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How Technology Is Transforming Appraisals

---- by M A T T COTTER ----

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Lenders have come a long way in how they order and obtain appraisals for commercial real estate.

ike most industries, financial institutions have long relied on technology to increase efficiency and prof­ itability. But even today, many of their processes are far from fully automated. ̂ Chief information officers might hope for a day when their respective institutions have integrated technology in all aspects of their operations— but what precisely would that look like? K A review of the mortgage lending industry’s current state reveals the types of technology of utmost importance and indi­ cates the technological improvements needed for what’s

currently in use to move closer to the ideal. H This article narrows its focus to a particular slice of the business where technology could be of tremendous additional help—in the appraisal of real estate for mortgage lending.

This segment of the business offers a great example of how technology improvements could greatly enhance operational efficiency, For banks today, the steady in­ crease in commercial mortgage originations represents a source of pressure in terms of timely turnaround and efficiency. Commercial and multifamily originations may have plummeted during the prolonged economic malaise

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th at began in 2008, but they began increasing in e a rn e st in th e second q u arte r of 2010 as credit req u irem en ts started to loosen and th e econom y expanded (see Figure 1).

Commercial mortgage issuance has in ­ creased m easurably, once again p u ttin g p re s s u r e on le n d e rs a n d a p p ra is e rs to process appraisals m ore efficiently.

The expanding economy, lower u n e m ­ ploym ent and low in tere st rates have all contributed to a nationw ide increase in real estate investm ent. W ith th e increased com ­ petition for assets h as come som e of the sam e pressure th a t occurred before th e last origination peak in th e second q u arte r of 2007.

While th ere are sim ilarities w ith the previous origination build-up, th e c u rre n t m ark e t backdrop for len d ers looks different. Increased regulations are requiring m ore oversight over loan portfolios. This poses a real challenge as th e data subm itted by some appraisers is frequently in unusable formats and n o t easily m anipulated.

Lenders face higher costs for compliance, w hich only has become more burdensom e as th e federal governm ent seeks to im pose m ore controls over th e lending process. Lenders and appraisers need a solution th a t allows th em to com pare th eir data quickly w ith th e m arket, from th e content of the appraisal to valuations across portfolios.

Just w hen it seem s as if the dust is about to settle, tech n o ­ logical dem ands are forcing change once again.

To lend on real estate collateral, banks, appraisers and

other key industry players necessarily op­ erate w ithin an intricate workflow in their lending and appraisal practices. Much of this complex, m ultistep process was shaped a while ago by the passage of th e Financial Institutions Reform, Recovery and Enforce­ m e n t Act (FIRREA) in 1989.

Yet, change is again coming for the m ort­ gage lending and appraisal industry. This tim e, advances in financial in fo rm atio n technology, not federal legislation, are fu n ­ dam entally changing the way banks and appraisers approach their day-to-day lending

activities. Industry veterans are asking how technology will change

day-to-day m ortgage lending activities, including workflow m anagem ent of the appraisal process. To u n d ersta n d w hat th e future m ight hold, it helps to begin w ith an exam ination of the workflow practices of yesterday, today and tom orrow w hen it com es to obtaining an appraisal. If we can m ap out w here we need to go (and w here w e’ve come from)—it could help us all get to a b etter process in the future.

The following sections provide processes and procedures th a t apply to how appraisals are done for commercial mortgage loans.

Requesting the appraisal The following processes and procedures apply to how appraisals are done for com m ercial mortgage loans.

Yesterday: Loan officers requested services by paper, phone,

Just when it seems as if the dust is about to settle, technological demands are forcing change once again.

F I GURE

C O M M E R C I A L / M U L T I F A M I L Y M O R T G A G E B A N K E R S O R I G I N A T I O N S I N D E X

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SO U R C E : M o r t g a g e B a n k e r s A s s o c i a t io n ( M B A ) Q u a r t e r ly S u rv e y o f C o m m e r c ia l / M u l t i f a m il y M o r t g a g e B a n k e rs O r ig in a tio n s

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em ail or an internal form system . These m echanism s supported lim ited data vali­ dation. Once a req u est w as initiated, the system lacked acknow ledgm ent, tracking or visibility.

Today: Loan officers m anually e n te r data into Web-based forms th a t integrate directly into a workflow system , often w ith direct connections to b an k s’ o th er system s, such as loan origination system s (LOS). A single d ata-en try point significantly reduces d u ­ plication of data in p u t th roughout th e sys­ tems. However, a weakness results whenever lim ited depth of d ata exists at th e tim e th e request is made, and th e su b seq u en t enforced data validation can lead to inac­ curate data entry to com plete th e form. As a result, appraisers often receive limited, inaccurate information during the request for proposal (RFP)/bidding process, w hich loan officers rely on to solicit bids on the assignm ent.

