This month’s column is the first of three installments that I am writing to bring attention to and to extol the virtues of the three most-commonly used appraisal review reports as a quality control tool. These tools are:
►The Electronic Appraisal Review,
►The Desk Review, and
►The Field Review.
They are listed in the order of the least comprehensive to the most comprehensive. This series of columns is designed to assist the reader in making the proper decision as to which review tool is best for a given situation.
With all the concern today about the mortgage meltdown and what caused it, much discussion has been focused on the accuracy of appraisals. While we would all agree that there are many contributing factors to one of the largest banking disasters in history, the real estate appraisal undoubtedly deserves its share of the blame. While there are many different types of shortcomings associated with appraisals, most can be detected with a proper appraisal review. It is the responsibility of the financial institution to monitor the quality of all appraisals it uses in connection with its collateralized loans.
This responsibility does not come without a monetary cost. Realizing that the bank must make an investment in the quality of its appraisals is one thing. How much should be invested is this quality control another. It would be very easy to for a bank spend more on the review of an appraisal, than it did for the appraisal itself. These costs manifest themselves in a variety of ways, including office overhead, technology services, staff costs and review appraisers. More than half of the appraisals, considered for collateralized loans, require specialized review attention. A few of them will require a lot of review and scrutiny. I would go so far as to say that the 80/20 rule is alive and well in the appraisal review business. Said another way, it is probable that 20 percent of the appraisals require 80 percent of the review resources invested by a bank for a given lot of loan applications. The process of resource allocation and the directing of scrutiny toward specific appraisals requiring the most attention can be an onerous one.
How does one determine which of the appraisals represent the 20 percent that cause most of the heavy lifting? How do we tell if a given appraisal justifies a lot of review time and expense? Those in charge of the appraisal review budget may be interested to learn that there is a safe and economical way to perform reviews without betting the farm on each deal. It is called the Electronic Appraisal Review and is an electronic screening tool that serves to identify the qualities that are out of sync with the norm or the typical. Electronic review tools are offered by a number of mortgage IT companies, including ACI and FNC. These review systems only work on standard appraisal forms, such as the Fannie Mae 1004 (standard) or its 2055 (drive-by) formats. They hone in on the fields of each form and address each part of the appraisal with what are called rules. If a field does not conform to the pre-prescribed rule, it will receive a demerit for that part of the appraisal. The demerits are cumulative depending what field a rule is broken in. Some review systems have their own formula that is used to grade an appraisal. Some fields carry more weight than others. Once the review is complete, depending upon the software program, a decision can be made relative to whether the appraisal has passed scrutiny.
This is where the electronics stop and humans begin. If there are few deficiencies listed, the appraisal may pass the review test and the appraisal may be considered appropriate to qualify the property for collateral. Conversely, if a number of rules are broken, the appraisal may fail the test. In such a case, the appraisal will be subject to more tests. What happens next will vary with those performing the quality control test. Some may contact the appraiser for explanations; others may order additional higher-level review appraisals, while others may simply reject the appraisal from further consideration. It is at this juncture where the competence of the review staff can be the determining factor as to whether the lender makes a good or bad loan. Whether it is an underwriter, the chief appraiser or an outside quality control vendor, the lender is investing its future in the hands of those making this call. This responsibility should be assigned only to highly-trained experts, who have a depth of risk management and appraisal review experience.
Institutions without adequate in-house expertise may consider outsourcing this risk management function to an independent appraisal review service provider, to insure high-quality results and meet regulatory compliance mandates. In addition, it is not just this one deal, but all of the deals that are approved or rejected by the institution that make up the organization’s track record and determine its economic success.
It is also important to note that when properly used, the Electronic Appraisal Review is blind to bias and can help reduce fraud. Even the most sophisticated review provided by a certified appraisal does not carry a guarantee against bias with it. This factor is a big plus for the Electronic Review, where regulatory compliance is an issue.
Cost is another important factor when considering Electronic Reviews. Typically, they can be purchased at a fraction of that of a review by a human with state certification credentials. Costs vary, but depending upon the quality and details, the raw report can be purchased at prices of $10 or less. Depending upon the amount of labor required in the handling and interpreting the review report, an Electronic Review, complete with critique, can usually be completed for under $50, and, in some cases, substantially less.
Electronic Appraisal Reviews are not subject to Uniform Standards of Professional Appraisal Practice (USPAP), since they are not prepared by people. Appraisal Reviews, such as the Desk Review and the Field Review, do require USPAP-reviewer compliance.
In summary, the Electronic Appraisal Review, in many cases, may provide all of the information needed for a lender to make a final decision, regarding the quality of the appraisal under consideration. It can save a lender a great deal of money that may have otherwise been needlessly spent on in-depth appraisal reviews for perfectly good appraisals. Since Electronic Reviews are not prepared by humans, there is less potential for fraud. That, coupled with the fact that it is less expensive, makes the Electronic Appraisal Review a powerful quality control tool, something that cannot be ignored.
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@example.com or visit his company’s Web site, www.appraisalsanywhere.com.
“Realizing that the bank must make an investment in the quality of its appraisals is one thing. How much should be invested is this quality control another.”