Appraisals, Fees, Lenders and Lies…
Can you think of a single business where an individual has less control over their own financial future than the appraisal business?
In most professions, your level of success is dependent on your personal work ethic, dedication to education, promptness of service, and overall level of quality. But, no, not in the appraisal industry. The HVCC took all that away. In the vast majority of circumstances, appraisers in any general market are paid the same fee. An average appraisal in Moore County, NC is worth $450.00. A VA appraisal $500.00. It doesn’t matter if you’ve been licensed six months or thirty years. It doesn’t matter how quickly you turn your work in, how detailed the report is, how many designations you’ve earned. Nothing matters, and you have no control over the way “YOUR Business” prices its products. Prior to HVCC, appraisers could visit companies and ask for their business. You built business relationships and prospered based on your own initiative.
I can’t imagine any other business where the same system is in place. Think a brand-new doctor gets paid the same as a twenty-year veteran? Can you think of a single business where an individual has less control over their own financial future than the appraisal business?
The entire scenario leads to lower quality appraisals. Where’s the motivation for appraisers to work hard, take new classes, learn the latest technology? It makes no difference how much extra effort they put into “their business,” because their business model has been destroyed. Their pay schedule is controlled by a lender or AMC.
No one wants to talk about this fiasco. All we hear about is all the so-called new technology and using automated valuation services instead of traditional appraisals. Think about this one rule change and what it might mean. “For any lender who chooses to use an AVM for their appraisal service, they must lend their own private funds.” Each bank can decide for themselves. It seems easy to worry less about quality when you are lending someone else’s money. Remember “In-House” loans? Maybe it’s time for a come back…
Let’s look at a few important facts.
#1. Lenders claim we need faster appraisals and that appraisers delay the lending process. They say that’s one of the biggest reasons they are pushing for online valuations.
That’s a lie. Simple fix. Order the appraisal at the same time a home inspection is ordered, or when the application is taken (when the buyer typically pays for the appraisal). I guarantee you appraisers can finish the appraisal before the lender completes the paperwork and is ready to close. It’s funny how much talk there is about appraisers slowing down the lending process when they’re the last thing ordered. What’s wrong with that timing?
#2. Lenders and GSEs claim the technology and big data is so much improved, a computer can do as good, or a better job than a traditional appraiser.
That’s another lie. Big data works very with consistent and accurate data. The real estate industry provides neither. Take a look at the over 800 different MLS systems that mostly use different methods of reporting data. How do you sort data when it’s not all reported the same way? It’s easy to track the errors in online valuations and look at their level of quality from the early 1990’s to today. The margins of error are the same. Sure, the bells and whistles look much nicer and there is much more information. However, more data means nothing but dots and dashes. In this case, bigger is not better. It is a simple fact that no computer will ever be as reliable as a highly trained licensed appraiser.
I’m pretty sure Fannie Mae just got a 3.7 BILLION dollar bailout and business is good. At this time, we need better work, not to be striving for faster and cheaper. I must have missed the public outcry for faster and cheaper appraisals. It was only an outcry from the very people who seek to reduce the role of traditional appraisals, only so they can charge for their AVM services. It’s really not that complicated. Take the financial incentive away from this appraisal debate and the debate would disappear overnight. It’s nothing more than a fight over who gets paid for the appraisal portion of a mortgage loan. If it’s simply a matter of deciding which appraisal product is better for consumers, it’s no contest.
If low quality appraisals are the answer, we’re right on track.
Let’s also talk about another fallacy. Fannie Mae will provide “no appraisal” loans in two circumstances. First, there must be at least a 20% down payment, so the owner has something invested in the property. That’s great. But, we have new 97% loans hitting the market. That’s bad.
The second circumstance is that they must have an appraisal on file from a previous loan. So, in other words, they are going to use the work of an appraiser to take work away from an appraiser.
I have a problem with that and it seems downright criminal. That report was created for a specific time and place. Circumstances have changed since that first appraisal report was written. Fannie Mae got to pay once for the appraiser’s work and then can use it anytime they want? An appraisal is an opinion, like what a doctor or lawyer may offer. It’s not a product you buy and own. It is a professional opinion that is only good for that day. Appraised values likely change every few months. So, imagine if my name is on a report and they use that report to make a loan two years later. If the loan must be repossessed for any reason, will part of the blame be on the appraiser? Lots of grey areas there but the bottom line is Fannie Mae will only allow a no-appraisal loan – if they have an appraisal. Is that confusing? And, this time, they don’t have to pay for the appraisal. What a system.
Be very careful what you wish for. AVMs may become the worst real estate nightmare in history and don’t say we never told you so.
#1 – Appraisers should be paid based on their value in the marketplace like every other business. Experience and quality should have value.
#2 – Order the appraisal earlier in the lending process and any timing issues will go away.
#3 – As for AVMs – they were not in 1995, and will never be a consistent and reliable valuation tool to provide security for most people’s single, largest, lifetime investment.