The following is a print article featured in MReport's June issue, out now.
For companies seeking innovative ways to persist—and prosper—in today's challenging mortgage market, automation may be the perfect fit.
It is not news to anyone in the mortgage industry that the market has changed dramatically in the last decade. Back then, volume was high and the focus was on closing as many loans as possible. Thorough review of the collateral was not the highest priority in loan decisioning or risk management as the prevailing sentiment was that appreciation would offset inaccuracies in value and mitigate any potential loss. So, why slow the process just to dissect an appraisal?
Well, we all learned why thoughtful analysis of the appraisal is crucial, not just to the lending decision, but also to maintaining the financial health and perhaps the survival of the organization. The question now is how do we as mortgage professionals adjust our strategy to not only survive, but also to thrive in a market that the Mortgage Bankers Association (MBA) has forecast to see overall origination volume 37 percent lower than last year?
By the way, that smaller volume is already impacting most,if not all, industry participants in one way or another. Each is at least strategizing on how to get through this valley and many have begun taking action by downsizing staff, reorganizing responsibilities, and restricting expenditures. However, these steps may not be the ultimate formula for success—tasking fewer people with more or new duties while still meeting operational goals and ensuring compliance is always a difficult formula for success.
The difficulty is in reducing staff without revising the business process, time frames, or support to maintain effective risk management. The last thing management can afford to deal with is staff burnout due to overload that can jeopardize operations. Cost-efficient automation or automated tools and services can be strategically inserted to shore up work-flow on many fronts and enable a smaller staff to perform at or above previous standards without increased risk to mental, physical, or organizational health.
In the midst of trying to maintain workflow with a smaller staff, there remains an increasing focus on effective appraisal analysis. Regulatory requirements, investor demands, corporate management, and now disclosure to the borrower have elevated the collateral analysis to the same level of scrutiny as financial analysis. The information provided in the appraisal report has expanded to encompass much of what is needed to adequately understand market value of a property, but it still requires validation and analysis to ensure the right decision is made for both the borrower and the organization. Does the employee now tasked with appraisal analysis have the necessary training, skill, and experience to fully analyze the appraisal and make that right decision? Fortunately, great progress has been made in automated tools and services for appraisal analysis that can enable that employee to do just that.
Is effective appraisal analysis become a prominent focus in the industry, providers of automated services focused on creating compelling products and offerings to serve the need. Initially, they found ways to provide data or access to data that previously required contracting outside resources to individually collect, such as property records, title transfers, and ownership verification. Instead of waiting days or weeks to get county records on a property, services were deployed to provide deep data on almost any property in the country almost instantly. One can now readily review the information in the appraisal to ensure its accuracy and begin the analysis for potential fraud or other unacceptable activities on the subject property and comparable sales used to support the appraiser's value estimate.
Data validation, while important, was not the only part of the appraisal analysis that could be automated. Metrics were created based on market activities to show the direction local markets were moving or whether the market was stable in terms of values and activities—sales, transfers, foreclosures, zoning, and growth. Listing activities are researched to overlay current market information on the historical data. Data is then reviewed over time to understand trends and patterns in order to see how it might all relate to both the value and marketability of the subject property. All of these metrics evolved because of a need for innovative ways to assist the reviewer in analyzing the information in the appraisal that is not readily accessible.
The industry is now at the point where we can take the evolutionary next step and fully analyze the appraisal itself. This goes beyond just internal form checking and discrepancy review. The data and metrics can now be incorporated into a rules-based underwriting analysis of the appraisal report content that results in directions and decisions that are efficient, consistent, and compliant.
