I read your interview article that appeared on the National Mortgage News Website. Some interesting ideas were expressed and I have a few thoughts:
“…The customers are looking for an expedited process; they want a mortgage process that’s like Amazon.”
The ideal world would be one in which the average borrower browses a loan on a website and clicks “Add to Cart”? According to this recent article, Americans owe $14 trillion in mortgage debt. First-time homeowners in 2018 borrowed an average of ~$220,000. That’s a serious financial burden — despite the benefits of homeownership — and perhaps should not be entered into lightly. We’ve all seen what happens when the housing and lending industry goes awry — it can destabilize the entire economy.
The idea that everything in the world needs to accelerate and be made faster is dubious reasoning at best. I don’t want bridge engineers rushing their work. I don’t want doctors or nurses rushing their work. And perhaps, dare I say it?, lenders should not aspire to give someone hundreds of thousands of dollars in the time it takes to order food through a drive-thru. There are serious, real-world consequences to that. We’re not talking about ordering new wool socks.
Certainly processes can be made better, but going too fast can create as many problems as it solves. That’s why “cooling off” laws came into being for a variety of situations. Real estate is currently exempt by the FTC, but if loans can be done in 20 minutes, maybe that’ll be reexamined.
And for the record, I am not anti-AVM. I just wrote a blog post on my experience with Clear Capital’s AVM and I can see that in some situations it would totally make sense to employ one. However, even Clear Capital’s own white paper states that AVMs are not as good as appraisers. And they’re trying to sell their product!
“Quicken Loans’ sister company, Rocket Homes, bought ForSaleByOwner.com, which to me was a very unique acquisition — they’re buying a site that lets borrowers sell their homes without a real estate agent.”
So a future without appraisers and without real estate agents? That does not sound good. At. All.
“The one problem I’d like to be able to figure out is how to eliminate the appraiser.”
…how to eliminate the appraiser…Appraisers are not a “problem.” They are an important component of sound collateral valuation and risk mitigation. I can’t begin to tell you how many problems I have discovered either researching a property to be evaluated or visiting a property with serious functional utility or condition issues. The appraiser is the fulcrum, the pivot point, that brings together data analysis, research, property condition, site issues, and a dozen other factors in the assessment of collateral. Along with analytical data, we bring the human component that can sense the intangibles. If you’ve ever been home shopping, how many times have you walked into a property that looked good in MLS photos only to discover it was grittier and less appealing in person? Maybe even some piquant cat aromas, to put the cherry on top?
The gold standard for valuation is for the valuer to have also seen, smelled, and walked the subject property. Looking at pictures doesn’t always do it.
While I do believe the industry will morph and human appraisers may not be employed quite as often, the industry is certainly not ready for their elimination yet.
“Whether that means using drones to do the appraisal and finding other ways to be more creative…”
So Amazon wants to deliver packages with drones and the mortgage industry wants to use them to do appraisals? Do we really want the sky to look like this?
“We’re going to run out of appraisers in 10 years.”
No we’re not. While the median age of appraisers in some areas is above 50 and even approaching 60, there are many younger people trying to break into the business. I am a board member of the ASA Portland, Oregon chapter of real estate appraisers and every month we have luncheon meetings. At those meetings individuals looking to become real estate appraisers are invited to introduce themselves. We have people do so at nearly every meeting — sometimes 5 or more. They come to our meetings because they need a supervisory appraiser to mentor and train them. However, most appraisers are not taking on trainees for some compelling reasons:
1) Middleman companies known as AMCs (appraisal management companies) have systematically stripped out most of the profits the appraisal industry once had. You insert a middleman into anything and they take their cut. In the appraisal industry, the sometimes take up to half of the total fee the borrower pays for an appraisal. AMCs shop appraisal orders around for days or even weeks, hoping to get someone to accept an assignment at the lowest possible fee. This lengthens the origination process and introduces valuation issues if the appraiser who eventually accepts the assignment is neither qualified or competent to appraise the subject property.
As an example, here is an order placement problem that was caused by the soliciting AMC for a rural area valuation: I was solicited to perform the assignment for a fee of X. I told the AMC to make the fee 2X. They withdrew the assignment and I went about my business. Well, guess what? A week later the order appears back in my queue for a fee of 2X. When I visited the property I asked the homeowner if they were waiting long for an appraisal and they said yes. How does that benefit anyone?
Appraisers are far too often fighting for decent fees and therefore many appraisers cannot afford to hire someone else; there is little to no profit margin to do so.
2) Most lenders and AMCs will not allow an appraiser to send their trainee out to the property even if they have one. This limitation is also stifling current appraisers’ ability to bring fresh blood into the industry. If we could send a well-trained apprentice out to an “easy” property, it would allow the supervising appraiser to make more money, allow a new recruit to learn the craft, and allow loans to be completed more quickly as the supervising appraiser would be free to tackle the knottier valuations.
