Just Because You’re Paranoid Doesn’t Mean They Aren’t After You
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It appears the government sees the future of appraising as one driven largely by Automated Valuation Models, Hybrids, and outright appraisal waivers….
The title for this article comes from a famous quote by Joseph Heller (the author of Catch-22 fame). I thought of his pithy quote when reading the recommendations by the Department of Treasury to the president. The title of the report: “A Financial System That Creates Economic Opportunities Nonbank Financials, Fintech, and Innovation” seems innocuous enough. However, some decidedly non-innocuous observations/recommendations regarding the appraisal industry appear starting on page 103.
The report starts off promising enough; the following quotes appear on pages 103-105:
Property appraisal practices, including a perceived lack of appraiser independence from loan originators and insufficiently stringent qualification requirements, were criticized in connection with the housing bubble and subsequent collapse in home prices. In response, lawmakers and regulators enacted changes to appraisal requirements that have fundamentally affected the appraisal industry. In recent years, lenders and homebuyers have pointed to the appraisal component of the origination process as a frequent source of delays and a driver of extended closing timelines.
Independent appraisers highlight post-crisis changes as exacerbating a mismatch between lender demand for appraisal servicers and the number of independent appraisers qualified and willing to meet this demand. Post-crisis appraiser independence standards enacted under Dodd-Frank have resulted in lenders channeling appraisal requests through appraisal management companies (AMCs) to subcontract with a state-licensed or state-certified appraiser. Partly as a result of more widespread use of AMCs as a market intermediary, independent appraisers report being paid relatively less than they earned prior to the introduction of the appraisal independence standard that gave rise to increased use of AMCs. Appraisers in some areas may be reticent to accept appraisal requests due to the compensation passed through to them. Delays in completing an origination or upcharges for rush appraisals to meet closing timelines may result and are ultimately borne by the borrower through higher origination costs.
Yes, yes. So far, so good. AMCs have largely decimated the profits in the industry, driven out some of the best appraisers, and have lengthened the turn-time for reports. So, your recommendation is to cut out the middleman and return fees to a rational level, right? Sigh…No!
Here are their recommendations, page 106:
Treasury recommends that Congress revisit Title XI FIRREA appraisal requirements to update them for developments that have occurred in the market during the past thirty years. Recent data has illustrated that approximately 90% of residential mortgage originations are eligible for appraisal exceptions established since the enactment of FIRREA by the designated federal regulatory agencies. An updated appraisal statute should account for the development of automated and hybrid appraisal practices and sanction their use where the characteristics of the transaction and market conditions indicate it is prudent to do so.
Treasury supports the GSEs’ efforts to implement standardized appraisal reporting, the GSEs’ and FHA’s adoption of proprietary electronic portals to submit appraisal forms, and the GSEs’ limited adoption of appraisal waivers. While Treasury acknowledges that automated valuation engines and appraisal waivers should apply to a defined and limited subset of loans, and that they may compete with traditional appraisers, these innovations offer borrowers upside through lower cost originations and faster closings, without sacrificing accuracy. However, further application of digital, automated property valuations must be carefully monitored and integrated with rigorous market standards where they are used in lieu of traditional appraisals.
Treasury recommends FHA and other government loan programs develop enhanced automated appraisal capabilities to improve origination quality and mitigate the credit risk of overvaluation. These programs may also wish to consider providing targeted appraisal waivers where a high degree of property standardization and information about credit risk exists to support automated valuation, and where the overall risks of the mortgage transaction make such a waiver appropriate. Treasury supports legislative action where statutory changes are required to authorize granting limited appraisal waivers for government programs. Treasury further recommends that government loan programs explore opportunities to leverage industry-leading technology capabilities to reduce costs to taxpayers and accelerate adoption of new technology in the government-insured sector.
Well, so much for recommending the easy solutions that could actually enhance appraisal quality and turn-time: removal of intermediaries and the return to full-fee appraising.
Some appraisers are not alarmed by the above, but I am. We appraisers make our living evaluating trendlines and it appears the government sees the future of appraising as one driven largely by Automated Valuation Models (AVMs), Hybrids, and outright appraisal waivers. That doesn’t paint a particularly rosy picture for the independent fee appraiser. And, as usual, in discussions involving AVMs and Hybrids there is absolutely no proof offered that such products are genuinely better and more accurate (or even as accurate). No discussion of controls, how to cross-check them, or how liability would be apportioned. Nothing. We are to accept on faith that the less-appraiser or appraiser-less future is something to be desired.
Appraisers are seen as an impediment. A roadblock to be driven around. An obstacle to be avoided. The ideal for the lending world appears to be infinite loans and infinite growth. The medical community has a word for unrestricted, unlimited, and unregulated growth: cancer.