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Appraisal Scoring Tools and Trends

Sep 10, 2012

Bill King, Veros' director of valuation services

September, 2012 Podcast Transcript - Duration: 15 minutes

Cecilie: Good morning. Welcome to Veros Real Estate Solutions podcast. Today, we're joined by Bill King, Veros' director of valuation services. Today Bill will be talking with us about appraisal-scoring tools and trends. Welcome, Bill.

Bill King: Well, thank you Cecilie. It's great to be here. I appreciate the opportunity. I want to talk a little bit today about some of the changes that have occurred throughout the appraisal industry, some of the trends that we're seeing unfold with particular focus on automated appraisal review and what we call "appraisal scoring." And I think a lot of the appraisers who might be listening to our podcast today know that there have been a lot of changes. There's been a lot of evolution in how they do business over the last few years.

One of the major things that has changed the landscape has been the introduction of the Uniform Appraisal Dataset by Fannie Mae and Freddie Mac. The UAD, as it's called, requires that appraisers complete appraisal reports with some specified responses for certain fields. Most notably, things like quality and condition have been defined, and the responses that an appraiser needs to use when answering the question about quality and condition of a subject and comparable property are defined for them in advance. So they've got to make the response fit the definition.

Another major shift, I think, that most appraisers have experienced has been from direct engagement by a lender to being engaged through appraisal management companies. Now, to be fair, appraisal management companies have existed and have been in the arena for a long time, but there's been a shift, particularly since 2008-2009 with, first, the, introduction of what was called HVCC and then the sun setting of HVCC. A lot of lenders have opted to go to appraisal management companies to handle their appraisal engagements.

So all of that kind of leads up to and builds up to the fact that appraisers are now being asked to produce appraisal reports that are more consistent in terms of the responses that they include in those reports. And I think most appraisers would tell you that they've experienced what we call "turn-time compression," in that the time that they're allowed or expected to turn an assignment around and has gotten shorter.

And one of the things that's happening at the user end, the AMC or lender or, in some cases, other users, is that they are taking these appraisal reports in, and they need to respond more quickly to their stakeholders, and so it's given rise to the introduction of more electronic review of appraisal reports.

Cecilie: All right. And so that gives us a little bit of background on how this came to be, how the necessity for appraisal scoring came to be and in terms of who is using it. But talk to us a bit about what appraisal scoring is in terms of is it actually a grade that we're giving to a report that a lender is receiving from their carrier? Talk to us about that.

Bill King: Well, yeah, Cecilie, in most instances, the appraisal-scoring tools that are available in the market today are going to produce a rating or a score that is applied to that appraisal and there are various scales that might be used that can be as straightforward as good or bad or A, B, C, D, E, or numeric scores. Veros has our own Veros score, which does use a numeric rating, so we grade the appraisal report based on a scale that starts at 1000 as being a "perfect" score and can be reduced all the way to 0 for an appraisal that does not score well or does not pass through the rules well.

Cecilie: And what are the criteria for that score?

Bill King: Excellent question. Basically – and I think this is true across multiple scoring tools – we look, first, at whether or not the appraisal report is complete, and it's a relatively simple process. Is data present in the fields where data's required? Is the data in those fields the appropriate data? Do I have alpha characters in text fields? Are there digits in numeric fields? Are date fields populated with dates, currency fields with dollars? And so forth.

The real question that a user wants to have answered is whether or not that appraisal is complete as it enters their system. So appraisers are able to check for completeness at their desktop. Most appraisal software today will automatically scan the appraisal report when the appraiser decides they're ready to send it and provide alerts to the appraiser that something is missing and give them an opportunity to fill it in.

That appraisal report, then, sort of travels and moves through cyberspace, and it may get handled by multiple parties before it gets to the party that's ultimately underwriting the loan and using this appraisal as part of their ultimate risk assessment. And they want to know when that appraisal report comes in that it's still complete, so we want to run a completeness check at that point.

The second layer deals with areas of regulatory compliance. So we're making an examination of the content of the appraisal report in this electronic fashion to look for aspects of the report that relate specifically to areas of regulatory compliance – Fannie Mae rules, Freddie Mac rules, FHA, VA, mortgage insurance requirements. So there's a variety of rules and regulations that are taken into account when examining the content of an appraisal report with compliance in mind.

