Smart Lenders Profit from
Quality Borrowers and Happy Appraisers
By Charlie Elliott, Jr., MAI, SRA

 

There is usually little if any discussion between the lender and the appraiser concerning the quality of the borrower in a given transaction. This has typically been perceived as none of the business of the appraiser, since most lenders look at it as a risk management issue, not a vendor client issue having anything to do with the vendor’s ability to service the client.

 

While it is not usually an issue that the appraiser will choose to go on record about, you can bet that it is on his or her mind in those situations where it affects the appraiser’s ability to provide service in an efficient manner. You might say that the appraiser, in many cases, will reserve comment on such issues, as it might be perceived to politically incorrect. It is one of those things that few people talk about. It is dealt with more subtly and is common knowledge to the most seasoned professionals within the industry.

 

The issue that we are addressing is that of the unqualified borrower, the one most likely with charge-offs, bankruptcies, high credit-card payments, past due accounts, excessive debt and a home with a current loan that exceeds its value. We are not talking about restricting access to credit to those who are responsible, even if they are short of cash and earn small salaries, provided they have a good credit history. Most of us would agree that America is the land of opportunity and everyone who works hard to get that home with the white picket fence should not be denied the American dream. What we are talking about are those rotten apples who have been given many opportunities to prove themselves and who have only done so to their own detriment.

 

This issue has destroyed many a lender-appraiser relationship and wasted the time of both parties. It has further damaged the borrower-lender relationship and created other negative effects of needlessly wasted expense incurred by all parties to the transaction.

 

It may pertain to a home purchase, but most often it is associated with a refinance. It raises its ugly head out of inadequate borrower qualification or even worse, no qualification on the part of the lender. Many, if not most, lenders do an excellent job of qualifying borrowers up front, before the wheels of loan processing machinery are set in motion. This is as it should be. Unfortunately, not all lenders do such a good job, and therein lies the problem. All too often lenders, particularly some of the untrained ones, just learning the business, take shortcuts in the qualification process or, in some cases, intentionally shirk their qualifying responsibilities. 

 

One favorite tactic is to have the appraiser qualify the borrower. No, we are not talking about the appraiser doing a credit check and income verification. We are talking about a simple test that goes something like this: The lender gets the lead on a questionable borrower. Rather than take time to qualify the borrower, the lender orders an appraisal being very careful to make the order, a collect-at-the-door, to be paid by the borrower upon inspection of the property. The theory is that if the borrower has enough money to pay for the appraisal and if the appraiser appraises the property at a value sufficient to make the loan, the borrower has, for all practical purposes, passed the first stage of qualification with little or no effort on behalf of the lender.

 

For those who think this is a good idea, I beg to disagree. All too often, the borrower is not told by the lender that he or she must pay the appraiser or how much the appraisal fee will be. When the appraiser calls to set up the appointment the borrower is automatically put on the defensive and is driven to distrust the lender as well as the appraiser. In the event the appraiser is able to collect the fee and proceed with the appraisal, the next pitfall is frequently that of an appraised value being too low to be used to fund the loan. This, in most cases, could have been avoided if the lender had done a minimal amount of homework. If the borrower is expected to pay for the appraisal, he or she should be made aware by the lender in advance of the risk involved. One practical test that the lender may use is to ask, “Would I use my money to pay for this appraisal and expect to be reimbursed by this borrower?”   

 

It is critically important to the lender-borrower relationship, as well as the lender-appraiser relationship, for the lender to spend time with the borrower in the qualification process and to counsel the borrower as to what is involved in getting a loan. Loan fees, appraisal fees, other closing costs, creditworthiness, loan-to-value ratios and any other issues likely to affect the loan application process should be covered. The particular issues, which should be at the top of the agenda, are those that affect the borrower’s pocketbook and whether the borrower will be able to get a loan. Furthermore, there should be no surprises, and the successful counselor will insure that the borrower has a complete understanding of what he or she is getting into, prior to beginning the process.       

 

For those not convinced that the appraiser is concerned about the quality of the borrower and that this can affect your relationship with the appraiser, think back. Have you ever called upon an appraiser who was suddenly “too busy” to get around to a particular project? You know the type situation I am talking about, the one where the appraiser refers you to one of his less professional and less successful competitors who “has more time.” All appraisers need work and most are constantly looking for good quality business. If this happens to you, there is a reason. It may just be the quality of your borrower.  No self-respecting appraiser is interested in spending his or her time chasing down unqualified “would-be borrowers,” particularly without compensation, which, all too often, is the case. When reaching into the prospect barrel, being very careful to pass up the rotten apples in favor of the nice, shiny and fresh ones can mean extra money in the pocket of the loan originator.   

 

The relationships between the lender and the appraiser, just as the relationship between the lender and the borrower, can have a lot to do with the success of the lender. The lender, who is willing to take the time to pre-qualify the borrower prior to involving the appraiser, will have a better relationship with his appraiser, have fewer deals fall through and get better service most of the time. He or she will spend his or her precious time on the transactions that are more likely to bear fruit and have happier borrowers and appraisers making for a more efficient and more profitable profession.