It’s been an interesting year, 2017.
This is partly due to the unexpected good fortune that lenders enjoyed in 2016. Loan volumes were high last year, higher than many expected. It was good for lenders, but it took a hard toll on the industry and its suppliers. The result has been a number of unexpected challenges for the industry this year and, perhaps, some more to come.
While most sectors of the industry managed the increased demand with few hiccups, the appraisal services segment of the industry did not fare as well. The uninterrupted appraisal demand throughout 2016 and into the first quarter of this year led to chronic fatigue that spread throughout the appraiser population.
This led to a number of service level issues, including missed deadlines, longer than customary turn-times, increased revision rates, unresponsiveness and higher appraiser fee demands, to name a few.
These appraisal report quality and service level issues created friction between the appraiser population and lenders, real estate agents and homeowners. Some worried that we were beginning to see a new set of norms for appraisers, work quality and service levels. A closer look at the challenges appraisers faced will be revealing.
Challenge 1: Appraisal turn times
Whether purchase or refinance, historically speaking, real estate loans are expected to close and fund within 30 to 45 days of loan application. Purchase transactions usually depend upon a pipeline of settlements prior to and after a respective borrower’s loan settlement. Most sales contracts are written based on Buyer, Seller and Real Estate Agent expectations, which typically demand loan closing within 30 to 45 days of contract acceptance.
The increased workflow we saw in 2016 overwhelmed even the most seasoned appraiser professionals, causing them to continually miss deadlines without time to give warning or notification. Lenders and AMC’s alike made ceaseless attempts to communicate with and extract order status updates from appraisers with very little success. Mass disregard for communication and falling service levels caused delayed settlements, excessive revisions, extension rate lock fees and increasing frustrations across the industry.
As a result, lenders attempted to increase appraisal turn-time and fee expectations among members of the real estate community, as well as buyers and sellers with no success. This attempt at open communication with all parties was the right course of action and it might have worked if all lenders had been working in the same direction.
Unfortunately, some competing lenders were promising agents unreasonable turn-times in an attempt to win their business, even though they knew they could not deliver on their promises and offer a settlement to meet the sales contract demands. We could write volumes about business ethics between competing lenders and loan officers, but we will reserve that for another day. Notwithstanding the real estate demands, turn-times were extended out to accommodate the slowing appraisal deliveries.
Typically, as a result of vacation season, the summer market is known to lead to a reduction in loan volume, which would have given appraisers a welcome respite. But as if to compound the problem, interest rates declined leading into the summer which caused loan volume to remain constant, adding to the pressure on the appraiser community.
Consider also that the GSE’s had introduced their UCDP/UAD and appraiser were attempting to deal with the dataset findings and warnings without the benefit of sufficient training. It’s not that the appraiser community was unable or unwilling to adapt to the new requirements, but they had been improperly prepared. The GSE’s expected the lenders to communicate and train appraisers about the new system, datasets and warnings. This did not happen which forced appraisers to learn on their own. The GSE’s have since caught up with the training materials but a little too late.
Unfortunately for the industry, the appraiser community also vacations during the summer months, which pushed the due date on current orders out even further than anticipated. Where the appraisers seemed eager to manage their way through the increased volume of the 2016 spring market, their tune changed drastically when vacation season arrived.
Their message was unified, clear and concise: They were no longer willing to cater to their loyal client base.
Challenge 2: Appraisal fees
Appraisal fees are an enigma that leaves all parties feeling as if they are staring into a black hole looking for answers. This is not, however, a new challenge. Appraisers have been demanding higher fees for years with no consideration.
Part of the reason appraisers haven’t been more successful in achieving higher fee levels is that appraisers are unwilling to unite and work together through an organization or association. We have seen some very weak grass roots efforts to create this unity but with no success. Where many appraisers demand higher fees and are willing to band together to get them, there is still a community of appraisers in the marketplace that are willing to work for reduced fees.
High volume lenders and AMC’s are preying on these low fee appraisers in an attempt to generate higher profits from their services. It is not uncommon for a high volume lender or AMC to charge a borrower $500 for an appraisal report but pay the appraiser only $250. As long as appraisers are willing to work for these lower fees, the appraiser community as a whole is going to struggle with their cause to increase fees. Ironically, the lending community only hurts itself by promoting the lower quality work of a poorly compensated appraiser.
