When it comes to whether to outsource valuations or keep them in-house, opinions can be fierce, but the best advice is to not close the door to either until one has carefully examined all the pros and cons in line with
“The decision should be based on the risk appetite of each institution,” said Matt Talacko, compliance manager at Value Services, Mt. Clemens, Mich.
“From what I’ve seen, it kind of goes both ways,” David Rasmussen, SVP of operations at Veros, told this publication. “It really depends on the internal expertise and comfort levels of the lender and if they have a desire to make changes.”
Getting too narrowly focused on either without perspective can hurt lenders, either because they are too close to perceive the inefficiencies or compliance lapses in-house, or have been too far removed from their AMC’s operations to pick up that there are concerns there, he said.
Multiple AMCs can be used if one has the resources to support them, although Alice Sorenson, CIO of LRES, told this publication that having a lead AMC who one relies most heavily will be the main point of contact if one goes that route.
Cost is the main concern when it comes to in-house valuations, unless a company is very small—originating less than 200 units per month, or extremely large, said Brian Coester, CEO of CoesterVMS.
“I always say, If you want to bring it in-house, it’s going to cost you a Bentley,’” said Coester, putting the costs in the ballpark of hundreds of thousands of dollars for a lender, the same as they would pay for a luxury car, depending on the lender’s volume.
He said this would equate to several hundreds of thousands of dollars for a lender handling on the order of $2 billion to $3 billion per year.
On the other hand Coester and several others interviewed for this article acknowledged there are instances of counterparty risk that have arisen due to outsourcing of valuation work.
When some players have dropped out of the crowded field of appraisal management companies some of their lender clients ended up with bills for “unpaid” appraisal fees. They may have already paid the vendor for these, but the appraiser never got them, a situation which has led to some legal disputes.
Coester attributes the failures in part to situations where lenders and AMCs agreed to rates for valuation services that were clearly too low given the operational and business needs involved, including the payments to appraisers, and advises players on both sides not to make this mistake again.
AMCs are generally aware of the concern and say they are quick to reassure their clients about it. “We ensure appraisers never go without paying,” Alice Sorenson, CIO of LRES, told this publication.
Sorenson said among the way to address this risk, particularly given the responsibility lenders have for compliance on the part of third parties they work with, is to vet AMCs carefully, making sure they are well-capitalized and have accounts-payable records verifying appraisers are paid within 30 days.
She suggests asking for tax returns and audited statements for the past three years, evidence of their performance history, and copies of their operational policies. She also advises periodic, onsite visits, perhaps twice a year to start, and then annually thereafter. Sorenson suggests also making sure AMCs’ licensing and other compliance, as well as their technology are sound.
As Rasmussen noted, technology should accommodate among other things updates in automation at Fannie Mae and Freddie Mac and can be used to track and record compliance, as well as to set criteria or measure performance in the valuation process.
Compliance lies at the heart of the in-house vs. outsourcing decision, as many AMCs came into being to meet new rules requiring there to be a sort of “firewall” designed to ensure appraisers’ decisions were objective.
“Appraisal reviews require analyses conducted by disinterested parties whose sole interest is to provide a good appraisal based on accurate data. Outsourcing offers the best approach,” said Randy D. Munday, director of collateral services for Indecomm Global Services. “To achieve this degree of independence, external appraisals are more suited than in house underwriting for several reasons.”
Proponents of in-house valuation note that regulations do not require that objectivity be maintained by an outsourcer, and National Association of Independent Housing Professionals president Marc Savitt has even gone so far as to argue the distancing from originators is not necessary and further regulatory reform to that end is possible.
But others, like Munday, argue that to be compliant under current rules, outsourcing valuations is the most efficient way to maintain objectivity.
“The independence of the appraisal must be apparent as well as real. The in-house underwriter may be actually influenced or merely appear to be influenced by other in-house underwriters, appraisers, or loan officers. In addition, firm goals like increasing closing ratios or boosting the production of an individual underwriter may influence or appear to influence a review. This could result in an actually biased report,” he said.
“Conflict of interest can also lead to an omission like the failure to consider all of the facts,” he added. “Outsourcing to a disinterested third party obviates these concerns offering a well-researched collateral piece that is both clearly supported by the data and that meets the compliance guidelines. Thus outsourcing avoids the possible biases of internal work. Quality reviews lend credibility to the total underwriting process and protect the client.”
Or as Sorenson said, “To put it bluntly, it gets too close,” if one manages their valuation services in-house.
But she also reiterated the need to also many types of counterparty risks when outsourcing, adding that one not to overlook is the cyclical nature of the mortgage business. One should ensure that an outsourced valuation services provider diversified so that it is active regardless of the market cycle it is in. Sorenson’s company, for example, provides both appraisals for both default situations and originations.
She said she would not rule out past outsourcing players who might have been connected with companies that had trouble in the past nor assume a player who has not had trouble in the past may not have any in the future.
“I do think we will have more failures in the future. We don’t know if it will be the identical people. Some learn from their mistakes, others learn from others’ mistakes,” Sorenson said. She suggested lenders look closely at individuals’ character and getting “at least three, preferably five” references when selecting a company.
In addition to past failures, a more arguable criticism that sometimes haunts AMCs is whether in their search for efficiencies they at least, at one time, would sometimes hire appraisers from too far away from subject properties based more on price than local expertise.
Some have argued that this was just as scapegoating of AMCs for changes regulatory and market changes, such as appraisal hurdles in originations that arose due to depreciation during the downturn. Coester said he does think there was some of this. But largely AMCs and technology providers today say they can accommodate virtually any criteria within reason that a lender client wants in their operations, including ensuring that appraisers are, for example, within a certain distance from a subject property.
“There is some sort of legitimacy to everything that is said about AMCs,” Coester said, but added that some criticisms are overblown as they were an “easy target” as the industry adapted to appraisal reform and contended with a depreciating market during the downturn. “The whole process was changing, we shouldn’t have expected it to be smooth,” he said.
Ultimately Coester said he believes the choice of outsourcing valuation services, bringing them in-house or using a combination of both comes down to, “Do you want to be in the lending business, or the vending business?”
While the process of vetting AMCs can require a lot of work, managing valuations in-house is not easy either, so whatever choice they make, lenders should look into whether they are up to the task.
