Appraisal Management Technology: A ‘SaaS’ Approach
An InHouse White Paper
PART 1 – The Lenders
May 11, 2010
An Open Platform Approach to Appraisal Management Using “Service as a Software” Solutions
EXECUTIVE SUMMARY
Over the last year, new laws governing the appraisal management process have drastically altered the mortgage industry, shifting the responsibility of appraisal management from the loan originator to the lender. This policy sea change is quickly morphing how lenders operate on a daily basis as well as how they deal with Appraisal Management Companies (AMCs). The landscape is changing in terms of how AMCs compete with one another, as well as how they deal with appraisers and appraisal companies. To keep up with the massive transaction volume they face on a monthly basis, lenders and AMCs alike are now forced to choose between building a solution in-house or leasing a solution with long-term lease obligations and expensive implementation/transaction fees.
New open platform solutions such as Service as a Software (SaaS) Solutions are coming on the market to help streamline and simplify this process so that lenders get better, faster and less expensive service at a reduced risk and even gain a competitive advantage. At the same time, SaaS allows AMCs to more effectively source, maintain and grow their client and revenue base. This White Paper covers this industry shift, the alternatives currently available to lenders and AMCs, and how SaaS Solutions, such as Connexions, are helping streamline the industry in much the same way Salesforce.com changed how companies manage their customer relationship data. It is Part-1 of a two part series focusing on the Lender side of the equation. Part-2 will cover the AMC side.
THE INDUSTRY
According to the Mortgage Bankers Association it is estimated that 6.5 million new mortgages will be issued in 2010, representing over $1.3 trillion in new originations at an average of $200,000 per loan amount nationwide. That is over 500,000 transactions every month that lenders are processing even within the depressed real estate market. In the past, lenders had an entire delivery chain to help administer this process. Due to a dramatic shift in regulatory policies, the lenders are now trying to figure how to best deal with over 300 Appraisal Management Companies (AMCs) and over 100,000 appraisers nationwide.
Over the past year the change has been especially troublesome for lenders and vendors because the inefficiencies in this process are grossly magnified to the bottom line of all parties involved. Recent press from National Mortgage News claims the average profit per loan to independent mortgage bankers dropped by $100 in the 4th quarter of 2009 (from $902 to $809). That is $50 million per month being lost in net profit. That loss impacts the bottom line of all parties involved and a large portion can be attributed to not only regulatory changes, but also the resulting inefficiencies in the process.
THE SHIFT
HVCC and HUD Mortgagee Letter 09-28 Appraiser Independence
Prior to 2009, the appraisal process was managed and administered by loan originators. A wide variety of entities with extensive familiarity with managing the appraisal process were integral, including loan officers, brokers, processors, Realtors, etc. because this is what they have been doing for years. Loan originators would simply order appraisals and once received, submit them to the lender.
Over the past year, a number of changes have been implemented across the real estate and lending markets to address much of the fall-out of the mortgage industry collapse. HVCC launched in May of 2009, while ML 09-28 launched in February of 2010, prohibit mortgage brokers and commission-based lender staff from involvement in the appraisal process. This has had a significant impact on mortgage lenders. In essence, these regulations prevent the originator (anyone who makes commission off a loan or real estate transaction) from ordering, retaining, directing and paying appraisers. No third-party (including brokers and real estate agents) can select, retain or compensate appraisers. Further, the lenders production staff cannot do the same, either. Appraisers are to be kept completely independent so that reports are not created out of pressure and influence and hopefully, performed in a non-bias manner.
Effects: The full management of the appraisal process and appraisers is now the lender’s responsibility.
Now, the lender must order the appraisal solely, however originators are allowed to “initiate” the order. The lender is always going to be held accountable for the quality of their loan. The core reason is the investor is going to hold the lender accountable for adherence to compliance and appraisal quality. This change means the risk factor is now increasing for lenders versus the intended reduction in risk some of the rule changes were designed to help mitigate.
One element that is being missed by the industry, specifically by the lenders, is although this shift in responsibility has created a bigger burden for them, it gives lenders the opportunity to turn it into a competitive advantage.
The appraisal process is a significant portion of the mortgage lending chain and if lenders have a solid appraisal process, they can recruit top producing loan officers, attract more brokers and receive better pricing. Applying technology can help streamline the appraisal process, reducing costs and if done properly, convert it into a sales tool to drive more business and positively enhance the bottom line.
