When investigating a major crime, law enforcement officials rely on as much information as they can get. Lately, we're seeing a similar preoccupation with uncovering the truth in the mortgage industry – and rightfully so, because so many parties can be severely affected by inaccurate or false information.
Today, the big questions are whether the loan will get repaid – and, if not, whether the property is going to be worth the cost of the loan. Today's borrowers must show proof of income and financial stability via tax transcripts and bank statements. It's not a choice – lenders have fastidiously built these steps into the origination process for fear of outcry from investors and regulators.
But appraisers face an increasingly difficult environment. For example, in housing markets that are beginning to recover from the mortgage meltdown, home prices are rising and, in some cases, bidding wars are erupting.
Yet at the same time, there are quite a few potential home sales that are hitting a speed bump because appraisals are coming in too low. Is that caution from the appraiser, or does the appraised value not match what the market is willing to pay?
First, we need to remember that there is a lot of pressure on the collateral valuation side. Appraisers are being ultra-cautious to reduce their own risk. Simultaneously, the number of appraisers in the industry has been decreasing for some time. But what is not changing is the price lenders are willing to pay for their appraisals – and appraisers and lenders are trying figure out how to do more with less.
There seem to be options and alternatives everywhere, but the industry hasn't quite figured out which ones are the most viable. For example, you can shop for properties online using services Redfin or Zillow, which instantly show estimated property values for practically any home nationwide. But this runs the risk of sparking that age-old debate: which is more accurate, human experts or technology?
In the end, at least for now, the answer is both. The nuanced expertise of an experienced professional and the consistency, reliability and objectivity of technology play key roles in the appraisal process.
If we want to confront and address the challenge of conservative appraisals, we need to automate certain pieces of the collateral valuation process. Technology can and should also be leveraged in the appraisal quality control process. Technology gives lenders the opportunity to automate quality checks of the data in an appraisal, but few lenders leverage these advancements to their fullest and, as a result, there continue to be challenges with the quality of information in the appraisals – which, in turn, costs time and money to resolve.
But that's the best-case scenario. Worst case, these appraisals can cause deals to fall apart, which hurts all of the parties involved in the transaction and, by extension, prevents a more robust housing recovery from taking shape.
Quite frankly, a lot of lenders are not familiar with the appraisal analysis technology that is available today. Right now, lenders have the tools to break down appraisal reports into a series of data, then run that data through hundreds and even thousands of business rules that enable them to find missing comps and inaccurate or inconsistent information. It sounds simple, but this is a huge boost in ensuring quality, consistency and compliance.
For example, if a lender requires that all comps be within 20% of the value of the appraised property, a business rule can be configured to automatically verify that this is indeed true. Another business rule could be configured to automatically cross-check the square footage or number of bedrooms against public records. Business rules can even be configured to validate information against local sales data.
Normally, an underwriter would have to conduct a hand-search through the appraisal report to validate information like this. But by using a good appraisal review technology that allows them to apply specific business rules, lenders can receive automatic notifications about appraisal quality or missing or inconsistent information.
Reports can also be pieced out into their smallest data points, so lenders can get a quality score for every appraisal report. These scores take into account numerous factors, inlcuding whether the appraisal report is completed or is missing key data, whether the comparable sales used are within 20% of the appraised value, whether there is a flood zone nearby, and even whether a report appears consistent with Uniform Standards of Professional Appraisal Practice or Home Valuation Code of Conduct guidelines – and that's all before a single human is needed to review the report.
Plus, by scoring appraisals, lenders can put appraisals into the hands of the right person within their company. ‘Easy’ appraisals – ones that are fairly straightforward and are within expectations – can be handled by junior-level staff for review and approval. ‘Difficult’ appraisals – those that include irregularities or other complexities – can be handled by experienced underwriters.
Lenders can also use these scoring capabilities to determine appraiser efficacy. If they have an appraiser who generates repeated errors or fails to recognize proper comps in the file, business rules technology will spot this automatically and bring it to the lender's attention.
Take note, however, that there is a wide range of technologies on the market, and not all of them are business rules-based. In reviewing vendor proposals, it is important to ask questions about the flexibility of the technology, the vendor's access to key data resources, and whether the vendor can help during periods of volume spikes.
Appraisers are the central part of the valuation process. By employing rules-based technology to automate the appraisal review process, lenders will be able to standardize the level of review that is performed on each and every appraisal. Ultimately, that's the only way to achieve the level of scrutiny needed to avoid appraisal-based buybacks and fees.
Phil Huff is the CEO of Platinum Data, based in Aliso Viejo, Calif. He can be reached at (949) 452-9100.