The Imminent Extinction of the Appraisal Industry?
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This year the Valuation Expo returned to the Flamingo Hotel in Las Vegas, NV, June 19-20, 2013. The consensus was that appraisers still have plenty of work at this time. The exhibit hall featured many appraisal management companies seeking appraisers for their panels which is good news. If you were an appraiser looking for more work, this was a good place to find it.
I attended all four of the sessions offered for CE credit. These included “Keynote – panel of government and GSE representatives,” “Valuation Visionaries,” “Appraisal Quality,” and “Appraisal Reform.” These panels involved more than 20 speakers, so I don’t have space to list everyone individually, but they all did a great job and had useful information for all appraisers.
I can’t possibly cover 14 hours of presentations in this article, but I did find the session with the “Valuation Visionaries” very interesting and wanted to share some of the information they covered. This panel consisted of Tony Pistilli, EVP/Chief Appraiser Axios Valuation Solutions; Jeff Bradford, Founder and President of Bradford Technologies; Rick Langdon, Chief Staff Appraiser for Wells Fargo; and Alan Hummel, Senior Vice President and Chief Appraiser for Forsythe Appraisal. The point all of the presenters were trying to make is that the appraisal industry is changing and must continue to change in order to not only survive, but to thrive. The session began with the distribution of a reprint of a press release covering proposed new legislation that would be very damaging to the appraisal industry. Many in the audience were a bit shocked to read it and were heard uttering things like, “I guess that’s it for this career.” Fortunately, it turned out that Mr. Pistilli actually wrote this article as part of his presentation and there is no legislation of this kind in the works. The appraisers in the audience were relieved to learn the article was just a fabrication, for now. Pistilli explained that appraisers need to take some action if they want to avoid this type of scenario. Things appraisers can do now to help promote the industry include:
- Train the next generation of appraisers
- Learn new technologies
- Be open to new, alternative valuation methods
- Become more professional
- Become more competent
These five items were repeated and emphasized by the other presenters in the session and also in some of the other sessions. First, the lack of new blood joining the profession is becoming a real problem. All the presenters encourage certified appraisers to take on a trainee. Yes, it’s a lot of work and sometimes you feel like you are training your future competition, but if no one gets trained, there will eventually be no appraisal profession and lenders will be forced to seek some other type of valuation process.
The speakers emphasized that appraisers need to learn and embrace new technology. Yes, the modern form software is much better; there are digital pictures, laser measuring devices, and so on, but the basic procedure of pulling a few comps and filling out a form hasn’t changed much. Now with all the new requirements it can take hours longer to complete each assignment, making the profession less profitable. The presenters feel that technology is the solution to this problem. They all had a slightly different angle on what a solution might be, but the theme was clear. The basic methodology for performing most appraisals will be changing sooner rather than later.
Jeff Bradford believes appraisers need to get beyond the approach of just filling out the 1004 form. For now, that form is the requirement, but there is more than one way to approach completing it. New technology, such as computer-aided appraising, will soon make a big difference in appraising. Bradford was very clear not to confuse this new technology with faster form filling. By new technology, he is referring to things like stronger analytic products for appraisers and instant access to all the needed data. The appraiser’s job will be to gather and analyze the data using a variety of tools and then present it in whatever format is relevant for the assignment. Look to your software provider for the latest and best tools to help you get the job done.
All the presenters mentioned that appraisers need to keep working hard to make sure appraising is seen as a true profession. In fact, they recommend no longer using the term “appraisal shop.” Instead the terms “appraisal practice” or “appraisal office” should be used. I know I will use these terms from now on.
Rick Langdon took this a step further and questioned current appraiser “Training, Guidance, and Accountability.” He has coined this as appraiser “T.G.A.” Langdon reported that his research has found that in many cases appraisers don’t really get enough good training. Most appraisers attend continuing education only because they have to in order to maintain their license and most of that isn’t teaching them about new methods and better ways to do the job. Langdon feels that the CE requirements should be strengthened in order to get the appraisal profession to the next level. Here are some of his recommendations to help fix the problems with TGA:
- Develop certification programs that require courses and testing in areas of expertise
- Demand that only appraisers who have certified expertise complete the assignment
- Review performance / remove those that do not maintain standards
- Continuous renewal of certification
To cap off the presentations, Alan Hummel discussed how the various players in this industry need to work together. He noted that there may not be another profession where such a high level of animosity exists between the parties involved. This is especially true with the problems that have developed between appraisers and AMCs over the past few years. For the industry to move ahead, this relationship needs to improve.
Hummel recommends the appraisal industry adopt something he calls “co-opetition.” This is a concept that allows for cooperation between parties that are normally viewed as competitors. Appraisers compete with other appraisers and also with AMCs, but they also need to cooperate. This cooperative effort should involve the following concepts:
- Share the knowledge – Trainees
- Share the Standards – Agree on what is necessary in a credible appraisal
- Share the Rules – Common rules engine
- Share the Data – Data is gold
So the bottom line message from this session, and actually a common thread running through the entire conference, is that the appraisal profession will need to make some changes in the near future. Appraisers need to get the next generation properly trained, even if it’s a bit painful at times. They need to embrace and use new technology. They need to improve training for all appraisers. They need to keep pushing to make real estate appraisal a recognized profession (they need to be recognized as local market experts) and they need to cooperate to make sure all these things happen.
