In 2020 the appraisal industry endured a series of rapid changes, both in the way that appraisals are completed, and how the industry thinks about appraisals as a whole. The sky-high volume during the Covid-19 pandemic coupled with a decreasing number of appraisers over the past several years put constraints on capacity and held up many lenders’ pipelines. In response, we saw temporary flexibilities from the GSEs, an increase in appraisal waivers, and also the Federal Housing Finance Administration (FHFA) public Request For Information (RFI) on appraisal practices and policies.
These changes have brought to light a number of important questions for mortgage lenders, appraisers, and technology vendors alike. Last week, Reggora CEO Brian Zitin dug into the topic with Tony Reese, Chief Appraiser at RPM Appraisal Services, formerly of Flagstar Bank, and William Fall, Chief Executive Officer at The William Fall Group, at the HousingWire Spring Summit virtual event. Below are some of the top takeaways and learnings from the panel and from our conversations leading up to the event.
Appraisal Waivers: Pump the Brakes?
As illustrated in the FHFA RFI, there was a significant increase in the number of waivers issued throughout 2020. The question is whether this new level is sustainable.
When you look more closely at the numbers, the increase in the number of appraisal waivers started back in early 2019. This increase was actually so dramatic that the FHFA asked the GSEs to pump the brakes a bit. As a result, there was some pull back on waiver activity through the end of 2019, but the pandemic hit in March before the key players were able to conduct thorough risk analysis on it.
This made it necessary to revisit the decision on waivers in 2020, and ultimately the regulators decided that not increasing the number of waivers was a greater overall risk. Ultimately, it sounds like we won’t know the true answer on waiver sustainability for a few more years.
William Fall, an appraiser of 46 years, suggests that increasing technology and alternative products will likely decrease the need for appraisal waivers over time. The input by humans in data capture and analysis removes uncertainty in the valuation process and increases confidence by the parties involved, leading the industry away from appraisal waivers and towards a more technologically sophisticated hybrid approach.
Appraiser Shortage: What is Being Done?
Over the past decade, the industry has struggled with an overall decline in the number of appraisers, leading to slower turn times and clogged pipelines.
The issue boils down to a few main points. Firstly, not only is there a shortage of appraisers, but there is a decline in the number of people entering the profession. This is largely due to the supervisor/trainee model that has been traditionally used to train appraisers. Tony Reese points out that “acting as a mentor it's really not a profitable endeavor for the first year,” and many appraisers actually view training a new appraiser as “training a new competitor in their market.” Additionally, most appraisers do not want to take on the additional responsibility of training a new appraiser, only for the trainee to go work for an appraisal management company after receiving their license or certification, where they can receive higher fees, a very common occurrence.
These factors have led to the creation of Practical Application of Real Estate Appraisal (PAREA). PAREA creates an alternative road for new appraisers to enter the profession, providing practical experience in a virtual environment. William added that he believes the PAREA system will go a long way towards getting more appraisers into the field by providing more accessible opportunities in a virtual and standardized way. PAREA is meant to help create a more well trained workforce by eliminating inconsistent training and introducing a broader and more diverse experience.
Hybrid Appraisals: Well-Integrated Solutions Are Key
Beyond just appraisal waivers, there is much talk in the industry about alternative products such as hybrid appraisals. While it is likely that these products will become more common, the question lies in how best to implement these products and overcome the challenges presented.
There has been a rush by many in the industry to be the first to market with a solution for hybrid appraisals, but rarely are they well-coordinated solutions. Tony commented, “if the products don't integrate together seamlessly, then we really don’t gain new efficiencies.” With it already being difficult to manage appraisers as a third party, introducing another third party can make the overall process more complex and difficult to manage unless the solution is carefully tested, fully integrated, and focused on making the life of the appraiser easier. William added that critical to the success of new technologies, is the validation of outcomes against previous and trusted systems. Additionally, participating in third party testing when creating a new product or technology is essential, as these tools cannot be created in a vacuum.
Tested and integrated solutions coupled with new regulations from the FHFA mean big changes, not only for the appraisal industry, but for the entire mortgage industry. According to Tony, the shift to hybrid valuations is a change with a magnitude that we are unlikely to see again in this field during our lifetime. It’s important for everyone in the industry to get involved and understand the shift that's occurring, and provide input wherever they can in order to ensure these improvements are felt across all areas that touch the valuation process.
Virtual Inspections: Here to Stay?
While virtual inspections were propelled into the spotlight due to the nature of the pandemic, questions remain about whether or not, and to what extent virtual inspections are here to stay.
One of the principal concerns with virtual inspections is the quality of the information the appraiser receives. In a refinance, for example, the homeowner may be incentivized not to show certain damaged or outdated parts of their home on camera, with the fear that it will hurt the value of their home.
Tony pointed out that in most cases, while certainly a factor to consider, he does not see virtual inspections as inherently presenting more risk than we deal with today. If a homeowner today wanted to hide a crack or imperfection from an appraiser who is physically in their home by putting a couch or a rug over it, the appraiser would be none the wiser, as he or she is not going to ask the homeowner to move every item of furniture or lift up each rug.
Important to the success of virtual inspections is training appraisers to readily request more information in a virtual format. If the inspector failed to sufficiently cover an area of the home, or provide a clear enough picture, it is paramount that the appraiser requests they go back and provide all the proper information required for an accurate valuation.
Tony concluded: “Virtual inspections are something that number one, helped us in the short term with being able to get through the pandemic, but in the future, it's something that we're definitely going to rely on more.”
Thank you, William and Tony, for sharing your insights with all of us.
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