Mortgage lenders nationwide are trying to figure out how best to meet the new appraisal management rules outlined in the Dodd-Frank Financial Reform Bill, which is likely to become law in mid to late October. The bill’s appraiser independence standards present lenders with new options on how to manage appraisers, and they must now evaluate their options to decide what will most benefit their business.
“With an October deadline looming for the issuance of new appraiser independence rules under the Dodd-Frank Bill, lenders must quickly choose how to execute the directives in the bill,” says Jennifer Creech, president of InHouse Inc, a provider of appraisal solutions to banks, lenders and other mortgage originators. “They will need to evaluate their tolerance for risk, their need for in-house control, and their budgets. Whatever lenders do, though, they cannot delay. The new law is stricter than the Home Value Code of Conduct (HVCC) and violations are unlawful and subject to stiff penalties of up to $20,000 per person per day.”
Creech says that under the Dodd-Frank bill, lenders can consider three ways to manage their appraisal process:
1. Complete outsourcing with one or multiple AMCs (appraisal management companies)
2. Self management of appraiser panels, from ordering to delivery of appraisals
3. A hybrid model, consisting of a combination of self-management and AMC outsourcing in which a lender manages its own appraiser panel in key markets and outsources out-of-market business and appraisal overflow to a nationwide AMC or multiple AMCs.
Creech points out, “All lenders also will face higher appraisal costs due to the new ‘reasonable and customary’ fees paid to appraisers mandated by the new law no matter which appraisal management option they choose.”
Outsourcing to multiple AMCs
In managing multiple AMCs (complete outsourcing) the pros for lenders among others include diversification of the risk associated with using one AMC, and sharing compliance risks and loss warranty risks with partners. It requires no internal appraisal management department, and imposes minimal technology burdens. Creech adds that smaller lenders can potentially find cost savings in this approach and it frees them up to focus on core competencies.
“Among the cons lenders face with complete outsourcing is less control of the day-to-day processes and procedures,” Creech says, “Also, lenders find that some loan officers, brokers and real estate agents are anti-AMC.”
Self-management of appraiser panels
Lenders self-managing their appraisers will find that among the pros is full control of the appraisal process, according to Creech. “It also can be the least costly approach if there is scale built into the process and if lenders use appraisal automation software. Such cost savings can be passed along to the borrower. However, the additional overhead lenders incur under self-management also could reduce lender margins.”
Then again, with self-management lenders are fully responsible for compliance risk and cost, and for day-to-day management of the operations of an internal appraisal department with fixed costs for a business process that does not add to the bottom line. “There also are costs associated with staffing up during sudden spikes in business and in boom markets,” Creech explains.
A hybrid model
The pros for lenders employing a hybrid model, a combination of appraiser self-management and AMC outsourcing, include a diversification of the risk of managing the whole process, while maintaining control of core markets. “This approach lowers fees for the core business, allowing the lender to better compete on appraisal fees, and offers variable costs for non-core business,” Creech says.
“The hybrid model can offer an optimal balance for a lender, because it requires a smaller internal appraisal management department than when fully self-managing the process,” she said, “It shares and spreads the compliance risk for core and out-of-market areas, and also satisfies the concerns of loan officers, mortgage brokers and real estate agents about exclusive AMC use, while staying compliant.”
On the con side, the hybrid model still requires lenders to deal with the costs, risks and compliance associated with staffing an internal appraisal department.
Creech points out that technology can help lenders adopt the right appraisal solution to meet their needs, while maintaining compliance with appraiser independence standards. Technology solutions like InHouse’s Connexions software provide access to any appraisal vendor on one centralized platform. Connexions combines analytics, data mining and workflow on one platform and empowers lenders to manage any combination and number of appraisal vendors, or outsource to an AMC.