talk about modernizing the technology, what specifically are you referring to?

Chen: Well, it starts, first of all, with a, I think a better gathering of the data at the property.

Ramakrishnan: To evaluate the value…

Chen: We actually send out an appraiser who goes to the home and collects data. They measure the home, they gather the characteristics, then they bring that back to their desk. And then they use their gray matter and do analysis and come up with the value. We’ve been doing a number of bifurcated solutions where we’re sending out a dedicated property data collector to the home. This is in addition to the appraiser, separate from the appraiser. And they bring back the data to an appraiser. So what that does is it frees up capacity in the system so that the appraiser is able to do more work from their desk.

Ramakrishnan: So the appraiser doesn’t go out. That physical role of going to the property is done by this other person? 

Chen: Yes. In our case we have an amazing network of valuation professionals who are trained as they came as a broker, or as real estate brokers and agents who have been doing valuations of course for servicing for many, many years. They know how to inspect the home. Then we train them using our technology. We use a mobile app to train them how to gather data in an objective way and bring that back to an appraiser at their desk who has the expertise to bring that data together with market data and comps and they can put the value on the property.

Ramakrishnan: That’s interesting. You’re bifurcating the role essentially. So the inspector versus the actual appraiser who puts in the value. So the property data collected just assesses the physical dimensions and the number of rooms, et cetera. But really it doesn’t opine on the value per se, which is left to the values or rational. Does that speed up the process or does that get you to a more accurate valuation? What is the net result of that?

Chen: Yeah, we’re seeing incredible results in speeding up the process. Because, first of all, we’ve introduced additional capacity into the workforce that’s scheduling the inspection and that often takes the longest amount of time.

Ramakrishnan: And oftentimes that forward deal is getting delayed because they couldn’t find appraisers to get there. So, I guess that leaves that process.

Chen: Exactly. But it also drives different techniques enabled by good mobile technology, so that we can start to capture the home in more detail, and capture the home in a way so that even after the home is originated, we have a digital record or a virtual record of that whole property that creates more confidence downstream as well. We see it as a win-win and that we have additional capacity, we can get through volume faster, which we expect more of it this year. But then also we’re building confidence and trust in the secondary market and in the servicing…

Ramakrishnan: Because the evaluations are more accurate than they would have been?

Chen: Yes. And because the person at their desk now has access to a lot more data than they went through a typical appraisal process.

Ramakrishnan: Oh, so they collect additional data than your typical appraiser would collect?

Chen: Yes.

Ramakrishnan: Oh, interesting. And so are AMCs your client too? Or do they view it as competition?

Chen: AMCs are peers of ours and we are an AMC as well. But you’re absolutely hitting on an opportunity there, because we can just do the front end of the process and then work with other AMCs to continue doing the desktop appraisal. So there’s actually a lot of opportunity again for increasing capacity for the whole industry.

Ramakrishnan: Right. Underwriting is one sort of impediment to faster closing because of capacity issues – especially finding local appraisers that can go to a specific area just because that requires a physical presence and if you have local people that can just get the physical data, it makes the process faster.

Chen: Yes.

Ramakrishnan: What is Clear Capital’s view on property valuations right now? Because you sort of hear different stories about what’s happening in industry about property values being too high and therefore being unaffordable. But then you have all this macro economic, sort of winds out there with slowing economy and so on. What is Clear Capital’s view about the outlook for 2020 and beyond as far as property valuations are concerned ?

Chen: We’re definitely seeing the signals of the gap of affordability, so the gap of home prices to income growth. And it’s an interesting trend to see that the average home purchase now is 39 years old.

Ramakrishnan: Okay. So the millennials are slowly getting in.

Chen: Yes. They’re getting in but the age of the home is 39 years old. So there’s a need to purchase an older home and then the gap between the starter home and that next tier up is widening.

Ramakrishnan: The number of years or the value?

Chen: The value. So it’s more difficult to sell your starter home within five years and move up to the next year. That shows folks are going to be staying in their homes longer. They’re in an older home and the driver is for things like cash out reifies in order to remodel the home that you’re in., I think that’s going to continue this year. We keep a pretty close eye on that. We have a home price index that we put out every month along with a forecast.

Ramakrishnan: Nationwide?

Chen: Nationwide. So, we keep an eye on which areas are moving. But I don’t see, at least for now, any major fluctuations or corrections for at least for the couple of quarters.

Ramakrishnan: For whatever that foreseeable rate is…

Chen: Until we have another global event. But yeah. We’re seeing a lot of questions and movement around products that can help folks understand how to take advantage of equity in their homes, since folks are going to be staying there. 

Ramakrishnan: You touched on millennials. Do you see or have you had the data of more millennials having to finally take that plunge in buying a home? Have seen an increase in that?

Chen: Yeah. Of course, we don’t interact directly with the borrower so we don’t see that directly.

Ramakrishnan: Oh you don’t see demographic data?

Chen: No. But we definitely hear that signal in the market and then are at least seeing it obviously in terms of volume growth.

Ramakrishnan: Technology and automation are more prevalent in the industry, or at least that’s the vision. How much it becomes reality is a matter of opinion. How do you feel that technology will continue to change the landscape of the industry? 

