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Thursday, December 13, 2018

Lenders' Performance Myths Harm Performance

By Bryan Caffrey, Chris Roberts
October 8, 2018

Topics:
Appraisal Management
Loan Performance
Arivs


Bryan Caffrey is CEO of Arivs, a national appraisal management company with local branches strategically located in momre than 20 mortgage markets across the U.S. Email Bryan at bryan@arivs.com. Chris Roberts, National Sales and Support Director of Arivs, implemented the company's national-local strategy, recruited and trained staff for local offices and expanded the services the company offers. Email him at chris@arivs.com.

BryanCaffreyA few mortgage industry myths drive lenders' selection of appraisal management companies and undermines their performance.

For instance, most lenders' selection of AMCs focuses on the size of an AMC's panel, price per assignment and a focus on national coverage, but relying on these mythical performance measures too heavily is almost sure to bring disappointment. That's because they don't drive performance, much less serve as a harbinger of high-quality AMC and appraiser performance.

Improved AMC performance won't require licensing expensive technology or radical origination process changes. But before that can happen, these myths need to be replaced with more meaningful performance measures and increases in productivity.

A handful of small changes in the way AMCs and appraisers are selected, can significantly increase appraisal performance, shorten timelines and increase margins--all with just ChrisRobertssome small tweaks in the way lenders conduct business. With origination volumes down, and costs up across the industry, it's an ideal time to consider making these changes.

Let's take a look at how with a few modifications in the way lenders select AMCs, performance metrics will improve, deadlines will be met more often, and client satisfaction increased.

Perhaps the most common myth is that the larger the number of appraisers on an AMC's panel, the better the service levels. To illustrate why it isn't very important, consider the effect of order volume on appraisers, consider the following scenario:

Appraisers can complete 30 to 40 appraisals each month, and a lender plans to place 100 orders per month in a local market. In response, AMC X, a fictional company, lets the lender know it has 20 appraisers in the area, and therefore is well covered. Those 20 appraisers can complete 600-800 files each month. That means each appraiser will complete about five orders, or around 12%-16% of their productivity for this lender. None of them received a noticeable, much less a significant, number of orders from AMC X, meaning the relationship is probably not critical to their business.

In contrast, to ensure the highest-quality appraisals and relationships, AMC X would identify the five top-performing appraisers in the market and assign orders to them exclusively. They would each receive 20 appraisals each month--representing 50%-66% of their volume. Because the volume of orders is significant, the best appraisers in the market spend most of their time completing appraisals for AMC X and its client.

This strategy creates a stronger business relationship and higher-quality service, which isn't possible when order flow is spread too thinly. The handful of appraisers who receive orders understand the needs and are intimately familiar with the procedures of the AMC. In addition, they are more concerned with effective communication and make sure the appraisal report is completed correctly, the first time. Appraisers are treated better, and as a result, are more loyal to the AMC.

An unintended consequence of large appraisal panels is that communication can become unmanageable and expensive--especially in the direct to consumer model. The solution is to employ automation that reduces costs, at the expense of customer service. Appraisers don't, as a result, receive the support they need to perform well. The cost of communication for AMCs is reduced and simplified.

Selection of appraisers is critical because they are the key factor in the appraisal process. Get that wrong and there will be issues with the appraisal. Assigning orders to the best performers ensures that challenges will be reduced, if not eliminated, and timelines met.

The AMC needs to identify the appraiser's strengths and match assignments to them. An appraiser who excels in homes in the hills, for example, might not be as good on historic properties. Another appraiser who has a great deal of local market knowledge might do an excellent job on new construction homes. Selecting appraisers based on their strengths in a market results in appraisal reports that are more accurate and require fewer changes.

Another myth is that AMCs are all the same, so a low-cost option will produce the same quality reports as a more expensive competitor. It simply isn't true and leads to unhappy clients and disillusioned borrowers. An inexpensive AMC will often attract the most inexperienced appraisers, who produce lower quality work.

And, it's a decision with a high-opportunity cost.

Working with a low-price provider can harm relationships with real estate agents and other referral sources that mortgage brokers or loan officers have developed, with painstaking care, sometimes over many years.

The performance and quality of the work is almost always lower and inconsistent compared to a full-service competitor. It's not unusual for turn times to increase, or to experience more revisions and reconsiderations of value that can increase costs. Sometimes there are origination delays that are a disservice to the borrower. In the short term, a low-priced AMC might look like a bargain, but not when the risks are considered.

And even less so, when compared to the benefits an experienced, full-priced AMC often delivers: Strong appraiser relationships, shorter turn times as well as appraisal reports that are more accurate and are returned faster.

With that said, paying more won't guarantee better performance.

Working with an AMC that charges higher fees than the competition will increase appraisal report quality--if the additional amount of money is paid to appraisers--and not retained by the AMC. Above all, clients need to ask what the margins of the AMC are, and how much of the client fee goes to the appraiser.

Overcoming the performance myths that have undermined AMC and appraiser performance--panel size, appraiser selection and cost--will help ensure the highest quality appraisals, save money and generate efficiency. All of which can be achieved without new technology or process improvements.

As a basis for selecting a national AMC, the number of appraisers on the panel is often not an important determinant of the quality or coverage it can provide. More important, is the AMC's ability to measure appraiser performance at the market and property type levels. Basing selections on proven performance, and not merely assigning an order because the appraiser is next in line, will optimize results.

A low-cost AMC can't deliver the quality of reports lenders require, and certainly not with enough consistency to offset the opportunity cost of assigning orders to them. The cost per file is low, but the savings won't make up for the problems their panel of green appraisers are likely to cause clients, borrowers, and referrals sources.

AMCs that have focused on having the best-performing appraisers in a market--will deliver a competitive advantage to lenders.

 

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)

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