The FHFA’s engagement of industry stakeholders signifies a critical inflection point for appraisal transformation. Modernization will either take root and flourish throughout every branch of the mortgage industry, or our industry could miss a critical window to introduce meaningful reforms.
While the fintech revolution has transformed the mortgage industry over the past 15 years — improving the borrower’s experience by reducing friction and increasing the speed of loan approvals — appraisal systems have remained largely unchanged.
A few years ago, cracks in the system finally started to show in the form of swelling turn times, delayed closings, and increasing borrower costs. For example, appraisal turn time has swelled 65% from 2018, according to Clear Capital data, and appraisal costs have also soared 24% since 2016.
Appraiser shortage
One significant factor behind the lack of evolution in the appraisal industry is that the American housing market has grown at a much higher rate than the pool of licensed professionals that are legally certified to appraise residential real estate.
A 2017 study conducted by the National Association of Realtors found that “lack of training, downward trends in compensation, and increasing regulation,” were driving both existing and would-be appraisers away from the industry.
Navigating appraisal challenges in today’s housing market
HousingWire recently spoke with PCV Murcor Founder, President and CEO Keith Murray, and COO Cindy Nasser on how the appraisal process can be streamlined in today’s tight housing market.
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Further compounding the diminishing pool of appraisers is the increasing demand for their services. Freddie Mac also found a 50% increase in appraisals completed in 2020 compared to 2012, but no more appraisers on hand to complete those appraisals than there were in 2020.
Despite fintech innovation in the form of lending-as-a-service (LaaS) startups and more user-friendly mortgage application portals, the appraiser shortage paired with “the old way of doing things” has aggravated process inefficiencies within the home loan ecosystem.
Poor data visibility
In 2020, the use of “blind” appraisal waivers reached staggering, record highs. In these scenarios, no inspection or appraisal of any kind is performed on the property. While waivers make sense for certain loans — and certainly provided some temporary capacity relief to appraisers who were struggling to keep up with order volume — the rate at which they’ve been issued over the last year represents a new high-water mark.
During peak months, 70–80% of all rate-and-term refinancing transactions have been executed without an appraisal. The lack of boots on the ground means that both the lender and the GSEs buying the loans have reduced visibility into the true condition of the property.
As an alternative, Clear Capital believes it would be more prudent to use a standalone property data collection process, then use that timely information about the property to determine if a desktop appraisal may be needed. Under this framework, mortgage investors like the GSEs would secure valuable data to inform their critical risk models that keep our housing ecosystem safeguarded. And appraisal waivers would be informed, not blind.
Delegating onsite data collection
In the traditional appraisal model, we ask appraisers to perform every single component of the valuation process. This includes lower-level aspects like appointment scheduling, driving, and collecting property information. But there’s growing evidence that non-appraisers can perform high-quality data collection that ultimately empowers the appraiser to focus on what they do best: analysis, research, and determining market value.
Real estate agents in particular understand local properties extremely well. They are a property data collection labor force that lives and breathes residential property markets as a general course of business.
Leveraging mobile technology, there is also no reason why real estate professionals today cannot perform the basic duties of onsite data collection. This includes the uploading of high-resolution digital photos and digitized floor plans complete with accurate square footage calculations.
Additionally, real estate professionals can include additional, community-specific notes and insights about the property that could have a material impact on asset valuation. This framework minimizes the impact of appraiser depletion, as shrinking pools of certified valuation professionals can leverage third-party data collection to maximize appraisal efficiency, productivity and accuracy.
Lastly, for those concerned with reduced regulatory oversight over real estate professionals who would conduct preliminary data collection in the appraisal cycle, these objections are easily overcome. In fact, real estate professionals are accountable to the exact same type of state government licensing requirements and regulatory frameworks that appraisers are.
Ultimately, the FHFA’s RFI on appraisal modernization has given all participants in the mortgage transaction chain an opportunity to step into the future. Maintaining the status quo with a shrinking appraiser labor pool invites unnecessary risks throughout property markets and beyond.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Jeff Allen at jeff.allen@clearcapital.com
To contact the editor responsible for this story:
Sarah Wheeler at swheeler@housingwire.com
