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In 2003, Francis Ford Coppola’s daughter Sophia Coppola directed her second film, Lost in Translation. It was a comedy-drama starring Bill Murray and Scarlett Johansson. It received 4 Academy Award nominations, made a tidy little pile of money and was generally greeted favorably by those who like that particular genre.
I never saw it.
While there’s no direct connection to the movie, I would suggest that any relationship—personal or business—suffers when communication is missing. Let’s start with something obvious; language. Have you ever noticed that, regardless of what part of the realm we occupy, all of us employ our own language. I sometimes think that this ‘secret language’ is designed to create and protect the power of our respective roles. We build it around a kaleidoscope of acronyms: TILA, GFE, OCC, FHFA, FDIC, SARS, UAD, XML, FNMA, MAI, NMLS … and a thousand more just as jaw tightening. They serve to erect walls between lenders, investors, regulators, mortgage brokers, real estate agents, AMCs and their appraisers, and consumers. The net result can inhibit real understanding. And that’s important, because it’s the ‘knowing’ that we’re all really after.
Your most important role: Delivering information
Early on in my own career, first in real estate and then in lending, I learned an important truth; that my role was to deliver information. As a real estate agent, it wasn’t to sell homes, it was to help my clients understand the market and to guide them through the process of buying a home. As a lender, I never sold rates; I provided information and solutions to my clients so they were able to make informed decisions. In both instances it was still the noble and important profession of sales, but it was always oriented to serve the consumer by helping them to understand. It’s what most successful loan officers and Realtors do, they deliver information and help their clients understand how things worked.
Why is all this “understanding” so important? Isn’t it sufficient that all of us simply perform our appointed functions? That’s a very good question. By way of an answer, let’s look at a not so atypical transaction as a case in point.
A real world, very common example
Take a young family buying their first home. They get a referral from friends for a real estate agent who loves to work with first time homebuyers. She in turn refers them to a mortgage banker she’s worked with and sends them to get pre-approved. They get thoroughly prequalified, understand their borrowing capacity and even have some gift funds to get to that magical 20% down payment. Armed with all that information, the couple venture forth into the world of open houses. They encounter a market with limited inventory, but their Realtor reassures them there’s something wonderful waiting out there just for them.
So far, so good. Informed and prepared, they visit open houses and peruse the new listings that their Realtor provides them. And then it happens; the house they’ve been looking for shows up on their agent’s MLS. They schedule an appointment that evening to write an offer. Their agent knows there will be multiple offers—and surely over the asking price given the limited inventory—so they’ll have to make their highest and strongest offer if they hope to prevail.
Lo and behold, the offer’s accepted and everyone is ecstatic. The Realtor feels validated that her advice on price won the day. The loan officer springs into action and immediately requests updated paystubs and bank statements, warns his borrowers not to use their credit cards, checks to insure that rates are still good (they are) and says ‘closing in 30 days is do-able’. The only thing left is to order an appraisal. Once that’s completed, it’s on to the closing table.
The lender orders the appraisal through one of their AMCs and an experienced local appraiser schedules an appointment to meet the Realtor at the property to perform the inspection. Because the Agent knows how quickly the market is moving, she brings closed sales and listings for the appraiser and makes sure he knows that there were 5 offers over asking. The appraiser thanks her for her professionalism and suggests the report should be done in about 3 to 4 days.
And then it happens. The appraisal comes in and it doesn’t support the contract price! The Realtor explodes at the loan officer. Obviously the lender engaged an appraiser who didn’t understand the market and who ignored the fact that 5 other people made offers in excess of the list price. How could the value not come in? The Realtor warns the loan officer that he’d better get this fixed right now or there won’t be any future referrals.
The loan officer is angry and embarrassed. He tells his borrowers that he doesn’t have any control over whom his company selects as an AMC and nobody can choose the appraiser, so sometimes they get stuck with a bad one who brings in a low value. Meanwhile, the borrowers are devastated and confused. Their Realtor told them this was what the house was worth, yet it didn’t appraise. Their loan officer is blaming his company for making him use that AMC, and the best the lender can do is suggest the borrowers appeal the value decision or try to find some material error in the appraisal so they can declare it flawed and safely order a new appraisal.
Before we get to the end of this story, let me play a recent, actual interchange with a seasoned mortgage banker that addresses the underlying issue here.
Banker: Hi Michael, what percentage ofappraisals come in low? Refis vs Purchases?
