Appraisals, Technology as Important as Credit Scores

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In the post-crisis housing market appraisal reports are becoming as important as credit scores, requiring lenders and servicers to be more inventive with the tools they use to assess real estate value risks.

“Before the crash, the borrower’s credit score was used as the primary barometer to assess risk,” Vladimir Bien-Aime, president and CEO of Global DMS, told this publication, but that is no longer the case.

Today the appraisal report is as important due to the drastic depreciation of the past few years and the numerous valuation compliance rules that lenders must now adhere to, says Bien-Aime. “As a result, lenders must place a far greater focus on the way valuations are handled” and use technology inventively.

Technology alone has helped change how property valuations are assessed. Insiders like Bien-Aime agree various trends observed in the marketplace are improving the overall turnaround time, quality and accuracy of property valuations.

The use of mobile technology is a major trend, he says, that allows appraisers in the field to manage their workflow and complete property inspections more efficiently.

Another “sign of the times” is that lenders are truly concerned about borrower defaults and buybacks from investors, he says, so collateral review is bigger now than ever before.

Lenders are investing in various tools and tapping valuation experts to validate their collateral. “We see lenders either outsourcing there collateral review process to AMCs or utilizing automated review systems” to ensure appraisal reports are sound and in the proper MISMO and XML format required to ensure approval by the GSEs.

The use of alternative valuation products by originators instead of the traditional Fannie/Freddie appraisal forms products, which has become the norm in the housing market in the past few years “is also growing,” he added.

Many lenders “are experimenting with statistically supported appraisals and hybrid products that incorporate Automated Valuation Models that utilize public records data and the MLS,” combining good old fashion appraiser know-how with state-of-the-art technology.

The foreclosure crisis and efforts to prepare for the housing recovery has affected the valuation process, the technology supporting establishing new standards.

Lenders manage the valuation process manually, by an AMC or by way of technology, he said. But the manual method is now on its way to extinction because the quality of manual valuations is very disputable if not “very dangerous,” so it “shouldn’t even be an option,” he says. If a lender decides to use an AMC, “they need to ensure it’s a stable, reputable company” that produces quality valuations, or use technology that automates the process for them.

Both methods have their advantages and disadvantages and lenders must decide what works best for their specific business models, he adds. Leveraging an AMC does minimize internal resources but also limits control of the process, while a software solution “maximizes control but requires noncommissioned employees to administer the process.”

Whatever the final choice, it cannot be a manual option that “can’t be measured, logged or audited,” he argues, and unless lenders comply with state and federal requirements, fines can amount to tens of thousands of dollars per day.

For example, all appraisals being sold to the GSEs must be submitted using the Uniform Collateral Data Portal that requires all appraisal forms to be structured using a specific format called the Uniform Appraisal Dataset. The UAD format allows the GSEs to easily validate the collateral based on a series of rules, so lenders and servicers can use valuation management software to effectively handle these requirements, he says. In other words, technology allows lenders to both save money and “to sleep easy at night from a compliance perspective.”

What has changed, says Clint Cornett, CEO of ValuTrac Software, is that technology is playing an important role in supporting demand for property valuation. Even though appraisers are expected to directly examine and report on what is going on the in the market, lenders are using AVMs and verification tools alongside an appraiser’s opinion. It is helping lenders, servicers, investors and even borrowers make educated decisions.

“Technology is really streamlining the workflow for the lenders and their appraisal management companies,” he said. “Regulators are really watching this industry just in lieu of the past issues and technology is playing a vital role as lenders and AMCs try to stay in compliance with the new requirements.”

These changes allow lenders to establish highly efficient appraisal processes that feature regulatory compliance tools and cater to valuation requirements, says Cornett. ValuTrac is one of the providers of appraisal verification tools designed to help users access several data sources, verify comparable market information and assess the validity of a completed appraisal.

Often the best software solutions result from collaborative efforts and partnerships so some businesses are aligning themselves with national and regional AMCs. “We’re seeing a lot of lenders aligning themselves with regional AMCs as they try to further improve the quality of the AVM product they receive from AMCs,” he said.

Judging from feedback so far, he said, lenders find that if they work with a regional AMC “they might get a better level of service, build a better relationship, and get a better quality appraisal product.” But since business preferences differ, they just have to find what type of service best fits their needs. Each business has to evaluate their business model and their goals, when they decide between starting an appraisal unit and outsourcing.

At the end of the day, technology is key, so finding the right technology provider is as important in managing the valuation process and enhancing the quality of valuation reports, he says.

ValuTrac software aggregates property data lenders and AMCs can use to analyze local markets, report or compare with previous valuation reports, with appraisal verification software for underwriters and other customizable solutions.