Recently, the rural housing landscape has sparked discussion about its lending, affordable housing availability, housing shortages and outreach to underserved demographics. A spotlight has been cast on the rural space with questions probing why rural properties often face excessive underwriting conditions for appraisal issues and how rural lending can be increased to differentiate an organization. To understand the discussions, it’s important to review a little bit of the history.
In 2008, Congress passed the Housing and Economic Reform Act. Among other things, the act established a Duty to Serve obligation for Freddie Mac and Fannie Mae, which includes a focus on rural markets, manufactured housing and affordable housing preservation. In December 2016, the Federal Housing Finance Agency issued regulations to implement the Duty to Serve requirement, and compliance with these regulations has led to recent efforts by the GSEs to increase housing opportunity for rural markets.
Although 97% of the U.S. land area is rural, merely 19.3% of the U.S. population resides in rural areas, according to the Census Bureau. By extension, 80.7% of the population resides in urban/suburban areas. Consequently, probabilities suggest that a majority of mortgage underwriters are also from urban/suburban areas.
Since rural markets commonly present appraisal challenges that are significantly less prevalent in urban markets, lack of underwriter familiarity with rural markets contributes to elevated first pass and overall appraisal denials. I refer to this phenomenon as Urban Projection – a process where underwriters unintentionally impose urban property expectations on rural markets. The result is loan delays, frustrated consumers, lost loans, rate lock complications, annoyed appraisers and lost productivity.
Rural markets are commonly characterized by:
- Low population density
- Low housing density
- Minimal listing/sales activity
- Prevalence of shared school districts
- Lack of public services
- Limited data availability/reliability
- Limited appraiser availability
- Distant travel to employment centers
- Frequent agricultural land uses
- Undeveloped land
- Outbuildings – lots of outbuildings
With these characteristics, the chances of receiving an appraisal having three nearly identical comparable sales (or “comps”) located within one mile and sold within the past six months are remote. Unfortunately, what we often see is when Urban Projection takes place, underwriters become skeptical of the appraisal and will assume that better comps exist, holding up the loan in an effort to obtain additional data. The information they are looking for comes in the form of additional, more recent, closer or similar sales, explanations about the lack of zoning or comp distances, and any extraneous questions about Toyo heaters, monitor heaters, septic systems or gravel roads, to name a few.
Curtailing excessive appraisal conditioning in rural markets requires a shift in mindset and the establishment of realistic expectations and tolerance of rural market dynamics. Training is a primary vehicle to deliver this success. For those looking to effect change within their organization, the following starting points will help lead to the desired outcome:
- Underwriter Training - Training is accomplished by using examples of acceptable rural appraisals as training tools for underwriters. Because of the lack of housing inventory (and available inventory) in rural markets, rural buyers are often less sensitive than their urban counterparts to differences in housing style and features. For this reason, an appraiser may elect to use some one-story comps when the subject is a two-story, or a mixture of housing designs. Case in point: If you are looking to buy a home in a rural market that has only 10 houses for sale, your choice is to buy one of the 10. As such, the buyer’s options are limited, and they become less sensitive to differences in housing characteristics.
- Holistic Analysis - Focus on a holistic approach to analyzing the reasonableness of the sales comparison approach and the resultant value conclusion. This includes stepping back from a critique of individual comp adjustments and instead assessing the high-level and overall comparability of a sale or listing. I refer to this approach as high-level bracketing.
- Shift Terminology - Another tactic is to shift terminology. For example, the common perception of a “comparable sale” denotes a high degree of physical similarity. Yet, when underwriting in rural markets, sales with a high degree of physical similarity are often unavailable. By replacing the term “comparable sale” with “market alternative,” the mindset of Urban Projection naturally relaxes, and the underwriter is encouraged to focus on whether the comps appear to be reasonable alternatives. Once again, it is helpful to provide the underwriter examples of acceptable rural appraisals that utilized market alternatives, and that did not have a high degree of physical similarity. This approach helps to illustrate the practical use of good judgment.
- Update Guidelines - Review your underwriting guidelines and credit policies to ensure that the wording is not biased toward urban properties. Guidelines that recognize and address the complications of rural markets will be useful in delivering effective underwriting of rural properties.
- Analyze your Data - Today, most lenders collect volumes of data about the loans they process. Often, this includes geographic information that help identify a rural property. Armed with this information, you can analyze the rate of first pass approvals and overall approvals on rural loans. By digging into the first pass and overall denials for appraisal issues, you can identify opportunities to provide additional training to specific underwriters and appraisers.
Access to housing in rural markets is vital to a healthy rural economy, important to our collective social well-being and represents a lending opportunity for savvy mortgage lenders. Taking the necessary steps to educate your organization on the rural markets and ensure your teams are properly equipped with the right training and materials will make the loan origination process smoother and better for consumers, underwriters, appraisers and lenders.