For anyone working in the mortgage industry, stress is not a foreign concept. Yet over the past several years, industry stress levels seem to be increasing — and one of the largest sources of this stress involves real estate appraisals.
In recent years, many people have elected to refinance and upgrade their existing homes rather than move to a new home. This was due to the combination of low interest rates and a scarcity of homes for sale. The result of this activity was increased stress on the mortgage industry’s ability to process and close loans expediently.
Stress was especially felt in the real estate appraisal segment of the industry, where there were extended wait times coupled with rapidly escalating fees for consumers. Additionally, the appraisal industry has suffered with declining capacity over the past several years. The average age of appraisers has increased significantly and individual appraisers have left the business through retirement at a rate much higher than new ones entering the profession.
The industry has long needed to find a way to adequately manage risk while reducing the cycle time for the lending process and protecting the consumer from extraordinary costs. Enter appraisal modernization, several elements of which promise to offer some much-needed relief.
Fannie Mae’s Mortgage Lender Sentiment Survey conducted in February 2022 found that an overwhelming 94% of lenders perceived value in appraisal modernization
. Lenders viewed modernization as a way to reduce the necessary time to complete a loan while simultaneously reducing the cost to the consumer.
Recently, Fannie Mae formed an appraisal modernization pilot group to examine practical alternatives to the current process while addressing issues for mortgage lenders and applicants alike. Yet this modernization effort actually began several years ago, when Fannie and Freddie Mac standardized the terminology and reporting of appraisal data. This was accomplished primarily through the implementation of the Uniform Appraisal Dataset, commonly referred to as UAD.
Through use of the common terminology and reporting, Fannie and Freddie have been able to accumulate a massive amount of property valuation data from all over the country. This data was used often during the most recent refinance boom to offer more appraisal waivers.
Essentially, Fannie and Freddie had sufficient valuation data to estimate the value of a property while comfortably bypassing the need for an appraisal. Waivers were granted in cases where the overall risk was within acceptable limits. In other words, enough was known about the applicant’s property to have a reasonable estimate of its value, the stability of the applicant’s income and credit, the loan-to-value ratio and the loan product requested.
One of the key factors in a property’s value is its condition. Although it is reasonable to use indices to adjust for changes in market value over a specific time period, the addition of current conditions allows for further adjustments to the statistical valuation data to increase the accuracy of the value estimate.
Currently, under the traditional appraisal process, the appraiser performs the property inspection. During periods of high-capacity utilization like the mortgage industry has recently experienced, however, this is a significant contributor to appraisal delays.
The next evolution in the appraisal waiver process is to marry the valuation data possessed by Fannie and Freddie with an inspection product. This is where appraisal modernization gets interesting. Separating the property inspection process from the valuation process would create significantly more capacity to perform inspections in a timely fashion than when appraisers perform them. In such a scenario, the trained inspector’s work product can be used as a companion to a Fannie or Freddie data product or a hybrid appraisal product.
Speaking of hybrid appraisal products, one of the purposes of a hybrid appraisal is to enable the appraiser to spend less time walking through homes and more time performing the valuation analysis necessary to support an opinion of value. Again, with a hybrid valuation product, the inspection is performed by someone other than the appraiser, and the inspection data and imaging is then provided to the appraiser to write the report.
The benefit is that the appraiser spends far less time driving from one property to the next, and more time doing the analysis. The result is that the appraiser should be able to generate reports on more properties.
Another key element of appraisal modernization lies in increasing the number of appraisers. The current requirements to become an appraiser are extensive and economically challenging for the trainee, and they provide little incentive for the supervisory appraiser. The mortgage industry and regulatory bodies are looking for ways to improve and shorten the process of becoming an appraiser while still maintaining sufficient controls that ensure the quality of the work.
Appraising relies very much on experience — the more you do it, the better you get at it. Options are being explored, however, that would reduce some of the “experience” hours, replacing them with increased coursework requirements and additional skill assessments. Certainly, some of this could be supported at the college and university level, which also would broaden the talent pool for appraisers while addressing some of the diversity and bias issues that have surfaced in the profession.
Additional modernization also needs to occur on the lending side of the transaction, where valuations need to be tailored to the transactional risk rather than a one-size-fits-all approach. When the transactional risk is low, lenders need to allow greater participation of trainee appraisers so that they can obtain real-life experience in a controlled environment.
Appraisal modernization holds many opportunities for appraisers, lenders and the general public. It provides a reduction in cycle times that will speed the mortgage process for lenders and consumers while creating cost savings. Modernization also can help replenish the number of appraisers to account for those who are leaving the business.
This doesn’t mean that traditional appraisal practices will go away. They will be used when it’s appropriate, based on the characteristics of a particular transaction such as rural homes, unusual properties or higher-risk loans. At the end of the day, however, appraisal modernization can be a major stress reliever at a time when lenders and originators need it most. ●