Author: Drew Watson

Where are we?

Before I get started, let me say there are thousands of independent fee appraisers who love their job and are very good at it.

But…

In the last two weeks, I’ve had officers at two of our large clients, both of whom happen to be appraisers themselves, rhetorically ask “where have all the good appraisers gone?” It seems that in numerous markets there is a shortage of high-quality, professional real estate appraisers. For lenders, that means inconsistent fees and delivery dates, which means more work to get the reports in and more work to keep customers happy.

How did we get here?

Prior to FIRREA, the appraisal profession was stocked with professionals that had come up through the ranks via a process requiring years of apprenticeship and experience. This taught them to gather data and thoroughly vet and analyze transactions.

The impetus to regulation was to improve morale and the quality of the work product. It also had the extra benefit of further raising the bar on professionalism by requiring education. Essentially, it took practitioners who were good at what they did and keenly interested in the subject matter and made them even better.

But…

The licensing requirements introduced in FIRREA not only made becoming an appraiser much more difficult, it made licensed appraisers much less willing to bring in new blood. Compounding the problem were lender requirements that prohibited trainees from performing any work on their reports. Rather than matching transactional risk to appraiser experience, many lenders simply implemented policies requiring a licensed appraiser to perform their work. If a trainee is barred from performing work for an appraiser’s clients, what incentive is there to bring on a trainee? The result is a steady decline in the number of new appraisers and a material percentage of those working today being licensed as a result of familial relationships.

Where do we go from here?

As a lender, you’re likely asking yourself questions like:

• What valuations could we be doing in-house?
• How do I train staff to do valuations?
• What systems can we use to generate those valuations? (Pro Tip – printing out an AVM is not a safe and sound valuation process)

The situation is not likely to be easily solved. For a profession that has long been slow to change, the pace of change is expected to accelerate. Appraisers are going to be needed to handle specialized, complex transactions and as a profession will simply not have the capacity to handle everything else.

But…

This brings us to the potential solution for safe and sound banking practices to continue as the ranks of good (non-biased, professional, can analyze numbers while spotting the little differences that drive marketability) appraisers continues to diminish.

In short, the solution starts with asking the questions above. As an AMC, it’s up to us to facilitate that through front-end decisioning tools, a full complement of valuation report options to match every risk profile, and tech platforms that empower your team to perform your own valuations when the risk profile calls for it.

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:

1. When COVID-19 hit, the GSEs quickly approved flexible forms not requiring an interior inspection of the subject property
2. Underwriting of the flexible forms did not offer rep and warrant relief
3. 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…

Is your time valuable? Is it worth saving?

“If your time to you
Is worth savin’
Then you better start swimmin’
Or you’ll sink like a stone”

– Bob Dylan, “The Times They Are a-Changin'”

Bob Dylan wrote those words in 1964, and the point he was making was certainly more existential than the need for lenders to focus on operating at their highest and best use. That said, it doesn’t prevent us from using it as a poetic jumping-off point for what is happening in the world of residential lending.

For 25 years, the de minimis loan amount over which banks are required to order a residential appraisal has been frozen at $250,000. Over that time, the average home price has more than doubled, rising from $156,100 in Q4 of 1994 to $377,000 as of Q1 2019. While long overdue, the de minimis amount is proposed to increase to $400,000. This will result in an estimated  nearly 30% increase in mortgage originations that will be exempt from the appraisal requirement. Add HELOCs, second mortgages, and loan renewals, and the numbers are staggering.

On the mortgage company side of the equation, the GSEs have started talking openly about their long-running pilot program testing a bifurcated appraisal process. For those not familiar, this means one person will complete the property inspection and another, unrelated person will complete the property valuation. Furthermore, the GSE has the option of waiving the property valuation portion entirely and relying on the inspection report and their own internal valuation.

Without getting too deep in the weeds on these changes, the consequences for lenders (and appraisers, for that matter) of all types are monumental.

Banks and credit unions typically – and rightly – focus on their processes for appraisals more heavily than for their evaluations. These lenders are also much more likely to handle evaluations in-house rather than using an outside vendor to manage the process for them. How likely is it that these processes can withstand the added pressure applied by an almost 30% increase in demand? Even if they can, how much staff time will be devoted to this to the exclusion of generating new business and supporting more complex commercial loans?

