For decades, getting a valuation on a home for origination or default was a simple process: You ordered an appraisal. You waited a few days to get the appraisal scheduled and completed. Then, voila! You received a report to sift through and extract what you need. Our industry accepted and embraced this as standard practice.
Fast forward to today.
It’s well-documented that the traditional appraisal business is challenged with an aging appraiser population and state licensing and certification obstacles, which have translated into delayed turn times, valuation-driven repurchase risk and a less-than-ideal consumer experience. We live in a world where smartphones, the availability of all the data in the world at your fingertips and agile technology development are helping to fuel an all-out assault to digitize the mortgage process, and valuation is no exception.
Big data and technology are coming together to build tools to enable traditional appraisers to be more effective and streamline their process in terms of Forms 1004 and 2055.
Additionally, there has been a leap forward in recent years by lenders, the GSEs and the efforts of leading data and technology providers to drive development and acceptance of alternative valuations to traditional appraisals.
In fact, regulations have been updated and many mortgage transactions under $250,000, like home equity and streamline refinances, can be originated using alternative valuations versus traditional appraisals.
The default side of the business arguably set the trend by using alternative valuations to lower costs and turn times. Recent technological enhancements have also improved accuracy for broker price opinions and comparative market analyses.
There has been a conscious and rapid shift to broaden the use of alternative valuation products for origination. To augment these efforts, new tools, which I’ll refer to as hybrid appraisal products, are being developed to respond to a market demanding lower costs along with improved response and fulfillment turn times.
The most obvious benefits are cost and time. Not every decision needs a $500, full-blown 1004 interior appraisal. And in some markets where appraisers are short in number, the turn times can stretch from days to weeks. What these new alternative, some would say disruptive, valuation products do is enable lenders and servicers to better match the product to the risk by harnessing big data and technology.
Over time, this will lead to better quality control, identifying inaccurate valuations immediately, and even detecting fraud patterns.
So how do lenders know which product to use based on their particular needs? I’ll share a few examples of various pain points we’ve discussed with our clients and how you can leverage hybrid valuations in your mortgage operation.
Home equity: With the appreciation of home prices, home equity has become attractive and many lenders want to conduct marketing campaigns to identify potential customers within their mortgage portfolio or deposit base.
However, traditional appraisals can take a long time and are expensive. In some cases, the appraisals come back informing the borrower there is no equity in the property, and now your loan officer or bank officer has wasted time and must charge the customer for the expense of the appraisal. And you probably lose the customer.
Using a precise automated valuation tool, you can immediately evaluate whether there is equity in the subject property and make an informed decision on walk-in and telephone applications, or, better yet, proactively reach out to customers with lendable equity.
Refinance loans: Most existing home loans were originated with a traditional 1004 appraisal. When a performing customer decides to make a change in a loan product or to take advantage of lower interest rates, and the customer’s area has seen improving real estate price trends, the risk associated with originating a new loan may not justify the cost and time associated with a full appraisal.
Many lenders are now leveraging a hybrid appraisal product in these instances for loans under $250,000. It saves the customer time and money and provides the lender with confirmation that the collateral value is appropriate for the loan being provided.
Questionable comparables: You’ve recently underwritten a loan, and ordered an appraisal where the comps seemed a bit off, leaving you to question the quality of the appraisal itself, which results in ordering another full appraisal as a second opinion.
Using available data and technology, this can now be accomplished with an appraisal risk review, whereby another appraiser is given verified data and comps to assess the original appraisal. This product is available at a fraction of the cost of a second full appraisal.
And that’s just scratching the surface of how these hybrid valuation and appraisal products can be leveraged today.
Loan officers, underwriters, quality control and risk managers can use these products in lending decisioning, MI cancellation, repurchase disputes, appraisal quality control, and home equity pre-screening and decisioning. Loan officers and marketing departments can generate quality leads for customer and loan officer retention. Risk management can perform portfolio monitoring, and prepayment monitoring.
Default servicing can determine the value for loss mitigation decisioning, foreclosure sale bid price decisioning, REO listing strategy and offer management. Portfolio and asset managers and NPL/RPL buyers and sellers can perform pre-purchase or pre-sale valuation assessment, ongoing investment strategy status, analysis and validation.
As regulatory regimes come to understand and appreciate the efficiencies presented, we can expect the opportunities for these products to further increase.
For an industry that sometimes has been criticized as being resistant to change, the evolution, or maybe better stated, the revolution of valuation is helping the mortgage industry to become more efficient, while reducing costs and mitigating risk. I think it’s safe to say this isn’t your father’s appraisal any more.