Tomorrow: Increased direct integration w ith loan origination system s supplem ented w ith additional d ata sources—such as tax records and other data providers—will improve data quality and accuracy. More com plete inform ation at project initiation will improve dow nstream workflow and data quality because initial inform ation feeds into com m unications w ith appraisers and o th er due-diligence vendors. More accurate inform ation will lead to more accurate estimates of the sizing of assignments (bidding) and m ore consistent, on-tim e deliveries.

Tracking appraiser workflow Yesterday: Past practices failed to em phasize tracking. Even afte r tracking of appraisal pro cu rem en t activities w ithin fi­ nancial in stitu tio n s becam e a regulatory edict, m any sm aller in stitu tio n s continued to allow th eir loan officers to order appraisals contrary to the legislative in te n t behind FIRREA and su b seq u e n t Interagency A ppraisal and Evaluation Guide­ lines published by regulators. Over time, as regulators focused m ore on th e independence issue and published interagency guidelines to clarify the independence requirement, institutions u p d ated th eir practices.

N onetheless, banks continued to practice lim ited data re ­ te n tio n to track activities. They used m an u al m ethods to track data, w hich lacked any in d ep en d e n t audit trail record and resu lted in lim ited feedback to loan officers, appraisers or m anagem ent.

Today: Banks’ workflow au to m ates staff assignm ents to select b est available resources or identify those w ith special knowledge or experience. Email notices and passive status visibility se t exp ectatio n s and p lan n in g for o th er related processes, such as th e loan closing date. Audit trails enable exam iners to confirm a b an k ’s com pliance with independence a n d v e n d o r-m a n a g e m e n t re q u ire m e n ts, w hile im proved process-tracking enables th e ability to more accurately deter­ m ine tu rn aro u n d tim es, average fees by property type and lo­ cation, and o th er critical m etrics used to stream line loan origination processes.

Tomorrow: Banks’ im proved data in p u t will lead to m ore ef­ ficient staffing choices, including identification of complex assignm ents th a t require m ore knowledgeable, experienced staff. Improved staffing algorithm s will incorporate m ore com ­

plex assignment logic to account for available staffing levels, current workloads and a p ­ propriate balance. Exceptions and alerts will au to m atically inform p a rtie s a t all stages if dates will not m eet original ex­ pectations or requests.

Publishing assignments—bid procurement Y esterday: Banks in itia te d a s s ig n m e n ts through th e delivery of basic assignm ent inform ation by p hone or em ail to a short list of potential vendors thought to be qual­ ified. Limited d ata led to inclusion of u n ­

qualified or underperforming vendors. Inconsistent information also led to errors in assignm ent m anagem ent, som etim es due to th e lack of clear sta te m e n ts of work (SOWs), w hich in ­ advertently m isled appraisers, ultim ately resulting in in a p ­ propriate assignm ents and dissatisfied banks, lenders and borrowers.

Today: Banks use common SOWs to com m unicate to a larger group of available vendors, m ost often through an application to gain efficiencies and to centralize vendor m anagem ent and inform ation m aintenance. Bid delivery by appraisers com ­ prises a mix of direct entry and o th er forms of delivery, including em ail and fax.

Tomorrow: Banks will implement sm arter SOW determinations, which incorporate more granular elem ents—including loan type, risk rating and other underw riting req u irem en ts—to ensure that the resulting report meets the needs of the institution w ithout additional a d h o c instruction sets. Tighter integration with vendor performance and experience will provide increased guidance during the selection of RFP participants.

Bid management—awarding assignments Yesterday: Banks received bids through various m echanism s, w hich required m anual collection and analysis to determ ine th e b est choice for th e assignm ent. C om m unications to loan officers regarding costs and options were conducted m anually as well, often by telephone. Once a bank m ade a selection, it com m unicated its decision w ith the selected appraiser by phone or email, typically failing to notify o th er bidders. The lender m anually generated engagem ent letters and distributed th e m via U.S. m ail to th e appraiser, often req u irin g th e appraiser to im m ediately sign and re tu rn a copy.

Today: Banks typically receive bids through a channel th a t reduces duplicative data in p u t and record keeping. Bids and related tim ing can be shared w ith loan officers in a m an n er th a t not only complies w ith regulatory requirem ents regarding independence b u t also inform s th em of the costs and tim ing in advance of th e selection to discuss w ith th e borrower if needed. Com m unications of award, notification to unselected bidders and generation of required engagem ent letters are all auto m ated in advanced workflow system s. If th e application tracks th e assig n m en t acceptance by th e appraiser, m ost banks remove the requirem ent of a physically signed engage­ m en t letter as evidence of th e contract.

