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ACI is a division of Verisk Analytics (NASDAQ: VRSK), a leading provider of risk assessment solutions to professionals in insurance, healthcare, mortgage lending, government, risk management, and human resources. Verisk Analytics includes the holdings of Insurance Services Office, Inc. (ISO) and its subsidiaries, which provide essential solutions to the insurance, mortgage lending, and healthcare markets. For more information, visit www.verisk.com.
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Valuation professionals are standing at the doors of additional licensing, regulation, transparency, and reform. Behind these doors of change are both opportunity, and unintended consequences. The authors featured in LiveValuation this month knock on these doors and consider what lies behind them for appraisers, appraisal management companies, and lenders.
Mark Chapin addresses reform in his feature article, “Appraising in the 21st Century.” But instead of reform imposed from external sources, Mark encourages appraisers to implement reform from within. Recently, he has observed that lenders are once again proclaiming “collateral as king.” Mark regards this shift in perspective as a good thing for appraisers, but they need to respond with confidence and assure lenders that they are “up to the task.” We need to change the way we do business and look beyond three comps on a grid.
Joseph Palumbo delves into the licensing of Appraisal Management Companies (AMCs); are these new state laws all they’re cracked up to be? Coming from the relocation world and managing a large panel of relocation appraisers, Joe has found himself caught in the net of AMC regulation. Joe contends that licensing is not the panacea that some view it as. He calls for unity within the profession and, like Mark Chapin, states that we need change from within. Palumbo pulls no punches in “The Fool’s Gold of AMC Licensing.”
Returning author Vladimir Bien-Aime opens the door of technology in his article “Enhancing Transparency in Collateral Valuations.” Vlad points out that much of the information passed back and forth in the valuation process is underutilized. This plethora of information needs to be made transparent and harvested for better collateral risk decisions. Since the GSEs are moving to collect more information by XML, Vlad asks, “Doesn’t it make sense for lenders and other parties, like appraisers and AMCs to do the same?” Technology and transparency can only enhance quality.
Jordan Petkovski writes a very timely article on financial regulation and the recent bill that was signed into law. In “Financial Regulatory Reform, AMCs, and the Residential Appraisal Industry,” Jordan analyzes past regulation and the current legislative reform. He introduces questions about AMC regulation, “customary and reasonable” fees, and appraiser independence. In concert with Joe and Mark, Jordan calls on the appraisal industry to “police itself” and regain consumer confidence. Jordan states, “The legislation isn’t going to make the industry any safer if we don’t do our part to aid those charged with enforcing the guidelines.”
In addition to these weighty topics and on the lighter side, don’t forget to glance at our section Things Appraisers See. Appraisers always have a camera with them and it’s amazing what they observe while out on appraisal inspections. Jeff Dickstein closes our magazine with his contribution to For What it’s Worth. In his commentary, Jeff enlightens us regarding the lifespan of the average appraisal. If you think your appraisal is only used to close a loan, think again! Read this article to learn how many times your appraisal might be read by different individuals.
This combined issue for July and August is intended to give the staff a little break from our monthly schedule. With all that transpiring in the valuation space, it’s not
going to be a lazy August. Remember to check our website www.LiveValMag.com for recent news.
See you in September,
Ernie Durbin
Ernie Durbin, [email protected]
Publisher’s Note
[Stats
{ Highlights as of April 2010 }
-3.1%washington
-5.6%nEVaDa
-4.1%MiChigan
-3.4%arizona -3.4%
FLoriDa
Excluding distressed sales, the worst five states for year-over-year price declines changes slightly. [ ]
+3.7%nEw york
+8.4%CaLiFornia
+6.0%N.DAKOTA
+3.6%Virginia
+10.6%hawaii { Forecast Highlights as of April 2010 }
[The five best states for year-over-year priceappreciation excluding distressed sales. ]
• Including distressed transactions, the peak-to-current change in the national HPI (from April 2006 to April 2010) is -29.5 percent. Excluding distressed properties, the peak-to-current change in the HPI is -21.1 percent.
• Including distressed sales, 60 of the top 100 Core Based Statistical Areas (CBSAs) increased on a year-over-year basis in April. The number of CBSAs with increasing HPI has been improving steadily since April 2009, when all of the top 100 CBSAs had a falling year-over-year HPI.
[ ]Stats
{ CoreLogic* Data }
“The monthly increase
in the Home Price Index
(HPI) shows the lingering
effects of the home buyer
tax credit,” said Mark
Fleming, chief economist
for CoreLogic. “We expect
that we will see home prices
remain strong through
early summer, but in the
second half of the year
we expect price growth to
soften and possibly decline
moderately.”
On a month-over-month
basis, the national
average home price
index increased by
0.8 percent in April
2010 compared to
March 2010, which
was stronger than the
previous one-month
increase of 0.1 percent
from February 2010 to
March 2010. [ ]Including distressed sales five states with highest annual price depreciation.
-7.2%iDaho
-4.6%nEVaDa
-5.8%iLLinois
-4.3%MaryLanD
-3.7%washington
CBSA
Chicago-Joliet-Naperville, ILPhiladelphia, PANew York-White Plains-Wayne, NY-NJPhoenix-Mesa-glendale, azAtlanta-Sandy Springs-Marietta, GADallas-Plano-Irving, TXLos Angeles-Long Beach-Glendale, CARiverside-San Bernardino-Ontario, CAHouston-Sugar Land-Baytown, TXwashington-arlington-alexandria, DC-Va-MD-wV
April 2010 12-Month HPI
CHANGE BY CBSA
Single Family Single Family Combined Combined Excluding Distressed
-6.0% -1.5% -5.3% -4.9% 0.0% 1.3% 1.0% -1.6% 1.1% -0.4% 2.0% 3.0% 4.2% 6.4% 4.7% 6.1% 5.4% 2.1% 6.5% 5.9%
* Source: CoreLogic HPI as of April, 2010.
April HPI for the Country’s Largest Core Based Statistical Areas (CBSAs):
{ Vladimir Bien-Aime }
Vladimir Bien-Aime is
CEO and
Co-Founder of Global
Data Management
System, LLC, a
respected pioneer
in appraisal process
management since
its inception in 1999.
Throughout the past
10 years, thousands of
prominent appraisal
firms, appraisal
management
companies and lenders
have employed the
company’s web-
based software
solutions for appraisal
management and
workflow automation.
Global DMS solutions
include the OASISOne
Management Platform,
eTrac WebForms and
the MISMO Appraisal
Review System (MARS)
PDF to XML data
extractor.
{ Joseph Palumbo } Joseph Palumbo is
currently the Director
of Valuation at Weichert
Relocation Resources.
He spent seven years
at Washington Mutual
Bank where he was a
First Vice President. Mr.