THE PROBLEM – THE APPRAISAL MANAGEMENT PROCESS
Appraisal Management
With this shift to the lender for administering the appraisal management process, one of the biggest challenges is the large number of touch points each lender must now deal with on a daily basis even at a small volume rate. For example, a typical mid-tier lender may deal with 3 AMCs, 100 appraisers, 300 Loan Officers, 40 Underwriters, 200 Processors and 200 brokers. Each entity may be using different AMCs and appraisers on many different platforms. This creates a level of complexity that is difficult to manage, is fraught with opportunities for error and ultimately increases the time/cost/risk to each lender. The efficiency an entity can lose can equate to up to 50%, thus requiring 50% more effort for the same number of files (based on internal research by InHouse Solutions).
The Payroll Analogy
The new regulations imposed upon the mortgage industry have created a situation for lenders that is similar to what corporations had to deal with in regards to payroll processing in the past when they had to manage the entire process themselves. It used to be that as companies grew from small businesses into medium and large businesses, they were forced to hire large staff and put massive systems in place to simply manage the process of compensating their employees.
As corporations become bigger and bigger and the ecosystem of payees, benefits and taxes become more complex, companies started to emerge with software solutions to help corporations manage and control this process. Having internal organizations of the magnitude they were reaching were simply not adding value to the organization. Payroll vendors such as ADP came along that basically streamlined the payroll process and simplified the administration of issuing compensation to the hundreds or thousands of staff members as well as contractors and third party entities. ADP provided software solutions that become invaluable to corporations not only because they can manage time-consuming tasks of payroll processing, but also because they handle the complex and critical components such as employee payroll tax filing, benefit allocation and tracking function required for local, state and federal tax entities.
In today’s complex, highly regulated and large transaction business environments, it is extremely rare to find corporations that manage their compensations systems without a payroll software solution provider whether done internally or externally. If you carry the analogy to the extreme it is almost as if some lenders are using a different payroll vendor for every employee.
Lender Pain Points
Though this example may be a bit extreme, it is readily apparent that the current situation has created a number of major challenges and pain points for lenders, whether they outsource or self-manage the process
FOR THE LENDERS (Outsourcing to AMCs):
Having to manage multiple vendors
Dealing with inefficient processes due to complexity of data flow
Increased cost and time demand because of complexity and number of vendors
Difficulty in changing vendors when needed (or locked into a specific vendor)
Lack of visibility into performance of a vendor or entire process
Inability to control allocation to vendors and partners
Not being able to centralize the appraisal process and hence the appraisal data
FOR THE LENDERS (Self Managed Users):
Having to manage hundreds of appraisers
Managing multiple appraiser panels
Dealing with inefficient processes due to complexity of data flow
Increased cost and time demand because of complexity and number of vendors
Lack of visibility into performance of a vendor or entire process
Inability to measure and control allocation to vendors and partners
Not being able to centralize the appraisal process and hence the appraisal data
High cost, long commitments, monthly minimums, high transaction fees, integration costs, wait lists, no customizations
Not designed from an AMCs perspective (most systems were patched together)
Staffing for a process that is a fixed cost; it is like running a company within a company that doesn’t make money
TECHNOLOGY ALTERNATIVES
To address these pain points both prior and following some of the regulation changes, a number of software solutions have come on the market with the intention of simplifying the administration of the appraisal process for a lender. As in other industries, technology can help streamline processes to reduce costs, eliminate inefficiencies and exploit opportunities for new products and or revenue. For the mortgage market and more specifically the appraisal management process, software can automate the affirmative evidence of Appraisal Independence conformity. One core benefit of using an appraisal software application that helps meet this criteria is that it can create, improve and/or even restore business relationships between appraisers, lenders and various third party partners. Until recently, lenders have been choosing between three primary software categories when seeking technology solutions to the appraisal management process. These include:
Off the Shelf Software / Leasing
Lenders can purchase or lease software as a quick solution to get up and running without having to have the internal resources necessary to implement and maintain the appraisal management process. They generally do not require a large up-front monetary investment and ideally the lender does not have to build a large IT staff to maintain the software. The vendor typically takes care of the maintenance and upgrades of the software – thereby reducing the risk that a large investment of internally built solutions may become outdated in a matter of months due to industry changes.
Currently there are only few software vendors to choose from that offer off-the-shelf appraisal solutions or leasing options when it comes to managing the appraisal process. The off-the-shelf solutions currently available were either patched together from a similar solution for their larger clients or were developed from an appraiser’s perspective.