Efficiency is always important in business operations, but it is now vital in the industry. Though the volume is smaller, customer expectations for services remain high while regulatory requirements and investor demands have increased. The organization must meet those expectations, requirements, and demands with a reduced or reorganized staff coping with changed responsibilities. When fewer people are responsible for a successful operation, there is no room for wasted time, as the operation must at least ensure it completes its daily workload and time frame constraints. An efficient operation meets or exceeds its goals for timely delivery of good product, which translates in our industry to performing loans that meet compliance requirements. Automation improves operational efficiency as it provides scalability. Incorporating automation or automated products and services into the operation can enable it to handle volume fluctuations without resizing staff. A smaller staff can still deliver good product as volume eventually rises because automation brings efficiency to the process and workflow. During quieter times, staff can be focused on other corporate goals such as additional training or education while management remains confident that business operations have not been degraded and standards have been maintained.
The lift provided by automation also lies in providing ready access to the relevant information needed to make the best decision for each particular situation throughout the organization as a whole. This eliminates the time-drag of searching for information or the resource to find information. It also eliminates issues associated with potential discrepancies in information from multiple or varying sources over time. This, in turn, eliminates possible compliance problems from inconsistencies that do not meet business, regulatory, or investor requirements.
In the arena of appraisal analysis, automation provides the relevant data and metrics needed for the manual review and analysis. This means it also helps turn down the noise from additional information that is not useful or helpful to the overall assessment of the collateral report, which in itself lifts efficiency in the process. Data and metrics from a single source that also helps eliminate potential discrepancies or inequities caused by accessing data from varying sources. To further maximize efficiency, automated appraisal analysis incorporates the relevant data and metrics with the appraisal information to return directions and decisions that focus staff attention on the areas where it is needed while ensuring confidence that no point of risk has been ignored.
Finally, the speed of automation means the request for service or product can be answered almost instantly. This means on-demand service fulfillment with little or no time wasted waiting for either a response to continue the manual appraisal analysis or the results of the fully automated analysis to take the appropriate next step.
Consistent application of business rules that lead to decisions on lending and managing loans is mandatory. Subjective application of processes and parameters is no longer acceptable business practice, and regulatory requirements allow significant penalties for disparate or inconsistent treatment.
Automation eliminates inconsistency in its processes. It performs the same operations each time, whether that includes a simple request and response or a complex and sophisticated analysis applying multiple layers of rules and reasoning to arrive at a compliant conclusion. Automated reasoning can include the organization's particular business rules and processes along with industry-standard guidelines to ensure the appropriate review for any and all characteristics is performed. It can also be directed by geographic or risk criteria to ensure each analysis fully addresses the current situation, such as more stringent property condition requirements in disaster areas or greater attention to ownership and transaction history in high-fraud markets. Automation ensures the analysis will not overlook or ignore a detail or miss a requirement—if it is in the rules, it will be in the analysis and in the results. In contrast, manual analysis is subjective and relies entirely on the analyst's training, experience, and perception—not to mention the amount of sleep they got the night before, quality of their most recent meal, distractions, and other types of interruptions that plague us all. While manual processes and their results are determined by our human condition, automation is entirely separate and consistent.
Deeper Insight and Effective Risk Management
Greater scrutiny and focus have demanded intimate knowledge and insight into the quality, value, and resulting marketability of loan collateral. It all then translates to more effective risk management for the organization.
Deeper insight into the fair market value of the collateral offered through automated solutions contributes to the overall lending decision. It contributes to the ongoing management decisions for optimizing performance, best secondary execution, potential cross-selling, and even loss mitigation. Standalone manual analysis of an appraisal report does not provide that deep insight. Black-box review from an investor or GSE does not provide that insight, though it may provide some pricing relief or warranty against loss. Whether from automated products and services for data and metrics to enhance the manual analysis or from a fully automated analysis that is transparent and delivers directive results, effective risk management must have that deeper insight to be successful.
Automation in Appraisal Analysis
Today's business environment may and market size require all of us in the mortgage industry be innovative about how we will survive and thrive. Some survive through traditional strategies of reduced staff manually processing and managing the business. Others may take a step beyond and continue or expand their use of automated products and services to enhance their manual processes and management. Those who take the additional steps with automation and automated analysis to provide operational lift will be the ones who thrive and are best prepared for the next chapter in our industry. Automated appraisal analysis is one of those additional steps that can make the difference between surviving and thriving—which path will you take?