“The data is there and you have automated valuation models that have been working for years.”
The data is quite often a mess. The more I have been studying the raw data export from my local MLS and county records, the more I see how important it is to have a human being cleaning up and correcting data errors. A big part of my job is contacting agents to clear important matters up.
I do think the appraiser of the future will be a valuation analyst that is also a specialized data scientist/practitioner. Maybe one day the data will be “clean” enough and reliable enough, but we are not there yet. Not by a longshot.
For the record, I recently joined RESO to assist with data standard issues.
“Appraisers push back on using an advanced AVM, where we go out and get a property condition report.”
I don’t understand this sentence, I think it is conflating multiple issues together. Usually if you are using an AVM you are not using an appraiser. There are types of assignments known as “Hybrid” appraisals where a broker or someone else gets paid $25 or so to visit a property and take photos. Then an appraiser is supposed to look at those photos and come to a value conclusion. Well, the appraisal industry is understandably loathe to embrace this model. Visiting a home and documenting its characteristics takes a lot of training to get right. I’d much rather send my trusted and well-trained apprentice to do something like that than rely on the work of a perfect stranger who might have gotten the job responding to a Craigslist posting. Yet, oddly enough, the lending work won’t let me send my credentialed trainee.
Another problem with Hybrids is they pay the appraiser as little as $50 and the appraiser must use a proprietary system rather than their own software and MLS access. I personally won’t use a product in which I do not select comparables without a check in my local MLS. Call me cynical, but I’d like to make sure I am getting the complete market picture.
“But at the end of the day, if somebody’s taking a picture of a home and you see that there’s no structural damage to it, and it’s safe, and it’s sound, and it looks to be the same it was five years ago when it was appraised last, why do we have to send out a licensed appraiser?”
Lots to unpack here, but let me just respond with another anecdote: I got an assignment for a property that was not listed on the local MLS. When researching the property I discovered that the property was essentially a double-lot in an area where there are virtually no vacant parcels. The improvements were located all on one side and if the lot were partitioned, it would have been a corner lot that could have had a duplex built on it per Portland zoning laws. We’re talking hundreds of thousands of dollars left on the table. The agent hadn’t thought of that. The seller didn’t know. The buyer may have known that and may have been looking to make an easy few hundred grand.
Eliminate the appraiser and expect to step on more and more collateral landmines.Appraisers do more than just check if the home is there and not falling down. Eliminate the appraiser and expect to step on more and more collateral landmines. Zoning changes, external obsolescence issues not present 5 years ago might be there now, companies relocate, consumer tastes change; there are lots of reasons an appraiser might be needed to integrate many disparate facts.
Again, I concede appraisers aren’t needed for every single valuation. But the interviewee stated she wanted to eliminate appraisers. Sounds ominous. I think the interviewee has forgotten the secondary and tertiary effects appraisers bring to the market. I’ve met a number of agents who said they held the price down because they knew the home wouldn’t appraise otherwise. Yes, while some agents can try to justify a sales price with dissimilar and superior properties they try to pass off as comps, many thoughtful agents keep the eventual appraisal needed in the back of their mind. What happens when agents no longer need to be concerned with an appraisal? Irrational exuberance on steroids?
I like to think of it as trace elements needed for the human body to function properly. 65% of the human body is oxygen, 18% carbon, 10% hydrogen, 3% nitrogen. Then you have trace elements like sodium (0.2%), chlorine (0.2%), and magnesium (0.1%). Those three elements together add up to 1/2 of 1% of your total body mass. Yet, see how’d you get by without ‘em.
I think the elephant in the room with eliminating appraisers is the issue of liability. Back when banks and lenders held their own paper, it was very important the collateral supported the loan as one bad loan can wipe out the profits of many well-performing ones. If a home was foreclosed on and it sold for a fraction of the loan amount, it hurt. It really hurt. But we now exist in a climate in which many loans are packaged and sold off to the secondary market, to the GSEs. The entity ultimately bearing the risk of bad loans is the US taxpayer. Just recently Fannie Mae made headlines due to low liquidity and reserves. We are 10 years past the start of The Great Recession and these guys still don’t quite have their act together.
The US taxpayer has bailed out the lending industry time and time again. The government can only print so much money before a day of reckoning will occur.
Maybe, just maybe, critical parts of the economy should be a bit slower; A bit more scrutinized; a bit more deliberated. The appraiser is the one neutral party to a real estate transaction and rather than being celebrated for saving banks and lending institutions from making billions of dollars in bad loans on overpriced homes, they are often derided, underpaid, and marginalized.
I guess we’ll see how high this clock can go: http://www.usdebtclock.org/