2020 was a heck of a year for the appraisal industry. Despite a global pandemic, volume hit record levels for most of the year.
But have we learned anything?
If we look back at 2020 with an open mind, we learned the following:
- Interior property condition is really important to GSEs
- Appraisers’ value opinions are much less important to GSEs
- Both of these truths are good news for appraisers (hear me out! Keep reading)
Interior property condition is really important to GSEs
Let’s agree on three things:
- When COVID-19 hit, the GSEs quickly approved flexible forms not requiring an interior inspection of the subject property
- Underwriting of the flexible forms did not offer rep and warrant relief
- Lenders largely opted to not use the flexible forms
The GSEs are to be commended for number 1. Unfortunately, number 1 was only allowed because of number 2, and number 2 led to number 3, meaning number 1 was essentially a moot point. What does all that mean? It means instead of adopting flex forms and losing rep and warrant relief, lenders continued to require interior inspections. But the important thing to consider isn’t what the GSEs did, it’s why they did it. Why did they shift the rep and warrant risk back to the lenders? It wasn’t because the value opinion was in question. It was because the condition of the property wasn’t verified. With the influx of big data, has confirmation of interior condition become appraisers biggest value add? Before I answer that, let’s look at the second thing we can learn from 2020.
Appraisers’ value opinions are much less important to GSEs
With the continual refinement of Collateral Underwriter (“CU”) and the increased accuracy of proprietary AVMs, the perceived value of appraiser-determined values is diminishing for conforming property. At the same time, conforming property is becoming more prevalent in the GSEs’ model. The lack of adoption of flex forms suggests that the most valuable transactional service appraisers provide to the conforming mortgage process is the inspection. This doesn’t include the more complex properties that fall into the non-conforming category that models cannot accurately gauge. This tells me that something I’ve written about previously (and will write about again), is not far off: bifurcation. It had GSE approval in the spring of 2019 before Director Calabria was appointed, and I suspect it will become policy soon after the current wave of refinance transactions is processed, i.e., when lenders have some capacity to put toward enacting a major policy change.
Both of these truths are good news for appraisers
It seems counterintuitive, but it’s true. Things are changing.
First, because of the appraiser certification and licensure process and the training entailed, appraisers are the most obvious group to provide inspection capacity. But that requires action. The industry stakeholders should move to increase training or create a higher inspection standard immediately. This will both shore up the perceived quality and usefulness of appraiser-performed inspections, and also drive acceptability of the assignments to appraisers. There will be one chance to become the inspectors of choice for the new process. If appraisers resist the change or drag their feet and fail to provide sufficient capacity, they will be replaced. There is an abundance of insurance adjusters who are being displaced because of inspection technology, and they would love to migrate into the valuation arena.
Secondly, this shift allows appraisers to work at their highest and best use more hours in the day and therefore make more money per hour. As customers become more able to identify and stratify their real financial risks, appraisers can provide the appropriate confidence interval and scope of work to match. In the long run, it assures the survival of the appraisal industry rather than putting it in jeopardy. Appraisers will know markets more quickly than models can adjust and therefore have a protected role validating or refuting model results.
So an independent fee appraiser’s work week in 5 years may look like:
- 40% inspection services / market observation
- 25% desktop valuations for secondary market
- 25% thinner scope proprietary alternative products like AVM validation and desktops
- 10% full 1004 work at prices somewhere near 2-3x current customary and reasonable fees
Some appraisers may even choose to concentrate on one product. For example, they may do 100% desktops because they can be done remotely, and the appraiser can work as much or little as he/she chooses. As an aside, this is a very exciting prospect for Gen Z-ers getting into the business, and youth is something currently lacking in the industry.
Are we ready?
Better yet, are we willing? That’s the ultimate question. Because we are ready. And I say that as an appraiser, not just the owner of an AMC. We have the expertise and the training to continue providing a valuable service to lenders. But we can’t continue providing it in the exact same manner that we’ve always done it. And that’s ok! Every profession is changing. The good news is, the changes we need to make are not monumental. At least not the changes to our businesses. The changes in our mindsets, however…