AMC:Interesting questions. The smart aleck answer is none. But here are some additional thoughts:
What’s the basis for determining an appraisal coming in ‘low’ on a refinance? Good appraisals come at value; sometimes expectations don’t match up with that. That doesn’t indicate that the value is wrong or low or anything else. There is a process to reconsider an appraiser’s conclusion. We get requests on about 2% of the files we manage. Of those, some 28-30% result in a changed value.
All of the above is pertinent to purchase appraisals toowith one addition: the worth versus value issue. I co-authored an article in Mortgage Banking Magazine last summer that might help to shed light on this topic. I’ll attach it. … after a short interval,
Banker: Thanks. Refis I get because most people think their property is worth more than it is. It’s the purchases that are perplexing, especially in such a competitive market. To me, purchases indicate next month’s value vs last month’s value. I’m not sure this is taken into
AMC:Ok, do me a favor then. Go to your secondary marketing person and tell them you want them to fund a loan based on an appraisal with next month’s value and then call me back and tell me what they said.
Banker:Good one … thanks for the education.
So, something had gotten lost in translation for the above exchange to have taken place. This was a seasoned mortgage banker with many years of experience and his questions mirrored the issues of our previous story. And he’s not alone. There’s a reason that transactions can devolve into open warfare even with experienced professionals who are guided by the best of intentions. It’s about ‘knowing’ or, perhaps more accurately, not knowing.
Giving borrowers the right information
How does one know those things that are critical to prosecuting one’s responsibilities? Here are a few ways lenders can be ready to share the right information with borrowers:
>> Choose AMCs who work WITH you: Work with an AMC vendor who fosters a culture of learning. Choose an AMC who believes that working with a lender’s sales team, their broker or correspondent customer base, and their Realtor partners represents a real opportunity to advance understanding and better serve borrowers.
>> Use AMCs with great appraiser relationships: Work with an AMC who builds their vendor partnerships around a commitment to finding ways to translate what’s important to know. Choose an AMC that spends their time and resources to deliver information to those most in need; much as good lenders do who hold seminars for those first time buyers.
>> Consider an appraisal expert on staff:If you recognize that appraisals are a critical component of the lending process, you can hire an appraiser as part of your staff to help translate appraisal issues.
Explaining tough situations to borrowers
Let’s go back for a moment to our young family who were trying to buy their first home. According to their Realtor and loan officer, the appraisal came in low. The truth is, appraisals don’t come in low, they come in at value. Now the question of whether a report is good or bad may be a fair question, but there are ways to determine that answer. Multiple offers can set off a bidding competition with the net result that the issue shifts from a property’s value being based on existing closed sales, to what someone is willing to pay for it, i.e., what someone feels it’s worth to them. It’s in part why auctions can sometimes be so effective a sales tool. The bidding doesn’t stop when the price reaches market value, it stops when someone wins by offering the most money because that’s what it’s worth to them. Markets can become distorted when there are limited sales and demand outstrips supply. The problem for the appraiser is finding data that supports the new expanding price points. The problem for everyone else in our transaction is that they didn’t know any of this. They didn’t understand the distinction and thus all were left disappointed and betrayed by a system that failed them.
Can we better define what we should know? I think so. I think lenders need to have the right AMC relationships and have someone with appraisal experience on their staff. The risk of not being fully prepared to explain to their own team and their clients what constitutes good appraisal practice is too great with every transaction being so precious. The most successful lenders make a commitment to invest in those people who can foster that understanding. And the smartest lenders ‘invest’ in working with AMC vendor-partners that focus on being a resource to help bridge better understanding among all the actors in the play.
More understanding results in more business
When presented with a clear understanding of collateral valuation, borrowers will understand the appraisal’s role in their transaction and why it has such a great impact on lending decisions. The right information will save your relationship with the borrower, and positions your company as trusted experts they can rely upon. If the lender sticks with the old “my hands are tied and the appraisal came in too low” explanation, the borrower will have a bad impression of you rather than knowing you can guide them in the future. Lost in Translation needs to stay a movie – and not define one’s business model.
About The Author
Michael Simmons is Senior Vice President at AXIS Appraisal Management Solutions and has over 35 years in the real estate industry. His experience as a real estate agent, multi-branch manager for a national mortgage banker, and veteran mortgage broker gives him a unique lens into helping shape AXIS’ critical commitment to relationship-based and service-oriented appraisal services (as opposed to the typical transactional-based AMC model). In his more formative years (ages 9-12), he held the “dumb end” of the measuring tape for his father, who was Chief Appraiser of a major corporation, and later apprenticed under his uncle, who held the MAI designation. Michael can be reached at Michael@AXIS-AMC.com.