Home sales and mortgage financing is down. First we hear of the possible loosening of credit standards, then comes the lower down payments, and now reports of inflated home values. (Dodgy Appraisals). Does anything here sound familiar?
To increase business, the industry is introducing new lending products with lower down payment requirements and pushing for the easing of current credit standards. This combination, in and of itself, increases both the lender’s risk and the secondary market risk. Now add reports of the old inflated values from shoddy, if not flat out fraudulent, appraisals. Now you got problems.
When all is said and done, the lender stands in the cross-hairs. If things go bad as a result of the lower down payment requirements and/or the loosening of credit standards, you just know that somehow, someway the lender will be held accountable, regardless of published guidelines. We’ve seen this movie before and know how it ends.
However, lenders need to stay competitive and to retain good originators, and stay in business. They need to originate what the market will buy. This is where it gets tricky.
A lender must have in place the training, systems and processes, to ensure that what is originated, is of sound quality and saleable into the secondary market. A loan must meet all requirements for compliance, credit, borrower capacity to repay and collateral value. The first three are handled by the lender, however, in most cases, the valuation is not.
Lenders need to know their appraisers or AMC and perform their due diligence on licensing, certifications and experience levels. More importantly, they need to periodically check the reports received using external field reviews to analyze reports and ensure the data used by the appraisers is the most recent and the most accurate. Loan quality is paramount and this includes the quality and integrity of the appraisal report.
Fannie will introduce its Collateral Underwriter (CU) program in early 2015. This will go a long way toward assisting lenders in identifying potential appraisal data problems. However, this system is only a risk evaluation. It is not a complete analysis of the report.
For example, if the appraiser did not use the best comps available, the entire report may appear accurate in every detail. However, the value presented may be somewhat skewed. Review appraisals shouldn’t just be done in connection with standard QC audits.
Comprehensive field reviews may be done on high risk loans, loans from third parties and/or those which might be scored a high risk by CU or other appraisal risk scoring services, throughout the lending process.
There are well qualified companies out there that will provide such services. The investment in these reviews is well worth the returns.
Lend smart my friends.