There are two ways to make the home loan market much more
efficient by empowering borrowers. The first is to authorize
borrowers to order their own appraisals. The second
(considered next week) is to eliminate misleading features
of the Annual Percentage Rate (APR).
Appraisals in the Current
System
The appraised value of the home that a consumer offers as
the collateral for a loan is a critically important piece of
information. It tells lenders how large a loan they can
safely make, and it tells home purchasers how much cash they
need for a down payment.
Under existing arrangements, the lender orders an appraisal
of a property after the borrower has applied for a loan on
the property. In most cases, the order goes to an appraisal
management company (AMC) which selects the individual
appraiser who does the work and delivers the appraisal
report to the AMC, who delivers it to the lender, who
delivers it to the applicant.
It does not have to be done that way, an alternative is a
system in which borrowers order their own appraisals from
AMCs. This article considers the costs of the current system
relative to the alternative.
Borrowers Now Pay For
Appraisals But Lenders Own Them
Borrowers pay for the appraisal but it carries the name of
the lender who ordered it. For all practical purposes, the
appraisal belongs to that lender because the borrower cannot
use it with another lender. While nothing prevents borrowers
from purchasing appraisals on their own, lenders will not
accept them, which means that they will have to pay for a
second appraisal when they apply. And if by chance they
decide that a lender other than the one they selected
initially is the one they want, they will pay for (and wait
for) still another appraisal.
In the alternative system where borrowers order appraisals,
one appraisal could be used with any number of lenders
within the 120 day validity period specified by current
regulation.
Excessive Costs of Aborted
Applications
In the existing system, consumers are denied the opportunity
to see the appraisal when it will do them the most good –
which is before they apply for a mortgage. In many cases,
having the appraisal early on would save the consumer from a
bad decision – the decision to apply for a loan for which
they either cannot qualify, or which is too costly to
pursue, because the property value is insufficient. This is
not a rare occurrence, and when it happens it wastes the
lender’s time as well as that of the applicant.
In the alternative system, borrowers order appraisals before
applying for a loan, which avoids the costs incurred when a
low appraised value aborts a transaction.
Needless Delays
Because appraisals are not ordered until the borrower has
selected the lender, the loan process is extended by the
time required for the appraisal. The average is about 2
weeks. To avoid lock expiration, borrowers need to extend
the lock period, which can cost as much as ¼ of a point – or
$500 on a $200,000 loan. This cost of appraisal-induced
delays, which is like a tax imposed on every borrower, would
be eliminated by the alternative system.
Ineffective Shopping
Lender-specific appraisals dampen the ability or willingness
of mortgage borrowers to shop, which is hard enough without
it. The disclosures that government requires lenders to
provide applicants are supposed to protect borrowers by
making it easier for them to shop. However, borrowers don’t
receive the disclosures until after they have applied for a
loan and paid for an appraisal. For a borrower to withdraw
at this point in order to begin again with another lender is
difficult under any circumstances. The certain knowledge
that doing so will require another appraisal fee makes it
doubly so.
With an appraisal issued in the name of the mortgage
shopper, the shopper could invite multiple lenders to make a
firm offer at a specified date and time. The offer would
specify the interest rate, loan fees, and lock fee, on the
mortgage for which the shopper had applied. The borrower
would accept one of the offers that day-- offers will lapse
at the close of business -- and pay the lock fee of the
selected lender. A lock fee will be necessary to discourage
shoppers from walking away from deals when interest rates
decline, and starting the process again with another group
of lenders. But lock fees would be subject to the same
competitive pressures as the other components of the
mortgage price.
Making appraisals portable is one of the simplest and most
effective ways to empower consumers, but it has no political
constituency. To my knowledge, none of the consumer
groups have touched it. I just checked the web sites of the
Center For Responsible Lending and the National Consumer Law
Center – not a word. I have a theory about the reasons for
this which I may write about in a future article.
