Let’s Get Rid of Appraisers. What Could Go Wrong?
Why would regulators fundamentally weaken bank underwriting standards?
Appraisers Warned The World In The Late 1990s And No One Listened. It Is Now Time To Listen Again as History is About to Repeat Itself.
There’s a proposal from the FDIC, Federal Reserve, and Treasury Department not to require appraisals for some mortgages under $400,000. The Trump Administration wants to disrupt the role of appraisers, but that’s not a good idea.
This change can impact several groups in particular:
1) Consumers: Removing appraisers from transactions can mean a lot of loans get made that shouldn’t be made. Does that sound familiar? We don’t have to look back too far to remember what a market with loose standards looked like. We are still in the hangover phase of the financial crisis a decade later. If there is another financial crisis as a result of these recent actions, it will make credit more costly and less accessible to the consumer. The irony is this proposal is said to save consumers money by lowering appraisal fees and making the loan process faster. But the cost of an appraisal is minor compared to the consequences of doing away with appraisers. Also saving a few days on the turn-time for a 30-year loan is BS.
2) The housing market: Why are regulators diminishing the role of the appraiser, one of the systems of checks and balances for our financial markets? With the U.S. housing market softening now, why would regulators fundamentally weaken bank underwriting standards?
3) Appraisers: There are roughly 95,000 appraiser credentials in the United States. Let’s keep these folks in business. They are the only eyes and ears that financial institutions have for issuing mortgages.
There has been a concerted effort to do away with traditional appraisals and shift more and more valuation efforts to automated valuation models (AVMs) which are notoriously unreliable. Think of the consumer-facing AVM known as “Zestimate” whose results are not within 4.3% of the accurate value 50% of the time. There are now a laundry list of new valuation products including evaluations, hybrids, and AVMs under development that enable lenders to bypass an appraiser inspection the property and whose valuation results are either automated or done by someone who didn’t see the property.
Why are these “products” being pushed by banks and regulators? We assume that it is easier to tweak financial models than it is to pressure an appraiser to “hit” the number.
This proposed rule doesn’t necessarily mean appraisals won’t be required in all situations because loans geared toward Fannie Mae and Freddie Mac are exempt (that’s nearly 80% of all mortgages). Some say it’s not a big deal to raise the appraisal threshold from $250,000 to $400,000 because it won’t affect loans for Fannie Mae and HUD. But if it’s not a big deal and there is no effect, then why is this being proposed in the first place? What is not being disclosed to provide justification for this rule change?
Bank and GSE bailouts by the federal government a decade ago created a moral hazard enabling them to assume that the taxpayer will pay for risky behavior this time around.
What is an “evaluation”? As Ken Harney wrote in the Chicago Tribune on 11/26/2018, “Instead of a formal appraisal, these homes would receive an “evaluation” by individuals who have no appraisal licenses or certification and would not be subject to current state regulatory oversight requirements that govern appraisers. The evaluators could be an “independent bank employee” or unnamed “third part(ies).” They would, however, have to be “competent” and possess “knowledge of the market, location and type of real property being valued.””
THE BOTTOM LINE:
While the current administration clearly believes in deregulation, this doesn’t sound like a move to protect the American consumer and the United States housing market. As recent experience tells us, it’s going to cost us.
Please sign the petition to send a message to federal regulators that exposing the consumer and taxpayer to unnecessary mortgage risk is not supposed to be their role.