Finally, I have reprinted the above mentioned article by Mr. Pistilli in full below. Enjoy reading it, knowing that these things haven’t actually happened. However, all the presenters hope it will inspire you to take action on some of the items mentioned above so that an article like this will never become a reality.
The Imminent Extinction of the Appraisal Industry?
Late yesterday afternoon a bill was introduced in the House of Representatives that would alter the mortgage process and ultimately the way millions of Americans receive a mortgage.
HR 1108 would eliminate the need for an appraiser to appraise a home prior to the funds being disbursed to the homeowner. The bill, which was heavily lobbied by the American Banking lobby, calls on “real estate professionals” to assume the role of valuing homes rather than licensed and certified appraisers.
The growing lack of appraisers resulted in turnaround times that lengthened to a point where bank and financial institution customers became unhappy their loans are taking 4 weeks to close due to the appraisal. This in turn has made financial institution executives worried they cannot serve their customers efficiently and further grow their profits.
The banking lobby sees this as an economically viable solution to the shortage of appraisers and a way to better serve millions of Americans buying and refinancing homes each year.
Looking back, it wasn’t that long ago that appraisal fees were on the rise, appraisers were in demand and appraisers were as sought after and referred to as the most important aspect of the mortgage transaction. What has happened in the past few years started rather innocuously.
The number of appraisers has declined because of the aging of its members and the lack of new, younger individuals joining the profession.
New, more stringent requirements from The Appraisal Foundation to become an appraiser have further constricted the growth of new appraisers. The rate of decline in the total number of appraisers over the past five years was approximately 4% per year and the number of new appraisers entering the market was about 1% per year.
Appraisers have for years refused to train others in to their profession due to the perceived extra work required to accommodate a trainee and out of fear that the newly trained appraisers would take their clients and destroy their businesses.
In their effort to keep their own costs down and outsource their responsibilities, banks and financial institutions have heavily relied on appraisal management companies, or AMC’s, that some say coerce appraisers into accepting appraisals at artificially low, non-market driven fees. AMC’s state their services are critical in implementing the requirements of The Dodd-Frank Act and appraiser independence while appraisers state they are mere middlemen that offer no real value to the process, but take up to 50% of the fee, or more in some extreme cases.
In late 2010 regulations became effective to pay appraisers “customary and reasonable fees” yet, the language in the clarifying rules released by the federal banking agencies just added to the confusion by introducing a conflicting Presumption of Compliance.
Some industry veterans who have been calling for the “Cost-Plus Model”, which separates the appraiser and AMC fee, have said if the banking agencies had adopted that pricing model as part of The Dodd-Frank Act, the industry would be thriving.
The resulting adverse market conditions due to lower appraisal fees and the negative economic influences being forced onto appraisers by financial institutions through their relationships with AMC’s continued to drive down fees to appraisers while requiring more work per appraisal. An appraisal industry veteran who declined to be quoted for fear of reprisal said “this increase in work is commonly referred to as “scope creep” and it has added 1-2 hours on to every appraisal”. He continued, “Because of the declining fees and these increasing work demands being placed on appraisers, even more appraisers are leaving and even fewer are entering the profession”.
At the same time, home prices have declined to a point where nearly 70% of the homes in America are under the diminimus threshold of $250,000 (loan amount) established by Congress many years ago that requires appraisers to complete appraisals. The American Banking lobby argued the small change will open up the opportunity for lower-cost, non-appraisal “valuations” to be considered as alternatives that in the eyes of the financial institutions will better serve the consumers.
Knowing that there are almost 10 times as many Realtors as there once were appraisers, and their ranks are growing not declining, the financial institutions approached Fannie Mae and Freddie Mac to rewrite their seller servicing guidelines to no longer require an appraiser to perform valuations on loans sold to the Agencies.
With ever increasing and improving technology and growing access to more accurate data sources, risk managers at financial institutions were able to convince senior management at Fannie Mae and Freddie Mac that the risk associated with potential losses can be overcome with the utilization of technology. One spokesperson at Fannie Mae stated, “Besides, look how good the appraisers did during the last crisis in the 2006-2009 timeframe”, referring to the overvaluation of properties that lead to massive losses within the Agencies. He continued, “This one small change allows real estate agents to perform ‘valuations’ that financial institutions then sell to the Agencies – totally eliminating the appraisers from the process.”
Many have said that because of their stubborn and ridiculously zealous professional pride, appraisers have created this issue themselves. For years they have refused to “lower” themselves to complete anything than a “full appraisal”. They have repeatedly rejected efforts from valuation providers to complete alternative valuations and to adopt new technology and automated processes that would have ultimately paid them more per hour for their services.
Others have insisted it was the lack of professionalism and the inability of the industry to perform competently that ultimately lead to the bill being introduced.
If HR 1108 passes it may very quickly cast appraisers into the same pile of historical dinosaurs like the telephone operator, bowling pin setters, and the ice man!