“Secrecy was the problem, transparency the obvious cure.” – Robert J. Sawyer
The relationship between lenders and appraisers has never been quite right. The association was scared by improprieties of the few that led to a fallout of the many, with each party retreating behind walls of mistrust and perceived regulatory requirement. Recently, communication is civil but has been described as resembling two parties of a legal arrangement who speak to each other on an as-needed basis.
The truth is, communication levels do not always reach the as needed basis. Federal banking agencies have requirements for lenders to select appraisers who possess the requisite education and competency to complete the assignment. However, when the scope of the assignment from the lender perspective ultimately requires alignment with a particular set of appraisal review requirements or automated valuation tools, the appraiser can only gain that knowledge from the lenders who engage them. Another example is that HUD 4000.1 guidelines require the appraiser to obtain, before beginning an appraisal, “a point of contact and contact information for the mortgagee so that the appraiser can communicate any noncompliance issues”. However, not all lenders are providing this in the engagement letter or assignment instructions.
Role of the Chief Appraiser
I believe that lenders have been missing opportunities to safeguard the valuation of their collateral through appraiser engagement. Appraiser engagement can be done in a variety of ways and delivered by multiple staff members or by an outsourced partner. However, the essential topics for appraiser engagement will come from a review of appraisals performed for the lender and the lender’s appraisal guidelines. Therefore, a Chief Appraiser employed by the lender who has a role in appraisal policy, appraiser panel oversight, and appraisal review is best suited to determine the topics for lender-appraiser engagement.
Chief Appraisers or similarly titled positions, filled by real estate appraisers are essential to the performance and compliance of a lender’s appraisal program. This applies equally whether the lender self-directs their appraisal assignments or engages a third party to do so. A Chief Appraiser is the role most suited to:
- Develop, maintain, and monitor Appraisal Independence Policy
- Develop or contribute to Appraisal Review Policy
- Analyze and respond to the most complex appraisal issues facing the lender
- Evaluate automated appraisal review tools or technology
- Train underwriters on appraisal review procedures
- Monitor and assess the overall quality of work and adequacy of the appraisal panel
- Ensure the lender uses appraisers that “have the requisite knowledge required to perform a professional quality appraisal for the specific geographic location and particular property type”
The last two items on the list may be outsourced to a third party. When they are, a lender must possess comprehensive policies to monitor the engagement and work of outsourced QC and AMC vendors. Here again, the expertise of a Chief Appraiser is ideally capable of developing and directing the lender’s policies related to appraisals.
I encourage small lenders and medium size lenders that do not have a Chief Appraiser type role to create one. Send your Chief Appraiser to Fannie Mae Boot Camp, Freddie Mac Connect, Valuation Expo, and any live FHA appraisal training. By incorporating their expertise and the information gathered at these seminars into internal policies and sharing it with your appraisal panel, they can drastically raise appraisal quality and enhance appraiser partnership.
Lenders Engaging Appraisers
Anyone who has directed appraisal management knows that they are only as good as the appraisers they partner with. This makes it vital to value each member of your appraisal panel as an integral partner in your company’s business. Lenders should not engage appraisers on an as needed basis but as much as possible to add value to the appraiser and the relationship. Attract and retain the best appraisers, and then take the quality of the work they do even higher through mutual dialogue. If lenders do not know where to start, recognizing appraisers for good quality work and conducting a survey of your appraisal panel are ideal places. Similarly, analyzing quality shortcomings in appraisal reports are opportunities to educate the panel when they are done so in a manner that meaningfully improves an appraiser’s practice.
Lack of Transparency
As an appraiser myself, formerly in the field, I can say that complaining about the actions of lenders is as American as baseball and apple pie. How much of these complaints would go away If lenders were more transparent about their review process, more forthcoming about their appraisal policies? How much would such a practice improve the appraisers ability to report the appraisal in a manner that addresses the lender’s review?
Lenders should develop sessions, in person or over the web, where they highlight specific elements of their lender or agency requirements and their appraisal review procedures. Engagement letters and assignment instructions can only go so far. I do not suggest that a lender make whole proprietary documents public but discuss with appraisers the aspects of appraisal quality that are most important to their business. They should also provide specific insights into their appraisal review and tools used as part of the review. Keeping these aspects of their business from appraisers creates confusion, distrust, and gridlock. Discussing these items with appraisers creates a forum for continual learning, an insight into new approaches, and mutual trust through clarity of process.
If the lender’s appraisal review puts an emphasis on the value reconciliation, a webinar is an excellent opportunity to highlight examples of appraisals that provide clear methodologies of reconciliation. If a lender concludes that some of their appraisal partners are underperforming in a particular aspect of appraisal development or reporting, how better to communicate this concern than sharing it with a wide audience of appraisers that you partner with.
The Role of the Appraiser
“Honesty and transparency make you vulnerable. Be honest and transparent anyway.” – Mother Teresa
Our industry has much to gain through increased transparency from appraisers. Appraisers can advance the lender-appraiser interaction by letting their clients know what is most conducive to an effective lender-appraiser relationship and being honest about the preference they give to clients who deliver on these items. Fees are a very important part of this, as higher fees allow appraisers to spend more time working on each assignment, raising the quality of the product.
Appraisers should expect a level of transparency into a client’s appraisal review process. If an appraiser sees that they could benefit from a lender sharing appraisal best practices, their interpretation of agency guidelines, or leading a discussion on an aspect of reporting, an appraiser should drop their guard in making this request. Fee appraisers who are open to embracing new ideas of report development, new technology, and new approaches will raise the level of appraisal quality and efficiency while making themselves prepared for the next paradigm shift in the industry. Collectively, the results of such a healthy relationship can transform the process of appraising for lending.
A specific aspect of the process that appraisers should consider is whether to impact the ability of more lenders to self-manage their panel. Currently, most appraisal procurement is performed by AMC’s, and appraisal fee negotiation based on the complexity of the specific property is common. AMC’s manage this through reassignment, broadcast ordering, or adjusting their revenue on the assignment. For lender’s who self-manage, there is no appraisal fee revenue to adjust nor ability to raise the disclosed fee, as TRID does not permit deviation of the lender’s disclosed appraisal fee based on complexity or “padding” the fee above what is typically assessed. Appraisers should not, of course, accept lower fees on average from lenders who manage a panel. In order to allow lenders who will not “eat” higher fees paid on more complex assignments to self-manage, appraisers should consider whether it is desirable to work with a lender for a higher on average appraisal fee while not requiring higher fees on more complex than average assignments.
Appraisers, Lenders, & Agencies Collaborating on The Future of Valuation
The approach of more open and honest communication can work at a macro level between groups of lenders, agencies, and appraisers. Lenders and agencies had concerns for a long time that many appraisals were not adequately reporting the analysis of market conditions. Imagine if lenders, agencies, and appraisers had a forum to discuss and ultimately take action on these concerns rather than having the 1004MC rushed into being during the crisis.
Appraisal form overhaul and wider acceptance of hybrid appraisals are topics that will each cause a paradigm shift in residential valuation for lending within the next three years. Appraiser input is vital and will shape the role of the appraiser in both. Appraisers should participate in industry seminars in order to impact these issues, obtain the most useful education, and be prepared to successfully operate after their implementation. Appraisal industry seminars that are encouraging a form of transparency and inclusive collaboration between agencies, lenders, appraisers, appraisal associations, and other interested parties will forge the form of the next paradigm shifts in the appraisal industry.