Sounding Bored is my semi-regular column on the state of the appraisal profession. With the holiday behind us, I will get back in the saddle. This week I point out the limited choices that bank Chief Credit Officers have to reduce their mortgage lending risk.
Lenders don’t know how to face the new market reality. In a market that has begun to cool, the call is starting to go out from the Chief Credit Officers to their minions to “be more conservative” and to “really review” the appraisal reports so the lender is not vulnerable to market swings.
We have mentioned before that mortgage brokers have provided similar comments [Matrix] to us along the lines of “lenders are actually reading the reports now so we have to get a real appraisal done.” This generally doesn’t mean more appraisal review, but rather greater hesitation to grant exceptions to underwriting policies.
Of course, the housing boom, which began circa 1998, has made this change in attitude increasingly more difficult. Lenders have largely eliminated the in-house appraisal department function, and have shifted all review functions to appraisal management companies or other third party review firms who operate on very slim margins. As a result, they aren’t able to manage quality because they don’t have a high calibur of qualified personnel. Its basically a sham on a breathtaking scale.
An entire generation of review appraisers have been put out to pasture with the new generation not being trained and nurtured. Why review when you can make more money as a fee appraiser? The lenders never viewed the appraisal department as a revenue department, only as a cost center, no matter how much window dressing is placed on it. The boom created the need for speed and all other issues didn’t really matter.
The skilled appraiser has been reduced to dealing with a 19-year old clerk who has no idea what an appraiser does but wants the report in on time or he/she will give it to someone else. Besides being dimeaning and disheartening, its also very negligient to the shareholders who own stock in these institutions.
In order for the banks to tighten the screws on lending irregularities today, there are only two choices that are available to them, and neither is attractive:
- Raise mortgage rates faster than they are already rising to reduce volume.
- Create an in-house appraisal review function to separate the appraiser from those whose compensation is commission-based.
Appraisal review needs to happen sooner rather than later or lending institutions simply need to be honest with banking regulators. Is the appraisal report merely a doc for the file or is it a tool to assess the collateral for a mortgage?
The time is fast approaching where its going to actually matter what the appraisal says. Lets try to be honest about this starting…now.