To say that Dodd-Frank did little to reduce the cost of making mortgage loans would be the understatement of the twenty first century. According to the FDIC, since Dodd-Frank became the law of the land, 843 community banks have closed their doors. Some would say that not all of the decline can be attributed to the Dodd-Frank Act. Aside from this new law, it is fair to say that federal banking regulations in general have made the cost of banking much more expensive. Dodd-Frank however is a very important recent addition to the equation.
Why have small banks suffered most? We do not hear of so many large banks closing their doors. The fact that fewer large banks are closing does not mean that they are not also paying a price. Is it due to economies of scale? Yes, that is the overall reason, but I would also say that one should not stop at that. Another underlying component of the economies of scale theory is alive and at work. It can be addressed in two words, Information Technology (IT). Large banks have been and are continuing to invest heavily in technology. Does this make them more competitive? Yes. Does it also cost them a lot of money? Yes. Can small banks usually afford to invest in such expensive technology? No. How can smaller and not so small institutions compete with the big boys when it comes to commercial property collateral evaluations?
For most small to middle sized banks the “O” word is likely to be their best option. Outsourcing permits those who do things best and most efficiently, to do them. It also helps those with small budgets to keep their fixed overhead to a minimum. Outsourcing typically does not require large amounts of system related upfront invested capital. It allows smaller banks, and smaller departments of banks, to control their overhead while taking advantage of some of the best IT systems and E Commerce platforms within the industry.
The days of ordering a narrative appraisal for each and every collateral evaluation passed years ago with the advent of drive-by and limited summary appraisals. In today’s environment, even these methods are quickly becoming obsolete. They are falling prey to more high-tech methods. Now enters the IT outsourcers with solutions, some being better than others. Today the term “Evaluation” is the new buzz word for quick and cheap. Listed below are two different Evaluation methods available within today’s market.
Low cost, low quality methods: Some Evaluations are not compliant with the Uniform Standards of Professional Appraisal Practice (USPAP), they cost very little, they are generally prepared by someone other than a certified appraiser and may not have included a true property inspection. In some cases, these Evaluations are the product of computer generated data, which is signed off on by an evaluator. Typically, these Evaluations fall low on the accuracy scale, do not meet all regulatory requirements and may not protect the interest of the bank. Such products are considered to be high risk and low quality alternatives; offering little more advantage than the low price.
Low cost, high quality methods: Restricted Appraisal / Evaluations are a fundamentally sound low cost option. They are prepared by certified appraisers who have personally inspected a subject property and who have complied with the requirements of USPAP. These are real appraisals prepared by real appraisers, that I contend offer a much more accurate conclusion. They are best prepared on state-of-the-art web based software residing on an interactive platform. Non-restricted Appraisals are also available using similar software. They compete favorably in terms of quality with narrative appraisals, but are much less expensive.
Dodd Frank may be here to stay. In order for us to be here to stay we must subscribe to products and systems that meet or exceed the efficiency of the competition. In meeting the commercial property valuation competition, I recommend the lower cost, high quality, Restricted Appraisal / Evaluation where possible. Web based USPAP compliant valuation tools are where the low cost market for commercial property collateral valuations is headed. It represents a welcome relief to bankers looking to reduce overhead and still get a solid, regulatory compliant, professionally prepared product. Cost and preparation time can be reduced by as much as 50 percent or more when compared to traditional narrative appraisals. This can be accomplished by selecting a professional provider, offering state of the art IT systems and a solid reputation for quality.
Charlie Elliott, MAI, ASA, SRA, a Certified General Appraiser is the founder of ELLIOTT & Company Appraisers. Elliott & Company is an Appraisal Management Company specializing in complex title claim valuations for the title insurance industry. Mr. Elliott is not an attorney and nothing contained herein should be construed as a legal opinion or legal advice. All statements and opinions contained herein are those developed by Mr. Elliott given his three decades of education, training and experience as a complex property appraiser.