Many mortgage professionals would agree that the appraisal process is broken. It has become inefficient and problematic. It is delaying closings and clogging up loan pipelines. And it also has become increasingly costly.
In some instances, appraisal management companies (AMCs) have lost the control they once wielded, allowing independent appraisers to set the market for pricing and turn times. With the onset of the COVID-19 pandemic and the brisk housing market that followed, appraisers found themselves in high demand, which created an opportunity to enable them to begin dictating inspection dates, turn times and fees. There appears to be a clear supply-and-demand imbalance as there are not enough appraisers to meet the increasing workload from mortgage lenders and originators.
The result is that appraisals often take an inordinate amount of time to complete. The delivery timelines are commonly much longer than what was once the norm — and they can change at the whim of the appraiser with no repercussions. Fees that were once set by the AMC are now being determined by the appraiser. These charges can vary widely based upon location and how busy the appraiser is.
In many cases, this forces borrowers to absorb higher appraisal fees and causes lenders to experience processing delays. It has become apparent that AMCs have turned over the reins with respect to pricing and the completion of reports, which are of utmost importance to lenders, originators and borrowers alike.
Heavy burdens
There is currently a shortage of certified appraisers and not enough new appraisers are entering the market. There are good reasons for this. The qualifications for certification are onerous. The Appraiser Qualifications Board, a federally authorized oversight body, requires certified appraisers to have a college-level education, to complete 200 hours of specialized course work and to obtain 1,500 hours of industry experience within a 12-month period, among other things.
Couple this with the fact that appraisers were stigmatized during the financial crisis of the late 2000s and the appeal of becoming one is diminished even further. Hence, AMCs are having a difficult time finding appraisers to perform inspections. The mortgage industry will likely contend with this problem until borrower demand decreases.
Lenders are free to order their own appraisals, but this has a caveat: It is far more costly for lenders to support an in-house appraisal department as they have to supervise these employees, comply with mounting regulations and keep pace with the technology that drives the industry. AMCs relieve lenders of these expenses and responsibilities, the latter of which are not core competencies of the mortgage industry to begin with.
There is a need for the AMC but not to the extent of a decade ago. These companies came into prominence as a result of the Dodd-Frank Act legislation imposed in the wake of the Great Recession, although they existed for many years before that. Lenders were basically forced to utilize AMCs, not only to comply with increased regulations but to create appraiser independence. This also was a way for lenders to offload the overhead costs by delegating the appraisal process to the AMC.
How is a mortgage originator to know whether the AMC their lender utilizes is a good one? If the AMC takes a higher share of the fee or forces an appraiser to charge less, you and your client may get lower-quality reports. As a result, the AMC also may have a smaller number of appraisers who are willing to accept orders. When you factor in the finite number of appraisers in rural areas, it is easy to understand how this problem persists.
Potential solutions
Can AMCs retake control of pricing and turn times? This may not be possible until such time that demand slows down and appraisers become hungry for business. If and when this happens, detailed pricing should be published by the AMC and these fees should be consistent across the industry — which has yet to occur.
The fees paid to appraisers also should be standardized, although this may prove difficult to accomplish. Some AMCs take a higher split than others, so fewer appraisers choose to be approved with them. Other AMCs take a lower split while allowing the appraiser to dictate pricing and thus have more appraisers to handle assignments. This imbalance is not good for anyone, although many would argue that this is how a free market works.
So, is there an immediate resolution to this predicament? It seems unlikely until homebuying demand slows, appraisal volume dissipates, and the mortgage and appraisal industries as a whole voice their concerns with what has occurred.
What will eventually streamline the appraisal process of the future is increased and improved technology. Mortgage lenders and brokers are increasingly likely to use an automated valuation model (AVM) or collateral desktop analysis (CDA) to keep costs down. These alternative appraisal methods will reduce turn times from weeks to mere minutes while retaining the required independence of a traditional appraisal. And these tools will eliminate human error.
This is what the mortgage industry needs to deal with the currently antiquated appraisal process. Fannie Mae and Freddie Mac implemented appraisal waivers during the pandemic that applied to certain transactions and helped to speed up the processing of loans. These changes may have gone unnoticed by some AMCs and appraisers who have had more business than they can handle.
The appraisal industry will not want to see these waivers become the norm once things slow down, so it behooves them to reevaluate. Secondary market investors rely upon AVMs and CDAs to verify loan eligibility, so it makes sense that they will eventually become the standard for valuations. Until then, however, mortgage professionals may need to suffer through the appraisal process. ●
