REQUIRED READING: It doesn't take a Type-A personality to want control over the appraisal effort. Nearly all lenders are concerned about their processes these days for a very good reason: the buck stops with them, whether for consumer complaints, compliance issues or repurchase demands from investors. The lender is ultimately responsible for the quality of its origination processes, and that includes the quality of the third-party work that goes into making each loan.
Internal appraisal departments never completely disappeared, but they have not been the rule in a long time. Lenders have relied on outside appraisers for decades, and this has worked well for millions of loans. The appraisal is among the most important and subjective documents in the loan file, so it is frequently cited when buybacks occur – more than a third of the time, by most estimates. It is also the victim of fraud, as is the appraiser, when data pools are clouded by flipping schemes, short sale scams and other spurious transactions.Â
It is easy to understand then why more lenders seek greater command over their appraisal efforts, but they are squeezed by competitive pressures on one side, and by quality control and regulatory pressures on the other. Where they once were content to largely outsource the entire appraisal function to appraisal management companies (AMCs), lenders are now looking for better ways.Â
AMCs are very convenient as a nuts-and-bolts means to replace the old-school appraisal department, but that convenience can come at the sacrifice of hands-on confidence. Moreover, there are the ever-present compliance issues.Â
Many sizeable lenders, including at least one top-10 bank, have recently taken their appraisal programs completely in-house, managing individual orders and appraiser panels themselves. It might make sense in theory, but in today's corporate environment, it is not an option for many lenders. What can a mainstream lender do to gain the needed control without running up costs and sacrificing competitiveness?
Flex appeal
As transaction volume heats up in the low-rate environment, flexibility is important for all lenders, but with national and growing regional companies, it is a must. Panels of approved appraisers need to be developed, scrutinized and meticulously maintained, with licensing and quality checks an ongoing way of life.Â
In some areas, like those close to the home base, this is more easily accomplished than in growth and expansion locales. In those places, using AMCs may be the best way to go, whether for retail or wholesale transactions, as long as their reporting, metrics and quality-control results pass muster. In other areas, a blend of in-house and managed appraisal services may offer the flexibility the lender needs.Â
Flexibility is critical in the overall appraisal effort, particularly when there are origination or bank branches demanding uncompromising service levels. Internal systems and outside resources can blend harmoniously – if a lender uses technology to bring it all together to provide quality control, delivery and panel management oversight.Â
The best technology platforms can also handle the commerce aspects of the appraisal program, collecting fees and paying appraisers with automated ease. The end game is gaining the ability to manage a virtually limitless number of appraisers and AMCs simply and efficiently.Â
Staying compliant
Compliance is obviously a place no one wants to be found wanting – it is not only a matter of keeping within the lines drawn by regulators, lawmakers and the Dodd-Frank Act, but it is also about staying on the right side of buyback letters from the government-sponsored enterprises (GSEs) and staying off the consumer litigation radar screens. With the evolving appraiser guidelines from the U.S. Department of Housing and Urban Development designed to keep appraisers objective and unpressured, and the growing concerns of appraisals being influenced by imperfect data, compliance is not as simple as not doing something wrong. It is an active concern that is best addressed by constant vigilance on quality, with metrics enabling painstaking analysis and rules-based triggers on red flags that arise.Â
Appraisal management technology platforms can provide great utility to make compliance simpler and less stressful. At the same time, the best technologies call for human intervention when it is needed, such as when comparables stray from optimal parameters or when transaction participants' names come up on databases that cause concern. With hundreds of local, state and federal laws still waiting to be created under Dodd-Frank, compliance will certainly become more difficult long before it becomes simpler.Â
But this raises more questions: How much should appraisals cost? And are consumers paying a premium for the AMCs' services when there is no apparent value to homeowners?Â
These are issues that have been debated since the first rumblings of the Home Valuation Code of Conduct rules and their more stringent successor, the Appraiser Independence Requirements, began. Section 1B of the requirements seeks to keep appraisers free of all manner of undue influence from parties on which they depend for compensation and future business. This is all intended to benefit consumers with greater appraisal quality, but it creates competitive pressures for lenders, too.Â
AMCs provide their intermediary services for a fee, and in the past, this amount has come, for all practical purposes, from the appraiser's share. With fee splitting now limited, the AMCs are charging their fees separately to stay compliant, but the funds have to come from somewhere, and that is most often the consumer.Â
A slow market has kept appraisal costs fairly steady for consumers over the last few years, but many appraisers would argue that they are ultimately the ones making up the difference. Technology can reduce AMC costs with lower administrative headcount, enabling narrower margins that lower-tech AMCs find hard to match. Lenders wanting more control, compliance and flexibility have noted this and are looking to technology for solutions.
With the right platform, lenders can become their own AMCs and save the middleman expense, replacing it with a compliant service set that is available at reduced costs. This offers opportunities for either a competitive advantage or additional income, while keeping the flexibility to use outside AMCs where needed to serve unfamiliar markets. However, keep in mind that AMC fees can often amount to hundreds of dollars per loan.
Control is highly desirable when you are held responsible for every aspect of your product. Appraisals are too often the disputed element in repurchases, and as a key component that is prepared outside of the lender's influence, its processes bear close management. Oversight is already in place from the investor side via the Uniform Collateral Data Portal and the GSE requirement for submission prior to loan submission. It makes a great deal of sense to use technology tools to keep a close watch on appraisals from start to finish.Â
Technology brings us amazing efficiencies and process improvements, but sometimes they come at a price: long implementation times, hidden expenses and unforeseen complications. In today's Internet-based world of cloud delivery and user-friendly software platforms, appraisal process management technology is highly accessible and easily adopted. Flexibility in the appraisal effort has never been so readily attained, with compliance and competitive enhancements included to help lenders deal with their often-hostile environment.Â
Lenders concerned about control no longer have to consider bringing appraisals completely in-house in order to achieve true command over the process. And that's good news for everyone in the organization – Type-A personalities included!
Jennifer Creech is president and CEO of InHouse Inc., based in Ponte Vedra Beach, Fla. She can be reached at (904) 395-8091.
