When it comes to appraisals, the key words in today’s market are quality and defensibility. Inaccurate valuations result in serious risk. When loans go sour, no investor or lender wants to be the one stuck holding the bad loan. Today, the threat of a forced buyback, or even follow on legal action, is all too real.
Often any future action will follow on the original appraisal, since an investor may claim that a faulty appraisal allowed the now-distressed loan to be approved and sold. Any misrepresentation could constitute fraud, willful inflation of value and potentially violates the representations and warranties outlined in the loan. Lenders and appraisal management companies must protect themselves by taking steps to ensure a systematic and comprehensive review of the appraisals used to underwrite or modify loans.
In general, existing collateral valuation and review practices do not deliver the quality of review needed, increasing the incidence of buyback and default risk. The problem is that most reviews today are largely based on manual reviews. Although manual reviews must be part of the review equation, they have a number of limitations. First, they consume significant resources and time. Second, they are very difficult to consistently deployed. Finally, they are not scalable.
Building a process to validate and ensure quality of valuations requires lenders to utilize a workflow that is comprehensive, consistent and ensures independence and competence. Lenders have to follow several critical steps to ensure they’re making the right lending decisions and ultimately protected.
