Whether appraisers work for a valuation firm (their own or someone else’s) or work in-house for a lender, these professionals are third-party experts. Their independence is paramount.
According to the Appraisal Institute’s latest research, nearly three-quarters of appraisers (74%) are consultants, while 26% work in-house.
For both
It has been two years since the sunset of the Home Valuation Code of Conduct, but the spirit of these rules lives on with the Fannie Mae and Freddie Mac “Appraiser Independence Requirements” and amendments to the Truth in Lending Act. Still, misconceptions persist in the marketplace about how lenders can comply with these requirements.
Lenders Can Manage the Process
One of the common misconceptions about the appraisal independence requirements is that they require the use of appraisal management companies. This is not true. Lenders can manage the appraisal process internally; they just need to ensure that the appraisal function is not reporting to “loan production,” a fundamental requirement of appraisal independence.
Many lenders maintain an active role in appraisal management by establishing appraisal departments, hiring appraisers on staff or delegating these responsibilities to someone within a risk management function. Many lenders prefer this approach to outsourcing the appraisal function for the simple reason of being able to “touch and feel” the process. Being able to actively see how appraisals are being engaged and reviewed can strengthen institutional risk management operations.
To support this, several software programs have been developed by mortgage technology firms to help enable lender staff to manage the appraisal process efficiently with their own highly qualified appraisers, such as those who have earned professional designations from the Appraisal Institute. A purely outsourced function is entirely removed from the loan approval, which may achieve independence goals, but may complicate loan administration. Appraisal management software programs enable lenders to maintain the appropriate firewalls while maintaining contact with the appraisal operations.
Outsourcing Doesn’t Always Cut Cost
Given the diversity in the size and structure of lending institutions, it is difficult to conclude that outsourcing necessarily will reduce costs. Lenders incur costs for appraisal risk management whether done in-house or outsourced. Lenders should consider all the costs of compliance, including the costs associated with ensuring appraiser competence and appraisal quality, before making a decision to outsource their risk management functions.
Vendors Don’t Ensure Competence
Lenders traditionally have been responsible for ensuring the competency of the appraisers and reliability of the appraisals they use for credit decisions. However, the competency of an appraiser is not measured by scoring compliance with seller servicer guidelines. Processing appraisal orders is a separate function that does not specifically include a review of competency. The function of competency review is best performed by individuals with significant education in appraisal standards and theory.
Designations Can Be Qualifications
The Fannie Mae Selling Guides state that designations may be helpful in evaluating an appraiser’s qualifications, particularly when the designation is from a nationally recognized organization. The Appraisal Institute is an example of such an organization.
In today’s real estate market, choosing the right appraiser is vitally important for both mortgage professionals and consumers, and working with a designated member of the Appraisal Institute has many advantages. Such professionals have gone above and beyond the requirements for state certification and have demonstrated additional professional knowledge, understanding, ethics and ability.