Palumbo holds an SRA
designation, is AQB
certified and he is a State
Certified residential
appraiser licensed in NJ.
Contributors
{ Jordan Petkovski }
Jordan Petkovski
has worked in and
around the residential
appraisal industry for
most of his career. He
has held numerous
leadership roles for
appraisal and settlement
services providers
nationwide. Currently,
he is the Director of Staff
Appraisal Operations
at TSI Appraisal
Services®, a wholly
owned subsidiary of
Title Source®. His
primary focus is the
successful development
of operational processes
based upon a greater
understanding of the
industry as a whole. His
responsibilities include
the development
and management of
staff level appraisers
operating throughout
the country.
{ Mark Chapin } As Chief Valuation
Officer for Interthinx,
Mark Chapin oversees
all value related
activities, including file
review services, new
and existing product
development initiatives,
and government and
regulatory compliance
efforts. His diversified
background includes
federal government and
conventional lending
experience, independent
specialty valuation
experience, and decades
of marketing, solution
development and sales
experience in the US and
Canada.
{ The Voice Powered By }
{ Jeff Dickstein } Jeff Dickstein, Pro Teck’s Chief Appraiser, is responsible for the people, processes and detail oriented
culture that is at the core of our work. Jeff has been in the mortgage industry for twenty-nine years,
twenty of which were spent as an appraiser. His diverse background and problem-solver mentality give
him a unique perspective on asset valuation, risk mitigation and the future of the industry.
Contributors
{ The Voice Powered By }
H The Fool’s Gold of AMC Licensing
V
C
C
Unity from within will
make much needed
change in the industry
possibleJoseph
Palumbo
Since I landed in the world of relocation about three and a half years ago, I really did not pay much attention to what was happening in the trenches of the lending world. That changed when the concept of licensing appraisal management companies came about and I began to take interest in them. My interest soon became more of an occupational study since these laws are so “broad-brush” and vague. (“Broad brush” meaning just about anyone involved in the process that retains appraisal services for a third party would be classified as a “management company”.) >>
{ For the record, let me say that I am not anti-AMC. }
As the manager of an in-house appraisal arm of a Relocation
Management Company, I was shocked and disappointed
that these laws cast a net on just about anyone who manages,
selects, and retains appraisers for third party use. Clearly this
type of legislation was created out of a knee-jerk reaction to
one of the many “crisis-type” issues that came at the appraisal
community in 2008 and 2009, such as a heightened
sense of scrutiny of the final appraisal product, the
means by which the analysis should be conducted,
and the national denial that the real estate world
had tanked. I am specifically referring to the
attention brought upon the “appraisal process” by
the ill-informed New York State Attorney General,
Andrew Cuomo, and the infamous HVCC.
This attention was brought on by the Attorney
General’s investigation into appraisal practices
between Washington Mutual Bank and their AMC,
E-Appraiseit, owned by First American. While I
agree with the basic tenets of the HVCC and the
AMC laws, I just do not think there will be a net
tangible positive affect, or that the “real issues” are
being conquered. AMC laws and HVCC are not
the panecea. In fact, I wish there were a panecea,
because some calm is needed. Being a realist and
institutionally tenured manager of the appraisal
process, I know the reality of what happens, versus
what is supposed to happen.
For starters, let me say that the relocation world has no direct
OTS-like government oversight or appraisal requirements for
the appraisals that are not intended for lending. The relocation
industry is self-policing and we rely on what is set up by state
licensing and our own quality control. Let me also say that
while my department may perform some of the same functions
that an AMC does, we do not take any of the appraiser’s fee.
We do select, maintain, review, and use appraisers, as well as
arbitrate valuation disputes.
Here is the issue: As pointed out by the OTS last year, the
FIRREA laws of 1989 already contain much of the language
that the AMC laws cite. States have also set up Appraisal
Boards who are supposed to monitor fraud, egregious issues,
and such. The problem with FIRREA and the State Boards is
simple: lack of money, resources and time. So, along come
these new AMC laws that deem it unlawful to coerce an
appraiser, not pay them, tell them which appraiser to use,
have people who select and review who are not “trained in
real estate,” and so on. These new laws are just restating the
ones that we already have; we still lack an efficient mechanism
to enforce them. If the new AMC laws are governed and
enforced by the state boards that are short on cash and time,
then what makes them different from any laws already on the
books? Currently, 18 states have such laws on their books, and
on top of the AMC laws, many states are requiring AMCs to
be “registered,” which can be costly and requires plenty of
paperwork. Kudos to Governor Bob McDonnell for signing the
Virginia state law, which makes it illegal to engage in the
same “appraisal nonsense” described above (coercing
appraisers, not paying, etc.), but does not require a
registration process (and, in turn, no fee). Also noted
as being proactive is the Arizona legal system, which
requires licensing and registration for AMCs, but has a
single line exemption for the relocation industry, simply
because “we are not the problem” (the law reads, “the
exemption for appraisals prepared for the purpose of
employee relocation”).
For the record, let me say that I am not anti-AMC.
Recently, a state board attorney whose state passed
AMC legislation in 2009 contacted me. She contacted me
based on my inquiry to the state board, and stated that
“this law was not intended for your business model in
the relocation industry…because you use the appraisal
with the client, whereas lenders do not use it…they
get it…QC it, and pass it on.” It is great to see some
realistic thinking for a change. The AMC-appraiser relationship
is much like the HMO-doctor relationship; mutual need
mandated by external forces, peppered with some mistrust.
Don’t get me wrong, there is a lot of merit to the underlying
premise of HVCC, but I just do not think it is going to result
in a changed world for the appraisal community. What the
appraisers do not like about the AMCs are the requests for
fast appraisals, some at a lower fee than they have seen in
years; requests coming with numerous assignment conditions,
many of which are not realistic and unacceptable (3 comps
within 3 months and 1 mile); and the occasional “can you hit
the number?” request before the analysis gets done (comps
checks), among many others. These requests changed the
previous business model that existed for appraisal services
(some as a result of the business cycle and some because they
were mandated by the HVCC). But, sometimes even good
change is hard to swallow. When you are forced to change, that
is when it difficult to acclimate. Many of the pressures placed
on AMCs are a result of what has transpired in the world, such
as increased competition, web-based valuation tools, quick
internet real estate research, fraud, secondary market issues,
and misunderstanding of the appraisal process in general. I
wonder what planet the “investors” live on—the one that
has guidelines so they will not purchase loans in declining>>
A
M
C
markets? I believe that a lender that asks an appraiser to
“remove a negative time adjustment” should be reported
to the HVCC hotline. Oh, that’s right, there isn’t an HVCC
hotline! Then call your department of banking, they say. Good
luck—the Department of Banking is not designed or staffed
for those types of issues. I recently spoke with an appraiser
who did not read or adhere to the engagement letter I sent,
which outlines many of our administrative requirements as
well as some assignment conditions. He told me, “We have an
AMC law here and you have to pay me, regardless, or you are
breaking the law.” I stated, “Great, I will take my chances since
you signed the engagement letter, yet failed to meet the simple
requirements stated in the letter—which is why I have called
you three times.” In this situation, we are not talking about
value; we are talking about basic development and reporting
issues that were not clear to me as both a user and a client.
