Magazine article Mortgage Banking

Appraisals: Why Not Let the Experts Handle It? (Executive Essay)

Magazine article Mortgage Banking

Appraisals: Why Not Let the Experts Handle It? (Executive Essay)

Article excerpt

THE BUSINESS OF REAL ESTATE--secured lending is conducted by companies of varying size--large national lenders, individual brokers, community banks--but valuation is always a local matter. The loan transaction is particular to a single home--a unique piece of real estate oriented in its own unique way to properties and the land around it, affected by market forces peculiar to the locale. As such, the value of a similar home in two different markets can vary widely.

For these reasons, appraisers are the eyes and hands of lenders. They are licensed and trained to establish a value upon which a lender may disburse a very large sum to a borrower. The lender relies on the value to secure the loan and does not want a surprise if there is a foreclosure. Those who lived through pre-Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) times realize the impact of poor valuations.

As one of the key underwriting rules--credit, income ratios, title, appraisal and loan-to-value (LTV)--the valuation forms a linchpin on which a home sale is financed. While the other four allow for flexibility, a low appraisal can kill a deal. Why? Because risk of loss upon foreclosure is certain where valuation is too low.

Lenders may employ several options to obtain an appraisal--staff appraisers, favored field appraisers or an appraisal management company (AMC). No matter which course is chosen, or a combination, the following functions must be managed:

* Identify appraisers who cover the geographic areas.

* Monitor ordering, tracking and delivery processes.

* Manage the use of automated valuation model (AVM) products.

* Review appraisal reports to ensure quality.

* Pay appraisers and issue 1099 forms.

* Monitor licenses and errors and omission (E&O) insurance.

* Accommodate several electronic means of delivery.

* Negotiate pricing where necessary.

* Maintain an appraiser database.

There is cost associated with each of these functions, and a lender can certainly make the decision to bear that expense. However, in this age of core competencies, lenders need to devote attention to creating quality assets. …

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