What lax standards caused, unreasonable standards will not cure.
I originally published an article on Scope Creep in 2011. Unfortunately not much has changed five years later. An appraisal report is now X number of pages, takes twice as long to complete and for fees that are the same quoted a decade ago. This is not a sustainable model.
I now have more than 30 years – OUCH -under my belt in the appraisal industry. I am so used to being told I am wrong that I get nervous when someone agrees with my value opinion. More often than not, I am “wrong” in both directions in the same day. I yearn for a Goldilocks scenario. This appraisal is too high. This appraisal is too low. Rarely is the appraisal “just right.”
During the days of property appreciation, I would cringe at having the reputation for being “too conservative.” Anyone in the real estate biz knows that “too conservative” is just code for being honest and not rubber-stamping the desired value. My firm does frequent assignments for real estate agents to assist in establishing market value for listing purposes. I enjoy that niche because every appraiser wants to be the “trusted advisor” and not the necessary evil deal killer.
Some may argue that residential appraising is dependent on the “Greater Fool Theory.” The sales approach is quite simply a recitation of what the last fool has paid. And, by 2005, things had indeed gotten quite foolish. But what did our clients ask of us? Did they ask what those fools should be paying? No. Our clients asked what the fools actually were paying! Everyone had lost their collective minds during the bubble, and market value became a reflection of that mass hysteria.
So other than stating what is now obvious, where am I going with this? As I see it, the problem is that two wrongs don’t make a right. We got into this mess with lax standards and we will not get out of it with unreasonable standards. When anyone who could fog a mirror qualified for a mortgage (or several), the only data point on an appraisal that was examined was the value. Now with a tsunami of loan repurchase demands and defaults, every data point must be perfect and more data points are added every day. Unfortunately, I am not convinced this makes for better appraisals. I am convinced it makes for very disgruntled and disaffected appraisers.
Beyond the unanimous grumbling and frustration amongst appraisers, it is appropriate to ask if these examples of “due diligence” make for sound lending decisions. Do these additional elements help identify collateral risk?
What is the solution? Thanks for asking! I would suggest the following … stop the horribly inefficient process of inflexible and mechanical protocols for quality control. First, ensure that those doing quality control have appraisal experience and knowledge and do not simply follow a checklist. Second, treat the QC process more like a USPAP Standard 3 Appraisal Review. Consider how an appraiser does such a review. Do they demand that the original appraiser correct every typo, add a 12th comparable, or get a better bath photo? No… a good review appraiser documents their finding and opinions and whether the appraisal is sound and credible. Why can’t such a QC report accompany the appraisal and document the typo, document the fact that the Subject Property Value exceeds the Predominant Neighborhood Value by 5% and the appraiser forgot to comment, and any other non-critical findings?
The Dreaded Revision Requests
Why not reserve requests for additional information or corrections to those appraisal reports that may not truly be fully supported and credible in the original submission? I don’t think that suggests tolerating sloppiness; in fact it would inject some common sense and also substantiate the QC process itself. In the era of mortgage repurchase risk, would that not satisfy the need to demonstrate good collateral risk management? Some Lenders are using the Fannie Mae Collateral Underwriter (CU) very effectively. The intent of CU is to provide the lenders with tools necessary to manage risk, providing more context from bigger data sets. However, some misuse CU and simply cut and paste outcomes to appraisers and ask them to address point by point.
Appraisers are also constantly asked to “tell the story.” I applaud reinforcing the need to fully and clearly communicate the appraisal opinion. Unfortunately, the mortgage-lending arena has become a “checklist” or assembly line type of process. Worlds are colliding. Appraisers now face Scope Creep – with demands for more information, more description and more analysis than what fits on the original forms. Once outside the box, there are no standards, no conventions, and no protocols. If the quality control side of the equation is working from a checklist, why not have the production side (i.e., the appraisers) work from that same checklist? Wouldn’t it be more efficient if every appraiser were prompted to address each and every deviation from conventional guidelines?
I am not suggesting the appraiser merely tick off an acknowledgement that some item is out of compliance. It would be quite easy and efficient to organize these items, and prompt for specific analysis and commentary. This would organize them in such a manner where it is no longer necessary to flip back and forth through pages of a report to locate information; for example, a statement about whether private well and septic were typical and accepted in the market!
Collateral risk management is a highly essential part of lending, and while we seem to be doing more of it, we also seem, in my humble opinion, to be far more concerned about the boxes on the form than the true risk and reliability of the appraisal professional’s opinion. For goodness’ sake, can we all understand that “ugly” appraisals don’t automatically equate to “bad” appraisals?! As one of my first Appraisal Institute instructors told me, we have to pick the comps but our client picked the subject!
Appraisers love to appraise cookie-cutter homes in tract housing communities with three model match sales within a few blocks that sold in the last 90 days. But alas, we also get saddled with the assignment of the manufactured home that was disguised with an addition, situated on nine acres, has two outbuildings, and is in a rural location with few relevant sales in the past two years. Some of the appraisals I have reviewed were simply “ugly” properties, but beautiful reports.
One recent bright spot were comments made during the recent Valuation Expo by Rick Langdon, Chief Appraiser at Wells Fargo. Rick addressed head on the need to refocus collateral risk management practices and retrain reviewers and underwriters. He called out many specific examples of unnecessary and unproductive conventions. One such example was the “absolute” need for bracketing. Rick correctly noted, if an appraiser has a subject property of 3000 SF and comps in the same neighborhood at 2700, 2800 and 2900 SF, why must the appraiser be required to add another comp that may be of little to no usefulness simply because it is 3100 SF but in a different market or otherwise not as similar.
I do think we have lost sight of the forest while cataloging every tree. Appraisers are desperately trying to fulfill our clients’ requests. And certainly all appraisers are not created equal. However, perhaps if we stepped back and looked at what exactly was being asked of appraisers and how our clients are digesting and using that information, we could find a more effective way to manage collateral risk
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This article was originally published in the Fall 2016 Appraisal Buzz Magazine. If you would like to read additional articles from the third Edition, Fall 2016 of the Appraisal Buzz Magazine, click here for our digital version.