On the leasing side, these vendors require a long-term commitment, monthly transaction minimum and a per transaction fee. In addition, implementations require customization because of the complexity of the lender’s IT environment which can be an expensive proposition. Even when going this route, requests can require a long waiting list that are billed out of hundreds of dollars per hour to develop changes to the software that in the end, the lenders will not own. One other aspect related to leasing is the deeper the lender relies on the software, the more reliant the lender becomes on it, making change difficult.
One key aspect to most off-the-shelf and leasing software providers for the appraisal management process is that these firms are not solely focused on the mortgage industry and these solutions are not designed with the subtleties and nuances that mortgage industry professionals are going to need and want.
Internally Built Solutions
Another option for lenders is to build a solution in-house that is custom made for the business and ties into the existing IT infrastructure of the company. This can be a powerful option for companies that want to closely manage and fine-tune the end solution based on the various needs of the business. The challenge with this option is the amount of time, energy and cost that is required to get a solution that works and will continue to do so. At rates of $50-$75 per hour, a team of four can cost $200-$300 per hour, or hundreds of thousands of dollars over a typical 6 month development cycle. This does not include the maintenance cost and resources, nor any special integration required for changes to the IT and/or business environment. According to Stephen R Schach, author of Software Engineering, 67% of the software cost is attributed to maintenance alone.
Building it internally can be a smart option if the company can afford it and if the firm can properly manage the IT side of the equation during and after implementation. The customization is the primary reasons firms are exploring or pursuing this option because of the specific demands of their business. However, a common phrase used to describe owning a boat, “it’s a hole in the water you pour money in to”, can easily be applied to this type of approach. Unless the firm is intent on becoming a technology company or at the very least having a well staffed and updated IT department focused on this side of the equation, it can be a large cost center and never bring the return it was intended to.
Loan Origination Software (LOS)
A popular software solution that has sprung up in recently is Loan Origination Software (LOS) providers now extending their offer to provide appraisal management technology solutions. LOS providers are firms that provide software that manages the entire loan process. These vendors have been in the mortgage space for quite a while. They are focused on and have a wealth of knowledge on the mortgage industry. LOS solutions that offer these newly designed appraisal management extensions are convenient for lenders because many times they are already using the LOS and have the relationship in place. This offers a quick solution for firms (specifically smaller lenders) and often leads to a starting point for some lenders to address the current challenges in managing the new appraisal process.
The problem with this approach is that for growing small lenders or for medium and larger lenders, this type of solution falls short. LOS solutions offering appraisal management add-on software do not have adequate features, reporting functions, vendor management capabilities and do not scale with the complexity of the business (increased regulations, multi-vendor relationships, large transactions, etc.). On top of the software add-on costs, there are usually additional expenses for the lender to interact with the LOS solution because transaction fees need to be paid to the LOS and membership is required.
THE OPEN SOURCE SOLUTION
Appraisal Management Service as a Software (SaaS)
A new option for the mortgage industry that is only recently becoming available is one where software companies are addressing the problem from more of an open systems approach. It is based on the Software as a Service (SaaS) model made popular by the likes of Salesforce.com, a Customer Relationship Management or CRM provider, that gave companies a revolutionary alternative to managing their sales and contact databases. Prior to Salesforce.com, companies were required to use off-the-shelf software solutions, purchase/lease 6-figure complex enterprise systems or build solutions in-house to manage all of their contacts in a database format. Salesforce.com allowed companies a simple solution with a rapid and scalable implementation process that could be accessed from anywhere and was maintained by the vendor. This is a solution that a number of security and back-up systems built in, with a variety of payment options so companies of all sizes could utilize their solution.
SaaS is a way of providing software to different customers over the Internet as opposed to at a server on site or on a customer’s individual computer. The SaaS provider handles the creation, updating, and maintenance of software. Customers purchase a subscription to access the software that can be based on a license (or seat) for each person that will use the software in a variety of term lengths (if any) and pricing bundles.
This open systems approach in the form of Software as a Service model instead of licensing/leasing a software solution or building one in house can add efficiency and cost savings for the customer. Customers, in this case, lenders, do not have to install and maintain programs nor do they have to hire staff, or use existing staff to maintain the software. As they are accessing the software over the Internet, they do not have to buy any new hardware and can even access it from mobile devices. Other benefits include:
Pay as you go model with a variety of termination opportunities
Lenders can scale with demand without upfront capital investment
Flexible and scalable to a lenders transaction volume, number of AMCs and users
Can be accessed remotely via the Web and still have a high degree of security
Can be updated with ease by the providers, eliminating long downtime or the need for end-users to download patches and upgrades
Community driven use and feedback often leads to better and faster updates and changes, leading the software publisher to support best practices
More feature requests from users since there is frequently no marginal cost for requesting new features
There are some drawbacks in this choice such as the fact that the lender does not control the software, and customization of programs may be limited. SaaS model contracts may be terminated early with sufficient cause. Downtime in the systems can have a significant impact on the business. Much like the leasing model, the lender is paying a recurring fee and does not own the software.
