We all wish we could predict the future. Imagine the scenarios we could prepare for or the events we can avoid. However, one of the many super powers valuation professionals, like mortgage lenders, have is their ability to analyze the market. Through research, trends, and market predications they are able to give us an educated look at the future through their analytical crystal ball.
Wes Costello, Senior Vice President of Quality Management and Collateral Risk with Annie Mac shared with us what is on the horizon for 2019.
Buzz: What is on the agenda for mortgage lenders in 2019, and how will it impact appraisers?
Wes: The primary focus of mortgage lenders is reducing the cost of origination. Why? Consider the following report from the Mortgage Bankers Association. “Independent mortgage banks and mortgage subsidiaries of chartered banks reported a net loss of $118 on each loan they originated in the first quarter of 2018.” Total loan production expenses per loan was $8,957 in the first quarter.
Obviously profits improved to positive territory in the 2nd and 3rd quarters as volume increased, because while there were dozens of mergers and acquisitions, most lenders survived, and fewer thrived. However, the cost of origination remained fairly constant, and is at the top of lenders to do lists for 2019.
Appraisers should have a business relationship with their lender clients. I recommend getting to know the chief appraiser or manager of their client’s appraisal team. This can prove to be a good resource in a few ways. These professionals are knowledgeable about their company and industry guidelines and willing to share. Secondly, the rate of mergers and acquisitions is expected to be even greater in 2019 as lenders find the need to join forces to find economies of scale necessary for profitability. When companies merge, knowing how the landscape will change can help you stay current with orders.
Lenders who manage their appraisal procurement in-house might be more willing to consider outsourcing to AMC’s to reduce costs or find other ways to reduce costs of their in-house team. Among lenders that continue to manage in-house appraisal departments, expect to see increased adoption of technology fees associated with appraisal orders to offset a portion of costs.
Buzz: Do you expect to do more lending in 2019 than 2018?
Wes: Yes, we hope to. Please talk to our sales team about financing your home purchase. Ha, ha!
Let’s talk about the prospects for the entire mortgage industry. The last three quarters of 2019 are expected to be very similar to 2018.
Right now, most appraisers are experiencing a shortage of orders, and this is expected to continue well into March. The Mortgage Bankers Association predicts $315 Billion in single family mortgage originations in Q1 of 2019. This would be the lowest quarterly volume figure since 2014. Such an outcome will be the combined result of low housing inventory, decreased affordability, seasonality, and lack of refinances. It’s a good time to get that continuing education done!
Buzz: How will home sales look for 2019?
Wes: Home sales are predicted to pick up during the 2nd quarter of the year compared to last year, but even lower refinance volume will balance out the increase in home sales and 2019 volume will look a lot like 2018, but with a tighter Q1. An unexpected further dip in rates is a scenario that could alter the prediction. The “shortage” of appraisers that was felt in several states in 2016 will feel like a part of the past in most areas in 2019. The MBA predicts lending volume will grow incrementally from 2019 to 2020 and into 2021.
Smart appraisers have done or will do what I didn’t adequately do with my appraisal business – diversify. At the same time, focus on quality. Fannie Mae requires lenders to monitor and assess the overall quality of work performed by an appraiser. Reductions in appraisal volume enable lenders to be even more selective in the quality of appraisers chosen. A well supported appraisal is too vital as part of the process not to place a premium on quality.
Buzz: How can appraisers insure the appraised value is well supported?
Wes: One way to maintain or improve quality is to revisit your process for determining adjustments. Is your valuation as accurate as it can be without a site adjustment? Are your GLA adjustments adequate for the homes in your market? What research or education do you need to get there? Stay nimble and learn new methodologies and technologies.
Buzz: Speaking of adjustments, is there one adjustment that surprised you or other lenders the most in 2018?
Wes: I would have to say, date of sale adjustments.
When I left the field in February of 2011 and went to work for a lender, I was making negative date of sale adjustments on nearly every appraisal I completed with a comparable dated over 90 days. Home values were declining significantly. In my independent appraiser bubble, I thought this was universally recognized. The first appraisal I reviewed for the lender was in a market where values were sharply declining, but the housing trend values were marked stable. I called the appraiser to discuss, but then the second appraisal also had stable, and the third, and fourth etc. The practice of marking stable was so ingrained that it was difficult to fight.
