Appraiser Function Requires Stronger Balance, Independence

MBA (2/21/2008 ) Palaparty, Vijay
The position of appraisers in the loan origination process exists at a knotty intersection among lenders, loan originators—loan agents or mortgage brokers—and borrowers. As a result, achieving balance in appraiser independence has proven challenging, according to a report from Strategic Development Worldwide, San Diego.
“When underwriting a property, you have three Cs: credit—how borrowers managed their debt so far; capacity —borrowers' ability to take on debt; and collateral—making sure that there is underlying value in the asset to support the loan amount,” said Corey Carlisle, senior director of government affairs at the Mortgage Bankers Association. “Lenders require an appraisal to make sure any money they are extending has collateral and they have to expect that the appraisal reports are unbiased and are accurate.”

Defining responsibilities of different parties involved in property valuation is one step toward achieving middle ground to meet business needs.

“Each member of the valuation transaction sees the valuation conclusion in a different light,” said Vicky Cassens Zillioux, senior partner in the mortgage lending consultancy at SDW. “The originator (mortgage broker or loan agent) has a responsibility to supply his client (the borrower) with the best possible loan arrangement. The violation here is that frequently the mortgage originator is driven to provide incorrect and/or fraudulent information to the lender in order best accomplish providing the borrower with the highest possible loan amount regardless of ability to pay or accuracy of the information needed to accomplish this goal.”

Carlisle said lenders have no incentive for loans to go bad. “One of the misconceptions is that the lender is seeking incentive—the party extending the finance. The lender is actually conservative and needs the appraisal to be accurate," he said. "Terms get conflated but an accurately-valued property is necessary. What we are concerned about is that policymakers may not understand the issue and increase regulation or legislation to ban coercion on appraisers to inflate values, which could result in extending liability and even increase expenses on each transaction."

The report, Appraiser Independence: Issues from a Business Perspective, echoes MBA’s view that lenders have responsibility to protect themselves with regard to the risk level of the loan and making sure that the information supplied by the originator is accurate.

“The ultimate responsibility of the appraiser has is not to make the deal work for the mortgage broker, but rather to provide accurate information to the lender so that a reliable risk decision can be made with regard to that particular loan," the report said.

Regulations to ban coercion already exist in the Uniform Standards of Professional Appraisal Practice, which promote standards and professionalism in appraisal practice, Carlisle said. USPAP is formally made public by the Appraisal Foundation, a non-governmental entity chartered by Congress to a maintain appraisal standards. “If appraisers know they are under a standard, they to be able to reject any pressure. They have to be an independent source,” he said.

But conflict could be a result of appraisers feeling unsure about the identity of their client.

“Everyone knows that the appraisal will be delivered to the lender in order for the loan to be funded,” Cassens Zilloux said. “But the borrower and the mortgage broker may have differing views as to the appraiser’s responsibility for the final product accuracy. Many borrowers feel that bank or lending appraisals are not really true valuations are just a reflection of what the lender is looking for to make the loan. The problems in today’s market only serve to support that opinion in the public eye.”

The pressures appraisers feel could be a result of many sources—one being brokers who want them to provide information that would directly influence compensation—suiting the goal of closing a loan at the highest possible value.

“There seems to be unilateral agreement, at least on the appraisers’ side, that the appraiser is an innocent party to the pressure he receives,” Cassens Zilloux said. “It is either the broker or the lender who is the ‘bad guy’ attempting to coerce the appraiser into reporting a value that is outside the range that the appraiser considers reasonable. The pressure can also take the form of attempting to force the appraiser to report information about the property, comparables, or neighborhood that is misleading or downright inaccurate in order to have the appraisal fall within the guidelines presumed to be acceptable with the lender and/or secondary market.”

Should a lender feel an appraiser is providing inaccurate reports, it can move on—as can a mortgage broker. But the appraiser could be blacklisted and “considered unacceptable in the lending community,” the report said.

However, appraisers too could be ‘crying wolf’ too often, being overly sensitive—a common complaint that affects the business conduct.

“Many times the appraisal vendor manager is unable to reconcile questions that they may have or additional information they have received,” Cassens Zilloux said. “The appraiser feels that any discussion with the lender is a form of appraiser pressure and should be avoided. The situation in many cases has gone from concern about pressure to one of avoiding any discussion about the report received. While this may eliminate time spent by the appraiser on a report already completed, it may also eliminate him from the lenders’ approval list as they find they are unable to work with a vendor who will not willingly enter into a legitimate business discussion.”

Increased education and professionalism helps alleviate some of the tension, allowing for a better process.

“Lenders must be able to take a defensive position with regard to this situation,” Cassens Zillioux said. “Internal appraisal groups should be able to use the best appraisers possible to protect both the integrity of the loans being made as well as protecting the organization from false claims of appraiser pressure. At the same time, the internal appraisal group must be in the position to keep the appraiser independent from the lending process so that they can do their job to the best of their ability as well as to the expectations of the client.”

Communication could also help clarify the system and purpose, given current market conditions, the report said. “Setting up a well-designed and documented operation can effectively cover all the bases and provide clear direction both internally and outside the organization.”