In light of market fluctuations and regulatory changes, mortgage lenders face significant challenges in today’s market. Even at the highest demand levels in 2024, purchase mortgage applications were nearly 45% lower compared to the same weeks in 2018 and 2019, exacerbated by record-high origination costs. Freddie Mac’s recent study reveals the average cost to originate for the top 25% of performers is $6,900, rising to $16,500 for the bottom 25%.
Adding to this challenging financial reality, the “COVID” vintage of loans has led to brutal repurchase costs for lenders, significantly driven by appraisal defects. While the volume of loan repurchases at both Fannie and Freddie has decreased considerably since the peak in the second quarter of 2022, the impact on lenders persists. Data from the most recent ACES Mortgage QC Industry Trends Report shows a year-over-year increase in appraisal-related defects. Consequently, lenders cannot afford to ignore appraisal quality. The key to ensuring appraisal integrity is building a quality-centric culture supported by technology.
The Value of Appraisals
Appraisals are fundamental to the mortgage process, determining the value of the collateral securing the loan. Concerns about biased and inaccurate appraisals have caught the attention of not only government-sponsored enterprises (GSEs) and regulatory bodies but also consumers. Instances of discriminatory practices, where appraisal values differ significantly based on the perceived race of the homeowner, have highlighted a deep-seated problem. Overvaluation remains a persistent issue, exacerbated by the fluctuating housing market and home prices hovering at record highs.
Heightened scrutiny from GSEs and regulatory bodies like the Consumer Financial Protection Bureau (CFPB) underscores the importance of accurate appraisals. These entities have implemented measures allowing homeowners to request reconsideration of appraisals, aiming to ensure fairness and accuracy. This heightened awareness has led to new protocols, such as the right for homeowners to request a reconsideration of value, a process endorsed by Fannie Mae, Freddie Mac and the Department of Housing and Urban Development (HUD). Moreover, tools like Fannie Mae’s Collateral Underwriter® (CU®) have been introduced to enhance the scrutiny of appraisal data. However, these measures alone cannot address the systemic issues plaguing appraisal QC.
The Value of Culture
A quality-centric culture is essential for effective appraisal QC. When quality is ingrained in a lender’s operations, discrepancies are promptly addressed, and both origination and QC teams work collaboratively towards common goals. This alignment minimizes conflicts and ensures that appraisal issues are resolved before they impact the loan’s final quality.
Moreover, regulatory updates from Fannie Mae have placed additional responsibilities on lenders, such as the mandatory 10% pre-funding sample review and stricter timelines for post-closing reviews. These changes, aimed at early defect detection and remediation, underscore the necessity of advanced QC tools like ACES, which automate and streamline the sampling, review, remediation and reporting processes. Appraisal defects are a significant contributor to the increase in GSE repurchase requests. With the fixed costs associated with underwriting and QC professionals, leveraging technology effectively enables existing staff to improve review speed and accuracy.
To effectively manage appraisal quality, lenders should use ACES in conjunction with systems like CU. While CU offers detailed appraisal analytics, ACES provides a platform for comprehensive audit management. Lenders can ensure a thorough review process by incorporating CU data into ACES, whether manually or through integrated solutions. ACES acts as the repository and reporting engine, facilitating the identification and resolution of appraisal discrepancies.
The Value of Technology
Technology plays a pivotal role in addressing the multifaceted challenges of appraisal QC. Traditionally, appraisal underwriters download a PDF from the appraiser, open the loan file in their loan origination system (LOS), and perform a “stare and compare” analysis with a static checklist. This manual, error-prone process has been the industry standard for decades but is neither sufficient nor accurate.
Despite the advanced capabilities of systems like CU, challenges remain in data integration and accessibility. Currently, CU data is housed in a separate system, creating barriers to seamless data transfer and comprehensive audits. Many lenders have opted to input CU findings into their LOS to ensure findings are associated with the corresponding loan file. Because ACES already pulls in LOS data, auditors can also leverage ACES to systematically review appraisal data, identify discrepancies and take corrective actions. The ability to generate detailed reports and share them with appraisal management companies (AMCs) ensures vendor accountability and maintains quality standards across the board.
Today’s low-volume environment is perfect for establishing a high-quality internal appraisal review process. With the proper structure in place, lenders can easily accommodate volume increases when the market cycle swings in the other direction while keeping quality high. In addition, a tech-driven process helps eliminate the need to staff up in a high-volume cycle or staff down when volumes decline, thus keeping labor costs relatively flat regardless of volume.
In a market where every dollar matters, effective appraisal QC is paramount. ACES Quality Management equips lenders with the tools and insights needed to navigate the complexities of appraisal QC. By fostering a quality-centric culture and leveraging advanced technology, lenders can ensure accurate, unbiased appraisals, ultimately safeguarding their bottom line and promoting fair lending practices. As the industry continues to evolve, staying informed and proactive in QC and compliance will be vital to maintaining loan quality and operational integrity.
Sharon Reichhardt is the executive vice president of operations at ACES Quality Management. With decades of industry experience, Sharon helps businesses strategically leverage quality control. Contact her at sreichhardt@acesquality.com