Chen: We wholeheartedly embrace technology advancements. The company actually started, through myself and one of our co-founders, when we were working in San Francisco during the dot com boom and working in web development. So it’s always been part of our DNA as a company. But we also appreciate people and good people, and the best technology is technology that enables people to be better. 

And so, yes, absolutely technology is important. – the capabilities afforded by cloud computing, by machine learning, AI, These are all things that we’re investing heavily in because they unlock, especially with all the data assets that we have, our understanding what’s going on with 110 plus million properties and the 19 years of data we’ve collected on observing these properties. 

You put that together with the power of cloud computing and machine learning and there are amazing insights that we can generate from that. It’s fueled things like our automated valuation model. Not only is it more accurate than what we would’ve been able to produce a decade ago…

Ramakrishnan: Because you use technology to be able to harness all of the data…

Chen: Absolutely. But also because of the power of computing now. At scale, we can also reproduce..run a national model in a couple of hours. So imagine that you’re getting in fresh data every day, real time data, and understanding what’s going on in the market. And you can actually produce a national model on the same day.

Ramakrishnan: So that data is churned at a much faster rate?

Chen: Yeah, no longer is it logging 30 days behind to just build your model. So with that we can do amazing things enabling people to be successful by using the right tools at the right time.

Ramakrishnan: So you have proprietary technology that you use for this?

Chen: We do. First of all, we have a pretty amazing real time data set that allows us to really understand what’s going on nationally from from sales and listings, signals from our records, and the evaluations from the visits to  around 100,000 properties a month. So we have a lot of signals there.

Ramakrishnan: We talked about existing home sales and the average home. What’s your view on new home construction? Lot of the new construction from what we’ve seen is focused on multifamily, senior housing. What is your view on that and how do you think this will impact housing trends and will there be enough property for the millennials and others coming into the market? 

Chen: Well I think it goes back to what we were saying before, which is the trend towards buying older homes.

Ramakrishnan: Because there’s a lack of inventory on the new model home front.

Chen: Exactly. And I think it becomes really important to understand not only the square footage when it comes to understanding the value of a property, but capturing the quality of construction. Because there are other things that we’re going to start having access to when it comes to the volume of a home. So not just the square footage and the footprint, but other differences in terms of the height of ceilings, livable space, green energy. These are the factors that are going to start becoming important for us to see how those homes were being valued.

Ramakrishnan: You would think the millennials and the younger population are more sensitive towards an eco-friendly home, etc.

Chen: Yes.

Ramakrishnan: So builders would almost have to take that into account as they plan new construction because those are the kind of houses I would think that would be more appealing to that demographic rather than just a McMansion.

Chen: Yeah. So square footage is a part of it, but I think we’re going to need to start looking at other dimensions as well.

Ramakrishnan: Right. With the mortgage crisis somewhat behind us, although, it can come back pretty soon as we all know…Do you feel the industry has learned any lessons from the excesses of 10 years ago or 12 years ago? And do you see the sort of the bad habits coming back at people?

Chen: I see things being very different now with the use of technology, – especially on the underwriting side – both in what Fannie Mae and Freddie Mac have done with their automated underwriting systems. We’ve been involved in some of that as well from a technology standpoint, and what we’ve seen is a number of lenders really adopting better management review of the collateral. Those things have made the process a lot more robust than it was before. And we see continued investment in that area. Not just to streamline, but to also improve quality.

Ramakrishnan: So are you saying that with technology better decisions are being made from an underwriting perspective than before?

Chen: I think so. And this availability of data gives quite a bit of power for someone at their desk to really make a good review decision as long as they’re using a system that really incorporates data and has the  ability to have configurable rules and models right into the workflow of what a collateral underwriter would be looking at. It really sets up the lender to still move at speed, but keep the quality as well.

Ramakrishnan: So, what used to be more opaque is probably more clear now. 

Chen: Exactly. Yeah.

Ramakrishnan: And then lastly, this is not exactly an industry where you can sit back and relax because every day brings new, good or bad news. So what do you do to relax?

Chen:  I’m a musician. I write and play a number of different instruments and I produce others as well. So it’s more of a  singer-songwriter. That helps me relax and get fueled up. I also enjoy racing cars and doing some other things that are completely different from the mortgage industry.

Ramakrishnan: Yeah. It’s got to be something different so you can sort of unplug out of this.

Chen: Exactly.

Ramakrishnan: I don’t know if you saw the opening session. But John Ondrasik from Five for Fighting is a singer-songwriter.  He talked about where inspiration comes and he applies a lot of these lessons. He’s also a keynote speaker at many of these events. I found his perspective to be very interesting and very different than just a “Business guy.”

Chen: Oh, that’s great. Yeah. I mean obviously the mortgage world is not boring at all. Right?

Ramakrishnan: No.

Chen: Things are constantly changing.

Ramakrishnan: Changing a little too much.

Chen: We have a ton of fun as well at work. And just being around great people…

Ramakrishnan: If you are looking forward to that, that’s great. That’s half the battle.

Chen: Yeah.

Ramakrishnan: Thank you, Kenon.

Chen: Thank you. Appreciate it.

Content has been edited for length and grammar.