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Collateral Damage

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This story was originally featured in the January issue of MReportout now.

The mortgage industry continues to face many new challenges and uncertainties, as well as opportunities as it tackles new regulations, the enforcement of TRID with fines, looming deadlines to implementing the GSEs’ new Uniform Collateral Dataset (UCD), HMDA changes, rate hikes, a rush to digital mortgages, and so much more.

The appraisal space, too, is certainly no stranger to dealing with the adversity that mortgage compliance mandates can create in a short period of time. This article addresses the challenges that the appraisal side of the mortgage business is facing with a focus on the shortage of appraisers and remedies to this growing problem.

Impact on Appraisals

Appraisals were traditionally a less concerning part of the basic foundation in assessing the risk associated with mortgage lending—the three Cs of underwriting: credit, capacity and collateral. But, since the mortgage crash, the valuation aspect of the third C—collateral—has experienced a dwindling number of active appraisers. Fallout from the mortgage meltdown and the regulatory intensity of Dodd-Frank legislation has played a huge role in leaving the appraisal field in disarray.

According to the Appraisal Institute Research Department, as of December 31, 2016, the number of actual real estate appraisers in the U.S. was 73,731. In contrast, the 2012 number was at 83,400. The data for 2017 could show another decline.

Much of this decline is due to an aging population of appraisers facing retirement, significant decreases in income, and fewer entrants into the profession. Compounding matters is the lack of training for new appraisers as experienced appraisers have exited the space and existing ones are not motivated to mentor, largely due to a lack of compensation for their time and efforts.

A survey released by the National Association of Realtors (NAR) in March 2017 highlighted the current state of the appraisal market. More than 2,000 appraisers were polled and the results confirmed that there is a significant issue with getting new appraiser trainees into the field while existing appraisers are leaving the profession or planning to leave. The report noted that the average tenure of an appraiser was approximately 22 years, but roughly 10 percent of respondents said they may leave the field within five years. Frustrations with regulatory burdens and insufficient compensation are the top two reasons cited for a desire to leave.

As for growing the pool of appraisers moving forward?  We certainly don’t see millennials who are advancing in their careers or recent Gen Z college graduates having an appetite to enter the appraisal space in some capacity, let alone becoming individual appraisers.

Appraisal Requirements

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), requires lenders to use an appraiser on any federal transaction above $250,000. This means there isn’t any getting away from using an actual appraiser for any transactions above $250,000, at least for the time being. So where does that leave the mortgage industry with this worsening problem? What solutions are available today?

Public Solutions

There are several solutions that have been or are in the process of being made available by various agencies in an effort to help with the shortage of appraisers. They include:

Temporary Practice Permits and Temporary Waivers: In response to growing concerns made by federal bank regulatory agencies, who jointly issued an Interagency Advisory Notice on the Availability of Appraisers on May 31, 2017, this notice provided two existing options—Temporary Practice Permits and Temporary Waivers—that may address appraiser shortages, particularly in rural areas.

Both options provide relief when there is a shortage of area appraisers and/or delays and empower appraisers to operate and perform appraisals out of the geographic area in which they are licensed only for a specified time period.

Changing the Appraiser Qualification Criteria: The Appraiser Qualifications Board (AQB) of The Appraisal Foundation has been evaluating making changes to the real property appraiser standards candidates must have to become a qualified appraiser. This includes The College Degree Requirement for Licensed Residential and Certified Residential, Practical Applications of Real Estate Appraisal, and Experience Requirements.

Many believe that making adjustments to the qualification criteria will help new appraisers get caught up to speed quicker and be able to successfully enter the appraisal field, although this is still being assessed by the AQB and other industry voices.