However these drawbacks pale in comparison to the advantages that SaaS solutions provide companies, specifically lenders in the mortgage industry that need the flexibility and options SaaS provides without having the ability or resources to manage internal or complex appraisal solutions. Salesforce.com dramatically changed how companies looked at software development and the delivery arena forever. The basic offering of SaaS forever altered the CRM industry. It is now spreading to other industries that need enterprise level software solutions that are more economical, easier to implement/maintain, do not lock-in customers to long-term contracts and allow for frequent updates without business disruption.
CONNEXIONS – A SaaS SOLUTION FOR THE APPRAISAL MANAGEMENT PROCESS
InHouse has created a Software as a Service system designed specifically for the appraisal management industry that is a based on an open platform philosophy. This solution, called Connexions, provides a solution for mortgage lenders and AMCs that addresses many of the short-comings of current solutions, while insuring that the every day and long-term critical needs are met for mortgage professionals at the enterprise level.
Designed from both a lender’s perspective and from a AMCs perspective, Connexions functions as a configurable appraisal management software solution providing the ability to order, track, assign, review and deliver appraisal reports. There is also backend functionality such as appraiser management, accounting and reporting. Connexions does not require long-term commitments, monthly minimums, integration fees, restrictive gateway fees, upgrade fees or monthly technical support membership costs. These services and support are part of the base offering prices so that companies that subscribe to Connexions know exactly what they are getting – no hidden or unexpected expenses.
For the Lender, Connexions is a vendor management platform wherein lenders can manage multiple appraisal vendors on one single platform. InHouse received consistent feedback over the past year that centered on the inefficiencies of this process for the lender due to complexity of the data flow, change requirements, lack of visibility across the system and lack of centralization of the process caused by the multi-vendor problem. Connexions was designed with these issues in mind so that vendor data and performance can be measured with built-in reporting tools and appraisal assignment allocation can be controlled in real-time.
For the AMC, Connexions is designed to remove barriers to entry by giving AMCs the ability to spread technology, risks and costs over time between multiple AMCs. This paper is focusing more on the benefits to the lender. A follow-on White Paper will cover the positive impact this will have on the AMC side of the equation.
Lender Benefits
Connexions is a web-based platform for lenders to manage multiple AMCs, appraisal companies and appraisers. Lenders are in full control of choosing/managing their appraisal vendors, controlling appraisal assignment allocation and monitoring vendor performance. It is a vendor management platform wherein lenders can manage multiple appraisal vendors on one single platform. Vendor performance can be measured with built-in reporting tools and appraisal assignment allocation can be controlled in real-time.
The web-based platform allows lenders to manage multiple AMCs, appraisal companies and individual appraisers and gives them full control of choosing/managing their appraisal vendors, controlling appraisal assignment allocation and monitoring vendor performance. Bottom line impacts:
Increased deal-flow. The SaaS model allows the lender to better and more efficiently manage a larger number of AMCs, appraisers and third party entities thereby increasing their ability to see more deals.
Eliminate barriers to entry for vendors. Allows vendors small and large, new or older, to work on the Connexions platform. Currently only larger AMCs have the resource requirements to integrate, while smaller AMCs and regional appraisal companies cannot.
Increase network of appraisal vendors. By making it easier for vendors to integrate, it actually attracts more vendors. By having more vendors on the platform, lenders can freely and openly add new ones.
Easily work with existing appraisal vendors. Lenders have relationships with existing vendors, and a SaaS solution such as Connexions allows vendors not on the system to easily and quickly implement and utilize it.
Reduce appraisal software requirements. No appraisal software needed, other than a connection to a website where everything can be managed.
Level the playing field. By putting all vendors on one platform, lenders can measure all vendors to one standard and compare vendors accurately in real-time.
Real-time performance metrics. Connexions provides reporting tools which measure performance metrics such as turn-around time, number of conditions and allocation.
Control allocation in real-time. Decisions can be implemented quickly in real-time. Other systems force the lender to contact the vendor and put a request in that can take days to weeks.
Compliance. Connexions allows TILA compliance with its manual/auto approve feature. RESPA compliance is met because of the engines ability to handle highly accurate fees at the point-of-sale.
