6 Areas Where Appraisal Automation Increases Lenders' Margins

It’s no secret that margin compression is a top concern for lenders at the moment. We’ve all read the headlines and in some form or fashion, we’ve all felt the pain. It’s a far cry from the refi boom when the industry was in growth mode to meet the wild demand. Unfortunately, we’re seeing how the inevitable change in market conditions creates such a turbulent transition.

The good news we’d like to share with this piece is that there are quite often simple, actionable steps lenders can take to reduce their cost to originate, increase margins by hundreds of dollars per loan file, and be prepared for the next time the market is primed for spikes in volume — lenders need to look no further than their appraisal process.

We recently participated in a webinar on how lenders can reduce costs and increase margins with Jennifer Fortier, principal consultant with STRATMOR Group, and Cliff Meggison, an executive leader in risk management, who was with Citizens Bank earlier in 2022. 

We outlined six areas where lenders can focus their efforts to reduce their cost per loan:

• Appraisal Modernization
• Appraisal Reviews
• Appraisal Order Allocation
• Appraisal Data and Reporting
• Appraisal Status Communications
• Appraisal Payments

By using STRATMOR Group’s 2022 lender appraisal operation study as a benchmark, we can determine a cost associated in specific areas of improvement and provide a reduced cost per loan to calculate the ROI of appraisal management technology. If you’d like to evaluate how much your organization could save, contact our mortgage solutions team for a free cost per loan consultation.

Now, let’s dive into the six areas where appraisal innovation helps lenders increase margins.

1. Appraisal Modernization

Fannie Mae and Freddie Mac rolled out desktop appraisals as a solution for lenders’ appraisal process. Creating a more efficient process is key to reducing costs and we’re excited that the GSEs are embracing a technology-driven approach to appraisals. But new technology can lead to many questions, which we outlined in our deep dive on desktop appraisals, “Understanding Desktop Appraisals: Takeaways from Fannie Mae and Freddie Mac.” Fittingly, the first piece of advice Fortier and Meggison had for lenders is to partner with a vendor that is equipped to accommodate appraisal modernization.

Finding a nimble, innovative tech partner should be a comprehensive process. Meggison points out that lenders should have a plan to evaluate vendors, such as the industry best practices outlined in the “Appraisal Management Tech Buyer’s Guide for Mortgage Lenders.” This is a crucial part of achieving ROI, as Meggison says “it is critical that lenders find the right partners” to avoid bringing in a vendor that promises great results, but ultimately drives up costs.

Whether it’s desktop appraisals, hybrid appraisals, or a new form of valuation to come in the future, selecting a partner that is built to adopt new products from the GSEs and guide lenders along the way is key.

2. Appraisal Reviews

The review process for appraisals jumps out as an area where lenders can significantly reduce their cost per loan. The cost starts with the high value provided by underwriters, driven by how long it takes to review appraisals and their understandably high salary.

Since they play such a vital role in risk mitigation, underwriters should be hyper-focused on their role. Digital tools can help reduce the need for underwriters to perform basic checks and allow them to focus on ensuring delivery of high-quality reports.

“You should provide underwriters a tool that makes it easy for the reviewer to make a decision on whether the appraisal report is meeting your needs or not,” says Fortier. “Looking at how you route reports and looking at who you use to review different types of appraisals is a great first step to getting some lift.”

This is where Reggora’s partnership with Clear Capital’s ClearCollateral Review^Ⓡ comes into play, reducing the review process from 45 minutes per loan down to just eight. An 82% reduction in time spent on quality control reduces a lender’s cost per loan by $81.

3. Appraisal Order Allocation

Finding a real estate appraiser and scheduling an appraisal simply takes too long. STRATMOR research showed that it takes an average of seven days from the time a lender realizes they need an appraisal to when the inspection date is locked in. With Reggora, this process can be automated by using custom automation to order based on a lender’s requirements, ensuring that lenders are paired with the right appraiser at the right time.

Generally speaking, the right technology should automate and speed up many parts of the appraisal process, but getting an appraisal ordered is an especially costly slowdown for lenders. By removing unnecessary manual touchpoints from the order management process, lenders reduce the time spent actively managing orders by 33%, a $44 reduced cost per loan.

Of course, this is just one piece of the puzzle, but ordering is a significant chokepoint in the process for lenders. 52% of a lender’s time spent managing orders is simply scheduling and following up with appraisers to communicate statuses. This is where order management software can take the burden off lenders, whether they manage a panel of appraisers or multiple AMCs, as Fortier points out during the webinar.

