Fast-growing appraisal firm evolves from subprime past

One of the largest independent survivors of the subprime debacle is staking its future on a real estate appraisal business based in Indianapolis.

Kansas City, Mo.-based NovaStar Financial Inc. last year paid $750,000 in cash and a portion of future profits to acquire control of Indianapolis-based PipeFire LLC and rename the business StreetLinks National Appraisal Services.

The StreetLinks unit plans to spend $1 million on a move to a new headquarters on the south side of Indianapolis and add 220 employees this year. The company will get more than $400,000 in state grants and tax credits.

But NovaStar’s moves don’t sit well with some industry observers. During the housing boom, the firm thrived by lending money to home buyers who could barely afford the payments, if at all. Now the company is hoping to capitalize on new rules designed in part as a response to the subprime mess.

StreetLinks is billing itself as a specialist in a new Home Valuation Code of Conduct, a requirement endorsed by government-backed mortgage giants Fannie Mae and Freddie Mac that’s designed to ensure appraisals are arms-length transactions. Inflated appraisals by lender-connected appraisers are blamed for helping fuel the nation’s housing problems.

There’s a risk that the new industry-wide rules will simply shift the issue of improper influence to appraisal-management companies, which are not regulated, said Bill Garber, director of government affairs at the Appraisal Institute, a 77-year-old not-for-profit association for professional real estate appraisers.

"We have a strong concern we may be transferring the problem from one entity to another," he said.

Home buyers typically are charged about $400 for an appraisal, without about half of that in some cases going to appraisal-management companies like StreetLinks that provide appraisers and help ensure the documents are accurate and independently produced.

Appraisal-management companies have been around for years. But they’ve been getting more attention now because of new government-approved rules that create more of a wall between loan originators and appraisers.

But Garber is troubled by the idea of making appraisals—traditionally a key risk-management function—into a new line of profit. He also worries that appraisal management companies have an incentive to find the lowest-cost appraisers instead of the most qualified.

Fallen lender

NovaStar was founded in 1996. Its NovaStar Mortgage unit initiated thousands of subprime loans, many of which the company held in its own portfolio.

Shares in NovaStar ballooned to more than $100 apiece as the housing boom peaked from 2004 to 2006. But when the subprime business went bad, the company laid off all but 30 of what had been a work force of several thousand, and the New York Stock Exchange delisted the company.

Shares now trade for about 35 cents on the pink sheets. The company has slowly made progress paying off creditors, but legal problems remain.

In January, the company paid $7.25 million to settle a shareholder lawsuit alleging that company officials made misleading public statements and failed to disclose relevant information in violation of securities law. Former employees also have joined a class-action lawsuit over the company’s 401(k), which included company stock that has since plummeted in value.

After winding down its lending business, NovaStar’s board wanted to move into a related industry to capitalize on its expertise, said Steve Haslam, the former head of retail lending for NovaStar who now serves as president of StreetLinks. (The founder of StreetLinks’ predecessor, Tony Ebeyer, still has a stake in the company and remains an executive.)

To distinguish itself in the market, StreetLinks provides a "certificate of noninfluence" with each appraisal. Its lender customers have no idea who does their appraisals and no idea how much that person is paid. A serial number on the certificate of noninfluence allows investors to look at the original unaltered document.

"We do appraisals and we do them right, and it’s the only thing we do," said Haslam, 53.

Growth plans

The company says it has a roster of more than 10,000 appraisers coast to coast that serve as affiliates. NovaStar will manage the StreetLinks operation from Indianapolis, where it employs about 100 and plans to add 220 by year’s end. Haslam also plans to move here in the next six months.

The company chose the south side of Indianapolis for its large pool of potential employees and the proximity to the existing StreetLinks headquarters in Greenwood, said Sam Smith, CEO of locally based Resource Commercial Real Estate, who represented the firm in its lease deal.

The company plans to take about 22,600 square feet in the roughly 30,000-squarefoot building at 7551 Shelby St., which previously served as medical offices. The building sits on Shelby Street near U.S. 31 and adjacent to a strip center with a Lifestyle Fitness.

Smith said NovaStar’s past in subprime loans shouldn’t exclude it from an effort to "bring standardization and quality control" to the appraisal management business.

"Subprime was literally a nationwide issue, and in hindsight there were a lot of people getting mortgages that shouldn’t have," Smith said. "But [NovaStar officers weren’t] the ones that wrote the rules. They originated mortgages like anyone else; Wall Street would buy them."

Some NovaStar shareholders remain optimistic, convinced the company has been unfairly lumped in with shady subprime lenders. The fact the company has survived without bankruptcy puts NovaStar in limited company.

"They’re like a cat with nine lives," said one of the shareholders, Richard B. Morris, an independent investor and private investigator in Virginia. "And they’ve morphed into a whole new cat with StreetLinks."

Morris has suffered big losses for his conviction; he bought his first shares in February 2007 when they were worth a split-adjusted $30 each.