The Dawn of a New Era in Appraising
Approximately 30 years ago the automobile industry began to introduce computers into cars and since that time they have never been the same. What was once considered a rather simple procedure – tuning up your engine or even changing the spark plugs – has become an almost impossible project for anyone, except the highly trained automobile technician.
Today nearly every aspect of your car is aided or controlled in some manner by a computer. Digital radios with CD players, climate control systems, cruise control and pollution control devices are just a few of the components that are aided by computers. Computers now control the engine functions and other systems within the vehicle where mechanical components once ruled.
The introduction of these new technologies into automobiles required mechanics to learn new ways to maintain cars. They needed to become proficient in computer analysis of the new, non-mechanical systems and they learned new terminologies. In addition to the ratchets and wrenches they have always used, they were now using computers to help them do their jobs.
At the time, this must have seemed like a huge change. However, the auto mechanics that embraced the new technology, seeing it as a way to enhance their current core skill sets, were greatly rewarded. The mechanics that didn’t adapt and learn the new technologies… well, they are now picking up the phone and calling to make appointments to have their cars maintained by the highly trained – and highly paid – automotive technicians! And by the way, those mechanics who didn’t adapt and learn the new technologies are also no longer earning a living maintaining cars.
Technology Will Transform the Appraisal Process
This same transformation of an industry that occurred in the automobile industry in the ’80s has been under way for many years in the appraisal industry. With the average age of an appraiser approaching his or her mid-’50s, I know many of us have been around long enough to see what we thought, at the time, were some pretty big changes over the years. It might have seemed almost revolutionary when we went from two-sided tape to glue sticks, or from carbon copy FHA appraisal forms and tractor-fed forms printed by the first-generation computers to appraisal form software – not to mention the industry’s effort to enter into a “paperless” environment with digital cameras, online mapping, electronic sketch programs and digital signatures. With all of these changes, appraisers are certainly more productive today as a group of professionals, but as significant as they may have seemed, these changes are merely incremental improvements on an existing process.
Technology has allowed us as a profession to reduce the turnaround time for delivering reports while reducing the costs associated with preparing them. Email has eliminated the need for faxing and mailing reports. We are no longer bound to photocopying and collating reams of paper to create multiple copies of our reports for our clients. We buy fewer printer cartridges and have been able to eliminate our photo processing and mailing expenses. We have become more efficient and more productive and this has, in a small way, made it more understandable why appraisal fees haven’t increased in the last 20 years. We all know it is a far more complex environment to be appraising today than it was just five years ago. But the technological changes that have occurred over the years haven’t addressed that issue. All these changes haven’t really altered the way we do things and how we value real property. We can do reports quicker but not necessarily better.
We are essentially still doing things and appraising the same way we always have…
At a time when the banks and financial institutions are all clamoring, and rightfully so, for more reliable appraisal reports, we have responded by routinely providing a fourth or fifth comparable sale and occasionally a few comparable listings. We are essentially still doing things and appraising the same way we always have and as a result it now takes longer to complete an appraisal report than it ever has, despite all of the efficiencies that have been introduced through technology.
In the flight to create more reliable and accurate appraisal reports, the agencies have introduced a multitude of requirements on how appraisals are done: comparable listings in declining markets, the 1004MC form and most recently the inclusion of interior photographs of the subject. Again, these have not necessarily proven to produce more reliable appraisal reports, just ones with more pages and addendums. What we need today is real change that will in turn produce a dramatic result.
The real change that is about to occur will transform the way we do things and bring about a new era in real estate appraising!Real change is affected when new systems or technologies are introduced that alter the entire process and ultimately the way things are done. Real change produces a totally different result, not just a polished version of the same old thing. Compared to what is about to happen over the next few years, what we have experienced to date has been a “buff ‘n’ shine” of the appraisal process. The real change that is about to occur will transform the way we do things and bring about a new era in real estate appraising!
A new frontier in appraising is upon us…
Whether you know it or not, a new frontier in appraising is upon us and the change it is bringing is unlike anything we have ever seen before. Right now there are many very intelligent and creative people working to develop the next generation of valuation tools and processes that will catapult appraisers into the role of highly trained and well-paid valuation analysts. I use the term “valuation analyst” to describe this new breed of appraisal professionals, however, my friend Mark Linne has coined the term “econometricians,” and others have used terms such as “trusted advisors” and “valuation technicians.”
