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Three easy ways to build your business in 2006

National Mortgage Professional
Mar 01, 2006

Appraising the appraiserJoe Amorosoappraisal issues When I first addressed the topic of appraisers seven years ago, the issues of appraisal fraud and pressure were boiling just under the surface. Not anymore. You know a topic is hot when it pops up in the Wall Street Journal and manages to actually get the attention of consumers. The flurry of recent media scrutiny around the appraisal process has done two things. First, it has shed public light on a system that is in need of serious reform. Appraisal fraud and overvaluation is a systemic problem long overdue for some checks and balances. Second, it has highlighted the love-hate or "us versus them" relationship we as bankers and brokers have traditionally had with appraisers. Few topics can actually silence a room full of brokers faster than appraisals, and the time has come for us to seriously rethink the way we structure our relationship. A two-way street Appraisers are businessmen and businesswomen just like us, and they have their own concerns about the way we do business. They serve a variety of masters, including the lender, broker and borrower, but in the end, their obligation is clearly to the lender. This sets the stage for pressure on both sides. The appraisal process has a direct impact on much of what we do, as well as how much we earn. We know that if the appraisal doesn't come in, there is no deal. We also know that appraisers are paid, regardless of whether the loan closes. On the flip side, appraisers can feel pushed, whether directly or indirectly, to deliver valuations at the right level and turn them around as quickly as possible. Many appraisers feel that brokers and bankers want three things out of them: fast, good and cheap. You can have two out of three, but you can't have all three. If something is good and fast, it won't be cheap. If something is fast and cheap, it won't be good. Clamping down Just how pervasive is the pressure on appraisers? According to a 2003 survey by October Research Corporation, 55 percent of appraisers felt they had been pressured to inflate or overstate the condition or value of a home. The issue of mortgage fraud and inflated appraisals is now under intense scrutiny by federal banking regulators and key members of the House of Representatives. Groups like the National Community Reinvestment Coalition (NCRC) continue to lobby Congress to enact stronger regulations and stiffer penalties to prevent appraisal fraud. In fact, members of the House Financial Services Committee recently introduced two separate bills that would hold lenders accountable for coercing appraisers to make predetermined values. The bills would give independence to appraisers to do their jobs without undue interference or pressure. The Ney-Kanjorski bill includes an appraiser independence provision that is supported by the Appraisal Institute. The Miller-Watt bill is supported by the NCRC, and contains whistleblower procedures that would allow appraisers to report complaints to one central agency in order to detect and investigate fraudulent claims quicker and more efficiently. The stakes are high Clearly, it is in our best interest as brokers and bankers to ensure that appraisals are accurate. While homebuyers must order and pay for their appraisals, they often pay little attention to this critical step as they enthusiastically rush to close on their home. Soaring numbers of homeowners have suffered from appraisal fraud and are at risk of losing their most valuable asset as a result. First-time homebuyers and homeowners who refinance risk defaulting on loans when they borrow more money than their homes are really worth. Upside-down mortgages combined with rising interest rates put both homeowners and brokers at risk. The secondary market is more than aware of appraisal issues that influence loan performance as well. In most cases, the secondary market becomes aware of an inaccurate appraisal when the loan defaults and they are making an attempt to remedy it. This, as you would imagine, has an effect on the big picture. The integrity of loans purchased by Wall Street is, in many cases, directly related to the performance of those loans. Performance dictates the price they will pay. With so much on the line, it's evident that more serious controls need to be implemented. While these controls may cost money upfront, they will undoubtedly save money in the long run as a means of avoiding foreclosures and/or having to repurchase bad loans - not to mention tarnished reputations and ruined businesses. Taking the air out of inflated appraisals While lobbyists push for increased government legislation and regulation in this arena, it is incumbent upon us to self-police our own industry. With a heated housing market and interest rates on the rise, the best way to protect against inflated appraisals and fraud is to be proactive and diligent during the origination process. Additionally, there are a number of steps that we can take to minimize the problem: - Only partner with the best appraisers. We need to be pickier about whom we do business with and increase the number of names we add to our exclusionary list of overly aggressive appraisers. - Choose a good AVM and use it. New technology and tools enable us to automatically flag between five and 10 percent of questionable appraisals that require additional or independent review. It takes about 10 minutes and costs around $30, making it an option that should be leveraged where appropriate. - Two independent appraisals are better than one. Homes valued at more than $1 million or loans made to buyers with lower credit scores may be key candidates for getting a second opinion. The road ahead The biggest mistake we can make is to view appraisals as nothing more than necessary evils. Appraisers are an important element of the loan underwriting process. Much like fraud, inflated appraisals are one of the greatest threats to our business. Pressure on loan officers and underwriters may be subtle or direct, but a "separation of church and state" between appraisers, lenders and brokers would remedy a significant portion of inflated property values. A good dose of empathy wouldn't hurt, either. If we expect appraisers to understand our urgency to close loans, it's only appropriate that we become more understanding of the realities of the appraiser's job and the pressures that they face every day. Joe Amoroso is a senior vice president with Opteum Financial Services. He may be reached by e-mail at [email protected]
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