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Appraisals traditionally are the most difficult part of the mortgage underwriting process. With the virtual collapse of the residential lending industry and loss of general confidence in its institutional processes, appraisals have come under intense scrutiny while assuming new levels of complexity.
Volatile housing markets continue to pose challenges. In addition, initiatives such as the Home Valuation Code of Conduct have been introduced by Fannie Mae and Freddie Mac to restore confidence and ensure the appraised values on which lending decisions are based are well-supported.
Consequently, credit unions involved in mortgage lending in this new environment must provide accurate and acceptable appraisals that also meet exacting investor standards.
Despite heightened appraisal standards imposed on residential lenders, credit unions are wise to institute and enforce rigorous internal processes that guard against poorly supported appraised values.
Sloppy appraisals can be enormously costly. Fannie Mae reported in September 2009 that one of the most common causes of loan repurchases is improperly performed appraisals, related largely to the selection of comparables and adjustments (“Reducing the Repurchase Risk: A Sustainable Approach to Loan Quality,” by Patria Kunde).
Credit unions and other lenders are seeking expert guidance when training employees to correctly perform appraisals.
Because poorly performed appraisals and underwriting can cause back-end surprises, including repurchases, arm your staff with best practices. The CMG MI Underwriting Network has identified several ways to help make the process easier for credit union staff.
Ask these key questions when reviewing appraisals:
- Does the appraiser appropriately and completely describe the property’s features, amenities, and quality of interior and exterior finishes, fixtures and materials?
- Does the appraiser accurately report the property’s neighborhood value trends (increasing, stable, or declining)? If the property is in a distressed market, the appraiser should use comparables that are no older than three months and provide a current listing.
- Is there support for the property’s age?
- Does the appraiser report and analyze the property’s current and prior listings and sales activity?
- Does the appraiser disclose and analyze negative features and/or characteristics of the property?
- Does the appraiser accurately support the adjustments assigned to the comparables?
- Are the subject and comparables consistent with the neighborhood boundaries as shown on the location map?
- Are the comparables similar to the property in relation to style, sales price, and square footage and, if not, are the discrepancies explained?
- Does the appraiser use non-Multiple Listings Service or nonverifiable comparables? If so, explain why. Also, don’t be shy about rejecting appraisals that rely on such non-verified and easily challenged comps.
- Does the appraiser report, analyze and appropriately adjust for seller concessions?
The appraisal’s value ultimately comes down to the appraiser’s integrity and professionalism. Even if performed by a third-party management company, the credit union ultimately is responsible for valuation errors caused by neglect or oversights.
To guard against poor-quality appraisers, consider implementing regular, post-closing sampling and audits of appraisals by a knowledgeable team of internal employees who have solid appraisal and underwriting backgrounds.
Credit unions should also consider bringing in a seasoned appraiser to assist in these reviews. Require explanations from the appraiser or management company about any irregularities, and be proactive about removing appraisers producing poor-quality work from their appraisal panels.
JOEL LUEBKEMAN is director of marketing & product development at CMG Mortgage Insurance Company. Contact him at 415-284-2508.