Hey Underwriters! Reviewing Additional Sales Will Not Always Mitigate Risk

By Mike Armentrout

Normally I write an article to chime in on a topic as it relates to appraisers.  Rarely do I address colleagues in other related fields outside of my own industry.  Today shall be different.

This post is specifically intended to talk to our lender clients about an increasingly frequent stipulation request we are seeing from many underwriting departments.  That is to comment on or possibly grid additional sales.  Here's how it goes; after we submit a report, an underwriter sends over three to four sales and asks why they were not considered.  Sometimes these sales were discovered in our original research and other times they may be outside of the defined market area.

Appraisers do have the duty to respond to any and all questions that the client as an intended user may have in analyzing collateral.  Such requests should also be handled in a professional manner.  It is certainly a lenders' prerogative and responsibility to scrutinize an appraisal when they are liable for a loan default.  Under specific and occasional circumstances, questions are a reasonable thing.  When they become typical however, there is a concern that it has grown into a checkbox item in a standard operating sequence.

It is important to remember that no appraisal can be fully exhaustive in it's content, nor is it intended to be.  Cited comparable sales within a report are what the appraiser believes to be the most representative of the subject property.  Under a standard scope of work, the process by which we research, analyze and eventually select those cited sales is not something that requires in-depth commentary.  An appraiser is not required to specifically comment on why every sale in our research dataset was or wasn't used.  For example, if we apply parameters for a defined market area that yields 40 sales and we submit four gridded sales for comparison, an explanation of why the remaining 36 were not cited is unnecessary.  Appraisers are required to be able to support their conclusions but written communication of every nuanced decision that went into comp selection is simply not feasible.

I cant' help but wonder by what metric are these requests being generated?  Is a qualified or credentialed appraiser selecting these additional sales or is it simply an automated valuation result?  Big data resources and AVMs may offer some helpful tools to busy underwriting departments but they should not be relied upon as a benchmark for appraisals to measure up to.

I do have some fear that these requests have less to do with prudent safeguards and are more the by-product of rubber stamped procedure.  If that is the case, then it will lead to a false sense of security for loan quality.  It may keep Federal Reserve and GSE auditors at bay for now, but will be futile if a large segment of a loan portfolio goes South.