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When the Details Really Matter

Published On 08-13-2013 , 12:05 PM

 My former employer bought a fair number of small banks in my tenure there. Buying banks is a great way to expand operational footprint into new markets or solidify existing market share. But this seemingly beneficial short-cut to grow a bank’s business comes with hidden pitfalls. Most crucial is the whole issue of back office redundancy. How are morale and production kept high when many employees do not know if they will be let go at some point?
 
Systems conversion is also a challenge. Sometimes the acquiring bank does not have the most updated hardware or efficient software, but its systems win out because it is less costly to downgrade the acquired bank than to upgrade the acquiring one.
 
What sometimes gets lost amidst the larger and more urgent issues is integrity of documentation. Yet such a quiet and easily overlooked issue can become a major headache when a loan becomes non-performing and the bank pursues foreclosure activities. It is at time of foreclosure when documentation integrity flaws are uncovered:
  • The mortgage on an office building that did not include the crucial adjacent parking lot
  • The tract of ground that was supposed to be owned by the condominium complex developer (the bank’s borrower), but was instead owned by the condominium association
  • The legal description that was supposed to describe the house on one side of the street that actually describes the vacant lot that can be seen from its front porch
  • The “Less and Except” paragraph that was left off of the legal description sent to the appraiser but was included in the recorded mortgage
These and many other problems have been found when documentation integrity was not what it should be.
 
When it comes to data integrity and the appraisal function there is something that every bank should get right: ensuring that the legal description that is on the mortgage is the same as the legal description provided to the appraiser. This is the legal description that will be included in the appraisal report and will be the basis of the valuation process. As routine and minor as this task may seem, a lot actually rests on getting it done correctly. This is not something that can be readily or easily outsourced. This is something that should be a part of the bank’s internal quality control systems.
 
The first step in this process is for the bank, not the borrower, to provide the appraiser with the legal description that will be the basis of the valuation assignment. The loan officer is ground zero to manage the flow of critical data, such as the legal description and operating information, the bank sends to the appraiser.
 
Once the appraisal report is delivered, there is a second step should never be bypassed in the urgency to close the loan. That step is a laborious and detail-oriented one. Someone has to compare the calls in the mortgage legal description with the calls in the appraisal report legal description. For those not familiar with the term, a call is the length of one portion of the property’s boundary; as an example: South 89 degrees 52’ 46” West 2,620.64 feet. If the legal description calls are not accurate or comprehensive the bank might not have the collateral that it thinks it has. Unfortunately, that fact is not uncovered until the bank needs to recover its losses by foreclosing on collateral it thinks it has but finds it does not.
 


 




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