Appraisals – Some Basic Info

THE APPRAISAL PROCESS CONTINUES TO CHANGE!

With very rare exception, an appraisal is required on every loan transaction. A final loan amount will be calculated by using the lesser of the purchase price or the appraised value whichever is the lower. There can be an element of surprise should the appraised value be lower than the agreed upon purchase price. A refinance loan can be similarly impacted should the home value be over-evaluated by the owner when initiating a loan.

In the old days, the loan officer was able to call the appraiser and ask for an opinion of the likely value of a home, especially one in which a refinance loan was being initiated. If the appraiser suggested that the desired value was likely not reachable  borrower could cease the refi loan without having spent the appraisal fee only to learn that there was insufficient value to allow the loan to proceed. Today loan representatives are prohibited from discussing value with an appraiser – the result is some refinance loans become canceled only after having paid for an appraisal that indicates an insufficient value for the project to be beneficial. This is one portion of the new regulations that doesn’t seem to benefit the consumer.

The appraisal process is a bit convoluted today. The loan process must be initiated, a loan file developed and submitted to a selected lender and then an appraisal may be ordered. By requiring the actual submission of a loan to a selected lender prior to ordering the appraisal can slow the process a few days. When the order is placed by the lenders Appraisal Management Company (AMC) the fee is paid via the borrower’s credit card.  The loan representative has little contact with the actual appraiser and is now prohibited from ever discussing “value” with the appraiser. This process was initiated following the recession of 2008 in an effort to protect the borrower. (See the history below for a perspective on the changes)

While many of the original concerns have been addressed in the ensuing years, there are some impacts that still exist in the appraisal process:

• The time frame for acquisition remains lengthened – having to submit a loan package to a selected lender prior to any appraisal order creates some delay.
• The lack of easy portability (the ability to transfer an appraisal from one lender to another) limits a borrower’s capacity to change lenders. This has improved marginally over the years.
• The designed system has resulted in increased costs which are unlikely to diminish.
• The process of having to order an appraisal via the lender which goes to the AMC and then to the appraiser makes challenging the value, making corrections or changing any other aspect of an appraisal more difficult – the appraiser is very much insulated from criticism from the borrower (who pays the fee) and the loan officer.

The original process was an assignment made via rotation from an AMC panel of lender designated appraisers. The panel consisted of appraisers with varying degrees of experience and awareness of the local community in which the appraisal was conducted. Complaints about appraisal quality soon followed.

Currently, some lenders now allow the local loan office to have 3-5 local appraiser names submitted from which the appraisal order is made on a rotating basis. The result has been greater acceptance of the appraisal reports.

A continuing issue is that the process in some locations (mostly rural) is impacted by the lack of a sufficient number of appraisers resulting in delays in the acquisition of the final appraisal report. Too often, the loan file is completed and everyone is waiting for the appraisal so that the loan can be finalized. This is likely to continue as too few appraisers are entering the profession to offset those retiring.

The industry has experimented with several ideas. During the worst part of the pandemic, lenders issued “appraisal waivers”. These were reserved for those transactions in which the loan-to-value ratio was low (meaning a sizeable down payment was provided) and credit scores were sufficiently high. As the pandemic receded so did the number of appraisal waivers granted.

More recently, lenders have introduced “desktop appraisals”. These are meant to be more quickly and easily done, at lesser cost to the buyer/borrower. Several accompanying requirements have been met with less than enthusiasm by appraisers. Current economic conditions are likely to interfere with either waivers or desktop appraisals being much used in the near term.

Finally, current experimentation with an Automated Valuation Model (AVM) format might prove useful. For the past few years we have had internet sites that evaluated property. Zillow, Trulia and Redfin are the most widely known. These entities evaluate property based upon what they refer to as statistical and mathematical modeling. Translated that seems to mean that they apply “comparable” data not unlike appraisers are required to perform. Relying upon data available from City, County and State as well as Multiple Listing Service information (if and when made available from local Real Estate services), a major criticism is the unreliability of the information. Critics point out that information may not be current and that internet values trend mostly low because they cannot account for recent upgrades and/or other home enhancements. Square footage measurements are those provided by the local agencies and may not reflect new improvements. Currently, some lenders seem to be comparing internet sources with the appraised values received from on the ground inspections on a sort of trial basis.  Time will determine if automated valuations become a relied upon and viable appraisal method.

Regardless of the method used to evaluate property, it is clear that the cost has escalated. As the economic slow down became more pronounced toward the end of 2022, appraisal fees rose substantially. This seems to have been a combination of fewer available appraisers and their ability to demand and acquire higher fees. It remains to be determined if fees will re-adjust as the economy moves back to a being more normal.

Overall, the current process is working reasonably well. Continuing change is inevitable and we will all adjust and accommodate new legislation and rules accordingly. We will keep you informed as we obtain new information.

 

If you are interested in the history of how the appraisal process evolved, the following is a bit long but can be interesting.

Note: The HVCC was discontinued as a policy a number of years ago. But the rules and practices identified in the original policy itself was largely retained by lenders who were eager to retain the Appraisal Management Company aspect as they own the AMCs and profit from this process. While marginally revised over time, the process has now become accepted by the real estate finance community. 

The Home Value Code of Conduct (HVCC) was enacted in late 2009 in an effort to ensure appraiser autonomy, free of any persuasion from real estate lenders or licensees. Following the sub-prime meltdown in 2008, some accused appraisers and mortgage brokers of collusion in the inflation of home values. Some appraisers, it was said, had complained that if they “did not make the value number” required by real estate practitioners that they were sometimes threatened with not receiving any additional business. In retrospect, it was determined that any such acts of coercion were actually infrequent. Unfortunately, Congress latched onto the notion that it was the appraisers and mortgage brokers teaming up to artificially inflate home values and was the major cause of the mortgage implosion.