…members of this new era of valuation professionals will be highly trainedRegardless of what they will be called, the members of this new era of valuation professionals will be highly trained and will possess a thorough understanding of statistics and regression analysis. They will have scores of data and analytical information available to them at the front end of the process that up until now was either unavailable or very expensive for the individual appraiser to obtain. They will be highly trained to understand how to collect, manipulate and interpret large data sets. They will use tools and processes via the web to present data in visually understandable graphs and charts. They may complete their reports on the Internet rather than using traditional appraisal software and the time to complete the reports will be reduced to a fraction of what it is today. In addition, their reports may look very different than they are today, much more visual and graphic, but they will also be much more transparent and objective to the end user.
This combination of upfront analytics, greater data collection, and increased transparency and objectivity, delivered in a more graphic and understandable format, is exactly what lenders and financial institutions are searching for in their quest for a more reliable valuation of the collateral in the lending process. Much like the transformation of automobiles in the 1980s, the process of appraising, performing an appraisal in the near future will be much different. Those appraisers who choose not to learn and adopt the new technologies will be left behind, like the mechanics who chose not to change with the times, and will be left looking for a new way to make a living. This change should be viewed as an opportunity to appraisers. This change should be embraced by appraisers
In addition to the technological change that is occurring, we are in the midst of some of the most intense regulatory changes since the passage of FIRREA and USPAP in the late ’80s. In the last 18 months we have seen the introduction of the Home Valuation Code of Conduct, numerous Fannie Mae and Freddie Mac Seller Servicer Bulletins and FAQs, multiple HUD Mortgagee Letters, the proposed Interagency Appraisal and Evaluation Guidelines, and most recently the Dodd/Frank Act. Appraisals and appraisers have certainly been very popular topics with rule makers and legislators. Despite the rumblings from Realtors©, mortgage brokers and even some appraisers, I believe that overall, these new rules and laws have been a very positive thing for the appraisal industry.
We are all familiar with the HVCC and the changes it has made in the industry over the past 18 months. The intention of the HVCC was to “correct” a perceived independence issue between a financial institution and its appraisal management company. Ironically, the unintended consequence was that it actually drove more business to the same industry it was meant to control. The market share of appraisals ordered from appraisal management companies pre HVCC was approximately 20%. That number grew to over 80% as financial institutions scrambled to find compliant solutions to the Code. Although the HVCC didn’t mandate the usage of AMCs, many lenders saw the outsourcing of their appraisal procurement obligations as an efficient, compliant and inexpensive solution to performing this function internally. While not widely seen as a perfect solution, the HVCC has been successful in furthering and more deeply embedding appraisal independence in the lenders’ processes.
What we are not as familiar with are the long-term changes that will be brought upon the appraisal industry as a result of the Dodd/Frank Act. The Dodd/Frank Act spans more than 2,400 pages with over 200 pages devoted entirely to appraisal and valuation-related issues. The Interim Final Rule clarifying the act is an additional 132 pages. The act sunsets the HVCC, but it also memorializes many of its provisions and advances the concept of appraiser independence even further. There are now significant penalties on financial institutions and appraisal management companies for non-compliance. The act provides far more authority, and funding to the Appraisal Subcommittee for enforcement of both appraisers and appraisal management companies, which is exactly what the industry desperately needs. In addition, the act has established a requirement for appraisers to be paid “reasonable and customary” fees for their appraisal services.
Without a question, the reasonable and customary provision of the Dodd/Frank Act has been the most talked about and controversial part of the act. Basically, this means appraisers will be paid what they would have received without the involvement of an appraisal management company. The requirement for paying a reasonable and customary fee is imposed on both financial institutions and appraisal management companies. What is yet to be understood is if appraisal management companies will be able to “negotiate” with appraisers to develop an additional standard of what is reasonable and customary, given the benefits provided by the appraisal management company to the appraiser. In my opinion, most financial institutions will regard the penalty for non-compliance ($10,000 per day, per violation) to be too significant to test and will instruct appraisal management companies to treat the appraisal fee as a “pass-through” to the appraiser and “negotiate” with the appraisal management companies for the services they provide to them. The impact of “reasonable and customary” will play out over the next few months, but one thing is certain: Things are about to change!
