Appraisals: A Speedbump in the Home Financing Process
The world’s population has grown to nearly 8 billion from roughly 2.5 billion in 1950. With this growth has come the demand for housing, especially in the United States, as 70+ million people in their late 20s and early 30s enter the prime home buying age.
Countless articles and books have already been written about this generation but suffice it to say millions need help in financing their dream of home ownership. As a result, many are discovering that the home loan process is not as simple as buying an airline ticket online or obtaining an automobile loan. Nor is it as fast. Between applying for a loan, analyzing their credit history, researching title and ownership, reviewing loan options, and making sure that the property is worth what the buyer and seller have agreed, the process can take 1-2 months.
As we wrap up summer and head into autumn, appraisal delays are likely to be cited as the Number One reason for delays in the loan process. Loan officers and lenders, along with their borrowers across the nation, are experiencing the disruption caused by appraisal process, whether it is an appraisal management company finding an appraiser to appraise the property, the cost of the appraisal, or waiting for the report to be completed. It is important for borrowers to understand the various players involved and the issues.
Appraisal hiccups, parameters
From the lender’s perspective, allowing a borrower to borrow more money than the home is worth makes no sense. If the lender has lent $400,000 to the purchaser because that is what the buyer and seller have agreed the property is worth, but the property is determined, through an independent appraisal process, to be worth $300,000, and the borrowers default, the lender is at risk of losing a significant amount of money.
Unfortunately, this is what happened during the financial crisis of 2007-2009 as lenders, borrowers, real estate agents and other “interested” parties used inflated values to determine loan amounts. Appraisals were “pushed” after appraisers were influenced to provide higher values. If a borrower stopped making payments and went into default, lenders and investors were left owning properties worth a fraction of the loan amount, and billions of dollars vanished.
To stop this from happening again, an intermediary was eventually created by regulators. Appraisal management companies, or AMCs, were set up to provide a theoretical buffer between a lender or borrower and the actual appraiser. Regulators with an eye on compliance and other proponents believe that if the lender cannot determine, or even communicate with, the appraiser carrying out the valuation, a more accurate assessment of value will occur. And the AMC’s staff appraisers will review the work of the actual appraiser to improve reliability.
Cost and delays
Critics, however, will point out that the AMC model is more expensive since the AMC will charge $150-300 on each appraisal. Additionally, AMCs, when acting as go-betweens cause communication confusion and time delays, given the nature of the process. When a loan is scheduled to close on a certain day, and an underwriter has questions about the value, reaching someone at an AMC who must then relay that information to the appraiser, and back again, can cause a multi-day delay.
But delays are not only the fault of the AMC. Appraisers themselves are in short supply. Mathematically, appraisers can complete two, perhaps three, complete appraisals per day. But the actual number of appraisers around the nation, those with “boots on the ground” looking at homes inside and out as well as comparable properties in the area, has been steadily declining for years.
Being an appraiser is viewed as unglamorous by people in their 20s looking for a career. Requirements for being a licensed appraiser include a college education and an internship (some would say an apprenticeship) with an existing appraiser. In effect, an existing appraiser will train their future competition.
The money earned by appraisers has not increased much over the years. Yet the cost to borrowers has, since the fees AMCs charge is added to the amount. Appraisers have choices about which assignments to accept and will often chose the most lucrative appraisals to carry out. Put another way, if an appraiser has the choice of appraising a house in a subdivision near their office, or a house on a remote farm 40 miles away – for the same fee – which will they choose?
Hope on the horizon
So, borrowers and lenders find themselves in a situation in which many appraisals are expensive, few appraisers are entering the industry, and everyone is seeing delays.
But on the flip side there is talk of technology assisting the appraisal process, an increase in the number of properties receiving a property inspection waiver, and investor policies changing to accommodate an improved appraisal process. No one wants to relive the financial calamity of 2010 over again, but with prudent, measured steps, appraisal costs, timeframes, and reliability will be improved.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.