Is this what the AMC laws are for?
Does anyone really think that requiring the AMCs to fill out
applications, pay a fee, and requiring staff members to take
a 15-hour USPAP will stop the madness? Actually, if the fees
are an issue, it could increase the cost of operating for the very
folks that are presumably not paying a “fair rate.” Since the big
3 lenders (all using profitable AMCs) have 60% of the market
now, via servicing or closing every US loan, I don’t see things
changing until we see a unified industry—an industry that
will unilaterally agree to push back on any conditions that are
deemed to be unreasonable. It is very difficult to push back
on three financial giants, but without a push, positive changes
for the appraisal community will not happen. The other day, a
friend told me of a lender (his client) who is seeking to create a
special list outside the AMC they use; the client’s claim is poor
service and product…I’d bet that licensing that AMC would
fix that! I also heard about a request coming from an AMC
in a state that requires they be licensed and registered. The
“caller” asked the appraiser if he could “hit the number.” The
appraiser asked “Isn’t that a violation of the HVCC and the
AMC laws?” The caller, who is in loan production, laughed,
“Who is enforcing this stuff anyway?—We do it all the time
and we just send a text message to our appraisers telling them
what they need.” There are approximately 97,000 appraisers
in the US handling over 1 trillion dollars in mortgage money.
Over 75% of the states require licensed appraisers for federally
related transactions and 45% require licenses for all appraisals.
Imagine if ALL 97,000 appraisers decided to make a change by
just saying “no” to unreasonable compensation or assignment
conditions. If we did not have state licensing, there would be
a clamor to get it because, in principle, it brings so much of
what the appraisal community needs now. Remember what
was stated twenty years ago? “State licensing will change
everything.” Maybe it didn’t actually change everything
because we didn’t make it matter; we didn’t make it change
everything.
What we already have included in FIRREA and state law is
part of the mechanism to get us to the next level. The missing
ingredient is unity. But, that does not mean we need to abolish
the AMCs or AMC laws. Let’s look within and stop trying to
reinvent the wheel with both the products and the process. We
are miners of fool’s gold until we make real change happen
from within, which, while it is not easy, is the only way for true
meaningful change.
{ While I agree with the basic tenets of the HVCC and the AMC
laws, I just do not think there will be a
net tangible positive effect, or that
the “real issues” are being conquered. }
I
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Appraising in the 21st CenturyCollateral is king again and appraisers are expected
to work harder and smarter
This is a time of great opportunity. It’s also a time of incredible change. I’ve found that these often travel together. The other thing that comes with change, of course, is discomfort. Change hurts, but if we as appraisers recognize the new environment for what it is and dedicate ourselves to giving clients the value they need, we will all thrive in the years ahead.
Let’s talk about the new environment we find ourselves in, as appraisers in the 21st century. As a professional appraiser with nearly 30 years of industry experience who now works as a chief valuation officer who hires fee appraisers to aid the risk mitigation work our company does for lenders, I see today’s appraisers facing new challenges and opportunities.
Lenders Return Their Focus to Collateral ValuationWhen I started appraising homes back in the early 80s, the value of the collateral was a critical part of the lending equation. If the property didn’t have sufficient value to fully collateralize the mortgage note, the deal didn’t get done. It was as simple as that.
Things changed at the end of the last century and during the first few years of this one. In my opinion, things got out of hand. The government is still trying to figure out where things went wrong and who is to blame and I’m happy to leave that work to them. I’d rather focus on where we go from here.
In the last days of spring 2010, I was in southern California for the Predictive Methods Conference. This forum typically focuses on risk mitigation, data analytics and forecasting. I left the conference feeling very encouraged by what I learned there. It seems clear (at least to those who attended the conference) that collateral is king again. Speakers and attendees both addressed the need to ensure accuracy in collateral valuations. Lenders now seem to be fully aware that property valuation is a critical component of their risk mitigation strategy.
As I see it, this shift in perception comes not a moment too soon. Fannie Mae recently issued new guidelines on how it will view appraisals, accept valuation data, and review loan files. Freddie Mac is also engaged in evaluating current and
past collateral valuation practices of the lenders it works with.This is all very encouraging to me. A return to well thought out practices in this area is critical for our industry’s recovery. And yet, I also realize that this focus on the appraiser’s business brings with it other challenges.
What Lenders Want TodayAs a professional appraiser, I fully understand the frustration and anger that many felt when lenders seemed to care more about the price a seller wanted than the realistic value of the property. Many appraisers felt pressured to hit these higher numbers and knew their livelihood was threatened if they did not.
Today, lenders need something different. Now it’s not about the number required to make the deal work, it’s about having reliable numbers that will convince investors that the deals are solid and will remain so into the future. Going forward, it’s the only way lenders can protect themselves from buyback requests that threaten their businesses.
When lenders approach appraisers today, they may be asking about a property that sold for $250,000 in the past, but might not be worth anywhere close to that number in the current market. The lender needs to know if the neighborhood will support whatever today’s value is and, just as importantly, whether or not that value can be expected to hold into the short-term future.
This change can be really great news for our industry. It means that we can get back to the business of appraising rather than the job of appeasing. We can spend our time doing the work we were trained to do. But first we have to convince lenders that we’re up to the task.
Some of the comments I heard at PMC—both from the speakers and from the audience—questioned the competency of today’s appraisers, both on the origination side of the business and on the review appraisal side. Initially, my reaction was one of anger, but after thinking about it, I was forced to admit that many appraisers are new to the business,>>
{ It means that we can get back
to the business of appraising rather
than the job of appeasing. }
have never appraised properties during a downturn of this magnitude, and some, I’m sorry to say, don’t seem to understand that in today’s market everyone is working twice as hard for half as much.
To be fair, I didn’t hear anyone blaming appraisers for anything at PMC or elsewhere. Most folks seem to understand that there were many parties to blame for our current financial mess and very few who can claim to be blameless. But as a professional appraiser, I’m troubled by the fact that most appraisers haven’t changed the way they do business in the last 40 years and that many appraisers are not willing to spend the money or take the time to provide reports that are up to date and in sync with current market conditions. Those are some of the comments I have heard at recent conferences.
If we really want to ensure that the values we’re returning to our lender clients are as accurate as possible, then we’re going to have to make certain that we factor in enough of the right kinds of data to make that happen.
