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A new world of appraisals.

ESTABLISHING LONG-TERM RECOVERY and sustained health for the housing market depends first and foremost on the accurate valuation of properties. Post-economic downturn, there has been a continued, strong focus on loan underwriting and the need to put consumers in homes they can afford. While this is a huge component of the industry's turnaround, it is not just borrowers that need to be qualified, but properties as well.

Everyone sees the great scrutiny under which the lending process has been placed; however, it is the process for appraisals that has changed entirely.

To prevent another housing crisis and mitigate risk, the need for quality control (QC) in valuations is at an all-time high. The industry is now leveraging greater methods--from the use of technology to more stringent regulatory guidelines and auditing--to prevent misrepresentation in property values and fraudulent activity.

What does this mean for appraisers, and how are they handling the complete transformation and growing complexity that their roles now entail?

Valuation risk remains

The vast majority of professional property appraisers are working diligently to do their best work, understand and comply with new regulations, and run successful businesses in the wake of significant industry change. However, the industry continues to face considerable risk as it relates to property valuation fraud.

According to Agoura Hills, California-based analytics firm Interthinx's quarterly Mortgage Fraud Risk Report, valuation fraud risk increased by 27 percent across the country in the first quarter of 2014 from the previous quarter. Fannie Mae reported in its August 2014 mortgage Fraud Findings Statistics update that in 16 percent of cases, a specific material fact about the property and/or the comparable sales was misrepresented.

And according to USRES' chief appraiser, Brad Froelich, who has more than 30 years of industry experience, where originations are committed and collateralized, we continue to identify instances of individuals attempting to manipulate property values by creating artificially high appraisals or purchasing and listing multiple properties in the same area to falsely control prices.

For this reason, QC standards have become more rigorous, and appraisers have a bigger job to do in terms of not just completing valuations, but providing proof through careful, consistent documentation for every single assignment.

Making every step transparent

While fraud issues certainly remain, most of the incorrectly conducted valuations are not necessarily a result of fraud, but rather from misunderstandings or lack of knowledge on the part of the appraiser. Many are still learning certain requirements or guidelines, and getting used to the idea of recording and tracking every activity. Their jobs have undergone a significant transformation, and because of both the previous economic downturn and continued risk, appraisers must be prepared for their new roles and responsibilities.

The key for appraisers today is transparency. Quality work is nothing if it is not accompanied by completely transparent processes. Appraisers must document every step and every detail to ensure the accuracy of their work.

Checking boxes is not sufficient today--instead they must provide a narrative of their activities. It is not just a random sampling of assignments that are up for review; now auditors are capable of reviewing every single property appraised.

The AMC-appraiser relationship

Another change for appraisers is the emphasis now placed on their relationships with appraisal management companies (AMCs). AMCs should be viewed as organizations that work alongside appraisers. They work hard with their vendors to provide key education and instruction, enabling both the AMC and its appraisers to remain strong contributors in this ever-regulated environment and at the end of the day, ensure misrepresentation does not occur.

The role of an AMC is to show a commitment to helping appraisers secure assignments and boost business; AMCs also help them stay abreast of and interpret new rules as well as understand the importance of documenting every action they take.

AMCs are under a tremendous and growing amount of scrutiny. They must follow regulated, intense processes for QC, and many are finding success by applying a hybrid method for valuations. This approach combines the use of in-house auditors and technology products for QC, putting every valuation through a series of checkpoints to ensure the information from the appraiser coincides with details from multiple listing service (MLS) data and other public records.

AMCs' required, comprehensive QC process--which helps prevent attempts to mislead and ensures appraisals delivered to their clients are collaterally sound--can be of great benefit to appraisers. AMCs can use these practices to provide appraisers essential feedback on their work and come back to an appraiser when more information is needed or more detail is required for compliance.

Fannie Mae is one agency more carefully scrutinizing appraisers specifically, distinct from AMCs or servicers. Fannie Mae is not only looking at potential misrepresentation by appraisers in terms of peer consensus, but it is also reviewing photos provided by the appraiser to certify them as accurate and reflective of a recent onsite inspection. For example, if an appraiser is required to provide photos of all bathrooms and he or she uses old photos instead of new ones, Fannie Mae's QC process now detects this information.

Auditors and regulators also have more tools for capturing inaccuracies in valuations, of which appraisers must be aware. They can identify the discrepancy if an appraiser attempts to crop a photo to eliminate a visible freeway overpass, for instance, using aerial photography.

Factors that might have been overlooked previously, which are critical for assigning a proper value to a property, are no longer inconsequential.

New tools for appraisers

Industry changes have forced appraisers to improve their skills and update their methods. There are several tools available today that they should be leveraging to deliver quality appraisals and represent all of their work in a transparent way.

More reliance is now placed on mobile appraisal tools, which have become critical for helping appraisers provide the accurate and timely reports they need for compliance purposes. Traditionally, appraisers arrived at sites with a clipboard and camera, and would later return to their offices and attempt to recall everything they saw and review their notes taken while walking through a property. This process will no longer suffice when such careful detail is needed for every single valuation.

If there is discoloration on the wall of a property, for example, technology now allows appraisers to instantly make a detailed record, take and label photo graphs on the spot and even send information directly to the lender and AMC.

In his experience working alongside appraisers, Froelich is now finding that appraisers who use these tools can significantly improve their businesses; by delivering feedback to their AMC almost instantaneously and providing the level of transparency that mobile tools offer, they are ultimately seen as more valuable members of an AMC panel, which can lead to receiving more assignments.

There is no magic solution or perfect technology to guarantee accurate appraisals. Technology is crucial today for automating and accelerating processes and delivering quick access to vital data. However, the need for human involvement and the expertise of trained professionals is still very much a requirement for true QC.

For those responsible for providing valuations--AMCs and appraisers--the future could look very different from the industry as we know it now. The relationship with lending institutions and auditors will likely further evolve and auditors could very well require more full-scale reviews upfront. New technology will likely emerge.

For AMCs, the intent is always to have the strongest possible panel of appraisers, which means on occasion, as necessary, taking disciplinary action. The business of valuations and truly, the industry as a whole, rely on the proper oversight of appraiser panels. Appraisers must fully understand and commit to an entirely new standard to succeed in the midst of so much regulatory change. Those who leverage the technology and tools at their disposal and make the most of their AMC relationship can have very successful businesses despite the ebbs and flows that will always be a part of the real estate industry.

Keith Guenther is chief executive officer and founder of U.S. Real Estate Services Inc. (USRES) and RES.NET, both based in Lake Forest, California. USRES provides financial support services for valuing and liquidating real estate assets, and RES.NET is a platform of specialized technology portals designed for different aspects and participants of the real estate industry. He can be reached at keith.guenther@usres.com.
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Title Annotation:VALUE JUDGMENTS
Author:Guenther, Keith
Publication:Mortgage Banking
Date:Oct 1, 2014
Words:1390
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