Flight to Quality?

The term “flight to quality” means different things in different contexts. In economics and finance, of which real estate is a subset, the term refers to instances when capital moves away from more “risky” investments and toward “safer” investments due to uncertainty about the overall economy.

There seems to be an almost bipolar interpretation of “flight to quality” in the real estate industry these days. In the securitization world, recently new residential mortgage-backed securities (RMBS) offerings seem to not be moving toward higher quality investments as much as one might expect given the numerous RMBS litigation matters across the country. (By my count, most of these cases have settled, with estimated settlements to date exceeding $20 billion.) In the week of February 2, Asset Securitization Report contained an article entitled “RMBS with Genuine Risk” by Allison Bisbey that describes how investors are looking for exposure to loans that are not “safe.” It seems that the new era of relatively tighter underwriting standards for a while ushered in relatively safe RMBS with less downside exposure. Now, that level or degree of safety seems to be relaxing a bit as investors are willing to take additional risk, hoping for the returns that often accompany riskier securities.

In the appraisal world, we are seeing a different response. What we hear about is the “flight” of lenders toward higher “quality” appraisers and appraisal management companies (AMCs) who have extensive internal due diligence processes that all appraisals must pass before going to the client and/or intended users. Last year we talked with Richard Hagar, SRA about the 12,000 appraisals that fail every week and the reasons behind those failures. While at first blush the number was startling to say the least, Hagar said that the key is education. When appraisers are held to a higher standard and required to continue learning and honing their craft, appraisals will improve and the industry will see a jump in quality.

What do you think… has the quality of appraisals generally increased over time?