Such a simplistic notion allowed Congress to avoid placing the responsibility where it was justified . . . with the banks who created the bad loan instruments which were then “sold” to the public as a way to experience the American Dream of home ownership. While the notion of appraisers having been the major catalyst for the housing problems was found to be inaccurate, Congress seized upon the idea to, in their words, “reign in” the rogue appraisers and mortgage brokers. Here then is what evolved.

THE HOME VALUE CODE OF CONDUCT (HVCC)

Prior to the HVCC process, a mortgage broker typically called an appraiser to order the appraisal. Deemed to be “too cozy a relationship” between broker and appraiser, the new legislation made it mostly illegal for a broker to have any contact with the appraiser. The law spawned the development of Appraisal Management Companies (AMC’s), a third party from whom appraisals were to be ordered. The process now required the mortgage originator to contact the lender to whom the loan would be submitted after which the lender would contact an AMC. The AMC, in turn, contacted an appraiser (presumably on a rotating, neutral process) who would perform the appraisal. Ironically, the big banks became the owners of the AMC’s, providing yet another profit center for the banks. Almost immediately the flaws in the system surfaced. Here are but a few of the problems that emerged:

1. Appraisal fees increased. A $300 to $350 appraisal fee grew to $500 to $600 depending upon the AMC to which it was assigned.
2. While the AMC was now collecting the higher fee, many appraisers complained that they were not being compensated any more and sometimes asked to accept a lower fee for their services.
3. Many of the most experienced appraisers opted out of the AMC registration process, claiming that they would not work for the reduced fees offered by the AMC’s.
4. This, in turn, resulted in many newer, inexperienced appraisers acquiring assignments. Complaints immediately identified:
   1. Poor appraisal quality.
   2. Appraisers being assigned from outside the area, with little or no knowledge of the local property to be appraised.
   3. Plummeting home appraisal values as appraisers reacted to the “persuasion” of the AMC’s to be conservative in their evaluations.
   4. Delays due to the convoluted process which made it nearly impossible to rebut or question errors in an appraisal. Rebuttal of any errors had to go from the mortgage broker to the lender to the AMC to the appraiser and back again. (This process continues today and remains a potential problem)
   5. Home purchase and refinance transactions failed because of poorly done appraisals with no constructive way to correct appraisal errors.
   6. With no way to correct a poor appraisal, lenders and borrowers were too often required to seek a second appraisal with its additional fee but with no assurance that the second appraisal would be an improvement.
   7. The lack of portability of the appraisal made it difficult for a borrower to seek another lender in the case of a loan denial (often over some obscure requirement of the particular lender). In other words, if a loan was denied for some minor reason at one lender, to  be submitted to a more accepting lender a new appraisal (and fee) was required.

As complaints mounted during most of 2010, the mortgage industry hoped that the entire HVCC program would be scrapped. Congress instead “re-examined” the HVCC process with the intent to make changes. Here are the changes enacted in late 2010 as well as more current adjustments (our comments are italicized).

1. While appraisals are generally more portable between lenders, cooperation between lenders varies. The accompanying conditions for an appraisal transfer can sometimes render the process impractical. (this depends upon the cooperation of both the appraiser and the newly selected lender).
2. A second appraisal/field review can be requested. An appraiser may be asked for a detailed explanation regarding the comps used and why. If a second appraisal is ordered, the first appraisal will become null and void, regardless of the value of the new appraisal, higher or lower. (the original appraiser will need to cooperate. plus this seems like a considerable gamble especially as appraisal fees have climbed to $700 plus).
3. There is language within the act that indicates that appraisers “should be compensated in line with what is reasonable within their community”. (Initially, the AMC seemed to be in charge of determining fees but appraisers now appear to have more voice in this decision. Hence, the upward trajectory of fees, likely enhanced even more by the past pandemic,)
4. Interior photos are now mandatory, including kitchens, all baths and main living areas. Photos of any physical deterioration, remodeling or renovation projects are required. (This has had mixed results. Some appraisers can appear to be more conservative than others when remarking about worn out carpeting, small damage to door frames, small holes in walls, deteriorating paint or the myriad other now considered minor items. For the most part, local uniformity in the appraisal process seems to prevail.)  
5. The value of personal property included in the sale is now to be deducted from the value. (This part of the new requirements seem not be much enforced. If the purchase agreement indicates the “refrigerator is to remain”, “window coverings are included”, the “chandelier is to remain” or the “in wall TV is to stay” appraisers now include a comment that “the personal property does not alter the estimated appraised value”.) 

In addition to all of the above requirements and continuing adjustments, every lender has rules regarding when within the loan process the appraisal can be ordered. As noted previously, nearly all appraisals are now ordered and paid for via the borrower’s credit card, often with no knowledge of the actual price of the appraisal until the bill arrives.

It is worth mentioning again that one of the most important losses in the new process is the opportunity for the mortgage broker to call the appraiser prior to his/her conducting the appraisal to assess the likelihood of the property’s value. This was particularly helpful to those seeking refinances as we could “check” to see if it might be possible to obtain the necessary value to make the refinance transaction viable. Now, we can obtain an appraisal with the anticipation that the value will be sufficient only to be disappointed in the appraiser’s determination of value. Unfortunately, the borrower has already paid for an appraisal that is useless for the loan purposes. How nice it was in the past to determine that before having to pay for an appraisal.