Innovation is the new buzzword in today’s mortgage lending market. Over the course of the past decade, financial institutions and technology companies have become more adept at discovering efficient ways to close loans with minimal friction. This shift has allowed mortgage lenders to compete not only on rate offerings, but also on borrower experience and the time it takes for loans to close. As a result, borrowers and lenders have started to place a premium on a mortgage experience that is both easy and stress-free.
However, despite the industry’s newfound acceptance of technology to streamline mortgage lending, one key area has remained particularly stagnant: the real estate appraisal. While being a necessary component of nearly every conventional home loan, only marginal efforts have been made to improve the quality and speed of the appraisal process. In fact, since 2010, the government has passed legislation that actually make it more challenging for those working in the appraisal industry today.
In response to the 2008 housing crash, the Federal Housing Finance Agency (FHFA) passed the Appraisal Independence Requirements (AIR) in an effort to ensure that real estate appraisals were truly unbiased and independent. Among other things, the AIR limited the manner in which mortgage lenders could interact with real estate appraisers. This prompted a rise in third-party appraisal facilitators, or appraisal management companies (AMCs), who today serve as an outsourced option for mortgage lenders to order appraisals. Alternatively, some lenders have built out independent, large in-house appraisal processing departments, which have substantially increased internal costs and manual operations.
From a high level, the appraisal industry has become increasingly fragmented over the course of the last decade. There is no compliant, consolidated entity or technology that brings appraisers, lenders, and borrowers onto the same platform in an effort to streamline the process, which has resulted in a challenging appraisal experience for each of the three parties.
For borrowers, the appraisal is often considered out of sight and out of mind – a dormant period of the loan process where borrowers idly wait for weeks as the appraisal is completed. During this time, borrowers have no insight into the process or timeline for delivery. Because they are left in the dark, it’s often unclear to borrowers why the appraisal is taking so long, and once the appraisal is finally completed, borrowers are not provided a simple explanation as to the methodology or guidelines that led the appraiser to his or her valuation. This often leads to friction between the borrowers and lenders. For borrowers, the appraisal process breeds frustration that could easily be addressed through education efforts.
For lenders, appraisals have become unnecessarily time consuming, costly, and opaque. For those lenders who choose to build out independent internal processing departments, they are forced to allocate money and manual resources to managing their appraisal panel, playing phone tag to follow up on appraisal completion times, and have to arduously review each appraisal. This is especially challenging for smaller lenders or credit unions, who would prefer to spend time on improved member experience. On the other hand, if lenders instead choose to outsource their appraisal operations to AMCs, they lose oversight and sacrifice quality during a critical part of the mortgage lending process. Lenders today are seeking control over the appraisal process, but without the headache of day-to-day management.
Finally, even for appraisers the appraisal has turned into a tedious process as the industry has been burdened with regulations and increasingly unrealistic demands. Today’s appraisal expectations require appraisers to follow a rigid set of guidelines that often delay the delivery of the appraisal. Perhaps more frustratingly for appraisers, their margins and fees have shrunk as third parties like AMCs take a cut of their appraisal fee. From a technology perspective, appraisers today pay thousands of dollars for software that should in theory help them do their job, but the available form software and management software for appraisers are outdated and counterintuitive.
All in all, today’s appraisal process has numerous drawbacks that are the result of a lack of standardization and innovation within the industry. The multitude of service providers, lack of industry transparency, and stifled communication methods have hampered not only the speed at which appraisals are completed, but also the quality of the final product. Today’s appraisal turn times are growing, quality of appraisals are decreasing, and costs for everyone are rising.
There are ways to shift this status quo, through innovation, automation, and consolidation. Lenders and appraisers should be allowed to spend more time focusing on the core aspects of their jobs, not manual tasks like calling or emailing to provide status updates, or chasing brokers down to schedule inspections, or going back and forth on issues of revisions. There is incredible room today for automation in the industry – not of the appraisal itself – but of the workflows that revolve around the appraisal. We are seeing companies begin to wade into this arena.
Through new technologies and platforms that bring all relevant parties onto the same, transparent platform, lenders, appraisers, and buyers will benefit from a streamlined appraisal process where everyone saves time and money.