Appraisal Issues

We have a huge problem right now in the real estate/mortgage world and it all centers on appraisals. The system is so broken, that in certain areas of the state, it will take 2 months to get your appraisal.

The simple reason is there are too many appraisal orders and too few appraisers to complete them. I can’t fault the appraisers. I personally know many of them, and they are working their tails off trying to get them done as quickly as possible. And to be brutally honest, some are doing a better job than others.

As with the issues within my industry I have written about many times before, when you don’t have enough people to fill all the orders, you have to expect delays. Mortgages, and all the components that go into getting that loan to funding, are no different than any other business in adhering to the laws of supply and demand.

Here is my complaint: Many appraisers are taking advantage of the situation by artificially charging obscene fees for their work. No other sector of the real estate/mortgage world is doing what this group of appraisers are doing. Real Estate agents aren’t charging more to list a property. Mortgage people aren’t charging higher rates or fees, and the escrow/title people haven’t raised their fees either.

Despite the record volume seen by all of us associated with real estate, it’s only the appraisers that have jacked up their fees. To be fair, some appraisers have added only a small premium, while others have doubled or tripled their regular fee.

I’m going to provide a bit of history, because a decade ago, appraisers got royally screwed.

When the mortgage world collapsed in 2008 everyone who was truly to blame were the ones pointing their fingers at all the innocent people. The Attorney General for the State of New York believed that the collapse of the mortgage industry was due in part to unscrupulous lenders colluding with appraisers. The theory was that lenders pressured appraisers to inflate their values on the properties they inspected to make loans on those properties. If this were true, why would a lender want to make a loan on a property not worth what it really was? We all know how the story ended. The bubble burst, values dropped, and all the loans that were approved with no income verification went into foreclosure. So despite a ridiculous preposition of collusion, the New York AG threated to sue the major lenders. The lenders panicked and settled. The settlement created the Home Value Code of Conduct (HVCC). HVCC was later adopted by the CFPB, the government agency that regulates everything concerning consumer loans and credit.

Prior to HVCC, mortgage originators and lenders had established relationships with appraisers. Our company had preferred appraisers we would order appraisals from based on many factors including geographic area and property type. We had a couple of great appraisers that really knew the Waikiki condo scene – because they did so many of the appraisals for that area, but I wouldn’t have used them for a beachfront mansion in Kahala – we had another appraiser that did tons of those properties.

HVCC did away with all that. Trying to end the “collusion” that nearly took down our country, the new rule was that originators and lenders could not have any direct contact with the appraiser. All orders were to go through a 3rd party middleman that had no financial interest in the transaction. This new entity was known as the Appraisal Management Company, or AMC. By sticking a middleman in where none had ever been before, we on the origination side lost the ability be assured of an appraiser that had lots of experience in the area.

Appraisers got screwed because the AMC’s raised the cost of the appraisal to the consumer so they could get paid AND took a portion of the fee the appraiser normally received. Appraisers not only lost the ability to market themselves directly to lenders for orders, but they were also getting paid less for each appraisal completed.

I never thought HVCC was needed. At the time I was surprised that the major national lenders all agreed to that settlement without a fight. Then I learned that there was no restriction on a lender owning an AMC! So long as the AMC was independent of the lending operation, it was perfectly legal for a lender to and AMC. We’ll save for another day how the major lenders used a threatened lawsuit to create a new income stream for themselves.

Let’s jump forward to where we are today, because there has been a dynamic change in the appraisal order process. The AMC’s receive appraisal orders from us. They post the order to their list of appraisers. If an appraiser wants to complete the order, they provide an estimated completion date and what they want to get paid to do the appraisal. When there were too many appraisers and not enough work, they accepted orders making only 2/3rds of what they used to normally get. Today with too many orders and not enough appraisers, were seeing proposed fees of $2,000 for a report that was $650 two years ago.

Appraisers: I can understand the long wait times but charging large premiums because you can right now, is wrong. And here is where your decision will come back to haunt you. Consumers are angry and complaining. Do you want to get regulated with fixed fees for your work? Your actions are going to force the federal regulators to respond. And as you know, Fannie Mae and Freddie Mac have been collecting vast amounts of data on values and transactions. It will happen in the very near future that many transactions will not require an appraisal at all. For the shrinking number of transactions that will still need your services, don’t shoot yourselves in the foot by getting your fees regulated. I understand the right to open and free competition and letting the market dictate what you charge, but the federal regulators don’t think that way.

For the real estate agents out there and the public, please understand the situation we are facing right now. There are too many transactions moving through the system with too few appraisers to accommodate those orders. Appraisals are taking significantly longer than in any other time in the 25 years I have been in the mortgage industry. The real estate agents need to inform their clients of this situation and how it will impact a realistic closing date. Adjustments will also need to be made to the date in the contract the Conditional Loan Approval is to be received. In the standard Hawaii real estate contract, the “CLA” cannot include a condition regarding a pending appraisal.

To find out how this situation will impact your transaction timeline, talk to your mortgage originator to get a sense of turn-time of an appraisal in your specific geographic location.

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