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Every home purchase should require an appraisal

The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac recently announced that they would no longer require a traditional appraisal on some home purchases, and would rely on their automated underwriting systems to verify the property’s value in some circumstances. Jim Amorin, president of the Appraisal Institute, spoke with Scotsman Guide News about why the appraisal industry has been pushing back on this move.

Were you surprised by the recent announcement that Fannie Mae and Freddie Mac will allow appraisal-free mortgages for certain home-purchase deals?

appraisalresponseThey started talking about this late last year, and the Appraisal Institute addressed a letter to [Federal Housing Finance Agency Director Mel Watt] explaining what our concerns were. We thought that maybe, as a result of that, that Fannie and Freddie had pulled back from this idea. They have obviously decided to do it. We are disappointed. It is not the first time they have done something like this. In the early 2000s, they were doing appraisal waivers. The end result of that was a decline in risk management by them, and by their mortgage lenders. Ultimately, it led to one of the crashes. It is a shame that the two entities that are now in conservatorship for past bad practices are now maybe heading down that road again, apparently with the approval of the FHFA [Federal Housing Finance Agency]. Disappointment and surprise is the best way to characterize it.

How many property sales are we talking about?

In May, we met with representatives of Fannie, Freddie and FHFA, in two separate meetings. Fannie Mae was more forthcoming and indicated that this might impact maybe 5 to 10 percent of the loans that they [purchase from lenders]. Freddie, on the other hand, was much more vague. The best that we could get from them was that a super majority of their loans would still be done in the traditional manner. Taking that into account, we think that Freddie is talking about maybe [doing appraisal waivers on] 30 percent to 35 percent of their loans.

Why are you concerned about this?

It may seem self-serving for us to say that we don’t think that they should be waiving appraisals, but it really is an issue for consumers, and an issue for all of us taxpayers. The residential market has been pretty healthy over the last few years; in fact, in many cases, home pricing is higher than it was even pre-2008, before we had the last crash. It seems like now is the time not to do less due diligence.

The GSEs say appraisal-free mortgages could save time and money. Do you dispute this?

I think it is safe to say that you can save time and money on the front end [with an automated appraisal]. But will you be saving money overall? That is a critical question. While a consumer may save a few dollars on an appraisal, are they going to overpay for a property? Ultimately, in the greater calculus of all this, I am not sure they are going to be saving money. They may be overpaying for properties at a much higher rate than they would have for an appraisal that could have helped them save money.

The assumption is that technology will advance and machines will become more accurate in gauging the value in properties. Could this eliminate most traditional appraisals?

There is no doubt that as data becomes more available, as the quality of that data becomes better, that automated models certainly can be in an appraisers tool box. Obviously, we would like to use those tools to do a better job.There are a couple of things that a human can do today that machines can’t do. One, the robots don’t go out and visit the property. They can’t see the quality and the condition of the home, or the quality and conditions of the homes in the neighborhood. They can’t smell the dump that is a couple of blocks down.They can’t hear noises from nuisance properties that are nearby. They can’t see the view from the snowy mountains in the background. Until that happens, I still think that there is always going to be a need for a good quality, competent appraiser.  

Do you think that appraisals are taking too long?  

In some instances, particularly in the rural markets, it is taking a little bit longer to get an appraisal done than would be typical. For the majority, a lender can find a competent appraiser to do that work within a three-day time frame. If the idea is to cut that down even more and still maintain a quality product, it is going to be difficult. You have got to give an appraiser adequate time to go out and to visualize the property and look at the comparable sales, and write up the reports. Lenders can do better by providing accurate information to appraisers – the location of the property, the size and some of those other details. Brokers can do better by working with appraisers to schedule the appointments to go out and visit the properties. I also think that lenders can order appraisals a little bit earlier. It seems to be almost an afterthought. If they would just start that process even a day or two earlier, then not everyone would be sitting around waiting on the appraisal. Whether we can get that down to a 24-hour process regularly, I don’t know if that is ever going to happen, and I am not even sure if that will be ideal. When someone is making typically the biggest purchase of their life, it makes sense to allow the professionals an adequate amount of time to do a competent job. 

Is it true that there is a shortage of trained appraisers?

Overall, I think the number of appraisers in the United States has remained consistent with the demand for appraisal services. Overall, I don’t know if there is an appraisal shortage, but there are clearly indications from lenders and others that use appraisal services, there are appraisal shortages in some markets. Typically, this is manifesting itself in rural areas versus the urban landscape. Our concern about the number of appraisers is yes, they have been declining at about 3 percent a year since 2007, and some of that is just a measure of lower demand for the appraisal product. What concerns us is that there are fewer and fewer people coming into the profession. So, five or 10 years down the road as people retire, there could be a longer term-problem. Today, it is really spotty.

Why are fewer people going into the profession?

There is really the million-dollar question. We think it is a number of things, but mostly we think it relates to the current regulatory environment. Not only do you have to go through a state licensing and certification process, but you also have layers and layers of education and experience on top of that. Somebody coming out of college with a four-year degree is probably looking at a three- to five-year period before they can actually become an appraiser doing it on their own. Back in May, we sent a joint letter to Congress, asking them to take a look at modernizing the appraisal regulatory structure. We think that if we can remove some of the barriers to entry, it would a profession that would be more interesting to people. But when you come out of college and have to work as an indentured servant for three to five years before you can go out on your own, it is a lot less appealing than some of the other avenues that people can go into after college. In some ways, I think it might be easier to become a lawyer or an accountant than it is to become an appraiser. I am not sure there is a balance there for what we are really doing. 


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