WHEN FIRST AMERICAN APPROACHES A LENDER about our collateral valuation services, one of the first questions we're asked is, "How do you select your appraisers?" Appraiser selection may be the single most significant factor in determining appraisal quality--yet this critical element of collateral valuation continues to operate much as it has for decades. Current methodologies for selecting appraisers are only marginally effective at assessing appraiser quality and vary widely from one company to the next. The time has come for a revolutionary approach to collateral valuation led by big data and analytics.

 

The financial services sector is often accused of being slow to innovate. The last decade, however, has seen a gradual but steady march toward modernization. Bleeding-edge developments in financial technology (fintech) that first took root in consumer finance and Wall Street trading are now beginning to transform the mortgage industry. There's no better place to start than with the underlying security that supports the entire mortgage lending process: collateral valuation.

 

The last seven years have brought several noteworthy developments in residential appraisal regulation. Both 2009's Home Valuation Code of Conduct (HVCC) and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that supplanted it delivered much-needed clarity around how lenders should and should not interact with appraisers to ensure appraisal integrity and independence. Big data first arrived on the appraisal scene when standardization of real estate appraisal data was significantly improved following the 2011 implementation of the Uniform Appraisal Dataset (UAD), part of Fannie Mae and Freddie Mac's larger Uniform Mortgage Data Program[R] (UMDP). Fannie Mae's Collateral Underwriter[R] is already leveraging analytics supported by this big data to deliver automated risk management of appraisal reports.

 

Appraiser selection, on the other hand, remains largely unaddressed in the appraisal process. While it's clear that lenders bear responsibility for understanding and managing appraiser selection--even when appraisal fulfillment is contracted through an appraisal management company (AMC)--there is no industry consensus as to how lenders should actually navigate this task.

 

The requirements around regulatory compliance apply regardless of the appraiser engagement model that best fits the lender valuation strategy. Many lenders elect to engage appraisers directly. Others find value in outsourcing the entire process to AMCs. A growing segment combines a hybrid of both direct appraiser engagement backed by outsourcing to AMCs.

 

Appraiser selection is the first step in the appraisal process, and it plays a critical role in determining appraisal quality. Choosing the right appraiser from the get-go can greatly reduce lender exposure to substandard appraisals and the downstream risks that go with them.

 

For instance, a questionable appraisal may trigger multiple reviews as it is passed from the appraiser, appraisal firm or AMC to the lender and on to the investors. At best, this drawn-out appraisal review process is a drag on productivity that eats into lender margins, and in certain cases on noncompliant appraisals, lenders may eat the cost of reappraisal. In the worst case, appraisal hang-ups can impede closing--costing lenders and borrowers real money--or even lead investors to request a buyback of the loan.

 

The question is, how do lenders select top-quality appraisers--or at least ensure their AMCs do? There is currently no standardized method for identifying top-quality appraisers or validating appraiser selection during appraisal review. Interagency guidelines dictate only that institutions should "establish selection criteria and procedures to evaluate and monitor the ongoing performance of appraisers."

 

As a result, lenders and AMCs across the industry each use their own internal metrics and data points to rank order or score appraisers.

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Wall, Kevin, Mortgage Banking