If you had to make a list of some of the most important elements of the real estate industry, appraisals would undoubtedly be right at the top.
Providing an accurate indication of a property’s value is critical, in part because it gives a mortgage lender the confidence that they’re not letting someone borrow far more than a home is actually worth. Not only that, but it’s also a way to prevent a person from dramatically overpaying for a home, too.
Yet at the same time, this is a process that has also been mired in controversy over the years. Going as far back as 2012, lawsuits were filed by the FDIC against appraisal management companies (or AMCs for short) that emphasized the need for strict quality control reviews of all appraisals being performed. This was in part fueled by the housing crisis that was still in effect at that time.
All told, quality control in terms of appraisals isn’t just a best practice – it is an official requirement for a wide range of different reasons, all of which are worth exploring.
To get a better understanding of why appraisal quality control is so essential, consider the impact that a lack of such measures had on the housing crisis that played out around the world in 2008.
According to one recent study, the event and larger financial crisis that took place at the same time contributed to “the biggest disruption to the housing market since the Great Depression.” By February of 2011, the housing market had experienced its biggest decline in almost 30 years. By the final weeks of 2010, roughly 23% of all homeowners in the United States owed more money on their mortgages than their homes were actually worth – a legitimate catastrophe if there ever was one.
A big part of this had to do with the lack of quality control in terms of appraisals – meaning that homes that were being appraised varied dramatically from local, comparable homes. Usually, this happens when an appraiser fails to do adequate research about a particular neighborhood or area. It can also happen when the appraiser does pull comps during this phase, but when the homes in question have recently been foreclosed upon.
Another issue has to do with what are called “desktop appraisals,” which is when a home is valued without the appraiser actually having been physically present at the property. In this case, the appraisal is created almost exclusively using information pulled from the Internet. While it’s true that these can be accurate under certain circumstances, they also need to be performed by someone with the skills and experience necessary to make educated assessments. If they’re not, an accurate valuation of the home isn’t just difficult to arrive at – it’s largely impossible.
When it comes to actually making sure that quality control processes are being followed, there are a number of important things to keep in mind.
Chief among them is the fact that appraiser workloads, not to mention time requirements, need to be considered to help avoid the low quality appraisals that contributed to the housing crisis, among other events. When an appraiser has far too much that they’re trying to do in a limited timeframe, it almost always leads to human error. This can contribute to inaccurate appraisals that ultimately do more harm than good.
AMCs must make sure that they’re hiring enough staff members to handle the amount of work that they’re dealing with, and must give each person the time and resources they need to do an accurate job in the first place.
Likewise, AMCs need to perform periodic reviews on their staff members to make sure that all reports are of the appropriate quality. At a bare minimum, they should verify that appraisals are being created on relative, accurate data, for example. They also need to periodically verify that appraisers are in compliance with housing industry standards and practices, and check to see whether or not the information being used to make certain conclusions is up-to-date.
In the end, appraisal quality control for AMCs accomplishes a great deal more than just avoiding another housing crisis. It can also help organizations avoid lawsuits and similar types of issues moving forward.
As we all collectively learned a decade ago, mortgage lenders don’t take inaccurate appraisal reports lightly – which means that AMCs can’t afford to do so, either.
If you’d like to find out more information about why appraisal quality control is no longer optional for AMCs, or if you have any additional questions that you’d like to discuss with someone in a bit more detail, please don’t delay – contact AmeriMac today.