Between a Rock and a Hard Place: Lenders Need Appraisal Acceleration without Added Collateral Risk
By Marty Haldane
March 18, 2019
Marty Haldane is Founder & CEO of Anow, Red Deer, Alberta. He is a third-generation appraiser with more than a decade of experience doing residential, commercial, industrial and agricultural valuations. He is a technology advocate and entrepreneur who founded Anow in 2011 with a vision and passion to transform the customer experience in mortgage origination with technology.
Timely, compliant loan closings are the hallmark of a well-run mortgage lender. So, what's the biggest bottleneck in the loan closing process? The appraisal.
In fact, the National Association of Realtors reports 21% of closing delays in 2017 were due to the appraisal process. These delays have spurred recent recommendations to raise the appraisal threshold and eliminate the appraisal requirement for entire classes of commercial and residential properties. It's a strategy that reveals the industry's short memory and fails to solve for the real problem: like our mortgage industry brethren, appraisal companies crave modernization and are suffering from a shrinking pool of resources.
The appraiser shortage puts lenders in a tough spot, as the urgent need to decrease turn times and operational costs confronts the imperative to maintain the quality of collateral valuation. Slow appraisals take a toll on borrower experience as well, reducing referral business and weakening loan pull-through. Consider the homebuyer in the waning days of her rate-lock learning there's a two-week wait for an appraisal. She may start shopping other banks, increasing the odds of attrition or abandonment of the loan file.
With appraisal wait times exceeding 16 days in some areas of the country, Fannie Mae and Freddie Mac have been allowing no-appraisal loans for select properties with previous appraisals and deals where buyers are putting down 20% or more.
Lenders and appraisal companies have also been using alternatives to traditional residential appraisals, including automated valuation models based on data analytics and hybrid or bifurcated appraisals, which combine inspection by a third party like a realtor or broker with analysis by an appraiser.
Faster Valuations--But at the Expense of Quality?
In 2018, Moody's set a cautionary tone about the risk this trend poses, saying that the "shift could weaken the credit quality of new residential mortgage-backed securities." In its report, Use of Appraisal Alternatives is Likely to Grow, Posing New Risks, the organization warns that use of these instruments "in tasks that affect the credit quality of RMBS securitization collateral could...lead to a weakening of new RMBS transactions."
Both AVMs and bifurcated appraisals can be faster than a traditional appraisal, but they also leave lenders more vulnerable to buy backs. The fact is, these approaches are not appropriate for every property. If the borrower's loan-to-value ratio is high, lenders will want an individual with a good deal of expertise walking the property, noting conditions a less experienced inspector may miss. A field inspector may fail to notice the house next door that's fallen into disrepair or the spike in home sale prices in the area. It's also worth noting that bifurcated appraisals aren't always as speedy as advertised. In fact, some state appraisal associations report that bifurcated appraisals actually take longer to complete than a traditional appraisal.
Further, AVMs are only as good as the data they use. The resulting valuation relies on averages that are not necessarily accurate representations of an individual property. Homes in gentrifying areas where old, unrenovated homes sit next door to brand new infill properties are particularly vulnerable to being mis-valued. Many of these models also rely on transactional data, which can lag anywhere from three to six months and fail to reflect changes in current market conditions.
What Would a Balance of Speed and Quality Look Like?
As CEO of a tech company, I believe strongly in the potential of technology--but I also believe that most valuations need the insight that can only be provided by a qualified professional human. The trick is to maximize the capacity of appraisers while improving workflows to speed up the process. A
ccording to AMCs like Nations Valuations Services, the average appraisal order in the U.S. has between eight and 12 manual touchpoints. These include calling or emailing multiple appraisers to place an order, make status checks or verify on-time completion. Technology has revolutionized many industries by streamlining manual processes like these, all while maintaining or even increasing quality.
Imagine if Uber revolutionized on-demand transportation but forgot to build in a rating system or minimum standards for drivers and riders. By the same token, successful transformation of the collateral valuation industry will require hand-in-hand improvements to the quality and speed of appraisals.
Opportunities for Dramatically Improving the Current Appraisal Process
Technology could be a boon to striking this speed-quality balance in the appraisal industry too, enabling new methods that dramatically increase the efficiency of the traditional process. The ideal situation would allow lenders to benefit from the insights of qualified appraiser professionals, while also slashing turn times. We believe this is an entirely achievable ideal when lenders and appraisal companies focus on these key areas:
Addressing Scheduling Inefficiencies
Perhaps the biggest drag on turn times is assigning and scheduling an appraiser, which can involve contacting dozens of appraisers, especially if you need to rush an order or book a specific time. An easy, on-demand and geographically optimized platform that maps properties and appraiser locations in real time would improve insight into appraiser availability and allow visibility into who is already scheduled to perform an inspection near the targeted property.
Streamlining Status Updates and Activity Tracking
Our own Anow research shows that appraisers spend approximately 20% of their time manually updating lender and AMC portals on the status of orders--that's one day in every five consumed by tasks that can be automated. Automation can create enormous efficiencies when it comes to dispersing information like status updates. Step one is to develop a single online platform which appraisers voluntarily use to manage their workflow because it's easier than doing things the old way. As they assemble the information that will populate their report, the platform automatically pushes notifications to lenders as each step in the process is complete, eliminating the multiple emails and phone calls currently required to keep all stakeholders abreast of progress.
Enabling Mass Collaboration
Online collaboration platforms can allow dozens of people to work on a file simultaneously. Qualified appraiser professionals can perform in-person inspections of a property while assistants back at the office gather comparables. In this scenario, when the appraiser backs out of the driveway, the report can be 90-95% complete. This allows him to minimize desk time and maximize his utility out in the field. Online collaboration in real time can also help our industry seed the next generation of appraisers. Trainees on site with an appraiser or back at the office can watch as property images are married with notes and see the details of how a report is assembled.
Automating the Audit Trail
Working with an appraisal partner who can reliably maintain records and notes of how an appraiser reached a valuation helps support the quality of a lenders' portfolio. With a well-designed appraisal tool, all details of a valuation are automatically stored in an organized fashion, making it easy for appraisers to produce defensible reports.
Seed the Next Generation
With appraisers' average age hovering around the mid-50s and mortgage lenders' in the late 40s, attracting new blood into these intrinsically related fields is critical to a vibrant residential real estate economy. Eliminating human loan originators and appraisers is tempting, but it is more realistic and prudent to modernize (i.e., digitally automate) business processes to ensure those careers become more efficient and lucrative--and therefore more attractive. In so doing, we'll also achieve significant compression in loan origination turn times.
(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 email@example.com; or Michael Tucker, editorial manager, at firstname.lastname@example.org.)