Unfortunately, many of today’s appraisers are not making enough use of quality data to adequately value and risk-rate collateral. In addition, they lack the ability to share information with other appraisers and to cooperate for mutual benefit. As a result, many lender-based risk managers do not generally view appraisers favorably.
Getting Back to BasicsAppraising real estate is a local function. It always has been and I think that to do the job right, it will always require local expertise. Over the years, we have finally learned that there really is no such thing as an “average house” in an “average neighborhood.” So many elements go into the socio-economic makeup of a community that it cannot accurately be compared to others around the country, except on a macro scale.
Recent strides in data collection technology have enabled savvy modelers to combine groups of data with advanced analytics that provide good tools and a 360-degree view of neighborhoods and properties within them. Unfortunately, much of it has remained difficult for appraisers and modelers to access until recently.
By taking into account a larger pool of “comp” data, the odds that a valuation will be dangerously skewed by one bad comp out of thirty are far less than they would have been under the old standard of one out of three.
Succeeding in a Swiftly Changing MarketWe’re currently working within a market on the move. Sometimes, the situation in a given geography can change within a 30 day period, so why are many appraisers still treating this like a market of the past and looking solely at history to derive a value? I worry that too many appraisers are just filling out forms without accessing the critical data sources now available.
I realize that this isn’t the way most appraisers worked in the past. I was one of those appraisers working in the field 20 years ago. In those days, the value of real estate always appreciated, it was just a question of how fast. Those days are now officially over and like everyone else in the real estate market today, appraisers are being asked to work not only harder, but smarter.
Appraisers today are being asked to look beyond what the property was worth yesterday and even further than what it is probably worth today, looking into the future. No one is suggesting that appraisers start buying crystal balls, but rather that they make every effort to compare and contrast the subject property, neighborhood and general market area to the same location in the past, as well as to comparable properties.
Lenders need to know if a subject property is in a healthy neighborhood and if it is likely to sell in a reasonable amount of time. Homes in healthy areas sell very differently from those in struggling neighborhoods plagued by anemic sales, multiple REO properties and overpriced homes.
Around the country, we’re seeing markets right now where properties are on the market for well over a year, at times. That’s driving down property values in those neighborhoods, but many sellers aren’t reducing prices to keep the properties moving. Lenders need appraisers to tell them where this is happening. That kind of detailed information goes beyond filling out a form. It requires the appraiser to really know the neighborhood and tell the lender what is happening on a local level.
Now, I will grant you that this means more work at a time when lenders are as interested in turnaround times as ever. So, of course, that’s a serious challenge. I’ve visited with plenty of appraisers who feel that additional work isn’t what they signed up for. I can appreciate that and each professional must set his own standards, but for those willing to meet a higher standard, the opportunity this market offers is very exciting.
Getting Better at What We DoAppraisers working in the field today must realize that in order to be the respected counselors of the marketplace that they want
to be, they must have a complete understanding of both the sales side of the marketplace as well as the forecasting side. A critical component of that is a thorough understanding of the effects of competition on the subject property over and above what has happened in the past.
To lenders, a good understanding of the dynamics of the neighborhood is more important than it has ever been. They need to know the general health of the market in that geography.
Buyers of appraisal services want to know that the person delivering the report has a personal and professional understanding of the market that will allow them to provide a report that will provide real, actionable advice and counsel on whether or not this investor should put their money into this neighborhood. Is this investment strategy sound?
As I see it, the solution lies in combining the past, present, and – if you will – future by utilizing a combination of sales within the real estate Multiple-Listing Service (MLS), current offerings and predictive models that examine transfer times, REO activity, and other pertinent factors. Instead of three comparable sales, why not look at 30 sales that are detailed with the MLS notes stored in the database by professionals such as real estate agents and brokers who worked with the properties during the sale?
Making sure that we are using the best tools for the job is no different than what professionals in any industry do.
For example, if I am going to be a master sports car mechanic and I am going to repair and maintain a client’s Ferrari, I need to have not only all the necessary knowledge through classroom, self-study, practice and technique development, I also need to have all the necessary tools to fix that high performance automobile. If that means I need special tools, I must invest in them because that’s an investment in my future.
If I approach a client’s Ferrari with an adjustable wrench, a ball-peen hammer, and a pair of pliers, chances are excellent that I won’t be able to keep that customer long term. He will ultimately go around me to find another source of maintenance expertise.
Unfortunately, in our industry, the tool of choice has become form-filling software. In the past, completing the form meant delivering a fairly accurate appraisal of current value. As good as these tools may be, they simply are not enough today.
When an appraiser is presented with a very well-defined scope of work and step-by-step instructions along with specificquestions, the lender needs to return a report that answers those
questions, completes those steps and provides an accurate value for the collateral. Appraisers content with just filling out basic forms are not likely delivering this level of service.
Preparing for the FutureAs long as lenders continue to rely on property valuation to make lending decisions, it will be important to have access to the data required to reach meaningful and unclouded collateral valuation decisions.
According to a published report covering data collected during the fourth quarter of 2009, the property valuation fraud risk index is up 40 percent over last year and up more than 100 percent from two years ago. Despite the fact that lower loan volumes contributed to a slight quarter-over-quarter drop at the end of 2009, the risk of valuation fraud is extremely high for lenders right now. That makes it more important than ever for appraisers to be in a position to provide lenders with reliable numbers.
Lenders today are looking very, very carefully at where they get their collateral valuation information. In our work, helping lenders create solid strategies for effective risk mitigation, we encourage them to do just this. The lender must know that the services he or she receives can deliver the quality that his or her risk mitigation strategy requires to be effective.
As counsel lenders, we remind them that low prices for valuation services do not have anything to do with the quality they require, but the same can be said of high prices. In the end, appraisers will set a fair price for their services and those that deliver the quality that lenders must have will get that fee every time.
We also remind lenders that the quality they need may not come from one of the industry’s largest players. Today, it’s just as likely to come from a professional fee appraiser working independently of any appraisal management company. When I hire appraisers for the risk mitigation work we do for our clients, I’m looking at the quality of the product I get back, first and foremost. It’s good for appraisers to know that there actually are companies out there who care about their expertise and the quality of their products, not just the lowest rate in the shortest period of time.
For the first time in 5 to 7 years, we are in a market where collateral is king once again. This is a stellar opportunity for the competent, prepared, and technologically astute appraiser to become the local expert in his particular marketplace and achieve great success. That is how we, as an industry, will meet the challenge of appraising in the 21st century.
En
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sEnhancing Transparency
in Collateral Valuations
Technology is rapidly changing, so utilize resources
in order to maintain success
Throughout history, great minds have had strong opinions on the value of
knowledge. Sir Francis Bacon once said, “Knowledge is power.” A couple hundred
years later, Ralph Waldo Emerson similarly stated, “There is no knowledge that is
not power.” Then, in the middle of the twentieth century, President John Fitzgerald
Kennedy said, “In a time of turbulence and change, it is more true than ever that
knowledge is power.”
