If the recent refi wave was defined by volume and speed, the current purchase market will be defined by cost reduction and borrower experience. The transition to a purchase market in 2022 has seen lenders focus in on how they can reduce their cost per loan without harming their ability to deliver the best customer service possible — crucial for lenders struggling to retain and recruit top producers, namely loan officers.

The good news is that lenders can both reduce costs and improve the borrower experience by fixing issues around appraisal fees. Mishandled appraisal fees are proving to be a huge issue for lenders, contributing to margin compression and increasing borrower fallout.

Appraisal Fees Present Lenders a Significant Opportunity to Reduce Costs

STRATMOR Group has studied lenders’ appraisal operations across the country and produced guidance around how technology can improve the appraisal process and reduce costs, written by Mike Seminari, STRATMROR’s director of customer experience. Seminari recently joined Brian Zitin for a lender workshop to show how lenders can stop losing money on appraisal fees while keeping a positive experience for borrowers.

The data collected for the webinar showed that lenders must specifically pay attention to how they’re collecting appraisal fees, fee escalations, and how they’re paying vendors. In short, we saw that lenders can lose up to $750,000 annually and decrease borrower NPS by 60 points due to issues with appraisal fees. Here’s an overview of the issues and ways lenders can stop losing out on revenue due to appraisal fees.

When the Borrower Walks Away from Loans, Lenders Are Stuck with Fees

Unfortunately, part of the reason appraisals present an opportunity for improvement is down to unforced errors. Seminari points out that so many things can go wrong toward the end of the loan process, particularly during the appraisal.

“We see a lot of lack of visibility toward the end of the process where people just don’t know what’s going on and that really can be a deal-killer and hurts NPS,” Seminari said.

Borrowers might experience an issue with the appraisal itself, or might walk away from a deal in progress for one of a number of reasons. A recent CNBC report found that borrowers in the current market walk away from the deal 15% of the time and this is largely out of the lender's hands. This is where things can get costly for lenders with appraisal fees.

How Much Borrower Fallout Can Cost Lenders

Lenders who opt to collect at close are incredibly vulnerable to losses due to borrower fallout, since they’re on the hook for the entire appraisal fee when the borrower walks. STRATMOR research indicated the average appraisal cost more than $600 earlier in 2022, but let’s use $500 as the cost of an appraisal for simple math. Given a 15% rate of borrower fallout, lenders who collect at close risk losing $375,000 annually, a cost of $75 per 5,000 loans.

• 100% collect at close
• x 15% fallout
• x $500 per appraisal
• x 5,000 loans 
• = $375,000 in annual losses

Even for lenders who only collect at close half the time or as low as 25% of the time, that still leaves lenders vulnerable to completely avoidable annual losses of $187,500 and $93,750 respectively.

How Lenders Can Avoid Losses from Borrower Fallout

While a potential loss of $75 per loan file sounds frightening, by collecting appraisal fees once the borrower declares intent to proceed, lenders can fully avoid these losses.

There may be some hesitation for lenders to collect up front due to fear that the borrower may not want to commit funds and terminate the deal. Seminari debunked this fear, stating that the practice actually locks in borrowers at a higher rate.

"The successful loan officers are never afraid to ask for commitment from the borrower and intent to proceed,” Seminari said. “It's much better operationally and it's good for the LO because you end up getting a lot better commitment and a lot better pull-through when you collect up front."

By switching from a collect at close model to upfront collection as a standard for appraisal fees, lenders can immediately reduce their cost per loan file by $75. Check out a blog post about the benefits of collecting appraisal fees up front to learn more.

Fee Escalations Drive Up Costs and Tank the Borrower Experience

While losses from borrower fallout can be completely avoided with a simple process change, fee escalations are a touch more complicated. Whether it’s due to appraiser availability, the complexity of the property, or a number of other reasons, fee escalations quickly add up. This decimates both the bottom line and the borrower experience.

Fee escalations occur in about 15% of loan files and cost roughly $200 per occurrence. Plus, Seminari pointed out that unexpected fees to the borrower can swing borrower NPS by as much as 60 points.

How Much Fee Escalations Can Cost Lenders

The key to avoiding losses from fee escalations is issuing a proper change of circumstance to redisclose to the borrower. What we’ve found is that lenders are only able to issue a change of circumstance with 50% of fee escalations — that means in the other 50% of loans the lender has to cover the cost of the fee escalation. Since the average fee escalation costs $200, the average lender is on the hook for $75,000 in annual revenue, a cost of $15 per 5,000 files.

The problem is this only represents the average lender’s performance and is based on the current market. There were more fee escalations when volume was at its peak in late 2021 and lenders were more than happy to do what was needed to get deals across the line. If you adjust the percentage of fee escalations to 20% and cut out change of circumstances completely, the worst-case scenario would see lenders lose more than $200,000 annually to fee escalations.

• 20% of appraisals with fee escalation
• x $200 per escalation
• x 5,000 loans
• = $200,000 in annual losses

How Fee Escalations Hurt Borrower Sentiment

Even though a valid change of circumstance allows lenders to pass off the responsibility to cover that cost, many choose not to because they don’t want to hurt the relationship with borrowers, who don’t want to pay for something they believe was already settled.