So it can run from as simple as, are the adjustment amounts within the expected guidelines? Typically, most folks want to see single-line adjustments no greater than 10 percent of the sale price of the comparable sale. So is this appraisal report completed with adjustments that are all individually less than 10 percent or not?

So it's simple things like that, but it also goes to deeper compliance issues that consider things like fair lending and other things of that sort. So we take a good look at the appraisal report with all of the regulatory stuff in mind.

Then where Veros, I think, sets itself apart in the appraisal-scoring arena is that we have a third component that we call the "credibility rules," which take a much more critical look at the information in the appraisal. And the goal here is to discover whether or not there are appraisal methodology concerns, whether or not there are inconsistencies in the way information is presented within this appraisal report.

So it looks at conditional constructs within the report for relationships and consistency of data and information throughout. Now I don't want to reveal a great number of the rules because that's kind of our "secret sauce," so to speak, but what it can help identify is whether or not there are issues that a lender might be concerned with that could impact the credibility of the value conclusion in this report.

So another thing that we do in this "credibility rules" component is examine outside data. So VeroSCORE makes a call to external sources – to several external sources – and, for example, compares reported factual information about the property that the appraiser has presented to information that's available from other sources. So if the appraiser is telling us that this house was built in 1978 and the public records indicate that it was built in 1942, we now have an issue that needs to be reconciled before a final decision is made about whether to accept that appraisal.

Cecilie: Sure. So it sounds pretty in depth in that, at least as far as VeroSCORE is concerned, it is based on completeness, credibility, and compliance. What questions, then, should someone be asking if they think this technology might benefit their business?

Bill King: The most important things to understand from a user standpoint are – how in depth is the electronic review itself? What kind of messaging does this review tool provide? Are you being able to quickly go to the aspects of the appraisal report that have been identified as problematic? Does it help speed the review process for your in-house reviewers?

I think one of the things that a lot of lenders have struggled with is that, when taking in appraisal reports, historically finding the problem reports requires an in-depth review of all reports. So they're handling a lot of appraisals that are ultimately very well prepared, that are very credible, that are completely in compliance with all of the requirements for that particular appraisal type.

So when a system can electronically identify for them these really good appraisal reports and help them speed those through, allowing their human resources and their talent to be focused on the appraisal reports that really do require some attention, I think they're going to be far better off. And I think it's important to keep in mind that a really good appraisal of a really complicated property is probably going to trigger a lot of rule firings in an automated environment.

That doesn't mean that the appraisal report is necessarily defective, but it does mean that the process is probably going to benefit when that appraisal report is put in front of the reviewer who can read the explanatory comments and then make the decision that, "Yes, this appraiser handled an exceptionally difficult property and did it very well. We're outside of adjustment guidelines for a good reason. We went farther than usual for comparable sales for good reason."

And now they're making a much more intelligent decision about accepting that property as collateral for a loan. And they haven't had to devote a lot of that reviewer's time, someone who's probably very skilled and highly trained reading appraisal reports that can be much more readily accepted into a system based on an automated review.

Cecilie: This is great information because you're making a very important point about the efficiencies that an appraisal-scoring tool can provide. We have just a little bit of time left. Is there anything else you would like to add or highlight?

Bill King: Well, again, I think a key point to emphasize, Cecilie, is that complex properties and complex situations result in complex appraisal reports. And electronic scoring and automated review should not be a tool for penalizing appraisers who accept complicated assignments and ultimately do a very, very good job with them.

But it can help identify appraisal reports of non-complex properties that have not been properly handled and help really bring efficiency to the process of putting only those cases that really require the time and talent of a skilled, trained reviewer in front of that reviewer, and enabling faster processing of those appraisal reports that are going to be found in full compliance, complete, and with very well-supported value conclusions.

Cecilie: Terrific. Thanks for that information, Bill, and for joining us. We really enjoyed chatting with you this morning, and we definitely appreciate your time.

For our listeners, additional information can be found in our Newsroom on http://www.veros.com. Please follow our Twitter handle @VerosRES for breaking news. Questions and feedback can be submitted to media@veros.com. Thank you for listening.


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