Your Mortgage: Collateral damage

By Mike Miles

Wouldn’t it be fun if this post were a review of the movie Collateral Damage? Unfortunately, it’s not, but if you were to Google it you’d see that Rotten Tomatoes gave it a whopping 19% approval rating. It just wasn’t one of Arnold’s classics like Commando that hauled in a 70% Rotten Tomato approval.

Instead, today’s title is about appraisals.

In my opinion, appraisals are the single most important part of mortgage underwriting. Other people will disagree with me, instead suggesting that credit scores or debt-to-income ratios are more important. Here’s why I think what I do:

  1. Real estate appraisals are used to determine the value of a property.

While this sounds simple, it’s not. The appraisal is completed by a person who is a trained and licensed professional, the key word there being “person”. This is important because people are fallible and have their own opinions too. The appraisal is dependent on a person making the best judgement that he/she can on things such as quality of construction, materials, lot view, etc. What one person thinks may not be the same as what another does, thus we often see differences of opinions between appraisers and real estate agents. In most cases, an appraiser’s opinion of value will be very similar (if not slightly higher) than that of what real estate agents think. However, there are times when appraisers don’t agree and that sets off a series of events that can affect both buyer and seller.

2. Appraisals have their own underwriting systems.

Did you know that appraisals are sent digitally through different portals to get graded? Each appraisal (on conforming loans) is ran through a collateral underwriting system where its data points are measured for risk assessments. This system analyzes the comparables used and can even tell if those same comparables were utilized in an unrelated appraisal report. Why is that important? Well, if more than one report uses the same comparables, the system will analyze to see if the newest report’s adjustments are in line with the other unrelated report’s adjustments. If the system thinks the adjustments are out of whack, it will flag them and identify other, better comparables to be used. Crazy right? It’s nearly automated appraising.

This is an example of where big data is being used to help mitigate risks for lenders and banks. Ultimately, it’s great that such an underwriting process exists as it will help prevent another housing crisis.

It’s quite normal to feel like you have to hold your breath during the appraisal part of the mortgage process. In most cases, mortgage underwriting is complete with the only thing remaining to be cleared being the appraisal. If the value comes in at or above the contract price, it’s a party so as long as the collateral underwriting doesn’t disagree. If the value comes in low, it’s damaging to at least one side of the transaction and possibly both.

This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain Mortgage today.

Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268