Most on the origination side of the lending industry have scarcely heard the term, “appraisal review.” Those who have heard of it probably do not know what and when it has been used as a lending resource. It is one of these obscure products and terms that many are cognizant of at a subliminal level, but that we seldom have a reason for an understanding of.
Historically, the term, “appraisal review,” was one that was known and understood as a tool lurking in the background that was kept mostly under wraps except for special situations, such as foreclosures, suspected fraud and challenges to an appraisals that were not high enough to meet the expectations of the borrower or lender.
Well, I suggest to you that this is about to change. Unless I am grossly mistaken, you will hear the term “appraisal review” more often in the months and years to come. As I see things, it is one of, if not the only, weapon of choice in the war against bad loans, mortgage fraud and bank bailouts. In recent years, our industry and economy has been riddled with problem loans. Many, if not most of them, have been linked to problematic appraisals.
In the past, we have seen mortgage lenders, with a financial interest in the closing of a loan, select and employ appraisers to perform appraisals on their own loans. We reached the point where everyone who has a stake in the closing of a loan has exerted pressure, political and otherwise, to impose as much control as possible over the process, in order to favor the successful closing of loans. Much of what has gone on is under the microscope of Congress, and it is unlikely that it will be allowed in the future. Having said that, we all know how politics work.
There is much pressure from lobbyists of the larger financial institutions to continue to allow the larger banks to continue to order appraisals directly from favored appraisers. This is done under the auspices of independence of separate departments within the institution. It is done, in many cases, with platforms that select appraisers from a blind pool of available vendors. In spite of the lack of arm’s-length transparency, some of these practices will still be permitted. Given this likelihood, regulators will have to resort to another way to verify the authenticity and accuracy of the appraisal.
Going forward, much of that other way is going to be the appraisal review. In the past, it was used very little in the origination of loans. It has been mostly used for post-closing analysis. I suggest to you that the time has come for the appraisal review. It is time for it to come in out of the shadows and stand on its own as a viable alternative to the simple appraisal being accepted at face value without question.
Yes, there have been informal appraisal reviews performed in the past; however, this has not proven to be very effective. These reviews have been performed, in many cases, by non-appraisers without documentation. They have been little more than a cursory skimming over the appraisal to catch glaring errors, with little or no record maintained of the process. You may look for more formal appraisal reviews, prepared by state-certified appraisers. In some cases, the reviews will be field reviews, which mean that the reviewer actually performs a follow-up inspection of the subject property and essentially performs another appraisal of the property.
At what time will the reviews take place in the lending process, and how will it affect the loans under consideration? This will vary with different lenders and their policies. All appraisals for mortgage loans will have a pre-closing appraisal review, performed by a qualified appraiser. Some of the reviews will be more formal than others. I consider a formal review to be either a desk review or a field review on a form for that purpose. The appraiser signs these appraisal reviews in the same way as they were by the original appraiser. Once performed, they may support or disagree with the original appraiser’s findings and opinions. In the case of a disagreement, the original appraisal will either be repaired or rejected, depending upon the severity of the problem within the appraisal. In some cases, the review appraiser will conclude that the actual property value is different than the value stated in the original appraisal, and the loan will either be modified or cancelled.
Others will also use the tool as a post-closing, quality control instrument to ferret out appraisers not up to the tasks. These appraisers will be removed from the approved list of the lender if found to be turning out substandard work.
In cases of pre-closing appraisal reviews, we can expect over time to see that all appraisals are reviewed by qualified state-certified appraisers. Some of these may not be formal review appraisals on every loan, but where appraisals do not pass the smell test, either formal desk reviews or field reviews will be performed prior to closing. This, which is perhaps the most significant point to be made, will be done in an effort for the lender and its staff to distance themselves from pressuring or influencing the appraiser.
In summary and conclusion, we can expect to see more appraisal scrutiny on all loans. Certified appraisers in the form of appraisal reviews will perform this oversight. Loans, which may have been made in the past, will not pass muster, in some cases, due to this stricter monitoring. In general, more emphasis will be placed upon insuring that the appraisal is unbiased, legitimate and accurate. For loan officers and other stakeholders, who believe that appraisal reviews reduce the probability that a loan will close, appraisal reviews, in some cases, will improve the probability of a closing. The review is a search for the true value of a property, whether it be higher or lower than that claimed in the initial appraisal.
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, e-mail [email protected]
or visit his company’s Web site, www.appraisalsanywhere.com.