Quality (E)valuations: Ensuring Appraisal Integrity through QC (Sponsored by ACES Quality Management)

Sharon Reichhardt

Sharon Reichhardt is the executive vice president of operations at ACES Quality Management. With decades of industry experience, Sharon helps businesses strategically leverage quality control. Contact her at sreichhardt@acesquality.com.

In the face of market volatility and changing regulations, mortgage lenders are encountering substantial obstacles. Independent mortgage bankers (IMBs) reported a pre-tax net loss of $645 per loan in Q1 2024, and total loan production expenses reached $12,593. While production losses did decrease compared to Q4 2023, production costs increased. After eight consecutive quarters of losses, lenders continue to feel the financial strain of today’s market and, therefore, must find ways to remain profitable while navigating an increasingly competitive and regulated environment.

Additionally, lenders are grappling with significant repurchase expenses from the “COVID” vintage of loans, largely due to appraisal defects. Although the volume of loan repurchases at Fannie Mae and Freddie Mac has markedly declined since its zenith in Q2 2022, the repercussions for lenders remain. The latest ACES Mortgage QC Industry Trends Report highlights an increase in appraisal-related defects over the past year, making appraisal quality a critical focus for lenders. Building a quality-centric culture supported by technology is essential for maintaining appraisal integrity.

The Importance of Appraisals

Appraisals are crucial in the mortgage process as they determine the value of the collateral securing the loan. Issues of biased and inaccurate appraisals have drawn attention from government-sponsored enterprises (GSEs), regulatory bodies, and consumers. Reports of discriminatory practices, where appraisal values differ significantly based on the homeowner’s perceived race, underscore a deep-seated issue. Overvaluation continues to be a persistent problem, exacerbated by fluctuating housing markets and soaring home prices.

Accurate appraisals are fundamental to the mortgage process because they provide an objective measure of a property’s value, which serves as the collateral for the loan. Any inaccuracies or biases in the appraisal process can lead to significant financial risks for both lenders and borrowers. Inaccurate appraisals can result in overvalued properties, which may lead to higher default rates and increased financial losses for lenders. On the other hand, undervalued appraisals can prevent borrowers from obtaining the necessary financing, hindering homeownership opportunities and affecting the overall housing market.

Increased scrutiny from GSEs and regulatory bodies like the Consumer Financial Protection Bureau (CFPB) underscores the need for accurate appraisals. New protocols, such as allowing homeowners to request a reconsideration of appraisal values, have been implemented to ensure fairness. This heightened awareness has led to the introduction of tools like Fannie Mae’s Collateral Underwriter® (CU®), designed to enhance the scrutiny of appraisal data. However, systemic issues in appraisal quality control (QC) remain. The challenge for lenders is to implement and maintain robust appraisal QC processes that can effectively address these systemic issues and ensure accurate and unbiased appraisals.

The Value of Culture

Fostering a quality-centric culture is vital for effective appraisal QC. When quality is embedded in a lender’s operations, discrepancies are swiftly addressed, with both origination and QC teams working towards common goals. This alignment helps resolve appraisal issues before they affect the loan’s final quality. A quality-centric culture involves creating an environment where all employees understand the importance of appraisal quality and are committed to maintaining high standards. This requires ongoing training, clear communication, and a commitment to continuous improvement.

Regulatory updates from Fannie Mae now require lenders to conduct a 10% pre-funding sample review and adhere to stricter post-closing review timelines aimed at early defect detection and remediation. These regulatory changes underscore the importance of early detection and correction of appraisal defects, which can significantly impact the overall quality of the loan. Advanced QC tools like ACES can automate and streamline sampling, review, remediation and reporting processes. Leveraging such technology can enhance review speed and accuracy without increasing staffing costs, even in a low-volume environment.

By embedding quality into the organizational culture, lenders can ensure that all employees, from origination to QC, are aligned and working towards the same goals. This alignment minimizes conflicts and ensures that appraisal issues are promptly identified and resolved. Moreover, a quality-centric culture promotes accountability and encourages employees to take ownership of their work, improving overall performance and reducing the risk of appraisal defects.

The Role of Technology

Technology is crucial in tackling the complex challenges of appraisal QC. Traditional manual processes, where appraisal underwriters compare PDFs from appraisers with loan files using a static checklist, are error-prone and outdated. Manual processes are not only time-consuming but also prone to human error, which can result in significant appraisal defects and increased repurchase risks.

Despite the capabilities of systems like CU, data integration and accessibility remain challenges. Currently, CU data exists in a separate system, hindering seamless data transfer and comprehensive audits. Many lenders input CU findings into their loan origination systems (LOS) to ensure findings are linked with the corresponding loan file. By integrating LOS data into ACES, auditors can systematically review appraisal data, identify discrepancies, and take corrective actions. Detailed reporting and sharing capabilities with appraisal management companies (AMCs) ensure vendor accountability and maintain quality standards.

Advanced QC tools like ACES provide a comprehensive platform for managing the entire appraisal review process. ACES can pull data from various sources, like the LOS and CU, and provide auditors with a unified view of appraisal data. This enables auditors to quickly identify discrepancies, take corrective actions, and resolve all appraisal issues before the loan is finalized. Additionally, ACES provides detailed reporting and analytics, which can help lenders identify trends and areas for improvement in their appraisal QC processes.

Establishing a robust internal appraisal review process during low-volume periods allows lenders to manage increased volumes effectively when the market rebounds without needing significant staffing changes. A tech-driven process ensures consistent labor costs and maintains high quality regardless of volume fluctuations. By leveraging advanced technology, lenders can streamline their appraisal QC processes, improve accuracy, and reduce the risk of repurchase requests due to appraisal defects.

In a market where every dollar counts, effective appraisal QC is crucial. ACES Quality Management provides lenders with the necessary tools and insights to navigate appraisal QC complexities. By fostering a quality-centric culture and utilizing advanced technology, lenders can ensure accurate, unbiased appraisals, safeguarding their bottom line and promoting fair lending practices. Staying proactive in QC and compliance is essential for maintaining loan quality and operational integrity.

The integration of advanced technology in appraisal QC processes not only improves accuracy but also enhances efficiency. Automated systems can handle large volumes of data and provide real-time insights, enabling lenders to identify and address appraisal issues quickly. Moreover, technology can facilitate collaboration between different teams, ensuring all stakeholders are aligned and working towards common goals. This collaborative approach can lead to improved overall performance and reduced risk of appraisal defects.

Moving Forward with Confidence

The challenges faced by mortgage lenders in today’s market are significant. However, lenders can effectively manage these challenges by prioritizing appraisal quality, fostering a quality-centric culture and leveraging advanced technology to ensure appraisals are accurate and unbiased. As the industry continues to evolve, staying proactive in QC and compliance will be vital for maintaining loan quality and ensuring long-term success.

(Sponsored content includes material submitted independently of the Mortgage Bankers Association and MBA NewsLink and does not connote an MBA endorsement of a specific company, product or service. For more information about sponsored content opportunities, contact Bill Farmakis at bill@jlfarmakis.com or 203/834-8832.)