Why Outsource Your Appraisals?
By Charlie Elliott, MAI, SRA

The methods used by many lending companies to engage appraisers have been and are in a constant state of change. In the distant past, a large part of the conventional mortgage market was local in nature and run by small institutions. These lending entities were the local savings and loan, credit union and the local bank. In most cases the appraiser was the guy up the street, perhaps in the same office building and, almost certainly, someone in the same town. He was the guy you saw at church on Sunday morning or at the kid’s afternoon baseball game.

Today, for better or for worse, things are different, very different. I would say 80% of all mortgage loans are funded by financial institutions from central office locations outside the venue where the property securing the mortgage is located. Yes, there are some local loans made by those small banks and S & Ls, but they are few and far between, while getting fewer every day. This has been prompted by the continuous and relentless merging of major banks, consolidating of the mortgage companies through net branching and the almost complete disappearance of the savings and loans. The credit unions seem to be hanging on, but show signs of centralization of management and the geographic husbanding of resources in order to achieve economies of scale commensurate with that of their competitors.

More and more real estate appraisers are receiving their marching orders from vendor management companies distant from their home turf. The property securing the loan is local and the appraiser is local, but the financial institution making the loan and the person ordering the appraisal is most often in some faraway city. This scenario brings one to question what is the best resource of the financial institution to obtain appraisals in distant locations. What advantages do appraisal management companies offer, and why would a bank choose to outsource its appraisal services?

Those in the lending profession who have been responsible for ordering appraisals over a broad geographic area know what a challenge it can be, particularly if there are large numbers of transactions to keep track of. That is what we would hope for, right? Issues of overhead cost, tracking and appraiser selection are only a few of the issues, which can be a drain on resources.

Listed below are a few of the pros favoring the outsourcing of appraisals.

• Appraiser Independence – Today bank regulators are placing more emphasis on appraiser independence. On October 27, 2003, the Comptroller of the Currency and four other major federal bank regulators sent financial institutions a directive reminding their directors of the importance of appraiser independence. The directive stated that property owners and loan sales people are prohibited from selecting appraisers and that the directors are held responsible for violations of the regulations which will be scrutinized during institutional audits. One of the most important benefits an appraisal outsourcing company can provide a bank is the opportunity for the bank to insulate itself from questions of impropriety having to do with appraiser selection and influence.

• Reduced Overhead – Organizations that outsource appraisal management tasks stand to gain by reducing their staff overhead as the function of administrating and monitoring appraisals is passed to the appraisal company. Under an outsourcing plan, costs are identifiable and may be transferred to the borrower as part of the true cost of acquiring the appraisal. Many financial institutions currently maintaining appraisal management departments are unable to pass this cost to the borrower since it is not part of the appraisal fee. Another related benefit of outsourcing is the ability to know what true costs are and, even if some of these costs are absorbed, it is at the conscious level and in quantifiable amounts.

• One Stop Shopping - The convenience of calling one number, sending faxes to one number, going to only one web order platform or delivering lists of properties and getting appraisal service over a broad geographic area, frees up management to do what it does best, sell and make loans.

• Online Tracking System – Many, if not most appraisal management companies, offer clients online tracking free of charge. This is very helpful in keeping transactions on track and communicating with borrowers about the status of the transaction.

• Pre Qualification of Appraisers – Those in the lending profession, who have managed appraisal purchases nationally, know what a challenge it can be to not only locate and select appraisers, but to also insure their qualification. A good national appraisal company will provide this service, insuring that the appraiser possesses the proper experience and education, has the proper current certification, is properly covered by professional liability insurance and can be trusted to perform the work at hand.

• Organizational Harmony – Most of us are aware of the internal conflicts and organizational discord that can take place within a financial organization when all tasks are performed in house. When things do not go well, it must be someone’s fault, right? This is especially the case when loans do not close, paychecks are on the line, and the appraised value of the collateral comes in lower than anticipated. Would you want to be the person who selected the appraiser, having to face your fellow workers depending the closing of a mortgage to pay their mortgage? With outsourcing, this problem becomes a more distant issue out of the control of the people working within the financial organization. Does this example also bring better into focus the issues of appraiser independence?

The objective of this article is to look at some of the positive reasons a financial institution would contract with an appraisal company to manage its appraisal procurement. Those issues sited above are not intended to be all of the positive reasons for outsourcing appraisal services, but some of the most important. Perhaps in today’s environment, where regulatory compliance, cost containment, operating efficiency and specialization are the buzzwords of the industry, outsourcing may be worth considering by your organization. The benefits of appraisal outsourcing are not just for large banks. Many, if not all of the efficiencies and benefits offered above will work to the advantage of small institutions as well as mortgage brokers.