While these observations come from arguably some of the greatest minds of their
time, I’m not so sure that knowledge in itself is power. In fact, I’m more inclined to
agree with Napoleon Hill when he said, “Knowledge is only potential power.” After
all, how much good will knowledge do, if it’s not used? In the mortgage industry,
there are a lot of tools that go unused. Therefore, while a lot of information gets
passed back and forth, much of it goes vastly under utilized.
These days, especially in light of the industry’s struggles, we’re seeing a big push for
greater transparency. We want to be able to see more of the details. We want access to
more information. Everyone wants to see exactly what’s transpiring inside of his or
her transactions, and rightfully so. It makes perfect sense. Companies are much more
likely to sell their products if they can show that those products are made of quality
components, especially when there’s a potential for risk as big as it is in the mortgage
industry, that product is much more likely to be bought than one whose quality is
questionable.
Having been in the appraisal technology business for more than a decade, I’ve seen a
huge evolution in the applications used to manage the appraisal process, and lately,
I’ve seen a push toward transparency as well. I’ve also seen a lot of changes with
appraisal regulations and guidelines – especially over the past 24 months. Where
these two evolutions are concerned, it’s technology that tends to evolve the quickest.
In fact, as a general rule, technologies grow faster than users’ tolerances or learning
curves. Technologies – at least the good ones – can usually provide much more
information than users know how to use or even know that they need. This goes
for consumer based technologies like computers and smart phones, as well as for
business-based technologies like appraisal process management software.
With technology’s vast capabilities, given the industry’s focus on appraisal quality
and the potential for costly penalties, it only makes sense to merge the two and
leverage technology to raise quality and ensure safer practices. Although the >>
industry seems to be looking for more and better ways of
getting tasks completed, the question isn’t how to get better
technologies, but how to maximize technology’s current
capabilities to transact higher quality loans.
As far as the appraisal process is concerned, the first
and probably most obvious way that technology can
help enhance quality is by providing insight into how
appraisals are being handled, from beginning to end. A
good technology is going to be a big help by providing a
transparent process. But remember, there’s a lot of room
for compliance violations and a lot of room for oversights
throughout the entire appraisal process, not to mention
the rest of the mortgage cycle. A good technology provides
access to an audit trail that tracks details all the way back
to the original appraisal request. There are a lot of lenders
that don’t take advantage of this information. If you’re
concerned about loan quality, and you want to prevent
buybacks and compliance violations, take the time to use
that visibility; monitor your processes. If you know who is
placing the request or assigning an appraisal order, you’ll
have a much greater chance at staying compliant with many
of the industry’s new guidelines and regulations. Appraisal
process management technologies are equipped with
firewalls that keep unauthorized individuals from having
noncompliant interaction with an appraiser, but even so, it’s
a good idea to gain knowledge of your processes. Once you
have that knowledge, you can turn it into power by taking
action should any areas of weakness arise.
Lately, we’re seeing a new tactic being used to certify
inaccurate values. Some unscrupulous originators
are sending appraiser- or AMC-provided certificates
(documents indicating that the appraisal is authentic
and was completed according to certain guidelines) to
authenticate inaccurate values. Instead of sending an
updated lower value appraisal with its certificate, the
original, higher value appraisal is being provided with that
certificate. In order to protect yourself from this scenario,
rather than taking the certificate at face value, make sure
that the certificate matches the appraisal in question. Ask
appraisers or AMCs to put the value of the appraisal on the
certificate. All of the information needed to determine the
discrepancy is easily available with today’s systems – the
appraiser that completed the appraisal, the appraisal, and
the certificate – but it will do no good if the information isn’t
cross checked and evaluated. Certificates should always be
linked to the appraisal, not to the appraiser or AMC.
Another highly under utilized information-providing
tool is the automated review feature of some appraisal
management software. Lenders are required to review
only one in ten appraisals, yet even so, many lenders aren’t
completing appraisal reviews at all. Of those that do, many
complete only the 10 percent bare minimum. A competent
appraisal management technology can perform an
automated review loan on every single loan, which in turn
can provide a level of information that can pay dividends in
the way of safer, quality loans.
Obviously there are certain parameters that are good
indicators of potential hazards. Armed with this
information, lenders can set up a scoring process that will
“red flag” an appraisal whose components fall below – or
exceed – certain tolerances. For example, automated review
technologies can flag appraisals that have less than a
certain amount of comparables, or that use comps outside a
certain radius. This way, rather than scrutinizing a random
10 percent of appraisals, a company can focus on the 10
percent of their appraisals that have been determined to
have the highest risk. Of course, this deliberate targeting
enables higher quality loans and helps to increase investor
confidence as well.
There’s a new program called UMDP, or uniformed
mortgage data program, and it will be enforced by the
GSEs in April 2011. According to the UMDP, the GSEs will
be requiring that all appraisals be submitted in a MISMO
XML format. This is a huge step forward in leveraging
information. Getting appraisal information in XML will
help aggregate information in a more digestible and easily
managed format, so that it may be analyzed and evaluated.
Instead of getting information in a PDF file, where details
are much less accessible, Fannie Mae and Freddie Mac
will now be able to harness information on every single
appraisal sent to them, analyze that information, learn from
it and utilize it to help ensure higher quality loans.
If the GSEs are moving to leverage appraisal information,
doesn’t it make sense for lenders and other parties, like
appraisers and AMCs, to do the same? If lenders, AMCs,
and appraisers import appraisal information in an easily
readable, easily accessible format, they’ll be able to
determine trends and areas of vulnerability, while also
storing information for future cross-checking and reference.
Looking at the opportunities available to lenders, the new
UMDP requirements don’t have to be a necessary evil.
Rather than concentrating on meeting the GSEs’ guidelines,
companies can concentrate on raising their own quality.
The industry isn’t perfect, not by a long shot, and there
is certainly a lot of room for improvement. The mortgage
industry will continue to evolve, technology will keep
advancing and new fraud tactics will arise. As the appraisal
segment gathers more information, it will undoubtedly
enforce more guidelines in the effort to enhance quality.
Through the ups and the downs, predictable corrections
and sudden changes, the companies that stay consistently
successful will be the ones that maximize the tools and
information available to them.
{ If the GSEs are moving to leverage appraisal information, doesn’t it make sense for lenders and other
parties, like appraisers and AMCs, to do the same? }
Financial Regulatory Reform, AMCs, and the
Residential Appraisal IndustryNew legislation can be a positive change, but those within the
industry must aid guideline enforcement
Determining how the newest round of legislative changes
will affect the independent fee appraiser, the AMC and the
lending community will be decided over time. What can be
said with certainty is change is upon us.