As a result of the continued outcry from the appraiser community regarding low fees, the interagency regulators established a rule that required lenders to pay appraisers a fee that is considered “reasonable and customary.” Typical for the federal government, regulators left a great deal of room for interpretation of the terms “reasonable” and “customary.”
Of course, we cannot fault the government for the vague language of its rule as it is not the duty of the government to establish the actual fees that are reasonable and customary in any jurisdiction. The government’s role is but to demand that they are paid accordingly. Many states have since taken the reasonable and customary fee rule to task and established minimum fees to be paid to appraisers for different appraisal report and assignment types. This is, in general, how it’s supposed to work.
Unfortunately, in some states, regulators seem to consider survey results an acceptable means of identifying reasonable and customary appraisal fees. Many of the surveys polled appraisers in an attempt to discover how much appraisers are being compensated for different appraisal report types and assignment conditions without the involvement of an AMC.
The problem with this approach is that the survey identified current appraisal fees, which from a historically perspective are deflated. For instance, in 2003 an appraiser in the Washington D.C. market charged $350 - $400 for a typical non-complex, non-FHA assignment, which consumed approximately 3 to 4 labor hours. As a result of increasing regulatory and industry demands, today in the same market an appraiser can expect to spend approximately 6 to 7 labor hours for a non-complex, non-FHA assignment for which they are compensated $375 to $450, on average.
Labor demands have increased by 100% and fees have increased by only 12%. Forgetting about cost of living increases, trainee appraiser limitations, overhead or other expenses, given the above scenario, appraiser compensation has declined by approximately 77% since 2003.
It seems that appraisers are on board with the reasonable and customary fee rule and the respective states’ approach to defining minimum appraisal fees. However, the states grossly missed the mark by setting the minimum fees incredibly low, thereby established a new normal appraisal fee. Now that these new normal fees have been established, appraisers will find it very difficult to increase their fees beyond state mandated minimums. It appears the appraiser community has been sold a 1972 Ford Pinto dressed as a 2017 Lamborghini.
Challenge 3: What's coming next
If the challenges appraisers and the industry they serve were grueling in 2016, they could get even worse in the future. There are a number of risks appraisers are facing.
The appraisal-related issues the industry experienced in 2016 convinced lenders, policy makers, regulators and legislators of the need for change. Today, we find these decision makers analyzing the real value of the appraisal process and considering alternative solutions.
Industry complaints surrounding the appraisal issues of 2016 were taken seriously on Capitol Hill, causing politicians to demand explanations and solutions to the problem. If one thinks politicians will have no impact on the appraisal industry, think again. Remember back to 2009 when Congress and the POTUS restructured the automobile industry and fired the President of General Motors. Those actions changed the automobile world forever, leading to the collapse of Buick and Pontiac and leaving shareholders in the poorhouse.
GSE executives, for their part, have frequently denied allegations that they would approve an alternative to the real estate appraisal. Even so, they rolled out their revised Home Value Explorer and the Appraisal Waiver Programs in 2017. Where the terms have been in existence for some time, the programs have recently been refurbished to permit as many as 25% of refinance transactions to close without an appraisal report as opposed to less than 2% in prior years.
Another challenge, though there is some question as to how serious it is, is the shortage of new appraisers entering the business. Where there may be a shortage of appraisers during peak times, during normal business cycles under normal business conditions, appraiser turn-times return to reasonable tempos and fee increase requests recede in most markets, which leads one to conclude that the shortage may be somewhat overstated. That said, we cannot ignore the fact that the average age of a real estate appraiser is approximately 53 years old. Regulators are in the process of addressing the aging appraiser population and believe they have a remedy close at hand.
Despite all of these challenges, most markets are now seeing appraisal turn-times returning to more reasonable timeframes and service levels normalizing. For reasons outlined above, appraisal fees will continue to be an issue while the mortgage lending industry as a whole attempts to establish an appraisal fee equilibrium. We will still experience slower turn-times and higher fees during peak times in the business cycle, which is normal, historically speaking.
Appraisers ability to deal with these challenges in 2017 will impact the business environment in 2018 as surely as the events of 2016 have impacted this year. Understanding the business cycle and establishing business cycle expectations at the front end of the transaction across all parties will go a long way toward smoothing out the process for everyone and ultimately ensuring better borrower satisfaction.