Appraisers Under Fire Once Again
Appraisers are once again being brought into the public spotlight as their importance in the home valuation process is being questioned. In a recent move, the FDIC, Federal Reserve, and the Treasury Department issued a joint proposal that would eliminate the need for an appraisal on mortgages for less than $400,000.
It appears that the driving force in this push is to save consumers both time and money in the loan process. In regards to the cost argument, appraiser colleague Ryan Lundquist summed it up best when he was quoted in a recent article by Ken Harney when he stated that “the appraisal is one of the least expensive elements in the transaction, especially when compared to what loan officers and the banks make.”
The time argument is another lame excuse for doing away with appraisals. There are various other processes that could be reformed to save time including the use of Appraisal Management Companies (AMC’s).
Since the financial crisis almost ten years ago the AMC middleman has become more prevalent in the loan process. While I have not performed any formal analysis myself I think it is safe to say that the average cost of an appraisal has increased due to the cost of the AMC and the time to complete the report has probably increased as well due to an additional party being involved.
Appraisers Only Unbiased Party To Transaction
It seems that appraisers always have to defend their role and importance in the mortgage process. This is pretty ironic since they are the only non-biased party among all of the participants.
Both agents and loan officers salary is based on the loan closing and/or home selling. Wouldn’t you do anything you could to push a loan through so that you could get paid if you were in that situation?
The appraiser’s payment is not based on the loan closing so there is no incentive to make the deal work at any cost. Because appraisers are unbiased they are able to provide a voice of reason in the process.
In light of all of this push to do away with appraisers, or at least limit their participation in loans under $400,00, I thought I would share three important roles that the appraiser plays. If you have anything to add please leave a comment below because I’d love to hear your take on the matter.
Top 3 Reasons Why Appraisers Are Needed
1) Consumer Advocacy- As consumer advocates appraisers are able to provide independence to the valuation process. In its current form, the mortgage appraisal is not intended for the benefit of the buyer but rather the lender. A lender obtains an appraisal to make sure that their financial risk is minimized.
The financial position of the lender is of utmost importance to them. If they have the option to get an appraisal or automated valuation for a cheaper price they will. This automated valuation model (AVM) will not necessarily provide an accurate market value of the property but it may provide the lender with the information they need to minimize their risk of financial exposure should the loan go bad and they need to sell the home.
One way that the appraiser can be an advocate for the home buyer is through the use of an appraisal contingency in a purchase contract. If banks choose to utilize an AVM this probably will not provide the buyer with the information they need to determine if the home they are buying is worth the contract amount.
By adding an appraisal contingency based on a valuation ordered by the buyer they will have the power to cancel the contract if it is higher than the appraised value. The buyer will not be blindly purchasing the home without knowing an accurate market value.
2) Realtor Liability- Real estate appraisers can provide protection to agents and brokers as well. While most agents see appraisers as a stumbling block to a house sale they should consider how we take liability away from them.
Property Inspection Waivers (PIW’s) are the new “shiny object” for mortgage lenders. In case you’re not familiar with it, a PIW gives the buyer an option of waiving a full appraisal. Instead of a full appraisal, an AVM is used, however, their accuracy is questionable.
An appraiser friend commented on a conversation he had with an agent involved in a recent sale. The buyer was encouraged to get a PIW but decided to go with a full appraisal. It turns out that the full appraisal provided them with information that saved them $10,000. I think that is a pretty good investment when you compare the typical cost of an appraisal with what it saved them.
What the agent needs to realize is that if the buyer finds out that they paid too much for a house, and an appraisal was not done, they now have a bullseye on their back. When the market tanks liability insurers and lawyers will now have a new person to blame.
I should also add that when the buyer accepts a PIW they must sign away their right to bring any future legal action against the lender and Fannie Mae. Again, this puts more liability on the agent and/or broker.
3) Public Trust- Ethical appraisers that provide reliable and accurate appraisals help to build and support the public trust in our financial system. If appraisers are taken out of the picture this could decrease the confidence consumers have in the home buying and mortgage loan process.
The public must know that their interests are as important as the banks. Even if a loan does not go into default, the value of an appraisal by a competent professional is immeasurable to the consumer because it provides an accurate estimate of the market value of what is typically their largest asset.
If a buyer purchases a home utilizing a PIW, and it is valued with an AVM, what happens if the home is worth less than what it sold for? What if the buyer must sell shortly after purchasing the home? Shouldn’t they expect to get at least what they paid for it if nothing extreme has happened in the market?
In a scenario like this, the buyer could potentially lose money because they will take a loss on the resale of their home. This will undermine the trust that the public has for the home buying and lending process.
Instead, the public might start believing that their rights are secondary to big corporations.
By attempting to eliminate appraisers the government is effectively putting the fox in charge of the hen house. Keep in mind that these are the same foxes that wrecked the hen house approximately 10 years ago.