I have to acknowledge that writing this article was my idea,
so there is no one to blame but myself. Hindsight being
20/20, I might have postponed this venture into the unknown
until August to see how the agreed-upon reconciled bill
actually ends up impacting the industry; but I’ve decided to
forge ahead earnestly with my most recent copy of the
Dodd-Frank Wall street Reform and Consumer Protection
Act and a steadfast belief in the capabilities of our policy
makers.
the Financial Regulatory Reform and its corresponding
impact on the residential appraisal industry is near and dear
to my heart, so I’m hoping you – the reader and more than
likely an industry participant – feel as strongly about the
subject matter as I do.
I’m certain this article will not be well received by all
readers, and I understand why. this is a very sensitive
topic that impacts the livelihood of so many. It may be
surprising to hear, but I hope to see commentary countering
my position. My interest is in facilitating the debate. not
everyone will see the effect of pending legislation in
the same way I do, but we all have an opinion, and we
must open up the discussion if we’re ever going to find
commonality of cause. this is a pivotal point in our industry;
I ask that all affected parties take time out of their schedules
to get involved in the process so they understand how this
bill will affect them. If you don’t like what is happening,
speak up and be heard. this is particularly applicable today,
since the specific standards governing appraisers will be
developed over the coming months, with all interim final
regulations due within 90 days after the bill is enacted.
ChangeHaving been in and around the appraisal industry for
the better part of my adult life, I’ve become relatively
desensitized to what some might characterize as the pains
associated with change. If you’ve been in this industry for
any significant length of time, you too have pinched your
nose while taking your prescribed (dictated) medicine.
some change is much easier to accept, like the use of digital
cameras versus your trusty 35mm, or the development of
practicable sketching programs versus graph paper, pencil
and protractor. these technological advancements made
what we do as appraisers easier; we were quick to embrace
these process changes. other changes have been less
palatable, most notably the implementation of the often
maligned Home Valuation Code of Conduct (HVCC). We’ll
cover the affects the HVCC had on the industry a bit later.
Let’s first continue our focus on the concept of change.
It’s not just appraisers that are adverse to change. Mankind
enjoys the warm embrace of familiarity. We tend to be
creatures of habit, changing only when prodded along
by necessity. “I’ve always done it that way” is a common
response when asking an appraiser (or anyone for that
matter) why they do something the way they do. I’ll recount
a conversation I had with an appraiser not too long ago. the
appraiser was involved in the industry for the better part of
a decade, so they couldn’t be categorized as a greenhorn or
newbie. At one point in their career, they were employed
as a staff appraiser for a national lender (names withheld
for obvious reasons). I happened to be engaged to review
a file completed by the appraiser in question. Doing so
led me to question some of the methodology employed
when concluding the subject’s value, so I initiated a call
with the appraiser for clarification. I asked the appraiser
to explain to me how the value conclusion was reconciled.
the response I got was puzzling; apparently the appraiser
was instructed - during their time as a trainee – to add up
the post-adjusted sales prices of the comparables and divide
by the total number of comparables used within the report.
I couldn’t help asking if the appraiser had ever heard of
this being a recognized technique for concluding the most
probable value of a property. the appraiser responded with
the following (and I’m paraphrasing), “I’ve heard of other
methods, but this is the way I’ve always done it.” ouch! not
exactly the response I was looking for, but it has turned out
to be useful in illustrating my point here. People don’t like
change, even when what they are currently doing makes no
sense whatsoever. >>
HistrionicsLegislative efforts meant to promulgate appraisal and lending
standards have been around for a long time. We can reflect on
the development and adoption of the Truth in Lending Act of
1968 (TILA); the Real Estate Settlement Procedures Act of 1974
(RESPA); Uniform Standards of Professional Appraisal Practice
(USPAP) in 1987; and the Financial Institute Reform and
Recovery Act of 1989 (FIRREA) as groundbreaking regulatory
measures. These legislative efforts ultimately form the
foundation that the most recent Financial Regulatory Reform
Bill will build upon.
In more recent years, the adoption of a Market Conditions
Addendum seemed to be regarded as a tidal-shift of sorts.
Many appraisers felt the information requested in the MC
Addendum was already being provided, and had been for
many years. “Why should this information be summarized
in predetermined data fields now?” we asked (especially
data fields that don’t analyze year over year trends and fail to
account for seasonal fluctuations in the market). We dealt with
it in the best way possible: by attending countless webinars,
seminars and lectures on how best to fill out the form. In the
end, we made do.
Around the same time, we were hit with the cataclysmic
regulatory change so many had been dreading: the HVCC.
Before appraisers actually understood the impact it would
have on their business model, it had already been adopted
- industry wide - as standard operating procedure. Most
independent fee appraisers likened it to an extinction-level-
event for their way of life. These appraisers relied upon the
relationships they’d fostered with individual brokers for their
entire careers. Now the regulators would undo everything they
worked so hard to achieve over the years. This was in fact a
metamorphic change that would not be widely embraced.
Many believe the HVCC was unnecessary. I’ve heard
commentary on the subject from every corner of the appraisal-
sphere, with the respondent’s tone depending greatly on
the respondent’s position (i.e. Independent Fee Appraiser,
Staff Appraiser, AMC Manager, etc.). I happen to fall into
the category of those that feel the HVCC did what USPAP
failed to do over the previous 11 years: securitize appraiser
independence.
Now, with new legislation afoot, the regulatory codes look to
be in flux. The HVCC was written to sunset in 2010, and the
pending legislation will do away with it once and for all, so
what next?
Pending Financial Regulatory Reform, known as the
Dodd-Frank Wall Street Reform and Consumer Protection Act
(H.R. 4173), made its way through reconciliation last week.
During the course of this article, we’ll examine how this latest
legislation will affect AMCs and the residential appraisal
industry as a whole.
Current Legislative ReformAppraiser Independence
I remember vividly the first time I saw the base text of H.R.
4173, specifically the Appraiser Independence Requirements
outlined in Section 4312. This specific portion of the House Bill
(pertaining to lenders and the GSEs) would have eliminated
the prohibition on using an appraisal report that was
completed by an appraiser “selected, retained, or compensated
in any manner by a loan originator licensed or registered in
accordance with the SAFE Act.” This commentary gave me
plenty of reasons to be concerned; primarily, the potential for
re-entrenching the broker/banker in what is meant to be an
arms-length collateral valuation process. All of the appraisers
reading this article can think back to a time when broker/
banker influence had a stranglehold on our profession. Many
appraisers would be selected for service based on whether
or not they were considered conservative or aggressive. This
practice finally came to an end in May 2009 with the HVCC’s
adoption.
