Home Inspectors & Appraisers’ Doomsday
The Sky is Falling for Appraisers & Home Inspectors
Chicken Little was right – the sky is falling…and landing on both appraisers AND home inspectors.
Home inspectors often suffer from a general lack of respect, part of which is caused by the fact that they have no single set of national standards of practice like appraisers who have USPAP.
Appraisers, on the other hand, suffer from what is commonly known as appraisal creep where the conditions and requirements of appraisal work keep expanding, but the fees for the work either shrink or stay the same.
Now, forces within the government are conspiring to stick it to both groups.
The lending community (FHA, FNMA, and FHLMC) has decided it would be a good idea to know the physical condition of a property involved in a mortgage transaction. Now, on its face this is really a very good idea since the probability of a marginal borrower defaulting is greatly increased if there are any sudden, unexpected repair costs in the first few years of owning a home.
Thus, knowing information like when the roof will need to be replaced or how old the furnace is or if the windows are single pane all makes sense in terms of assessing the risk of a default in payment, the possible reduced value of the home, and the potential for a loss on the loan made on the home. However, like the government often does, those responsible have seemingly managed to take a perfectly good idea and screw it up during implementation.
How, you ask?
Well, for starters the proposed regulations seem to have appraisers making determinations about the condition and remaining useful life of things like the roof. At FREA, we like appraisers as much or more than anyone else, but since we are a professional risk management group, we really don’t want appraisers climbing ladders and guessing how long the shingles will last. Heck, we’re not even sure we want appraisers to have ladders, let alone climb them.
From the appraisers’ perspective, this means they will once again be asked to do more for the same amount of money. Plus, now they can get sued for something new- a bad home inspection. Since borrowers now see the appraisal before closing, they will undoubtedly claim they skipped having a full home inspection because the appraisal would contain a limited inspection. I can even predict many realtors will tell buyers they don’t need to pay for a home inspection because the important stuff will be in the appraisal.
The net effect on home inspectors is that they end up losing business they could have otherwise captured and business which appraisers do not want.
This is once again in large part because of a lack of national standards. You see, lenders want to hire professionals with uniform rules so the lenders don’t have to learn 20, 30, or even 50 different sets of standards and rules…and so the lenders can sue later if the sky really does fall (see, 2007).
With a national set of standards, inspectors could have looked to add lenders as an entirely new client base in residential financing transactions. This is much like the property condition assessment work done by inspectors/engineers for commercial lenders already.
The other major issue the government has missed is that E&O carriers insure appraisers for appraisals and home inspectors for inspections, and not vice versa.
So, if the appraisers do this work and get sued, they probably don’t have any coverage. On the other hand, if they refuse to do the work as requested, they won’t have any clients. This is called a Catch-22.
The good news is that the regulations have been noticed and the impact recognized in time to spread the word and hopefully convince the government that inspectors must be involved in the work. This will let the appraisers answer the questions the lenders want answered without climbing up on a ladder. FREA is spreading the word to get appraisers and inspectors on board.
Stay tuned, the fun is just beginning. And remember if your E&O provider is not keeping you informed about important issues like this, then maybe you need to look at belonging to a risk management firm like FREA where we’ve got your back.