The Appraiser Independence Requirements and its precursor, the Home Valuation Code of Conduct, changed the process for lenders ordering appraisals.
Since its adoption in 2010, AIR has certainly complicated the relationship between lenders and appraisers. Most lenders sought appraisers who were highly skilled, but now the ability to specify them as their appraiser of choice is gone.
Today, appraisals are generally ordered through an appraisal management company, substituting the AMC’s judgment for the lender’s experience. The certificate of non-influence provided by the AMC is a kind of safe harbor for the lender.
It shows that a third party has selected the appraiser and exempts the lender from keeping stringent records that show they are handling their orders on a rotational basis from qualified sources. Most lenders go the route of the AMC.
The AIR process does not, however, relieve the lender from the responsibility of obtaining the most accurate appraisals and not all AMCs are created equal. In order for lenders to ensure that they are getting good appraisal reports on the property, which is collateral for their loans, the lender should at a minimum:
1. Establish a relationship with a reputable AMC. Some AMCs have better results than others. Ensure that you are dealing with one that has performance records that meet your company’s requirements. Provide the AMC with your criteria for acceptable appraisers. Ensure the AMC has controls in place to meet your requirements and that the AMC has a good record of getting corrections back to you in a timely manner.
2. Establish a strong appraisal review program. If you flew your own private airplane, you would not go to a shade tree mechanic to work on your plane. Consequently, why would you allow a novice to do collateral reviews for your company? Get a good, experienced review process in place or contract it out to ensure that the appraisal, which is used as a final to base the loan on, is well supported and meets Uniform Standards of Professional Appraisal Practice guidelines. Effectively a lender needs to regularly audit their AMCs.
A few items that require a trained eye to watch for on appraisals are:
1. Uniform Appraisal Dataset compliance issues such as address matching U.S. Postal Service, correct verbiage, and abbreviations.
2. Correct ownership and occupancy input.
3. Zoning verification and ensuring highest and best use compliance.
4. Accurate neighborhood and market descriptions.
5. Utility and private road concerns.
6. Best comparables are utilized.
7. Adjustments made correctly.
8. Bracketing of the subject to ensure no across the board adjustments exist.
9. Ensuring that the purchase agreement information is accurate on the appraisal.
10. All pertinent forms are properly filled out and meet USPAP guidelines.
These are just some important areas where appraisers have frequently failed to provide accurate or clear information in the report.
Lenders need to establish a review process that ensures all areas of the appraisal are properly addressed, completely described, and also meet USPAP Standards and especially 2-1, which states that each written or oral real property appraisal report must (a) clearly and accurately set forth the appraisal in a manner that will not be misleading, (b) contain sufficient information to enable the intended users of the appraisal to understand the report properly, and (c) clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions used in the assignment.
As a result, lenders can and need to utilize a high degree of due diligence in appraisals even if the AMC makes the selection more opaque to them. It is in the lender’s short- and long-term interest not to gain too much comfort from a safe harbor mechanism.
Randy D. Munday is director of collateral services at Indecomm Global Services, a business processing outsourcing company based in Edison, N.J. Munday can be reached at firstname.lastname@example.org.