To Combat Rising Origination Costs, Lenders Should Focus on Valuation


It’s simple: The current housing market is less than ideal for mortgage lenders. There is a shortage of housing inventory and interest rates are rising. There is a reduction in the number of loans being originated, so total loan production expenses are increasing. It’s a vicious cycle that the industry just has not been able to shake.

And, to make matters worse, few lenders say they are expecting growth for the rest of this year.

Because of this, it is more important than ever for lenders to be fast and efficient with their processes. Over the last several years, a number of new products and services have been introduced claiming to automate every part of the loan process.

However, lenders are still somehow missing out on the efficiencies to be gained in a key part of the process: the appraisal.

Why Focus on Appraisals?

An appraisal is one of the most necessary and important pieces of originating a loan. It is the process of developing an unbiased opinion of value on a property, and forms the basis for mortgage loans, taxes and property sale prices.

Traditionally, appraisals were conducted exclusively in person by an experienced appraiser. This included the appraiser driving to the property, walking around, taking pictures, driving back to the office and logging all notes.

While the process is effective, it is proving to be an expensive and inefficient bottleneck that lengthens time to close and stalls loan production. Lenders must balance compliance with customer satisfaction (i.e. speed) in order to remain efficient and profitable.

Many lenders are finding that the easiest solution is to partner with a third-party that provides a technology-enabled solution for any type of valuation.

Choosing The Right Valuation Model

An AVM is the most basic valuation, and also the fastest. It provides the lender with instant results and is often recommended for most loans for this reason. Using mathematical modeling combined with an appropriate third-party database, an AVM calculates a property’s value at a specific point in time by analyzing values of comparable properties and other attributes. It is definitely a more attractive option than an in-person appraisal when a lender needs information fast, or when there is nothing unique about the property or location.

Of course, the disadvantage is that an AVM does not take into account the property’s current physical condition, and therefore may not reflect reality. This is why desktop valuations were created, and why they are quickly becoming a top valuation choice for lenders.

While desktop valuations are still completed by a computer, like an AVM, a real estate evaluation specialist is employed to manually select and weigh the comparable sales. That data is then analyzed by the evaluation specialist to generate a compliant report.

This approach of computer and human working together was created to provide an appraisal alternative that is more reliable than an AVM, but less expensive than a full, in-person appraisal.

Unfortunately, not all properties are viable candidates for desktop valuations. Although a specialist is reviewing the information, the process still relies heavily on automated valuation tools and available market data, leaving room for potential holes in certain lending areas, such as extreme rural locations.

In this case, lenders should look to a hybrid valuation. This model is the result of a joint effort between real estate agents and appraisers effectively working together while, at the same time, independently focusing on their particular contribution to the product. There is no value sharing between the real estate agent and the appraiser; the appraiser simply uses the data aggregated by the real estate agent to establish a final value.

The hybrid model saves both time and money while allowing appraisers to focus on analysis. This is a great alternative to traditional appraisals at much lower costs and quicker turnaround times.

Finally, the property condition report is the closest option to a full appraisal while still being quicker and less expensive. If a certain property requires a lender’s eyes, the property condition report can be added onto an AVM or desktop valuation to provide current photos and condition of the property along with the hard data.

Benefits of Valuation Options

By offering the ability to choose among all these valuation options, lenders can significantly improve their closing times. If a certain loan does not require a full appraisal and the lender can use a hybrid valuation instead, they can save up to twelve days in turnaround time.

Borrowers also benefit from these options. A full appraisal generally costs around $450 while a hybrid valuation is usually around $150. If a borrower can save money with a certain lender, and that lender delivers results in a third of the time than the borrower expects, the borrower is much more likely to use that lender repeatedly.

And, if a lender has more and more borrowers coming to work with it, it can then grow its business and quickly realize a profit.

In short, the best thing for mortgage lenders to do in order to combat the rising origination costs and simultaneously increase their profits is to partner with a third-party provider that can offer every type of valuation.

This will allow lender to focus on what it does best – originating loans – and will bring back the lender-borrower harmony that the industry is currently lacking.

Tim Smith is co-founder and chief revenue officer of FirstClose, a provider of end-to-end technology solutions to mortgage lenders nationwide.

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Michael Geis
Michael Geis
4 months ago

Great Article. Very Accurate. I recently refinanced. It took over a month. Thousands in closing costs. Appraisal fee $400.00. Appraisal took a week from the time the appraiser called to to make the appointment to the time it was delivered to the bank. I’m glad this is cleared that up so I totally see why the appraisal is the bottleneck and the costly part of the process.

Don Rump
Don Rump
4 months ago

Of course someone from the tech side would have the biased one sided opine that their industry can make everything better. What a joke! Do you have any idea why the appraiser came into existence in the first place? The complexities of the appraisal problem? The games that are played by brokers, lenders, home owners that are thwarted by appraisers? The misinformation that exists by omission, intentional placement, or incompetence is overwhelming in any given appraisal and never could a computer generated system replicate these factors. DO you know how many times a home sf is massively different than that… Read more »

Dallas Scott Wilke
Dallas Scott Wilke
4 months ago

What about FHA/HUD/USDA Guidelines that Appraisers are trained to see if there are violations of that REALTORs and agents don’t know about and then FHA loans originate on properties that shouldn’t have been done. Having the appraiser there in person is the only way to ensure that an unbiased and accurate opinion of the value is achieved. Agents and REALTORs are going to want that property to sell because they get commission off of it, so they will be motivated to show the good and not the bad. The appraiser, while they may want the deal to close on a… Read more »

Robert S. Abbott
Robert S. Abbott
4 months ago

Any bottlenecks in the appraisal process are the results of the appraisal management model. Appraisal can be conducted in 1-3 days in most cases … no longer than it would take to hire a non-appraise to measure/photograph the dwelling under a bifurcated model. The AMC’s take days … sometimes weeks to assign an appraisal. It takes 1-3 days for an AMC to award the job after I bid it and routinely bid the same appraisal job for two different AMC’s, while they hunt for the lowest possible fee. Recently, on a complicated job I had asked for fee increase on,… Read more »