Mortgage lenders face significant challenges in today’s market given market volatility and regulatory changes. Even at the highest demand levels in 2024, purchase mortgage application volumes were nearly 45% lower than the same period in 2018 and 2019, a situation exacerbated by record high origination costs. Recent research by Freddie Mac shows average development costs for the top 25% of performers are $6,900, rising to $16,500 for the bottom 25%.
To add insult to injury, COVID-19 lending has left lenders facing brutal repurchase costs, driven in large part by appraisal flaws. Although Fannie Mae and Freddie Mac’s loan repurchase volumes have declined significantly since their peak in the second quarter of 2022, the impact on lenders remains. Data from the latest ACES Mortgage QC Industry Trends Report shows that appraisal-related deficiencies are increasing year over year. Therefore, lenders cannot ignore appraisal quality. The key to ensuring assessment integrity is building a quality-focused culture supported by technology.
assessed value
The appraisal is critical to the mortgage loan process and determines the value of the collateral that secures the loan. Concerns about bias and inaccurate assessments are of concern not only to government-sponsored enterprises (GSEs) and regulators, but also to consumers. Instances of discriminatory practices, where assessed values differ significantly based on a homeowner’s race, highlight a deep-seated problem. Overvaluation remains a persistent problem, exacerbated by volatile housing markets and home prices hovering at historically high levels.
Intense scrutiny from regulators such as the GSEs and the Consumer Financial Protection Bureau (CFPB) highlights the importance of accurate assessments. These entities have implemented measures that allow homeowners to request reconsideration of assessments, designed to ensure fairness and accuracy. This increased awareness has led to new protocols, such as the right of homeowners to request reconsideration of value, a process endorsed by Fannie Mae, Freddie Mac and the Department of Housing and Urban Development (HUD). Additionally, tools such as Fannie Mae Underwriters® (CU®) have been introduced to increase scrutiny of appraisal data. However, these measures alone will not solve the systemic problems that plague assessment quality control.
cultural value
A quality-focused culture is critical to effective quality control assessment. When quality is ingrained in a lender’s operations, discrepancies are promptly resolved and origination and quality control teams work together to achieve common goals. This coordination minimizes conflicts and ensures that appraisal issues are resolved before they impact the final quality of the loan.
In addition, Fannie Mae’s regulatory updates create additional responsibilities for lenders, such as a mandatory 10% pre-financing sample review and a more stringent post-closing review schedule. These changes aimed at early defect detection and remediation emphasize the need for advanced quality control tools such as ACES that can automate and streamline the sampling, review, remediation and reporting processes. Assessment deficiencies are a significant factor in the increase in GSE repurchase requests. Because of the fixed costs associated with underwriting and quality control professionals, effective use of technology enables existing staff to increase review speed and accuracy.
To effectively manage appraisal quality, lenders should use ACES in conjunction with systems such as CU. CU provides detailed assessment analysis, while ACES provides a platform for comprehensive audit management. Lenders can incorporate CU data into ACES through manual or integrated solutions to ensure a thorough review process. ACES serves as a repository and reporting engine, helping to identify and resolve assessment discrepancies.
The value of technology
Technology plays a key role in solving the multifaceted challenges of quality control in assessments. Traditionally, appraisal underwriters download the PDF from the appraiser, open the loan document in their loan origination system (LOS), and perform a “view and compare” analysis using a static list. This error-prone manual process has been the industry standard for decades, but is neither adequate nor accurate.
Despite the advanced capabilities of systems such as CU, challenges remain in data integration and accessibility. Currently, CU data is stored in a separate system, which creates barriers to seamless data transfer and comprehensive auditing. Many lenders choose to enter CU findings into their LOS to ensure that the findings are associated with the appropriate loan documents. Because ACES already extracts LOS data, auditors can also use ACES to systematically review assessment data, identify discrepancies, and take corrective action. The ability to generate detailed reports and share them with the Assessment Management Company (AMC) ensures supplier accountability and maintains comprehensive quality standards.
Today’s low-volume environment is ideal for establishing a high-quality internal assessment review process. With the right structure in place, lenders can easily adapt to increases in transaction volume while maintaining high quality when market cycles swing in the other direction. In addition, technology-driven processes help eliminate the need to add personnel during high-volume cycles or cut personnel when production declines, thereby keeping labor costs relatively stable regardless of volume.
In a market where every dollar counts, effective evaluation quality control is critical. ACES Quality Management provides lenders with the tools and insights they need to tackle complex appraisal QC. By cultivating a quality-focused culture and leveraging advanced technology, lenders can ensure accurate and unbiased assessments, ultimately safeguarding their profits and promoting fair lending practices. As the industry continues to evolve, staying informed and proactive about quality control and compliance is critical to maintaining loan quality and operational integrity.
Sharon Reichhardt is executive vice president of operations for ACES Quality Management. With decades of industry experience, Sharon helps companies strategically leverage quality control. Contact her: [email protected]
