Is the residential appraiser doomed?
Over the past 35 years that I’ve been an appraiser, I’ve heard that residential appraisers are going to be replaced within the next five years. With improved technology, the accumulation of “Big Data,” combined with changes proposed by the GSEs in the risk analysis associated with value, it seems significant changes are just around the corner.
What are the GSEs Doing?
GSEs have been given a mandate by the Federal Housing Finance Agency (FHFA) to modernize the lending process, including the modernization of the appraisal process. One of the stated objectives is to speed up the time in which the “Reps and Warrants” are delivered to the originating lender. Reps and Warrants are the set of assurances that lenders make to the GSEs regarding the quality of the loans that they originate and sell to the GSEs. Typically, an appraisal is ordered near the middle to the end of the loan application process, often delaying the closing, particularly when there are valuation issues. The GSEs have determined to get the information about the property at the beginning of the loan application process where an analysis will be made to examine the risk associated with the loan. This includes risk associated with the borrower together with the risk associated with the collateral. At present, Fannie Mae is offering waivers on about 10% of the loans being made where no appraisal is required. They report that that number could increase to as much as 40%. Lenders prefer the Appraisal Waiver, as the lender is indemnified from a “Buy Back” by Fannie Mae due to valuation issues lowering the lender’s risk in originating the loan.
When the property doesn’t qualify for a waiver, the appraisal is completed by having the property data that was collected at the beginning of the process sent to the appraiser who is engaged. The appraiser relies on the information provided to complete the assignment. The third option is that an appraiser is engaged to both collect the property data by making a physical observation of the property to be appraised and then completing the appraisal. The GSEs have a risk assessment matrix used to determine what type of appraisal is required.
In addition to the Bifurcated appraisal process, the GSEs are working to update the uniform data set, including the UAD property ratings (which, in my opinion, has some significant limitations as they are currently configured) with plans to completely revise the appraisal reporting process into a modulator reporting system. The second phase of the modernization is still down the road, but they have indicated that they are moving away from the “form” report with the hope that better property data analysis will take place.
How will this affect the typical appraiser?
It seems clear that the number of residential appraisal assignments will decrease as the number of appraisal waivers increase. Common sense suggests that the appraisal assignments that will be going to appraisers will involve properties that are more complex. The so-called “Cookie Cutter” homes are easy to model and develop a value using statistical analysis. The result is likely to be that appraisers will be doing fewer of the “easy” appraisals. As currently envisioned by the GSEs, fewer appraisers will be collecting property data with a site inspection and will be doing more analysis at their desktop.
Keep in mind that appraisals are only required for lending where the loan amount is above the “de minimus” transaction amount, or where is required by the lender’s own policy, or if required by federal requirement such as an FHA, or VA loan. As the de minimus level increases, the number of transactions that require a traditional appraisal will decline.
What to do?
Fannie Mae reports that about half of the purchase transactions that qualify for a waiver do not take the waiver as the purchase contract has an appraisal contingency. Appraisers need to be looking for other sources of appraisal work. Appraisals to meet purchase contract appraisal contingency could be a good source of additional work, but it will require the appraisers to market their services to the real estate agents and brokers to obtain that work. A number of appraisers supplement work by diversifying the valuation services they provide including pre-listing appraisals, cash purchase appraisals, evaluations for lender portfolios, along with a variety of other non-lender-oriented work.
Many state appraisal organizations are establishing standards for data collection where the data is to be used in the development of an appraisal. It seems clear that the best qualified parties to collect property data for an appraisal is an appraiser or someone who is employed by the appraiser. One hopes Fannie Mae can be persuaded to realize that fact, rather than the use of third-party data collectors where there are issues associated with competency and character.
Residential appraisers may need to diversify the valuation services that they have been providing in order to maintain the same income. My experience in serving on a State Appraisal Board for eight years was that appraisers who got in trouble, often did so when they ventured outside their typical appraisal practice. This may require appraisers to invest time in getting better qualified to perform a boarder range of services.
National Association of REALTORS® (NAR) has a workgroup developing standards to be advocated by NAR dealing with the so-called “Hybrid Appraisal.” Many of the national appraisal organizations are likewise providing classes and training to help their members deal with the changing nature of the valuation landscape.
While the proposed changes will not eliminate the role of the residential appraiser in lending transactions, it will most certainly reduce the number of appraisals required by lenders in residential transactions and will likely provide new roles and opportunities to be filled.
Unfortunately, the GSEs believe many of the appraisals that are being performed are less reliable than their valuation models. The fact remains that if appraisers are going to remain relevant, we will need to improve our skillset so that the work being provided is more reliable than any alternative valuation tool. As long as appraisers are the best valuation source, there will be demand for appraisers. However, the nature of what we do, how we employ technology, and how we provide our services is likely to change. Those who insist on the status quo will be obsolete and out of business.