- Business Models Will Change – With all of the technological and regulatory changes on the horizon, appraisers, appraisal management companies and financial institutions will be changing the way they do business.
- Appraisers – First of all, as I mentioned earlier, appraisers will become highly sought-after “valuation analysts,” “econometricians,” “trusted advisors” and “valuation technicians” that will be paid for their knowledge and expertise. The idea of doing an appraisal exclusively on a 1004 URAR form will become a distant memory. Appraisers will no longer be paid $350 for an appraisal; they will be paid for their services by the hour, not by the product. Over the years appraisals have become commoditized by the financial institutions and the appraisal management companies that have ordered them. Forcing appraisers to perform appraisals for a fee that is constantly challenged and outbid by a less experienced appraiser will no longer be the norm. Appraisers will earn more money per hour in the future than they earn today, but it will require a dramatic shift in their mind-set to achieve. The only question is, are appraisers ready and will they embrace this change?
- Financial Institutions – Financial institutions will change their business model as well. No longer will they be looking for the best fee on an appraisal; they will now be looking for the best appraisal, regardless of the fee. Over the last four years, one thing that has become painfully clear to the financial institutions is the impact of poorly performed, inaccurate appraisals performed by incompetent appraisers. Certainly the losses incurred would not have been avoided solely by better appraisals, but the loss severity would have been dramatically reduced if there was a good appraisal behind every bad loan. Financial institutions have figured out the “V” in LTV now matters and that it actually costs less to pay a reasonable fee to engage a qualified, competent appraiser upfront than it will cost to have a portfolio full of defaults from inaccurate or fraudulent appraisals.
- Appraisal Management Companies – Appraisal management companies may have the biggest changes of all on the horizon. For decades they have provided valuable services to financial institutions and appraisers, and that will not change. What will change are the services they will get paid for, and, more dramatically, how much they will get paid. If it becomes the norm for financial institutions to consider the appraisal fee a “pass-through,” the services provided by the appraisal management companies will receive much greater scrutiny. Financial institutions will begin asking appraisal management companies to itemize the services they provide and attach fees to those services. More transparency in what the appraiser is getting paid and what the appraisal management company is charging is a good thing.
A new term, “cost plus,” will enter the lexicon of more appraisal management companies. The “cost” will refer to the fee paid to the appraiser and the “plus” will refer to the fee paid to the appraisal management company. I can see a day when financial institutions will select what individual services – or perhaps what bundle of services – they decide to “outsource” to the appraisal management company. As an example, financial institutions may decide to rely on the appraisal management company to manage a panel of appraisers, maintain license information and use their appraiser selection process, but forgo the appraisal review traditionally performed by the appraisal management company since the financial institution has a regulatory obligation to do it themselves anyway.
“Reasonable and customary” will place appraisers in a competitive market among their professional peers and it will also place appraisal management companies into a similarly competitive market among their peers. As a result, there will most likely be fewer appraisal management companies in the future, whether it is through failure or consolidation.
As it stands today, financial institutions may pass along the fees incurred from using appraisal management companies to the consumer. Any further changes to disclosure laws or an interpretation that the fee to the appraisal management company must be borne by the financial institutions could ultimately cause them to administer these functions internally and totally avoid the appraisal management companies altogether.
In summary, what we are seeing unfold today is, in many ways, a return to the way we used to do things. Sure, technology has changed the cars we drive and the way we do appraisals. But what is occurring today is a return to a time when valuations mattered, when appraisers were valued and when the industry saw the appraisal as an integral part of the lending process. Combine this change in attitude with the new technologies, the new regulations and the new ways of doing business, and we quite certainly are in the midst of the most exciting times of our era. Appraisers ought to welcome this change with open arms and take advantage of the new opportunities or prepare to face the same, certain extinction that the stubborn, inadaptable automobile mechanics experienced.