It was during this time that I decided to reach out to colleagues
across the industry in an effort to procure their opinion of the
HVCC and its impact on appraiser independence. “Are my
contemporaries interested in revisiting the days of old?” I
think to myself. The answer to this question was clearly “No!”
Unanimously, the industry leadership applauded the positive
effects the HVCC had on appraiser independence. Most agreed
the HVCC finally did what USPAP could not. That is to ensure
a borrower, broker, banker, or realtor did not unduly influence
the individual appraiser at any point during the valuation
process.
Understanding the HVCC took some time. Notable fallout
was the misconception of what the HVCC was and how it
impacted the boots on the ground appraiser. The HVCC was
invoked inappropriately countless times, as if it were the
5th Amendment to the Constitution. The biggest concerns,
however, seemed to revolve around fees, turn-times and
requirements. The independent fee made appraisers feel that
they were being paid less to do more in a shorter period of
time. It’s not hard to see why the agreement between Cuomo
and the GSEs was met with such resistance. >>
You may have read a position paper written by my colleague,
Kristine Hughes, and I that was circulated by the Collateral
Risk Network (CRN). It was titled “In Response to Proposed
Property Appraisal Requirements; Amending the Truth
in Lending Act (TILA), the Financial Institution Reform,
Recovery, and Enforcement Act of 1989 (FIRREA) and the
Real Estate Settlement Procedures Act of 1974 (RESPA).”
You’ve got to love that title! Well, I reference it here because
that paper asked for thoughtful consideration to be made
by the legislators participating in the reconciliation process,
and I believe they did on some issues. In that paper, I use the
analogy of letting the proverbial fox back into the henhouse
when describing what may have occurred if the original
House Bill language prevailed (allowing brokers/bankers the
opportunity to become involved in the ordering of appraisal
assignments). This commentary shouldn’t be interpreted as an
indictment of the broker/banker community, it is simply an
observation made by someone who’s been doing this for a long
time.
Having my experiences as an appraiser to draw from, it was
easily conceivable that an undoing of the safeguards that had
so recently been adopted would lead us down a very familiar
road. One in which the relationships between broker and
appraiser could once again stray off into very gray areas of
practice.
The legislation, as it is being submitted to the President’s
office for approval, does appear to have retained the most
important appraiser independence clauses. Strong language
meant to dissuade the practice of biasing appraisers has been
built in to the bill, including the establishment of a federal
appraiser independence standard – which is long overdue.
For the fee appraiser and AMC, it looks like the probability of
experiencing undue influence has been mitigated.
Fees and TransparencyMuch of the legalese used in the bill appears to be there
for ambiguity’s sake. I’ve heard more than one legislator
comment on the regulator’s responsibility for interpreting the
legislation. It’s akin to a very passive form of pass the buck.
That being said, the idea of really knowing how this aspect of
the reconciled bill is going to impact the industry will require
the participation of a psychic. Since I’m out of mentalists, I’ll
have to rely on a rudimentary interpretation of the level of
transparency the new legislation will require.
AMCs and other lender/clients will be required to pay
fees that are considered “reasonable and customary” to the
appraiser, for services rendered. I can already see the debate
taking shape. While attending the 2009 Valuation Expo in New
Orleans, it became very apparent that the phrase “customary
and reasonable” might be less than definitive. It was around
this time that HUD decided to send out Mortgagee Letter
09-28. This Mortgagee Letter, with Appraiser Independence
in the subject line, required FHA-approved lenders to ensure
appraisers are compensated in a “customary and reasonable”
manner “for appraisal services performed in the market area of
the property being appraised.” Doesn’t get much clearer than
that, right? Apparently it wasn’t as clear as HUD had hoped,
as evidenced by the protracted sidebar that became a very
spirited debate between the fee appraisers and the industry
leaders in attendance. Either way you slice it, the appraisers
had a reasonable gripe. They were used to getting paid a
certain amount for a service they’d provided for years, and
now the fees were being squashed. Nothing conclusive came
of the discussion, but it became apparent the terminology used
did not clearly identify what the appraiser could expect to be
compensated.
Is the disclosure of fees associated with the management of
appraisal products going to negatively impact the industry?
My answer is no, it isn’t going to create a gravitational pull
for better or for worse. What should be given a second look
is the way in which this type of regulatory change can be
circumvented. Just because the adoption of this new level of
transparency appears to be a done deal doesn’t mean we can
solely rely on regulators to foster a mindset of fundamental
change. We must continue to police ourselves in hopes
of regaining as much of the consumer confidence - in the
appraisal industry - that was likely lost as a result of our most
recent economic crisis.
During a recent conversation with a colleague whom I hold
in the highest regard, we discussed the topic of transparency.
His commentary was insightful and inspirational. He noted
the need for transparency across the board, including a
disclosure of fees and their corresponding beneficiary. Being
in the AMC world, it may be hard to believe, but I agree with
his assessment. Why shouldn’t we disclose who is being paid
what and why? I’ll reflect on a scenario that was presented to
me recently in hopes of illustrating one of the many potential
pitfalls associated with non-transparent transactions. A large
AMC engaged an appraiser to complete a residential appraisal
assignment for a large national lender. When the appraiser
was onsite, the borrowers commented on the $700 appraisal
fee (feeling it was a bit excessive). The appraiser was taken
aback, since the appraiser accepted the assignment at a fee
of $250. Not saying anything of an incendiary nature, the
appraiser left the residence with a well-earned distaste for
AMCs. I ask of my peers, “Is this acceptable behavior?” “Is it
endearing the appraisal professional to the consumer?” In this
case, the borrower ends up believing they were overcharged
by an appraiser that undervalued their home. Not the ideal
way to boost consumer confidence. I can continue to opine
on the benefits of transparency, but I will defer to the reader’s
judgment while anxiously awaiting some constructive criticism
or praise.
CompetencyShould an appraiser concluding an opinion of value on a
property be required to maintain state licensure or certification
in the subject properties’ state? Is it an unrealistic expectation?
Does USPAP’s Competency Rule prohibit the review/
reconciliation of appraisals completed on properties outside
the appraiser’s state of practice or even their immediate market
area when a value determination is made? These questions
don’t appear to have been answered with the proposed
legislative changes. H.R. 4173 does impose a requirement
for anyone conducting a review to be licensed or certified in
a state, but it doesn’t really address the question of whether
or not his or her lack of local market knowledge could be
construed as a competency concern.
From the AMC perspective, the guidance provided to us by
USPAP and this new round of legislative changes still leaves
room for interpretation. I think this is a topic that requires
further scrutiny. I’ve heard from both sides of the aisle on these
questions, but the verdict is still out. This might be one of the
few rocks best left unturned for the time being…
AMC RegistrationThe legislation calls for the state-to-state registration of AMCs.