Seminari and STRATMOR found that all types of unexpected fees occurred in between 10 and 15% of loans and lowered the borrower’s NPS from an average of 81 to 21. While the overall cost of an appraisal or when you collect may not negatively impact the borrower, a miscellaneous charge late in process absolutely will. This is where an appraisal management solution can make the difference.

How Appraisal Management Software Reduces Losses without Impacting the Borrower

By using appraisal management software that is equipped with nationwide appraisal fee data — that includes information on fee escalations — lenders can build those fees into their fee schedules. This reduces occasions where there’s risk of disclosing an inaccurate amount to the borrower and avoids the scenario where a borrower is asked to cover a 40% surcharge, a disastrous misstep.

Additionally, lenders can use appraisal management technology to automate the ordering and product selection process and set triggers to redisclose when absolutely necessary. This removes additional risk that come with manual intervention such as improper disclosure, selection of the wrong product, or failure to redisclose. Lenders can learn more about the ideal workflow in our blog on how to remove revenue leakage from appraisal fees.

Processing and Payout Costs Quickly Add Up

The final area where lenders can see appraisal fees drain revenue is when they handle payment collection from the borrower and payout to appraisal vendors. Much like having a system in place to mitigate losses from fee escalations, payment processing is best handled by an appraisal management platform.

Many lenders choose to sit in the middle of the process with the borrower experience in mind. A payment link from a random appraisal vendor the borrower has never heard of can spook borrowers. Beyond that, if the borrower is waiting for confirmation from the lender that the payment request received is legitimate, the overall appraisal turn time is impacted.

The problem is, bringing the collection in-house is not a cost-effective solution. Lenders who choose to collect the appraisal fee directly from the borrower are losing revenue due to processing fees of 2.5% per transaction. Additionally, lenders are losing even more revenue if full-time employees are tasked with paying the balance to appraisal vendors. Simply put, operating as the middle-man for appraisal payments is a costly practice.

How Much Electronic Collection for Appraisal Fees Costs Lenders

Going back to our established cost of $500 per appraisal, a 2.5% processing fee per order rapidly stacks up, especially for larger lenders — the resulting cost is $125,000 per 10,000 loans, or $12.50 per loan file.

• 100% electronic collection
• x 2.5% processing fee
• x $500 per appraisal
• x 10,000 loans‍
• = $125,000 in annual losses

This also rings true for lenders using branch cards and eating the processing fees. No amount of cash back offering is worth this.

How Much Reconciliation for Appraisal Fees Costs Lenders

Collecting the appraisal fee is one thing, but this workflow means lenders take on the added task of paying out vendors for appraisal fees. Now there’s now a labor cost to consider. Anecdotal data pointed to some lenders having leadership and executive team members involved in handling vendor payout.

Working backwards from a $208,000 annual salary, one hour of that executive’s time is worth $100 — and lenders handling payout manually can require up to 10 hours of work per week. Assuming 50 weeks of work, that’s an annual cost of $50,000 per person managing appraisal vendor payout, or $10 per 5,000 files.

• 1 employee managing appraisal vendor payout
• x $100 per hour
• x 10 hours per week
• x 50 weeks per year‍
• = $50,000 per employee annually

Even if you reconfigure the math to an employee who makes $75 per hour working 10 hours on vendor payout, that figure is $37,500 per employee. If that employee spends more time on reconciliation, say 15 hours per week, that loss jumps back up to $56,250 per employee.

How Appraisal Management Technology Reduces Processing and Payout Costs

The beauty of having an automated system in place is that it solves both pain points with ease. By using an appraisal management platform to collect payment from the borrower, the processing fee is passed to the vendor and the software automatically pays the vendor. It may sound easy, but that’s because it is, as we outlined in a blog post about how easy payment processing for appraisals is with the right technology.

To take it a step further, lenders who already have a point-of-sales system in place can sync the appraisal management platform so that all transactions take place in the same interface. For borrowers, this is a significant improvement from paying vendors directly as they automatically receive an email in the lender’s branding. For the lender, the collection and payout process is handled without the need to manage each order individually.

Poor Appraisal Fee Workflows Can Cost Lenders $750K Annually

Issues with workflows around appraisal fees cost lenders dearly. As we saw with each worst-case scenario, the instances may seem uncommon or be nominal charges, but there’s hundreds of thousands of dollars in revenue that are at risk for lenders.

• Borrower fallout — $375,000 annually
• + Fee escalations — $200,000 annually
• + Fee collection — $125,000 annually
• + Fee payouts — $50,000 annually‍
• = $750,000 potential lost revenue per year

Appraisal fees quickly add up, but there’s plenty of opportunity for lenders to reduce these costs. The key takeaway is that it’s not a matter of huge, sweeping changes required to recoup these losses, but instead simple tweaks.

For lenders who are looking to eliminate these losses and want to learn more about the simple, ROI-driving process changes they can make, our mortgage solutions team can show exactly how Reggora’s appraisal management platform can reduce costs in appraisal fees and help increase margins.