REQUIRED READING: These days, there is a big push across the industry for greater transparency. All parties, from originators to investors to regulators, want to be able to see more details. Everyone wants access to more information, and everyone wants to see exactly what's transpiring inside the current transactions.
This makes perfect sense. Companies are much more likely to sell their products if they can show that those products are made of quality components, especially when there’s a potential for risk, as is the case in the mortgage industry.
This push toward transparency is particularly acute in the appraisal process. In the past two years, there have been numerous changes to appraisal regulations and guidelines. The challenge here, of course, is whether today’s appraisal technology can evolve at the same speed with which the regulatory changes are occurring.
Although the industry seems to be looking for more and better ways of getting tasks completed, the key question is not how to get better technologies. Instead, it is crucial to determine how to maximize technology’s current capabilities to transact higher-quality loans.
As far as the appraisal process is concerned, the first - and probably most obvious - way that technology can help enhance quality is by providing insight into how the full appraisal process is being handled. A high-quality technology will be a big help by ensuring a transparent process - but there is still a lot of room for compliance violations and oversights throughout the entire appraisal process, not to mention the rest of the mortgage cycle.
A good technology provides access to an audit trail that tracks details all the way back to the original appraisal request. Many lenders do not take advantage of this information. However, anyone who is even vaguely concerned about loan quality and the threats of buybacks and compliance violations has to be up to speed on this front. If you know who is placing the request or assigning an appraisal order, you will have a much greater chance at staying compliant with many of the industry's new guidelines and regulations.
But technology is not a stand-alone answer - there has to be a competent person using the technology to ensure proper business procedures. For example, let's consider an appraisal fraud tactic that is gaining popularity.
Some unscrupulous originators are sending out bogus appraiser or appraisal management company (AMC) certificates. These documents allegedly indicate that the appraisal is authentic and was completed in accordiance to certain guidelines, but they are being used to provide authentication on inaccurate values. Instead of sending an updated lower-value appraisal with its certificate, that same certificate is provided along with the original, higher-value appraisal.
In order to protect yourself from this scenario, it is crucial to make sure that the certificate matches the appraisal in question. Ask appraisers or AMCs to put the value of the appraisal on the actual certificate, not just on the appraisal. Certificates should always be linked to the appraisal, not to the appraiser or AMC.
Another highly underutilized information-providing tool is the automated review feature of some appraisal management software. Lenders are required to review only one out of every 10 appraisals.
Even so, many lenders do not complete appraisal reviews at all. For the lenders that complete only the 10% bare minimum, a competent appraisal management technology can perform an automated review on every single loan - which, in turn, can provide a level of information that can pay dividends in the way of safer, quality loans.
Obviously, there are certain parameters that are good indicators of potential hazards. Armed with this information, lenders can set up a scoring process that will "red flag" an appraisal whose components fall below - or exceed - certain tolerances. For example, automated review technologies can flag appraisals that have fewer than a certain number of comparables, or that use comps outside a certain radius. This way, rather than scrutinizing a random 10% of appraisals, a company can focus on the 10% of its appraisals that have been determined to have the highest risk.
Of course, this deliberate targeting enables higher-quality loans and also helps to increase investor confidence. Again, the tools are available, but it is up to each company to use them correctly.
As if things were not hectic enough, there is also the challenge of the uniformed mortgage data program (UMDP), which will be enforced by the government-sponsored enterprises (GSEs) beginning in April. Under the UMDP, the GSEs will require that all appraisals be submitted in a MISMO XML format.
This is a huge step forward in leveraging information. Getting appraisal information in XML will help aggregate information in a more digestible and easily managed format so that it may be analyzed and evaluated. Instead of getting information in a PDF file, where details are much less accessible, Fannie Mae and Freddie Mac will now be able to harness information on every single appraisal sent to them, analyze that information, learn from it and utilize it to help ensure higher-quality loans.
If the GSEs are moving to leverage appraisal information, doesn't it make sense for lenders and other parties (i.e., appraisers and AMCs) do the same? If lenders, AMCs and appraisers import appraisal information in an easily readable, easily accessible format, they will be able to determine trends and areas of vulnerability while also storing information for future cross-checking and reference.
The new UMDP requirements do not have to be a necessary evil. Rather than concentrating on meeting the GSEs' guidelines, companies can use the new guidelines as a way to improve their own quality.
There is still much room for improvement in this area. But as the mortgage banking industry continues to evolve, technology will have to keep advancing. As the appraisal segment gathers more information, it will undoubtedly enforce more guidelines in the effort to enhance quality. Through the ups and downs that the industry will face in the near future, the companies that maximize the tools and information available to them will be the ones that are ultimately successful.
Vladimir Bien-Aime is CEO and co-founder of Global Data Management Systems LLC, based in Landsdale, Pa. He can be reached at (877) 693-8722.