4. Appraisal Data and Reporting

Both Meggison and Fortier agree that lenders need to “know your data.” Why? Because too often appraisals operate within a black box, meaning that loan officers, borrowers, processors, and vital stakeholders can be left out of the loop without a window into the status of each order.

The presence of actionable data means that lenders act when needed and avoid unforced errors. When STRATMOR completed its lender appraisal operations study it found that:

• 1 in 5 appraisals is delivered late
• 1 in 8 closings is delayed due to the appraisal
• 1 in 20 borrowers walk away due to the appraisal

It’s amazing how proactively using data completely changes the experience for both the lender and the borrower. Outside of just increased visibility, Meggison reinforced that performance monitoring can lead to better outcomes for the lender.

“It’s critical, one thing I would tell lenders is to know your data and know what it’s saying before your vendor has to tell you or before someone has to come and ask you,” Meggison says. “You should know what your open orders are, know your timeline, know what’s overdue and what’s coming due. When you know your own data and your own pain points, it can be a significant lift and view into what’s going on.”

Fortier doubles down on this point, saying that lenders who know their own data and those who are able to make it actionable is like the difference between “watching the news and knowing a hurricane is coming versus knowing it’s coming and building a plan around that news.”

We’ve seen users utilize exception-based pipeline management to reduce as many as two days from their loan cycle time, a reduced cost of $43 per loan file.

5. Appraisal Status Communications

We’ve touched on how valuable sharing data can be and it’s important to remember that the time spent seeking and sharing information is its own cost. As we pointed out earlier, 52% of a lender’s time managing appraisal orders is spent scheduling the appraisal and following up on the order. The traditional way of accomplishing these activities: tons of emails and/or phone calls.

That’s why eliminating the need to seek or share information should be emphasized to make communications proactive rather than reactive. Whether it’s the borrower, realtor, vendor, or internal updates for each appraisal order, all of this information should be easily accessible to all stakeholders.

“If you can give visibility to the status of the appraisal, you can avoid playing a game of telephone that’s pretty common in the process,” Fortier says. “It’s going to eliminate that element of chasing orders, it will make realtors feel better about this scary part of the process, and it’s going to make everyone’s job easier and quicker. All of that contributes to cost, so if as a lender you haven’t nailed that, focus on that.”

As Meggison put it, good comms separate the good from the great, and bad comms can kill an operation via “the worst game of telephone imaginable.”

6. Appraisal Payments

The final, and perhaps the costliest portion of a lender’s appraisal operation, is related to payments. Between appraisal fee escalations, fees that go unpaid due to borrower fallout, and everything related to invoicing or cutting checks for appraisals, this category adds up quickly.

Going back to Meggison’s point on knowing your data, lenders who use proactive reporting coupled with smart automation are able to cut costs by nearly $100 per loan file. This can be done by a couple of tweaks to a lender’s process, easily achievable with appraisal management technology.

“The trick is figuring out what the right fee for an appraisal should be up front,” Fortier said. “We’ve heard nightmare stories from lenders in unique markets and how much research it takes to quote a reasonable fee. Lenders also have different processes in how they want to collect fees for appraisals, when they want to collect for appraisals, but for those that want that payment up front early in the process, building it into the process and triggering it in an easy way and getting the payment assessment correct are all challenging problems.”

Thankfully, this is a problem we have a streamlined solution for. Lenders using our platform to collect payments at the time of ordering, using nationwide data as a fee engine to set the right prices, eliminating two of the causes for revenue leakage within appraisals, a topic we dive into deeper in a blog post dedicated to eliminating revenue leakage.

By reducing fee escalations 65%, eliminating the losses from borrower fallout that impacts 4% of loan files, and automating appraisal payment collection and appraiser payment, Reggora reduces a lender’s cost per loan file by $91.

How Much Reggora Increases Lenders’ Margins

In the six areas covered, there is a bit of overlap. The great thing about solving one problem is that you can often find it alleviates another problem in a different area. Solving for one of appraisal modernization needs, appraisal reviews, appraisal order allocation, appraisal data and reporting, appraisal status communication, and appraisal payments will undoubtedly start any lender down the path of fixing one of the other areas of need.

All told, the value of addressing the pain points outlined in this piece comes from reducing the cost to originate by $258 per loan file. Reducing costs in each of these areas provides not only some much-needed breathing room in the immediate but leveraging automation also presents a scalable solution that is primed to take on more volume once the market shifts for the better.

If you’d like to see where your operation stands and how much you can save, contact our mortgage solutions team for a free consultation.