How accurate are your appraisals?
"Gone are the days when people just looked at the last line of the appraisal," says Rich Jackmauh, a 35-year veteran of the mortgage banking industry and SCA consultant. "Now everyone is paying a lot more attention to the details, especially Fannie and Freddie!"
As reported in American Banker, the GSEs are still finding "serious" mistakes in appraisals (Fannie finding 17.6% of them with contradictory information about the condition or quality of the property). The FHFA estimates that about 35% of repurchases are related to faulty appraisals!
It's likely appraisal errors have occurred for years. The difference is that now, with the Uniform Appraisal Dataset, the GSEs have the information to do something about these errors ... this facilitates an increased emphasis on quality. With new appraisal rules related to "higher priced" mortgages taking effect on January 18, 2014, no doubt there is likely to be increased scrutiny in this area .... from GSEs, regulators, and private investors alike.
How will your organization handle this increased scrutiny? What actions will you take to reduce the amount of errors in appraisals? Often, the first step to fixing a problem is to identify its source.
Three common sources of appraisals errors are:
1. Simple Sloppiness
Today, appraisers need to have serious attention to detail. Unfortunately, all too often, we see appraisers reusing forms and failing to remove all the old information. The names and dates may be correct, but look for "carryovers" in the body of the report... is there a comment that is completely unrelated to this appraisal? Is there a comparable from another zip code? These errors often occur in the Addendum section of a report. Make sure town names and descriptions of the property are accurate. It's also important to check for any fields that are blank on the report.
Aim to be error-free. Are your UAD codes correct? Do your comps match? Are there any quality or condition adjustments that seem out of place? Also, keep your eyes peeled for mathematical and calculation errors.
2. Insufficient Explanation
Returning to Rich's point, a major change in appraisal requirements is the amount of explanation necessary. Areas where this is especially true is with adjustments and exceptions to standard guidelines. For example, if the appraiser uses comparable sales that are more than six months old, it should (MUST, if for GSE) be accompanied by an explanation. Is this a rural area? Have there simply been no other more recent sales of similar properties in the area?
Specificity is more important now. Adjustments need to be explained and supported with hard numbers.
3. Assigning Appraisal Review to the Wrong Person
Well, what can you do to insulate yourself from the appraiser's mistakes (which you will be responsible for)? The answer is to assign the task of appraisal review to the right person. GSEs and regulators require this person to be independent of the decision-making process. This doesn't mean the person can't be in-house, but it can't be your underwriter! It also needs to be someone with the requisite experience. Not just anyone can do appraisal review. This person should be competent in the application of appraisal theory.
If you're worried about finding someone with the requisite experience to do appraisal review, or concerned with the profitability of keeping such a person both independent and busy, consider outsourcing your appraisal review to a company like Spillane Consulting. If you go this route, remember the importance of speed--any good appraisal review company will agree to complete appraisal reviews within 2 to 3 business days.
In conclusion, when it comes to appraisals, our advice is to channel your inner Ronald Reagan and "Trust, but verify."
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**These are our opinions. We're not authorized, or willing, to express those of others.**