Ten Years After the Mortgage Meltdown; Banks will do anything to get around primarily, the cost and secondly the purpose of an appraisal. After all, the Big banks are certainly not making enough money as it is, correct?
Like many folks, I’d assume, most don’t keep up to date with the mortgage and banking industry. Moreover, I can confirm that there have been some very interesting $#*& Going down in the new and improved “valuation space” formerly known as Appraisal, that could jeopardize appraisal accuracy, so grab a cup of whatever you like, and let’s focus forward.
Background and Detail
There has been a five-year-long false narrative campaign that there is a shortage of appraisers that have resulted in longer turn times and higher fees.
Lenders and their AMC’s have been cherry picking the data that Appraiser numbers have declined and that therefore, there are not an adequate amount of active appraisers to meet the demands in the majority of “their” areas.
Who is this source that’s spreading these rumors?
What they’re not sharing is that since legislation went into effect post, 2007-2008 has spurred the creation and growth of “Third Party (Think of HMOs) Appraisal Management Companies (AMC’s) who have appropriated the Fee Appraisal industry like Temp Agencies.
Systematically, fees paid to appraisers have been steadily “Compressed” as this was how the AMC’s idea of paying appraisers like giving them a minority percentage of the entire Appraiser fee paid by the bank for the Appraiser.
Well, there is a term for this. it’s called “Assumpsit,” which in English is called “Unjust Enrichment.”) And this has and has been the main reason that many Appraisers refuse to work for these AMC’s.
And the reaction from the AMC/Lending industry was to utilize the AMC and Lender Associations and lobby groups to implement an ongoing “Appraisal Shortage Fake News” cycle that has finally gained the The Appraisal Standards Committee to eliminate the four year degree requirement for the Certified Residencial License and lower both the Class Room and Experience hours in 2017.
Then in 2018, Fannie Mae began the Property Inspection Waiver, and there is Senate Bill 2155 which eliminates the need for an Appraisal in rural America, where it is especially needed.
All Players in the Real Estate Industry affected with “iBuyer, FrontDoor, Zillow Offers” the banks are finding ways to get around the appraisal process and or continuously finding ways to lower the cost of an appraisal to the bank.
This race to the bottom is a one-sided, self-serving pursuit of winner take all. Like the Chinese water torture fable, each of these disruptive business models not only serves to decrease the accuracy and reliability of the service of the appraisal, but for the Real Estate Agent and Lenders as it undermines Consumers and the integrity of NAR, and the financial institutions of our country.
Reader, I’d like to Introduce to you, three new, improved and Cheaper “Valuations” that the Lenders and FNMA are implementing since 2018.
Property Inspection Waivers (PIW), Hybrid Appraisals, and Appraisal Waivers.
1) Property Inspection Waivers- (PIW)In a PIW situation, when the traditional appraisal is not mandated, but instead the buyers’ property value is based on an Automated Valuation Model (AVM) by Fannie Mae’s Collateral Underwriter (CU) program from the Independent Appraiser’s from across the country since 2014.
There is very little daylight between Fannie Mae’s AVM and Zillow’s “Zestimate” because both rely on algorithms (not boots on the ground data) to base the value of your home and loan.
Algorithms are both Deterministic ( producing the same output going through the same states) and Non-Deterministic ( will show different behaviors for the same input on different execution and there is a degree of randomness to it.)
Both FNMA and Zillow do not publish or share their methods to either to the Appraisers whos data they use, the Lender or the Consumer. Is that even ethical under statute or current business law? All this allows for margins of error when these fatalist Algorithms machines Appraise”your property.
However, has Fannie Mae factored that in if they’re their costs calculations? No Worries, Fannie Mae (A GSE who was bailed out by the taxpayers in 2009 have absolved themselves, including the originating Lender (as in your local lender) from any future lawsuits that may pop up in the future from current and prospective consumers. Misleading or am I too “judgy.”
Let’s Summarize: The Government Backed FNMA is not Responsible. The Lender is not responsible, and There is no Appraiser to complain about or their E&O Insurance.
Which practitioner is potentially holding the “Bag”? Could it be the Buyers Agent and their Brokerage?
2) Hybrid AppraisalsA hybrid appraisal is where the functions of the appraisal process are divided up among farmed out to unknown parties, each with their ways of doing things.
The number crunching performed by a certified appraiser and is similar to a desktop appraisal. The Appraiser property observation is farmed out by AMC to a non-appraiser. Which, could be a real estate agent or some other type of property inspector, all who by the way are not familiar with each other’s Real Estate credentials or experience.
The problem with this type of Fractured (Hybrid) appraisal is that if the property observation is performed by someone who does not hold a State Appraisal Credential and does not know what to look for in that context.
Knowing what to look for is one of the most critical components of the trained Appraisers job, and the results of the observation get reconciled with the other parts of the professional appraiser. Which can impact the final opinion of value?
3) Appraisal waivers in rural areas referenced at the top of this post, SB2155 allow the Lender to invoke not only a property inspection but eliminates the need for an appraisal by an unbiased third party appraiser. What Could go wrong?
Most would state that this is just an example of the “dumbing” down of services across all industries. The Real Estate Industry for both Residential and Commercial is a 25 Trillion Dollar Annual Market, and the wolves are at the door.
In closing – For Home Buyers getting mortgages, before allowing the bank in your negotiations, that you will enable them to perform one of these types of Valuations (they are not appraisals), you should know that you as a Consumer are not achieving your due diligence and need to be aware and accept whatever the consequences.
As for Real Estate Broker’s and Agents and or E&O insurer if you have coverage for this under any of the three Valuation substitutes you’ve have read about today, and most importantly, create a very tight legal disclaimer.