Tomorrow: Banks will strea m lin e th eir b id -m an a g em en t processes through improved logic and sm art preauthorization w hile still m ain ta in in g independence. T hese strea m lin ed processes will allow loan officers to preapprove w ithin select

Banks’ improved data input will lead

to more efficient staffing choices.

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price points and delivery dates. Sm art ap­ plications will be aware of bids received and allow for business rules to automatically select th e b e st fit w ithin lender-defined constraints, significantly reducing m anual follow-up.

Appraiser activities Y e s te rd a y : A ppraisers received req u ests for q u o tatio n s (bids) or direct aw ards from clients in various ways—by telephone, email and fax. Lack of uniform com m unication m e a n t th a t appraisers who m issed a phone call could easily m iss out on an assignm ent. Only after a len d er aw arded an assignm ent to an appraiser would th e a p ­ praiser begin th e process of defining th e appraisal problem — u n d ersta n d in g th e assig n m en t—and gathering inform ation about the subject property and its environm ent. Report writing com m enced as d ata gathering continued, w ith appraisers often leveraging prior reports for content, such as comparable data and overall report format.

Completed reports were reviewed, signed, published and bound in preparation for delivery to th eir client. Appraisers often delivered reports by m essenger or overnight carrier to ensure delivery and to m eet tight deadlines, which typically consisted of four to six weeks.

T o d a y : Appraisers continue to receive bid requests through m ultiple channels—including by telephone, em ail and fax, as well as through in stitu tio n s’ workflow system s. C om m itm ents to m any b an k s re m a in difficult to track and m a in tain , as resource m anagem ent and delivery dates continue to presen t key challenges.

Im provem ents in report production have occurred, through the leveraging of new tools and applications th a t m ake reports m ore consistent w ith th e use of tem plates connected to data repositories. Updates to a data elem ent in one place can flow through the report and update in several locations, elim inating a com m on cause of errors.

T o m o rro w : Appraisers will more consistently adopt autom ated and tem plate-based tools to stream line report production and connection to data sources. Institutions will routinely receive d ata as p a rt of th e re p o rt delivery, w hich will facilitate expedited review processing and increased d ata analysis throughout the institution in response to increasing regulatory m andates.

Banks will handle staffing or assignm ent m an ag em en t in a consolidated view of outstanding assignm ents and open bids so th a t deliveries are on tim e and staff utilization is m ore ef­ ficient. Increasing data-source options will allow appraisers and all due-diligence vendors to leverage th e b est available data for any specific assignm ent.

Review process Y e s te rd a y : Upon receipt of an appraisal report, the bank assigned an in te rn a l review resource or, if necessary, engaged an external co n su ltan t to review th e report. The physical report was delivered to the chosen reviewer by interoffice mail, or by courier or overnight delivery service in the case of an external consultant. The reviewer read th e report, checked and verified key assu m p tio n s or m ark et inform ation and a n ­

alyzed th e data, looking for factual errors, m istakes or om issions. Contact w ith the appraiser was n o t uncom m on during the course of th e review to discuss relevant factors and validate assu m p tio n s and con­ clusions presented.

If th e review p ro m p te d r e q u e s te d changes, the reviewer would often physically re tu rn the entire report set to the appraiser for correction and republication. The reviewer would also m anually create a review docu­ m e n t th a t outlined th e steps tak en during the course of th e review and the reviewer’s

final findings; m uch of th e sam e inform ation contained in th e original req u est and in th e engagem ent letter was once again m anually entered on th e review docum ent.

T o d a y : Banks electronically receive m ost appraisal reports and electronically route the report to the reviewer. Increased availability of data in som e m arkets allows reviewers to more readily validate report data. Discussions w ith the appraiser still com m only occur, although com m unications occur more frequently by em ail or other electronic m eans, as opposed to telephone calls.

Report updates and corrections are more frequently delivered electronically, reducing labor and costs for appraisers and re ­ ducing delays for the financial institutions and th eir review staffs.

T o m o rro w : Banks will gain more intelligent resource allocation for review assignm ents incorporating factors such as reviewer workloads, schedules, experience and com petence. Sm art ca­ pabilities to ensure com pliance w ith state-level appraisal m an ag em en t com panies’ regulations and licensing require­ m ents will also exist for external reviewers.

Report delivery, retention and distribution Y e s te rd a y : Interoffice m ail or altern ate delivery providers dis­ tributed physical reports to loan officers. A ppraisers incurred additional costs and tim e to produce physical reports and deliver th e m via carriers w ith delivery tracking capabilities.