Flash forward to 2017-2018 and to markets such as San Francisco, Denver, Boise City, etc., have had or are having double digit annual home price appreciation (according to the Federal Housing Finance Agency and local sources). Most appraisal reports marked the housing value trends as stable with no date of sale adjustment on comparables that sold six months ago and went under contact eight months ago. At times, lenders viewed reports where other adjustments appeared to be unsupported or left out to “make up” for the lack of date of sale adjustments. Home price fluctuations are highly localized and complex, but their analysis and adjustment should not be ignored.
Speaking nationally, home value increases are predicted in every quarter of 2019 but slower and steadier than 2018. We have seen affordability creep in to check price appreciation in some markets already. Because market trends are so localized, speaking nationally about home values is more misleading than helpful. Appraisers who are experts on their local market trends are highly valued by responsible lenders. Educate your client with a statistical graph on local home values in the subject demographic drawn from your MLS and you’ll blow our mind.
Buzz: What are lenders seeing from the agencies in 2019?
Wes: Mortgage aggregators and agencies have appeared to be more discerning in reviewing conventional and non-conforming, jumbo appraisals than government appraisals in recent years.
Therefore, HUD issuance of Mortgagee Letter 2018-06 accompanied by FHA head Brian Montgomery’s commentary in a Wall Street Journal article were a surprise to some and are a clear indication that HUD has concerns with appraisals backing FHA insured mortgages.
FHA reviewed 134,000 appraisals on closed loans and made the determination that inflated appraisals are partly responsible for an expected $14.4 billion-dollar loss in mortgage insurance over the next few years. FHA sees this most clearly with reverse mortgages, because the eventual recovery of the mortgage funds is entirely dependent on the future sale or refinance value of the property. As a result, all appraisals performed by reverse mortgages now require a pre-closing review of the appraisal by FHA. FHA then informs the lender whether a second appraisal is required on the property, with the lower value to be used.
On the conventional side, Fannie Mae continues to strongly encourage lenders to smartly utilize Collateral Underwriter to review appraisals. Appraisers can learn more about CU at https://www.fanniemae.com/singlefamily/collateral-underwriter and by talking with their lender clients.
Fannie Mae’s appraisal innovations in the second half of 2018 were the MH Advantage and High-Needs Rural Area appraisal waiver. MH Advantage is a program that recognizes higher construction standards of manufactured homes and affords them higher LTV and reduced loan pricing. These homes must have the MH Advantage sticker affixed and be reported on the 1004C, with the appraiser responsible for selecting the best comparables.
High-Needs Rural Area appraisal waivers allow for the lender to use a home inspection in lieu of an appraisal for properties that are within designated High-Needs areas when the borrower’s income is at or below the median for the area. The home inspection is used by the lender to determine that the property is safe, sound, and structurally secure and above C6 condition.
Traditional Appraisal Waivers are being offered by Fannie Mae and Freddie Mac on a small minority of transactions for purchases, rate and term refinances, and cash out refinances when below varying LTV’s, from 60% to 90%. One of the contingencies for Fannie Mae’s waiver is a previous appraisal uploaded to UCDP/Collateral Underwriter. As time progresses, more properties are becoming eligible. Fannie Mae indicates that nearly 3% of purchase transactions and 6% of rate and term refinances receive an Appraisal Waiver. However, only approximately 50% of waivers are utilized. I expect this figure to creep upwards as lenders realize that paying an underwriter to review the appraisal contributes to their cost to originate.
Hybrid appraisals will not be a part of fully amortized mortgages in 2019 and the fundamental role of the appraiser in developing full appraisal reports to establish collateral value will be a critical part of our nation’s housing finance structure.
Buzz: Wes, thank you for this look into what to expect from lenders in 2019. Any final thoughts?
Wes: Real estate appraising is a good industry and a great career for professionals that are principled and dedicated to the science and art of valuation. Because it is closely tied to the mortgage industry, it shares some of the cyclical competition of that industry. It is important to understand that we are in one of those cycles, and how lenders and appraisers favorably differentiate themselves will contribute to their long-term success.
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