From the real estate agent who lists a property for sale to the underwriter approving a loan file, property valuations are an integral part of the mortgage loan process. The majority of the mortgage industry relies greatly on the valuation outcome in order to determine loan amounts for financing and potential risk. Without knowing the market value of a property, a lender would be “going in blind” so to speak, and could be putting their reputation and resources at risk.
The mortgage industry players include, but are not limited to, real estate agents, loan officers, brokers, underwriters, investors, appraisers, buyers and sellers. We need to realize that we’re all on the same team, headed toward the same goal; that goal is to close loans. So why do some players seem to make it their personal mission to push and fight against the other team members, especially the appraiser?
In order to reach the goal, it takes each player’s specialized skills and knowledge working together. Developing a credible property valuation is key to getting to that goal, as it is vital in the loan decision-making process. An appraisal is necessary to determine the market value of the property in question. The final opinion of market value determines the loan amount, which is required as part of the risk-based decision-making process for lenders, investors and all industry players.
Most mortgage lenders will not approve a loan amount greater than the market value of a property, just as most buyers don’t want to pay more for a property than it’s worth. Market value is defined by the Appraisal Institute as, “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.
“Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (a) buyer and seller are typically motivated: (b) both parties are well informed or well advised, and each acting in what he considers his own best interest; (c) a reasonable time is allowed for exposure in the open market; (d) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (e) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”
In order to accomplish our goal of closing loans, each player must accept that they are part of a larger team and acknowledge the other players, their strengths and weaknesses, and allow them to perform their jobs.
Rather than the listing agent loading the appraiser up with 20 potential “comps” at the time of the inspection, or the loan officer continually calling the appraiser to see when the report will be completed, why not trust that they are competent in their area of expertise and let them perform their job without interference or pressure?
It can be quite a challenge to work together as a team. It requires each player to place past conflicts aside, trust the other players, keep their egos in check, show humility and behave professionally. This is much easier said than done. Each player has different life experiences that cause them to have a difference perspective.
Also, numerous industry-wide terms are misused or used interchangeably so they mean different things to different players, such as the term “appraisal rebuttal.” Many mortgage industry players understand this to mean a reconsideration of value, but in fact it actually means to dispute the reported data in an appraisal report, not necessarily the value.
I would say the biggest challenge is the lack of communication. Part of working together as a team includes communicating status with the other players, asking for assistance, accepting that assistance when necessary and keeping one another informed. Otherwise, chaos is likely to ensue.
Another common challenge is that not each team player will have the same values, priorities and/or motivation. An overly proud player who does not admit his/her shortcomings will hinder the success of the entire team. All the players need to act in the best interest of the team to reach the goal.
Unfortunately, there can also be players who are unable or even unwilling to work as a team due to their own self-interests. These are not the kind of players we should be working with. When self-interest is prioritized over the ultimate goal of the team, reaching the goal will be more difficult, more stressful and will likely diminish each player’s sense of accomplishment once the goal is finally reached.
Each player has their specific role, set of skills and knowledge base, which make them vital to reaching the goal. The real estate agents who write up and deliver the purchase contract to the broker or loan officer is an expert at what he/she does. They know the property, the neighborhood, and the market trends, therefore, they should be able to determine a realistic list price fairly easily.
Once the offer is in the hands of the broker or loan officer, they will collect and verify the borrower’s creditworthiness and will build a loan file to present to the lender or underwriter.
The underwriter will then analyze the loan file to determine the level of risk for the lender and will either approve or deny the loan. The valuation or appraisal is part of that loan file. Therefore, the appraiser’s role is to inspect the property, analyze the data, report his/her findings and determine a final opinion of value.
The appraiser is considered “the eyes and ears” of the lender. The findings within the appraisal report do not just pertain to value, but also risk. This risk extends to the lender, the investor and also the borrower.
The appraiser is required to report any potential or obvious health and safety issues and concerns. Keep in mind that the appraiser is an expert in the valuation process, as they had to obtain numerous years of education and work experience required by their governing state agency and had to pass an extensive state exam to be allowed to perform residential appraisals for mortgage loan transactions.
Without each industry player performing their vital roles, the loan process will not work. If an appraisal is not completed and a final opinion of market value and potential risks are not determined, the repercussions — such as lender re-purchases or borrower default — are great.
Though errors and incompetency exist in every industry, we need to make sure that each player we have a working business relationship with is given the courtesy to perform. Without this courtesy, we experience more unnecessary stress, fewer closed loans and even additional regulatory constraints.
This is evident by Fannie Mae’s creation of Appraiser Independence Requirements, better known as AIR, which went into effect October 15, 2010.
AIR was implemented in an attempt to “protect appraiser independence and prevent pressure from being applied to appraisers to produce a desired property value,” according to Fannie Mae. The policy specifies that members of loan production, such as the real estate agents, brokers and loan officers, cannot communicate with the appraiser when an AMC is involved, which is how the majority of appraisals are now ordered.
This was the result of the pressure placed on appraisers to determine values that were higher than their true market value, which was motivated by the self-interests of others — others meaning various players in the transaction.
No mortgage industry player segment is without blame in sometimes not acknowledging the value of another’s role in the loan process. However, I challenge all of us mortgage industry players to work together, appreciate and respect one another’s purpose in the process and see the worth in the valuation process to get some loans closed.