What You Can Do To Help
We are still recovering ten years later from a toxic lending environment that encouraged no verification of income and loose credit requirements. Everyone that is interested in preventing another financial crisis must speak up to end practices that could contribute to such an event happening again.
Two of my friends and appraiser colleagues, Ryan Lundquist and Jonathan Miller, have created a petition to bring attention to what is going on. I encourage all of my readers to sign the petition and share it with everyone they know so that this may be prevented. (click picture below to go to petition)
Click here to go to the petition
If you have any questions about the role appraisers play or how I can help you please feel free to contact me and as always, thanks for reading.
I’ve found what appears to be my ideal home—an exquisite house—but the seller and I can’t agree on the property’s worth. It’s become a real estate stalemate, and I’m looking for a trustworthy property evaluation agency to get things moving again. I appreciate your information that using an appraisal contingency in a purchase agreement is one method the appraiser may represent the interests of the house buyer.
Thanks! I’m glad it was helpful! Good luck moving forward with your ideal home!
Like Ryan said this is a big deal. I think homeownership is important to our society. It’s financing should be transparent and honest. It’s not all-about-the-money. Contact your state representatives, if it smells like fish…
I totally agree, Christopher. Banks are getting too caught up in cheap and fast, however, some things just shouldn’t be pushed into this type of box. I actually don’t think borrowers mind paying for the appraisal and it taking a little longer if it is done right. Please let as many people know about the petition so that Congress knows we are serious.
Thanks Tom! Wonderful article!
Thanks, Conrad!
Great article Tom. I think the most important takeaway for Consumers as you said is that when they sign a PIW they sign away their rights to take any legal action against the banks or fannie mae. That is very risky for consumers given the noted corruption of these entities. When a bank is comfortable that the borrower is financially secure so as to mitigate their risk the bank is happy to propose a waiver. The buyer is then on the hook for any amount possibly above what their home is truly worth. With this proposed rule its upon the buyer to demand an appraisal or obtain their own so as to safeguard their financial interest in the property. I think as residential appraisers dealing with financial institutions in a manner as to analyze and report risk we’re all shocked at the lack of ethical and moral responsibility these #toobigtofail financial institutions truly have towards consumers.
I agree, Gynell. We all know what happened last time. It is even worse now given the number of loans that are approved for PIW’s which I heard was about 10-12%. Consumers should really pay attention to what is going on with their home loan, especially given the fact that it is usually their biggest investment.
Tom. That is probably the most well written article by one if my peers I have ever read. Thank you ! Claire Ryder. Denver
Thank you, Claire, that means a lot. My hope is that the public and the government will realize how important appraisers are so that the past will not be repeated.
Awesome article, addresses what many of us are saying thinking and feeling. Well put addressing consumers and the lending world.
Thanks, Ernie. I hope that with my post as well as others and Ryans petition the word will get out.
Excellent discussion Tom, I am going to pass this around on social media as well. The importance of a truly professional appraiser is critical.
Thank you for passing it along, Rachel. I hope that the word will get out so that we don’t go through another real estate crash like we had 10 years ago.
It is fantastic to have people like Tom Horn, Ryan Lundquist, Jonathan Miller and Joe Lynch of Sacramento REAA fame going to bat for us! Maybe this 400k threshold will be brought to the attention of the public and legislators through their blog actions, petitions, positions of authority and forums like this as well as possible public messages as was discussed in San Antonio at the Appraiserfest. If not, I think a lot of appraisers will not survive in this profession.
Thanks, Andrew. I think that all appraisers should be getting the word out in their own communities to educate the public on the value of appraisers. Thanks for reading and passing along.
Tom, thank you for the article defending appraisers. I’m not a legal expert, but I like the argument that the realtor’s liability could go up if the appraiser is out of the loop.
Thank, Gary. I think in the world we live in no party to a transaction is safe. I think the agent would definitely be in the line of fire of a attorney
Another thing to consider is this. If AVM’s overinflate the value of a home, it has a trickle down effect on the market. Now this overinflated sale is part of county record and will be used to overinflate the next home in that area. In short, this could initiate a false overinflated market just begging for collapse.
That’s absolutely true Bob. The overinflated comp would set the tone for future sales.
Fantastic. Thank you Tom. Preach. This is a sermon we need to listen to as a society. Let’s be accepting that technology will change various industries, but let’s also not let go of a system of checks and balances. This is a very big deal and I hope people are paying attention.
Thanks, Ryan, and thank you and Jonathan for putting this petition together. I hope other parties to the real estate transaction will see the future implications for this legislation.
Good points Tom. I question the timing of this significant change. Real estate markets have been increasing the past six years and are rapidly approaching a peak. Now is not the time to reduce oversight.
I agree, Joe. The timing is definitely suspicious.