The purpose of due diligence is typically to determine whether statements about a pool of loans is true. Whether the loans are residential or commercial, being sold in a security, at auction in a pool, or simply as a large pool, the goal is to verify what is said about the loans in the offering documents.
This review can be done in several ways, including the loan review used in loan re-underwriting, but also using automated valuation models (AVMs) to evaluate the underlying collateral, and reviews of documents like appraisals to determine if they conform to Uniform Standards of Professional Appraisal Practice (USPAP) guidelines.
We perform underwriting of loans, but we can structure the entire due diligence process to meet the goals of the due diligence. Specifically, we can structure the samples to be reviewed using both adverse and random selection, we can combine the results from these two samples to measure value in the pool being investigated, and we can also perform the checks on appraisal value and validity through use of an AVM and a USPAP review.
As a result, investors can know the real underlying value in a pool as the loans are assessed as to risk and collateral value. Understanding where the risk really resides in a pool and the care given to the original valuation of the pool gives the investor comfort that what they are purchasing is truly worth the stated value.
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