Throughout the past few years the real estate appraisal process has seen some substantial changes. The legislation that followed the 2007-2008 financial crisis was meant to ensure better protection for the consumer and independent appraiser. However, we are seeing that it has done little to achieve that goal, sending the industry into a bit of disarray…
Here in Portland, we are now seeing appraisal fees up nearly 100 percent in only one year, reaching almost $1,000. Turnaround periods are taking almost 4 times longer, commonly exceeding 30-45 days. It has become quite an epidemic in our metro, and has forced us to investigate the cause. As we looked into the issue deeper, we determined that the fee hike and longer turnarounds we are experiencing this year are most likely due to the escalation and accumulation of the following:
Expenses Have Gone Up
With the new regulations, appraisal management companies (AMC’s) and appraisers are incurring new expenses. Some of the new costs are:
- AMCs must pay to register in each state where they do business;
- AMCs must pay to register each of their appraisers at the federal level;
- Appraisers who do appraisals in federally related transactions must pay an annual fee;
- AMCs will be spending more on compliance
There has been a decline of appraisers by over 15 percent (ASC, 2015) since 2007. Former appraisers who are leaving the market due to age attrition (where almost 20 percent of appraisers surveyed in 2013 were between age 52 and 55, nearing retirement) are not being replaced quickly enough by new entrants.
This may be because of the stricter education requirements to get started:
- Entrants looking to become a licensed residential appraiser:
- Have to receive an Associate’s Degree or higher from an accredited school, where before no degree was required.
- They must complete 2,000 hours of field experience and
- Are limited to non-complex transactions with a price limitation
- Entrants looking to become a certified residential appraiser:
- Have to receive a Bachelor’s Degree from an accredited school, where before only an Associate’s Degree was required.
- They must complete 2,500 Hours of field experience and additional course work
New entrants also have a harder time gaining the hours of field experience they need as lenders do not typically accept work from anyone who isn’t a Licensed or Certified Appraiser for federal transactions. This in turn discouraged established appraisers from hiring trainees as they would largely be unable to perform. The Appraisal Institute’s most recent Appraisal Outlook Survey of 2013 proved that only 9 percent of residential appraisers had planned on hiring trainees for that exact reason.
Less Direct Communication
There is now less direct communication between homeowners, lenders, brokers and appraisers. Most communication goes directly through the AMCs in an attempt to cut down some of the questionable deals that occurred in the past. This could mean that if there is a problem, most of the party involved won’t know until it is too late.
Record Amount of Sales & Refinances
With Portland being one of the top markets in the nation, it has seen a record amount of sales and refinances over the past year. A hot market and large amount of transactions, brings a serious increase in the number of appraisal orders. And, with more transactions and fewer appraisers it puts the ball in the appraiser’s court, allowing them to pick and choose based on price, location and deadline.
Responsibility Falls on Lenders and States
The increased legislation has placed more of the burden on lenders and states to manage the risks themselves associated with appraisal management companies and their ability to hire competent, independent and knowledgeable appraisers. With a mounting dependence on third party management companies, it may become easy to overlook the quality of assignments and do the needed due diligence.
With fewer appraisers, increased field expenses, more sales, and less direct communication it’s no wonder the fees and turnaround times have reached this point. These issues, coupled with a more convoluted legislation, seriously start to impact the viability of some transactions. According to July data from the REALTORS Confidence Index, appraisal issues were the reason more than one of every four contracts were delayed. In the figure below you can see how this concern has continued to escalate.
Figure 1: Percent of Contracts that were Delayed with Issues Related to Appraisals (NAR, Economists Outlook)
Ultimately, we believe that these consequences were drastically overlooked in the creation of the current legislation. However, we are not saying that the new regulations were unnecessary…
Yes, Previous Legislation Had Errors
Following the Great Depression, the federal government began to initiate housing policies that enabled lower income individuals to receive affordable lending rates with greater protection. These policies were created in an attempt to rejuvenate the nation’s economy, which came to include establishment of the Federal Housing Administration (FHA), the Federal National Mortgage Association (FNMA), and the Veterans Administration (VA). Even more efficient mortgage-lending practices quickly followed suit and as a result, the industry hurled forward as new entrants flooded the market.
Because of escalating inflation in the late 1970’s, the federal government limited the growth of the money supply, causing interest rates to double. Ultimately, widespread corruption and other factors led to insolvency, spurring the savings and loan crisis. In response to this crisis, congress enacted more legislation, creating the Real Estate Appraisal Reform Act. This act aimed to institute appraisal standards and qualifications related to federal real estate transactions. To reinforce this bill, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (Title Xl in FIRREA) was later included as a separate amendment. FIRREA created a central structure to manage the licensing and certification process of real estate appraisers. It did this by creating the Appraisal Subcommittee (ASC), who coordinated efforts with the states to establish licensing and certification requirements and required all government related transactions be performed in writing, according to the uniform stands and subjected supervision. While the FIRREA doesn’t regulate appraisers, it does so indirectly if the ASC finds a state’s appraiser regulation and certification program is inadequate, policies would be set in place to ensure all appraisers properly follow the regulation and obtain the correct certifications.
Previously under the Title XI in FIRREA, lenders had the option of choosing the appraiser and had direct communication with them at all times. This led to lenders picking and choosing which appraisers they would work with, and opened the way for potential bribes to be accepted for different valuations and time orders based upon the type of relationship the two parties had. When the markets would get more business, relationships grew strained and there was more room for error on both sides of the deal, which ultimately added to the cause of the crisis.
As a result of the subprime mortgage/financial crisis of 2007-2008 the market was primarily regulated by the terms of the 2009 Home Valuation Code of Conduct (HVCC), which required that mortgage lenders use a third party when obtaining an appraiser to complete an appraisal. The HVCC also prohibited lenders from having direct conversations with appraisers during the appraisal process.
HVCC was set in place to discourage the previous practice of lenders placing pressure on appraisers to value properties and homes at a pre-determined price. However, the code had unintended consequences. As a result of these requirements, many lenders decided to outsource the full process to appraisal management companies. These AMCs would then take a sizable share from the appraiser’s fee, and send appraisers far away from neighborhoods which they knew well. As a result, these appraisers were undervaluing homes and putting potential sales in danger.
The Reform and Its Good Intentions
In order to combat the financial crisis of 07 – 08, it was clear to both consumers and legislators that the previous regulations simply weren’t enough; additional steps needed to be taken to safeguard lending and purchasing practices. In 2010, Congress enacted The Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act includes appraiser independence and set in motion the phase out of the HVCC’s legislation.
Appraisal Subcommittees that were previously set in place had their functions expanded under the additional Acts to include monitoring state requirements, registration changes, additional provisions for high-risk mortgages, and greater supervision of appraisal management companies. In addition, legislators made it mandatory that the ASC report to Congress annually to list audits, create a national registry of all appraisal management companies, set new rules and qualifications for appraisal trainees and senior appraisers, and apply stronger disciplinary actions for non-compliance from appraisers by removing them from the registry for ninety days.
These new rules also set safeguards for appraisers so that lenders couldn’t discriminate against appraisers when choosing an assignment. Furthermore, the amendment set up a complaint hotline, set additional standards for Automated Value Models and Broker Price Opinions, as well as required customary and reasonable compensation for appraisers.
Consumers Still Pay the Price
So yes, the change was needed and definitely had respectable intentions but overall, the increased legislation has boiled down to a simple issue of supply and demand. While it was set in place to protect consumers, investments and even appraisers, it is clear that there have been some unforeseen consequences. In the end, the consumer is paying the ultimate price and the responsibility falls on all of us to correct the deficiencies within the law.