For mortgage companies, the impact is in the form of having to now manage not one, but two processes and sets of vendors – one for residential inspections and one for residential valuations. Not only that, but it will be vital to be up and running quickly so as not to lose ground to competitors who are able to take advantage of the faster, less expensive process.

Whether you’re on the bank/credit union side or the mortgage company side, not only are Dylan’s questions about the value of your time worth considering, but so is his warning:

“…Then you better start swimmin’
Or you’ll sink like a stone”

The good news is you don’t have to swim alone. EVP has the solutions to get your time back so you can operate at your highest and best use, which is not managing evaluations or vetting new processes and inspectors.

For banks and credit unions, EVP-Eval is the industry’s first solution to utilize not only a homeowner-performed inspection (using our proprietary inspection app), but also to provide you with an appraiser-certified evaluation.

For mortgage companies (and all other lenders as well), EVP has been sourcing appraisals for clients under the bifurcated model for years. Now that the GSEs have caught up with us, it only makes sense for you to take advantage of our experience and get ahead of your competition.

We plan ahead so we can make our clients’ lives easier. Contact us today to see the future of property valuation.

Is your bank ready to handle a 30% increase in residential property evaluations? According to the OCC, Board, and FDIC (collectively, the Agencies), that’s roughly how many more there will be if their proposed increase in the de minimis loan amount from $250,000 to $400,000 takes effect.

Before you answer, however, there are two key questions to consider:

1. Will handling the increase result in all of your staff operating at their highest and best use?
2. Is your current system already in need of an update due to compliance concerns?

Highest and Best Use

This is a term of great import in property valuations. It essentially means that the best use of a property is that which will result in the highest value for the property. The term, however, certainly has implications as a general economic theory.

For example, is making site visits for transactions that fall under the de minimis threshold the highest and best use of your production staff? Might their time be better allocated toward producing new business? What about your appraisal staff? Might their time be better allocated to larger residential loans and more complex commercial transactions?

Our research shows that lenders spend a minimum of five hours on a single evaluation. Calculate the hourly wage for all the people who touch the transaction over that time, and all of a sudden the no-cost internal evaluation process gets very expensive.

Compliance

There are two passages in the ABA’s response to the proposed increase that I believe are worth considering First:

ABA believes that the first priority that must be considered is the continued protection of banks by the implementation of strong risk management practices.

Note that they said “the first priority.” But that’s not all. They go on to say that increasing the de minimis threshold

“…would be accompanied by the required implantation of effective risk-control measures by depository institutions.”

Webster’s defines implantation as “establish and set permanent / to set permanently in the consciousness or habit patterns.”

I see these two comments together as a warning that this is not business as usual and that current controls across the industry are inadequate. Your advocate is telling your regulators that their members – you – have weaknesses in evaluation production and control structure. How likely is it that the regulators are going to overlook those weaknesses versus making sure those holes are plugged?

So what are those holes in current evaluation processes? The first and easiest to fix is that some institutions are simply not doing them. Second, some are still relying on realtor estimates and tax values. Third, there isn’t clear separation between production staff and the people doing the evaluations. Fourth, and the one that is sure to ruffle the most feathers, is the use of AVMs.

Let me start by saying that I am not declaring AVMs to be noncompliant. I am, however, saying the industry needs to take a hard look at whether or not they are.

Let’s start with another excerpt from the ABA’s response:

When institutions decide to forego obtaining an appraisal by state-certified or licensed appraisers, the rule would require that institutions obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices.

So what qualifies as “safe and sound banking practice” when it comes to evaluations? According to the Interagency Appraisal and Evaluation Guidelines (IAG):

“It would not be acceptable for an institution to base an evaluation on unsupported assumptions, such as a property is in “average” condition…”

And here, in Appendix B dealing specifically with the use of AVMs:

“…the results of an AVM would need to address a property’s actual physical condition, and therefore, could not be based on an unsupported assumption, such as a property is in “average” condition.”

It is certainly possible that an AVM exists that takes into account and makes adjustments for “a property’s actual physical condition.”

Does yours?

If so, you’ve found something I’ve been unable to find. If not, and you haven’t had any issues with compliance, are you confident that will continue to be the case moving forward?

Regardless of the method you currently use to perform or obtain residential evaluations, there are causes for concern as the demand for them expands. If you want to take a look at other options, we would love to talk to you about EVP-Evals. It combines a first-of-its-kind inspection app to allow the homeowner to complete the inspection with an actual property appraisal. For $99.