Appraisal management is still not perfect but it continues to improve, and it has come a long way from where it was just a few years ago, according to Judy Wheatley, a senior vice president at Indecomm.
“I certainly feel we are moving in the right direction,” said Wheatley. “Valuations have more integrity. However, the regulators expect the lenders have the proper tools to ensure that is the case.”
Companies like Global Data Management and FNC today have “pretty good automated underwriting for appraisals,” such as digital scans of appraisal reports that can identify red flags, with user-defined rules.
GDM CEO Vladimir Bien-Aime, who said his company provides technology for many appraisal management companies as well as lenders and their captive AMCs, confirmed that this is among the forms of automation it provides. He said technology alone is not enough to ensure appraisal management produces values with integrity today, but it has gone a long way toward providing “visualization of data” that helps those reviewing valuations toward that end.
A call to FNC had not been returned at deadline.
Wheatley said these companies’ offerings are tools more lenders should consider using, particularly if their underwriters’ perform appraisal reviews.
“I think that having those tools available for the lender, some sort of automated appraisal review, is important,” she said. “But it can’t replace someone who specializes in reviewing appraisals.”
Current practices are generally much better than they were a few years ago compared to when there was not much time spent reviewing appraisal reports in general, never mind conditions or repairs, she said.But based on feedback from the company’s collateral review team, Wheatley said it sounds like in some cases appraisers are “still not always reporting all negative factors about the property.
“Appraisers are human, they make mistakes from time-to-time,” Wheatley said. But in instances where they “clearly omit information they should have reported,” there is a problem.
Overall, she said she believes, “With the level of diligence on the appraisal review we are going to continue to improve, to feel more confidence in the valuation.”
She said she believes appraisal management companies have been working diligently with their appraisers to be sure they are meeting all USPAP requirements.
But in her opinion some have in the past had lax hiring practices that resulted in situations where appraisers were sent to neighborhoods outside their understanding, something that also has been a common mortgage industry complaint.
To some extent the increased rigors of the current valuation environment have weeded out some of the appraisers that should not have been in the profession. But they tend not to be compensated as highly as in the past, even as their workload increases, and this also has pushed some good appraisers out of the business as well, Wheatley said.
The GDM CEO said he believes regulation and awareness of the appraiser proximity issue since 2009 have largely addressed the concern, adding that he also thinks it is at least partly frustration with low valuations that cause deals to fall through that makes it a bit of a scapegoat. “No one complains about a high valuation,” he said.
Wheatley said it also is her understanding that AMCs have been aware of and working to address concerns such as ensuring appraisers have the expertise needed to work in a certain area, but she also said she believes in some cases there are “still some gaps” in appraisers’ knowledge when it comes to “unique property types” such as properties in rural areas, manufactured home sites and two-to-four family units. Technology can help with this also, the GDM CEO said.
This is “not to say underwriters can’t perform comprehensive appraisal reviews,” said Wheatley. But not every appraiser might know all the nuances of a specialized valuation, such as a condominium project review done in conjunction with a Federal Housing Administration loan.
She said it has become a trend in the industry to add another layer of review when it comes to higher risk property types. To address the sensitivity of appraisal management issues like these and meet regulatory guidelines, some major lenders have decided to take the valuation review and separate it from the credit review, putting the two together in their underwriting decisions, Wheatley said, noting that this is what her company has been working with some of its clients on. This has been primarily a response to interagency guidance issued by federal regulators at the end of 2010 to specifically address risk in collateral practices with an emphasis on independence and separation in valuations. Using “qualified skill sets” to perform these reviews helps mitigate the risk of concerns in this area, she said.
When Indecomm is providing a third-party appraisal review, “once an appraisal has been received, an AMC may have it reviewed before passing it on to their client,” she explained. At that point the appraisal “comes to our collateral review team of licensed appraisers throughout in the country.” This may be supplemented by the use of an automated valuation model or some other automated collateral review service. Indecomm’s collateral review team looks at the automated feedback on the appraisal and consults its own checklist as well as anything the client may be interested in adding to it.
“It takes about an hour on average to perform the review. They are not just looking at the appraisal report and the contract. There is additional research through public portals, things like that, [and] determination to see if there are any inconsistencies, questions, or issues.”
Wheatley said the company will “reach out to appraiser or AMC with our questions before we provide a feedback report to our client, as to whether or not the collateral is acceptable to them and [its value is] supported.
“Generally, this is done before credit underwriting [is completed] and available to underwriting for a final decision on the loan.”
Indecomm generally charges per appraisal review but also offers tiered pricing based on volume. The service is a variable cost alternative to setting up an in-house appraisal review team, she said.
With indicators of relative home price improvement appearing in the market recently, one may wonder what might happen to appraisal management quality control if the market begins a more full fledged stabilization and/or recovery where there is more in the way of comparable values and less depreciation risk. “I hope same level of review continues as the market improves,” Wheatley said. But she noted that historically, the industry tends to relax standards when this has occurred.
But she said even in the event that values stabilize or recover she believe the market will continue to use the greater array of quality control measures now available. “Today we have a lot more automated tools,” Wheatley said, noting that she believes these will “probably improve over time.”
What may change in an improved market is the amount of sampling as opposed to 100% reviews. Because the recent, inordinate downturn and sizable distressed inventory still on the market means that any appreciation in a recovery is likely to be modest, Wheatley thinks the risk of lapsed quality control is smaller than it would be if home prices saw a rapid run-up in value.
“I think we’re reaching a pretty good place now” in terms of market values. What may be a concern, is that if “demand picks up, we may not have enough appraisers.” Not only are margins already squeezed, but also training new apprentices requires supervision by certified or licensed appraisers. This is challenging because of both the financial and manpower costs involved. Supply-demand factors in a recovery as well as increased technologically driven efficiencies, however, could help restore appraiser compensation.
