Appraisal Issues: Predatory Lending

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Appraisal IssuesPredatory Lending Fraud

• Lewis Allen
• Lewis.Allen_at_oomc.com
• November 14, 2006

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Steps we can take today !

• Appraiser verification How our industry can
  reduce appraisal fraud by verifying appraisers
  identities
• Improving appraisal integrity by increasing
  requirements for appraisal content, performance
  and training
• Using external data to verify appraisal content
  and improve quality
• Case study How one system is improving appraisal
  integrity by eliminating appraiser influence

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Reducing fraud through appraiser verification

• Require a resume, including education and
  references
• Only accept appraisals in PDF format from e-mail
  addresses on record
• Require appraisers to sign as they are listed in
  ASCs National Registry
• Send e-mail or call on QC sample
• Require that trainees work be signed off by
  Certified Appraiser doing business in the same
  state as the subject property (not just their
  license)
• Interagency Letter March 22, 2005

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Elevating requirements when ordering appraisals

• Letter of Engagement in file signed by individual
  that placed order
• Establish and appraiser independence policy and
  require all production and sales associates to
  endorse
• Require cost approach for all appraisals
• Require interior photos on property
• Require complete sales and MLS activity on the
  subject
• Ensure appraiser competency
• Legal compliance
• Geographic
• Technical

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Raising the bar on quality control practices

• Pattern analysis on appraisers portfolio
• Associate training methods and practices
• Adherence to policies and procedures
• Internal property history
• Property issues
• Effective age
• Land-to-improvement ratio
• Zoning
• Property condition
• Depreciation
• Cost approach
• Comparable sales
• Marketability
• Location

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External data validation is critical to appraisal
quality control

• Public record data
• AVM
• Satellite imagery
• Multiple listing data
• Property and neighborhood history
• Cost approach
• ASC National Registry
• County data
• Market data

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Case studyOption Ones Collateral Management
System

• Creates folder automatically from LOS
• Pulls public record and AVM data
• Performs OCR on PDF of appraisal
• Runs almost 100 rules checking data and appraisal
• Red flags are presented to UW
• Live administrative review form adjusted per
  transaction
• Technical reviews are forwarded in the system
• Continuous auditing and reporting
• All paperless

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Current business practices place appraisal in the
hands of the originator or loan agent, which
requires lenders and investors to perform quality
reviews of loans
Broker or loan agent
Appraiser
Property location Loan background Required value
Condition
1. Examine the property
Marketability
2. Find comparable sales
3. Establish a value range
4. Evaluate the deal
Required value the property appraises
Funding lender
Investor
Appraisal QC process
Portfolio review
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The Appraisal Option program, controlled by the
funding lender, produces a risk-adjusted value
estimate using the same principles applied today
Broker or loan agent
Broker or loan agent
Loan amount purpose Stated value Credit
score Location Name
Certificate and Limiting conditions issued
Physicalinspection by an Appraiser ordered by
lender
Loan risk factorsare established and a value
iscalculated using database weightedvaluation
algorithms
Value isadjusted forloan risk via Collateral
Risk Score
Eligibility established
Broker/LO-suppliedvalue comparedwith
risk-adjustedvalue
Quality control tracking
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Appraisal Option addresses and solves for
numerous fundamental weaknesses in current
collateral assessment practices
Appraisal is controlled by the funding lender
Appraisal is controlled by the loan officer or
broker
Value is objective and statistically derived
using thousands of local sales, adjusted for
the risk profile of the loan
Appraised value is subjective and based upon a
single point estimate of value rationalized
using three sales comps
Costs 50 less and can be completed in 72 hours
(including inspection)
Appraisal costs 250 - 550 and requires 5-10
days to complete
Consistent, objective and data intensive,this
process lends itself to continuous improvement
Inconsistent, subjective and light on data,the
results cannot easily be qualified
Because method is data intensive,outliers reveal
themselves
Difficult to spot outliers
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Recommendations for our industry

• Appraisal Registry
• Expand ASC Registry to include appraisals
• Appraiser to log appraisal prior to delivery
• Verify license and issue unique ID via e-mail
• Deliver ID to client with appraisal
• Allow client to verify ID in system database
• Verification should include data on all previous
  appraisals for that property
• Violation of USPAP if the appraisal is not signed
  as it appears in ASC.
• Letter of Engagement must be in each loan file
  and signed by ordering individual

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The future is here This response surface model
was used to make location adjustments in Dade
Countys real property valuation model.
East
North
West
South