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A day in the life of a mortgage professional: Loans from Hades

National Mortgage Professional
Dec 14, 2006

The appraiser's perspective: How banks are complying with appraisal regulationsCharlie W. Elliott Jr., MAI, SRAappraisal regulations As I stated in my column in September 2006 ("Regulatory compliance and the appraisal made clearer," The Mortgage Press, September 2006), bank regulators are making it clearer what may and may not be done in complying with appraisal regulations imposed by the five regulatory agencies that regulate our banks, credit unions and savings institutions. Regulators are taking a strong stand against loan originators and others, who have a financial interest in a transaction, deciding who appraises property to be used to collateralize a loan. Recent incidences of loan fraud have precipitated stronger enforcement of the laws and regulations that serve to monitor the financial soundness of banks and the loans that they make. Some argue that past practices encourage lender pressure on appraisers who consider themselves likely to lose business if they do not inflate their estimated values. There have been few, if any, new laws or regulations concerning this issue, just a new approach to enforcing the laws and regulations that are, and have been, on the books for a long time. In the course of their audits in recent months, regulators started with the larger banks and worked down to the smaller ones, quietly informing them of changes that they must make in order to comply with current interpretations of the regulations. This has caused the risk managers of many banks to scurry around and develop new plans and systems that are designed to comply with the current interpretation of the regulations. The primary goal is to remove the responsibility for selecting appraisers, supervising appraisers and ordering appraisals from those who have a financial interest in a transaction. This would include loan officers and others who report to them in an origination office. It seems that, while not all banks are approaching this the same way, there are basically three paths that most seem to be taking. They are listed as follows: Staff appraisers Banks are permitted to use staff appraisers so long as they are not influenced by loan originators or others with a stake in the transaction. Typically, one or more staff appraisers are employed by a bank to cover limited geographic regions. In cases where the staff appraisers are unable to handle all workflow, contract appraisers are used to fill in. The contract appraisers must be selected in a random way so as to eliminate bias. Bank of America has used staff appraisers to perform many of its nationwide appraisals, and other banks use staff appraisals to perform some of their appraisal services. In-house management companies Some banks are electing to establish bank-owned and operated vendor-management companies, not just for appraisals, but also for other services such as title or mortgage insurance. In these situations, the bank is required to establish a panel of approved appraisers capable of covering all of the geographic territory where it makes loans. Appraisers are then selected at random, usually by a vendor platform containing all of the approved appraisers. Many of the larger banks, including Wachovia and Bank of America, have their own proprietary management companies. Some banks own their own vendor platforms, while others are contracting out vendor platform business, which offers a level of compliance within itself. Examples of such platforms are FNC Inc.'s Appraisal Port and Ocwens REALTrans systems. In cases where there is no approved appraiser available, the appraisal order is typically sent to an independent appraisal management company, which selects an appraiser who is impartial to the transaction. I like to refer to this as a cleanup hitter of last resort for a particular transaction. Independent management companies Banks, which are electing to get as far away from the appraisal selection process as they can, are going with independent management companies. This was recently the decision of Washington Mutual, where management selected two appraisal management companies to handle appraisals and eliminated less-independent appraisal sources under its control. In such cases, the bank relieves itself of the overhead and responsibility of acquiring the appraisal by contracting this service out. This is probably the purest form of regulatory compliance, in that the bank exercises little or no control over the appraisal process. Which of the above systems is best for our industry? Which will become the most widely used? It would seem that in this instance, the old adage of "Beauty is in the eye of the beholder" would be a fair explanation. As in the cases of the above examples, we are seeing some of our larger banks with virtually unlimited resources taking different tacks in approaching the compliance issue. Over the past 25 years in which I have been part of the appraisal profession, we have seen banks vacillating back and forth with the economic and regulatory winds of a particular day. Some banks jumped head first into having their own proprietary appraisal management company only to find that it was not a very lucrative profit center and that it often produced conflict. They were accused of being heavy-handed by charging bank customers much higher fees than they paid their appraisers, creating animosity with both the customers and the appraisers. The last bastion of appraiser-selection independence is through the mortgage brokers who still, in many cases, select appraisers for their loans, since they are not regulated in the same way as banks. While this practice still exists in many brokerage operations, it will be interesting to see how long the brokerage community will be able to enjoy this position. Their loans typically are sold to banks and other regulated institutions, and there is a new focus on those loans as well. Banks buying loans for non-regulated institutions are under new scrutiny to ensure that appraisers involved in the process are not pressured to provide inflated appraisals. In summary, we are likely to continue to see a variety of different types of appraisal management systems going forward, as banks try to balance customer service, regulatory compliance, control and profitability. Everything else being said, compliance is todays operative word and one that we are likely to see drive the engine of appraisal management policy going forward. Either way we cut it, if we are to believe the regulatory community and its recent decisions, banks are going to be required to discontinue the practice of allowing individuals with a financial interest in a transaction to select appraisers. Charlie W. Elliott Jr., MAI, SRA is president of Elliott & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889, [email protected] or through the company's Web site at www.appraisalsanywhere.com. Previous columns he has written for The Mortgage Press can be seen on the Elliott & Company Web site.
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