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10 Warning Signs Lenders May Need a New Quality Control Process

October 09, 2018  //  BY Team DataTree

In the appraisal process, accuracy is an essential element. Without it, you’re at risk of making costly errors in sales comparables and relying on unreliable information that can result in lost sales to qualified buyers or bad loans to homebuyers at high risk of default. The purpose of quality control is to minimize the risk of such errors. However, your appraisal quality control process may not be serving its purpose. If you observe any of the ten warning signs described below, you may definitely need to develop a new quality control process for your property assessments ... fast.

1. You Use Multiple AMCs

As a result of the housing crisis, home appraisals have come under more scrutiny. Using the services of an appraisal management company (AMC) is one way to ensure that the valuation of a home a client is considering is equivalent to the money you would be lending in a mortgage. 

Reputable AMCs maintain a pool of licensed appraisers to conduct objective evaluations of given properties and produce reports that lenders can rely upon. However, some lenders, including Lender X, feel compelled to use multiple AMCs as a matter of due diligence. After all, if multiple reports produce similar results it should stand to reason that the results are accurate. This is faulty reasoning.

The problem using multiple AMCs is that different AMCs can produce reports with wildly varying results. Some AMCs rely heavily on distressed properties in producing “comps,” which naturally drives down valuations. As a result, contracts may be needlessly cancelled because the home valuation is too low to justify the amount of the mortgage. Worse, lenders like Lender X may lose out altogether, because relying on multiple AMCs makes it impossible to execute the sort of quick turnaround on mortgage applications many homebuyers demand. 

2. Multiple Divisions; Multiple Appraisal Processes

Lender X prides itself on being a full-service lender providing VA, FHA and even sub-prime loans in addition to standard loans. However, each of its lending divisions insists on employing its own appraisal process. For instance, the FHA and sub-prime divisions employ the cost approach, which consistently results in lower comps for similar properties provided by other FHA lenders. On the other hand, appraisals from the market rate division are generated from the sales comparison approach, which consistently produces higher appraisals due to heavy inclusion of sales from “hot” markets that draw multiple buyers.

It should come as no surprise that Lender X loses out on a lot of FHA loans due to lowball loan approvals. Of course, the market does bear some effect on appraisals. However, if FHA borrowers consistently receive lower loan approval amounts than market rate borrowers for properties that are otherwise essentially similar, that’s a sure sign of faulty appraisal quality control in one or both departments.

3. No Documented Proof of Consistent Quality Control

Lender X is losing a lot of FHA contracts. The suspected culprit is its consistently lowball appraisals, but there is no documented quality control process in place to trace the process of developing comps, or even a means to determine whether comps are developed using consistent evaluation methods. This lack of documentation for quality control is an obvious sign of a faulty quality control process, and until Lender X gets a handle on its QC for FHA mortgage lending, it’s unlikely that matters will improve.

4. Multiple Valuations for CYAsset Purposes

Lender X has adopted a policy of ordering extra valuations for each appraisal. The thinking is that covering multiple bases will minimize the hazard of making erroneous lending decisions, specifically losing out on FHA loans. However, this approach has only served to confuse matters with inconsistent information on comparables, transaction history and related property information. A better approach to valuation would be to insist on rigorous data collection with traceable methodology. Efficient quality control in data collection would reduce if not eliminate the need for multiple valuations.

5. Boomerang AMC Reports

Lender X isn’t happy with the service it receives from its multiple AMCs. The reports they receive have information gaps or simply seem out of line with appraisals obtained by other area lenders for similar properties. So they send the appraisals back with questions or comments, receive revised appraisals, rinse and repeat. Meanwhile, many contracts have been lost to competing lenders that have their QC act together and are able to make lending decisions without multiple AMC requests.

6. Different Underwriters, Different QC Processes

There are several legitimate methods for conducting appraisals. However, there should be a consistent method of conducing field review appraisals within an organization. This is not the case with Lender X. Not only does each department employ its own appraisal method, each assessor performs quality control in a unique fashion. For instance, one assessor may provide three comps for an appraisal while another assessor provides 10 comps.  

While more comps may appear to be more rigorous, that’s not necessarily the case. If the 10 comps are heavily weighted with foreclosures, the appraisal may actually be less reliable than an appraisal that uses three carefully selected comps. A better approach would be to utilize a consistent approach based on carefully researched comp data.

7. You Employ AMCs and Expect Appraisal Expertise from Underwriters

AMCs have been a part of the real estate landscape for more than half a century. However, their role became more prominent in the aftermath of the housing crisis and federal; requirements imposed by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and the Truth in Lending Act. Today, AMCs are contracted by lenders to provide fair, objective appraisals of a given property. Ideally, AMC assessors have local knowledge that has been obtained by independent experience. They are not given prior information about the property from the lender nor do they contact the lender before conducting a field review appraisal.

By contrast, underwriters employed by lenders such as Lender X are by definition employed to serve the lender’s interests. This does not mean that Lender X or its underwriters are dishonest or deliberately produce misleading assessments. What it does mean is that Lender X’s underwriters often rely at least partially on lender-provided information, and that it is difficult if not impossible for Lender X’s assessors to conduct an assessment that is not influenced by their obligation to promote Lender X’s interests.

8. Too Many of the Same Revision Requests

Revisions happen. No lender or AMC is immune to making errors or the need to revise assessments based on new information. However, Lender X experiences a revision rate far in excess of the industry average. Worse, the revisions are often redo’s of the same reports or needed changes due to the same types of misinformation or procedural error. Much of this repetition is due to a lack of a documented audit trail for the assessment process, as well as an absence of corrective measures to minimize the need for making the same types of revisions in the future. Quite simply, this is a waste of time, money and resources not to mention lost business.

9. Bad Valuation Is Killing Deals, and You Have No Way to Stop It

Lender X loses a lot of FHA loans due to under assessments. Prospective homebuyers lack the means to make up the difference between the approved amount and the agreed selling price and sellers understandably don’t want to eat the difference either. However, because of the lack of rigorous QC procedures and standards, Lender X has no way of differentiating bad valuation from a fair assessment that is simply less than the price agreed between buyer and seller.

By contrast, good valuation incorporates transparency in every element. Where discrepancies occur between an agreed selling price and a property valuation, the lender can point out distinct factors to account for their conclusion, based on verified records and well-matched comps.

10. Your Appraisal QC Checklist Only Exists in an Assessor’s Mind

Lender X has one really top notch assessor. She somehow manages to turn around property assessments quickly, with results that lead to good loans for qualified homebuyers, and very few bad loans that wind up in default. The only problem is that no one else in the company has any idea how she does it. She clearly utilizes a QC checklist, but it exists neither in paper nor in pixels.

There are several reasons why this is a faulty way to conduct quality control. First and foremost, even the best assessors are human. When there were problems with this assessor’s work product in the past, there was no way to determine where the error originated. Second, a QC checklist that exists only in an assessor’s head makes general record keeping difficult. If that assessor is out sick, takes a vacation or leaves the company, it would be nearly impossible to evaluate her work.

Get a Handle on Appraisal Quality Control

One result of the housing crisis has been an enhanced emphasis on due diligence. As a result, many lenders have turned to AMCs or other QC strategies. One of the best ways to ensure sound QC is through transparency and consistency in assessment and evaluation. It is also essential to ensure the quality of data that is utilized by your company’s assessors. DataTree Mortgage Lending Data Analytics allows your assessors to verify vital information on ownership, order valuations and acquire information that was previously nearly impossible to uncover. Give us a call today to learn more.


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