Saves money. Reduces the time and effectively the cost associated with management of the process in other inefficient ways.
Flexibility. Easy pricing, no long term commitments, scales with the business.
The bottom-line benefits and impacts effectively give the lender a true competitive advantage over lenders not using a SaaS solution because the lender can see more deals and process them more efficiently while keeping costs down and setting prices at or below market.
AMC Benefits
Makes it easier to work with any vendor, large or small by lowering the barriers to entry for lender’s vendors via an Open Platform
No upfront cost
No high transaction fee
No integration fees or wait list
No contracts
No monthly minimums
No gateway fees
Other benefits for Appraisal Management Companies will be covered in Part – 2 of this White Paper that focuses on the AMC side of appraisal management process.
For example, Connexions is being integrated with multiple Loan Origination Software (LOS) platforms, wherein AMCs benefit by automatically being integrated with multiple LOSs without any integration costs. The AMC simply pays a per transaction fee, which in many cases is the same fee they would normally pay if they integrated on their own.
Functions as configurable appraisal management software providing the ability to order, track, assign, review and deliver appraisal reports.
Backend functionality such as appraiser management, accounting and reporting.
Designed to remove barriers to entry by enabling AMCs the ability to spread technology risks and costs over time between multiple AMCs.
IMPLEMENTATION EXAMPLE
InHouse originally developed Connexions for an existing client located in North Carolina. For this 1 Billion dollar mortgage lender, their wholesale channel wanted to diversify their AMC provider base, but the work involved in managing multiple AMCs would not allow them that flexibility.
InHouse built a beta version of Connexions in two months, hand-in-hand with the lender.
The following is a quick synopsis of the implementation and benefits that this lender was able to reap in the first 2 weeks following implementation:
Lender was able to implement Connexions SaaS solution in less than one week with hands-on training and LIVE support.
Removed a long term vendor instantly due to invoice disputes. This change did not effect operations and sales at all because the platform was centralized.
Added new AMCs easily without interrupting ops and sales. The lender was previously handling three AMCs and quickly added a fourth.
Prior to Connexions the lender would have to interview the AMC, negotiate fees, negotiate Service Level Standards, negotiate process/workflow and implementation. Implementation can take from 2-3 months to mature and involves: manual transfer of business to the new AMC, retrain loan officers, processors, managers, underwriters, account executives and brokers on the new process, the new website and the new relationship.
Eliminated TILA compliance issues. Previously brokers and originators were ordering appraisals and charging the borrower too early. Connexions allowed the lender to approve and filter all orders before submission of the appraisal to the AMC. Connexions has a configurable tool which lenders can use to manually approve files for compliance, or automatically approve files for compliance.
Provided more accurate pricing at the point-of-sale due to Connexions pricing engine, which is an exception based pricing model allowing for fine-tuning of fees down to a zip code level. Accurate pricing saves time/money. Connexions also calculates rural properties and homes over 1 million, all which allows for more accurate pricing.
Lender was able to reduce the need for a full time appraisal coordinator saving $35k per year in base salary (does not include time/cost attributed to appraisal review). Lenders typically need 2 coordinators per 400 orders to manage the process fully.
SUMMARY
Increased regulations and requirements imposed upon the mortgage industry are have posed significant challenges, added risk and increased costs that lenders currently face due to using existing, inadequate solutions. Fortunately, other industries have paved the way for the mortgage industry to adopt many technology advancements that have enabled more efficient and streamlined processes leading to reduced costs and increased revenue streams.
Technology solutions such as SaaS for appraisal management are examples of advancements that can benefit all of the stakeholders in the appraisal management process. These solutions are better, faster, reduce risk, are less expensive and can eventually lead to ways that lenders can better compete in the market. InHouse created Connexions with both the Lender and the AMC in mind and is creating a new standard for the technology management process. Lenders are already reaping benefits within weeks of implementation of a SaaS solution and will continue to do so as the solution is refined and updated to meet the current and future needs of lenders as they become more accustomed to this type of solution.
In Part-2 of a two part series, the challenges faced and benefits received by AMCs will be covered.
ABOUT INHOUSE SOLUTIONS
Founded in 2002, InHouse Inc is a lender services company providing a full spectrum of appraisal solutions from appraisal management, self-service software and fully customized appraisal processes. The company was founded on one simple principal: to provide exceptional service and quality that meets and exceeds one’s own in-house solutions without any of the costs. InHouse is dedicated to exceptional service, quality and innovation. For more information contact www.InHouseUSA.com
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