This is an aspect of the bill that should have been retooled.
Initially, most AMCs were excited about the idea of federal
registration since it would provide for a standardization of
process, requiring realistic registration fees. While registering
AMCs makes reasonable sense, the process in which they will
now be required to comply couldn’t be any more fragmented.
Unless the AMC is owned in whole or in part by a company
that is subject to federal regulation (think OTS and OCC),
the AMC must register at the state level. This makes for a
very unlevel playing field, with the advantage going to bank
owned AMCs. Leaving the registration fee-structure up to
the individual states could very well price some industry
participants out of the marketplace. Others may instead
decide to pass those fees off to the consumer, even if it’s done
surreptitiously. You’ll be hard pressed to find lenders and
AMCs that want to shoulder this added expense.
OversightThe new legislation provides for the financial resources
necessary to fund supervision efforts. Does anyone remember
the Independent Valuation Protection Institute (IVPI) promised
by the HVCC? I hate to say it, but isn’t it about time we
orchestrated a supervisory body at the federal level that can
accept complaints and respond to actionable claims? This
may finally provide for some bite to go along with all the bark
we’ve seen at the legislative level.
I’ll feel a sense of relief once this committee or oversight panel
is up and running. For too long, we’ve relied on the states to
manage complaints. This may have been a viable option before
the financial crisis we’re in, but now the states lack the funding
necessary to enforce the law of the land. Many are backlogged
with investigations they just can’t get to in a timely fashion
because they lack the manpower and resources necessary to
conduct comprehensive investigations.
TakeawayWe must be accountable to our industry. This might be as good
a time as any to run through a goodness of fit test to finally
conclude if these legislated guidelines will do for the consumer
and our industry what they are supposed to. How often are we
presented with circumstances that are less than ideal? If you’re
an appraiser or work on the collateral valuation side of the
industry, chances are you see this happen more often than you
might care to admit. I was once told, “If you’re not managing
the process, then the process is managing you.” These are
words to live by (in my humble opinion).
The legislation isn’t going to make the industry any safer if
we don’t do our part to aid those charged with enforcing the
guidelines. Some of the points that have been focused on in the
legislation are likely to be more impactful than others. Clearly
defining federal standards for appraiser independence is a
must-have. Allowing the states to regulate AMC registration
as opposed to federally regulating them falls into the
“should’ve thought this through” category. These new rules of
engagement aren’t all that dissimilar from the ones we’ve been
operating under for some time now. So, in conclusion, I say to
everybody, “It’s time to pinch your nose and swallow fast.”
Things Appraisers SeeHere are some funny, interesting,
and unique pictures of things appraisers saw over the last month.
Think you can top them? Go to www.livevalmag.com
and upload your photo(s) to be considered for our next issue.
Taken ByDouglas wold
Taken Bygerald randall
Taken ByLeroy Thomas
Taken ByJudee neuchter
Taken ByTom Armstrongvideo available
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Most field appraisers I speak with seem to believe that when an appraisal is completed for loan origination purposes it gets reviewed by an underwriter and review appraiser, then post-funding is locked away in a file folder never to be used again.
In fact, nothing could be further from the truth. The funding appraisal is one of the documents that stays through the life of a loan.
InvestingOnce loans are funded, the majority are packaged and sold as a Mortgage Backed Security (MBS) or securitized by a warehouse line. Either way, the appraisal is getting looked at again and again.
If a loan is sold as a MBS, not only the purchaser of a loan pool reviews it, but possibly a separate due diligence firm as well. The sellers and buyers of loan pools will each hire separate diligence firms to represent them in the sale, and both will have appraisers as part of the review and negotiation team. If a loan is pulled from a pool for any reason, it will be placed in another pool and the process takes place again with a new purchaser.
If the loan is securitized, the holder of the warehouse line will do audits on the portfolio again, either using in-house appraiser/valuation staff or by hiring outside diligence firms to perform reviews. If there are appraisal deficiencies noted, the loan could be set aside for further review and possible repurchase.
Aside from the sale of the loan, lenders also conduct post-closing quality assurance. HVCC requires lenders to perform a quality control test by using retroactive or additional appraisal reports on a randomly selected 10 percent (statistically significant) sample. Lenders not selling to GSEs might not sample 10 percent, but do conduct some type of post close QA using a statistically significant sample on a monthly basis. Some perform this in-house, using staff appraisers, some outsource to diligence firms. Either way, the appraisal report is being looked at again for any abnormalities or omissions.
servicingThere are a number of situations that occur during servicing that might warrant another review of your appraisal report:• First Payment Default (FPD) — Most loans that miss the first loan payment are again reviewed, not only for credit
and compliance, but collateral as well. • Early Payment Default (EPD) — This is the same as first payment default: the entire loan package is reviewed. • Bankruptcy — When a home loan includes bankruptcy, the appraisal is reviewed in order to review the underlying
collateral and assess loss severity to the lien holder.• Loss Mitigation — Once the loan goes into default, the servicer/investor/lender needs to make a decision on
how to proceed on the property. Do they try a loan modification? Do they negotiate with the borrower? Do they foreclose? Regardless of the avenue taken, there is going to be a review of the appraisal completed at origination as well as current valuations to assess loss severity.
• Foreclosure — Once the property is foreclosed, there will be a review of the appraisal as well as current valuations to assess loss severity and anticipated sale price. If the lender/servicer or investor determines there was any type of overstated value, misrepresentation or errors and/or omissions on the origination, it could result in a repurchase request to the loan originator, an E&O claim against the appraiser’s insurance, or in the worst case, criminal charges filed and notification to state appraisal boards.
• Fraud — If a lender/servicer or investor feels there is possible fraud anywhere within a loan file, most times the entire file is audited, including the appraisal. If there are trends noted that the loan was submitted by a specific broker, realtor or account executive, an audit of all loans connected to that firm or individual could be audited. That being stated, if you have completed an appraisal for an individual or firm that is being investigated for possible fraud, an audit of all appraisals connected to that person(s) under investigation could be audited, even if the loans are performing.
• Repurchase/Buyback — Recently, we have seen a large increase in repurchase/buyback requests initiated by lenders, servicers, GSEs and mortgage insurers. These parties with vested interest in the collateral of a loan are going back and performing retroactive appraisal, and retroactive reviews. Again, if there is evidence of overstated values, misrepresentation or errors/omissions on the origination appraisal report, this could result in a repurchase request, E&O claims, and legal action against the appraiser.
So the next time you are submitting an appraisal for a home purchase, refinance or appraisal for mortgage finance purposes, remember that the initial review is only the beginning of your appraisal’s life. Your work will be reviewed dozens of times by well qualified people whose job function is to find fault with your work. Guard yourself against any future issues by submitting the most accurate, comprehensive and complete appraisal possible.
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