File retention consisted of retaining a hard copy of the report in the physical appraisal files, as well as an additional copy in the physical loan file.

T o d a y : Reports are com m only delivered electronically. W ith appraisal m a n a g e m e n t softw are, all distrib u tio n s to loan officers take place w ithin th e application, w hich avoids dis­ ruption to em ail servers brought about by large file sizes and typical file size restrictions. Web-based deliveries and downloads increase security of th e appraisal docum ent.

File retention involves moving a copy of th e electronic file to a file storage p latfo rm w ith in th e in s titu tio n ’s n etw ork environm ent.

T o m o rro w : Institutions will experience m ore fluid report d e ­ livery workflow th a t coordinates file availability to loan officers at appropriate tim es during th e appraisal and review process. File re te n tio n m ay likely un d erg o a u to m a tio n in serv er connections upon acceptance of the final report.

Vendor management Y esterday: Infrequent meetings within the banking institution constituted the primary m eans to discuss the performance and

Commitments to many banks remain difficult to track and

maintain.

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management of approved vendors. Poor documentation largely resulted in a process that relied on the memories of appraisal staff, which frequently led to arbitrary judgments of appraiser competencies.

Today: Banks can consistently evaluate appraisers in real time, upon report de­ livery and at the completion of a review that typically includes one or more scores assigned to the vendor to indicate per­ formance during the course of the report production and review processes.

Scores are evaluated so that appraiser competence can be judged and prefer­ ences recorded based on factors such as property type, geographic location and assignment complexity. Available data allows this to be a more frequent process, and allows for updates at any time.

Banks maintain files on each approved appraiser, which may include current li­ cense copies, insurance coverage docu­ m entation, sample reports and communications with the vendor. Banks either manually monitor an appraiser’s li­ cense status or through services that check at least once a day for changes to the Fed­ eral Financial Institutions Examination Council (FFIEC) Appraisal Subcommittee’s www.asc.gov certification database.

T o m o rro w : Banks will see evolutionary changes in the scorekeeping process as systems gradually improve to capture more events that populate performance metrics. Some financial institutions will share score events directly with apprais­ ers to provide immediate feedback.

Public sharing of aggregated scores from multiple mortgage lenders may occur to create a useful satisfaction index for individual appraisers. Common scoring techniques and willingness to share data will create a useful, trans­ parent m easure of an appraiser’s com­ petence, at least for selected property types and locations.

Appraiser certifications and insurance documentation will be shared directly with the appraiser’s clients or available for direct download by prospective clients. Additional docum entation about the company, staff capabilities and strength, and sample reports are available for direct download and retention. The RFP and vendor selection process will tightly integrate appraiser license validations, with live checks at key stages to ensure, for example, that a selected vendor is li­ censed at the time of selection or agrees to obtain any necessary temporary license

for assignment completion.

R eporting and d a ta — perform ance m onitoring Yesterday: The limited nature of perform­ ance data made reporting impractical for banks. Banks mostly conducted m an­ ual counts of activity levels for reporting to management.

Today: Banks find extensive reporting of activity levels, turnaround times, con­ clusions and appraiser performance readily available. For those with service-level agreements, some reports allow for meas­ uring performance against established metrics. Additional user-defined reports allow for more specific analysis.

T om orrow : Banks will find increased reporting capabilities from advancements in reporting tools, but mostly in data availability and granularity. Comparative statistics allowing them to benchmark performance characteristics against peers will drive process improvement.

Greater data capture of the subject property and specific valuation conclu­ sions will allow for more seamless port­ folio monitoring, concentration analysis and risk-identification. For new loans, loan officers, underwriters and credit managers will benefit from increased data used to corroborate borrower infor­ mation when analyzing a new loan or loan renewal request.

For appraisers, increased data capture will result in a shared data environment that will lead to increased transparency, reduction in operating costs and more streamlined report preparation.

The appraisal industry has undergone tremendous change over the last several years. An already fragmented and time- consuming workflow has become in­ creasingly complex due to regulations, market conditions and competitive pres­ sures. Thankfully, best-in-class use of technology can place lenders, and ap­ praisers, in a position to more effectively compete for opportunities.

Change is, and will continue to be, a constant in the industry. The challenge and opportunity is to deploy the appro­ priate technologies to best serve the end consumers. i v b

M a t t C o tte r is chief executive officer of ExactBid in San Jose, California. Before joining ExactBid, he held senior positions with such leading-edge companies as D+H, Mortgagebot and SAP. He can be reached at [email protected].

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