Technology Solutions

Technology is filling the gap and helping GSEs, lenders, and other vendors by providing appraisal solutions to make informed valuations. Some popular technology solutions include:

GSE Valuation Technology Solutions

Fannie Mae and Freddie Mac have developed technology offerings that yield benefits relating to mitigating the need for a full appraisal in some circumstances:

  • Fannie Mae’s Day 1 Certainty Program is an attractive option that safeguards lenders from potential buybacks or kickbacks if its Collateral Underwriter® (CU™) system produces a score of 2.5 or lower, thus providing freedom from reps and warrants. But moreover, no appraisal is needed for low loan to value ratios on certain loans.
  • Freddie Mac’s Automated Collateral Evaluation (ACE) Program waives the need for an appraisal, depending on the results that ACE produces. The program is based on the use of big data and analytics for appraisal automation. On September 1, 2017, the program was expanded to include purchase transactions for certain Loan Product Advisor® mortgages.

Proprietary Valuation Technology Solutions

Vendors offer a number of technology solutions to help with valuations. Based on need, some solutions work better than others and at different points in the valuation process. These solutions can be extremely helpful in avoiding a full appraisal, until such time that it is absolutely necessary. Technology can also help lenders with valuations in this new era of appraiser shortage. There are alternatives to full appraisals, but how do they work and how effective are they? Some technology solutions offered by vendors include:

  • Automated Valuation Models (AVMs) are leveraged by lenders as a tool to determine what a property “might” be worth for them to lend against the valuation. AVMs are increasingly being utilized to prequalify the borrower as a means to ascertain if the value of the home is reasonable before proceeding with the underwriting process and paying for an actual appraisal. This can dramatically reduce the number of manual reviews, resulting in huge time and cost savings.
  • Collateral Review Solutions are used by lenders to help arrive at the potential valuation risk of a Broker Price Opinion (BPO) or appraisal report. Using thousands of data points, they automatically analyze an appraisal in real-time for completeness, compliance, consistency with GSE guidelines, best practices, and more.
  • Desktop Appraisal Applications are a method of valuing a property with readily available information. The allure of desktop appraisals are reduced costs. A desktop appraisal does not consist of an actual physical inspection of the property but is done using publicly available information whereby the appraiser does not have to leave their desk, hence the use of the word “desktop.”
  • BPO Ordering and Management uses a real estate agent to perform a cursory drive-by opinion of properties to assist in determining the potential price of a home. Frequently used in default servicing, the “process” by which a BPO is ordered and managed can be automated using technology. However, by no means can this replace an appraisal.

Hybrid Home Valuations: An Evolving Industry Standard?

Hybrid home valuations combine features to offer robust products that do a solid job of appraising a property without incurring the cost of a complete appraisal. These alternative valuation products come in many different flavors, and one common type is an AVM coupled with an inspection.

A hybrid approach enables technology providers to collaborate with both lenders and AMCs to develop comprehensive web-based forms that are concise, digital, accessible, and auditable. These integrated forms can efficiently merge data from multiple sources like MLS, AVM, and property condition inspector data, providing an easy auto form-fill system for reconciling and digital sign-off by the appraiser. These types of products can be typically completed in two to five days.

Hybrid-based products will grow in popularity as they save time, have low risk and costs, and are very accurate when used in major metros with homogeneous housing profiles.

All this goes back to the importance of the collateral. As a lender, what deal am I getting into?   What is this asset really valued at? How accurate is it?

Given marketplace conditions and the shrinking pool of experienced appraisers, will machine replace man?  No. But the entire valuation ecosystem is changing, and lenders are continually in search of a remedy to keep costs low, maintain acceptable turn times, be compliant, and ensure the accuracy of appraisals. Now more than ever, the third of the three Cs is crucial to effectively manage. The overall appraisal field will certainly get more interesting over the next couple of years. For now, lenders should leverage the appraisal technology solutions that make the most sense for their business, always keeping compliance at the top of the list.

About Author: Vladimir Bien-Aime

Vladimir Bien-Aime is CEO and Co-Founder of Global DMS, the award-winning pioneer of Web-based appraisal process management software and a provider of technologies used across the mortgage process. He is an appraisal compliance expert with specific knowledge of the most current federal, state and local appraisal-related regulations, including the Dodd-Frank Act and new Interagency Guidelines, as well as initiatives such as Uniform Appraisal Dataset and Uniform Collateral Data Portal. For more information, questions, and guidance, lenders can visit GlobalDMS.com/ead-help.

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