Pandemic Problems Adding To Appraisal Issues For Lenders

Pandemic Problems Adding To Appraisal Issues For Lenders

Record lending may be hamstrung by appraisal delays. Virus shutdowns are just one more roadblock.

BY JOHN TEDESCO, SPECIAL TO NATIONAL MORTGAGE PROFESSIONAL

The appraisal industry has been under a great pressure for several years now. Increasing demand, shrinking pools of aging appraisers, evolving data and technology, growing regulations, and difficult entry barriers into the profession, are just a few factors that have contributed to the current climate over the past 10 years.

Now add the impact from the COVID-19 pandemic and the industry challenges expand even further. The impact is being felt by mortgage lenders and borrowers across the nation, and they will need to navigate these concerns in the new world.

First let’s talk supply and demand; the key pressure on the industry. With Millennials becoming the largest generation in American history, housing demands are at an all-time high both for the Single Family and Multi-Family Rental markets as well as first homeowners. The National Association of Realtors is predicting 12 million new homeowners over the next 10 years. The second biggest generation, Baby Boomers, are starting to downsize. Both the selling and buying in these transactions typically require an appraisal; granted large portions of the selling may overlap with many of these millennial home buyers. Additionally, interest rates are at an all-time low driving a refi boom and also requiring valuations in many cases.

The 2019 Fact Sheet from the Appraisal Institute highlights 79,000 active appraisers in America. Less than 50% of those are active residential field appraisers; meaning many other may work for an organization like an AMC full-time doing quality control or review work, serve as chief appraisers for public and private organizations, work directly on staff for a lending institution, or perform only commercial asset class appraisals.

The Appraisal Institute Fact Sheet notes several other important facts. First, that number of active appraisers is down more than 10% in five years and has been on a steady decline for more than 10 years. The average age of an appraiser is now over 55. More than 50% of those have been in the industry over 20 years while less than 16% have entered the industry in the past 10 years. Nearly 41% of appraisers surveyed in 2018 by the National Association of Appraisers responded that they plan to retire in the next 10 years.

LOCATION, LOCATION, LOCATION

All of this is exacerbated regionally. Rural areas have always dramatically been underserved by appraisers by nature because of lower populations, but even cities and states can deviate significantly. Clearbox, host of the annual Valuation Expo (largest for the valuation community) reported in 2017 that metro Atlanta has 60 appraisers per 100,000 people, San Francisco had 30, while Cincinnati had 14 for 100,000 metro residents – and shrinking. In Illinois, its state appraisal board reported nearly 1,500 new trainee licenses issued in 2005; just 53 a decade later in 2015. Followed by the housing market recession of 2008, increased regulations, added risk, and stagnant fees compounded with added education and trainee requirements to deter many from entering the industry.

This supply and demand pressure has been dramatic and painful to lending across America. Initially it has added costs to appraiser fees and delayed turn-times, extended times that killed rate locks, delayed closings, and added to loan expenses. In recent years the impact forced federal agencies, lenders, and key decision makers to take measures to combat the challenge. Some measures pushed to increase supply with reduced barriers to becoming an appraiser trainee; scaling back the added education requirements and field hours. Other measures focused on reducing demand.

In 2017 and 2018, Fannie Mae and Freddie Mac adopted and expanded waiver policies that allowed low-risk borrowers with previous appraisals on file and higher down payments to secure appraisal waivers. In 2018, Fannie reported 60,000 of their 1.2 million loans (5%) received a waiver. Other exemptions from the Federal Reserve and FDIC were put in for commercial properties under $250,000 and then in 2018 that was raised to $500,000. In 2019, the FDIC raised the residential exemptions from $250,000 to $400,000 and required alternative valuations for items below that. These were for nonGSE loans, and in September of 2019, HousingWire reported these waivers represented 750,000 residential loans in 2017; the updated threshold based on based on that 2017 data would have added an additional 214,000 appraisal waivers.

Government entities also started using bifurcated reports, or what many of us know as hybrid reports (although technically there are some differences). These reports allow the appraisers to complete key portions of the report from home while other methods can be used to acquire photos and inspections.

DEMAND ESCALATES

As we entered 2020, those changes were still being significantly outpaced by the growing demand from new home buyers, low-rate refi’s, and new construction. In addition to the conventional demand, the rapidly growing demand from private capital investors acquiring residential assets through private lenders, real estate investment trusts (REIT), family funds, institutions and more has surged. In 2005, it was projected that this represented 5% of all residential lending in America; many experts suggest that number has grown to closer to 12% to 15% today. Further, these private lenders who fund investors with fix & flip loans, rental loans, refi’s, bridge loans and more have seen a dramatic boom in recent years with the emergence of a secondary market.

In March of 2020, ATTOM Data released its 2019 Home Flippers report where they reported an eightyear high with over 245,000 homes flipped in America in ‘19. That alone represented 6.2% of all lending in America for $32.5 billion in financed flips in 2019.

Rental programs were even stronger in 2019 for these private lenders and had more than doubled in recent years, while public and private REITs contributed even more with greater residential rental asset acquisitions than ever. In 2019, NaREIT (National Association of Real Estate Investment Trusts) reported their 2018 holdings now had 150,000 single-family rentals and over one million multifamily units. All of this driving valuation demand.

COVID CREATIVITY

As a provider of valuations across all these sectors, in the beginning of March we saw record breaking volume for ourselves and many of our clients. By mid-month, this all came to a screeching halt with COVID-19 shutdowns. The conventional spring/ summer house buying flood that normally backlogs appraisers and drives added delays turned into a trickle; virtually no one was house hunting while quarantined. That secondary market funding helping the private lending boom was now on lock down.

Government agencies like Fannie Mae and Freddie Mac were scrambling to find ways to accommodate the lending that was continuing. The ability of appraisers to enter a home to inspect or even leave their own homes was different state by state, even county by county in some cases. Some states deemed them essential workers in line with inspectors and contractors while others deemed them unessential. Exemptions were being made to allow conventional singlefamily interior 1004 reports to be done as an external drive-by reports, and the agencies began allowing lenders to use a desktop report in certain circumstances.

GSEs and lenders began evaluating further alternatives as well. We were fortunate to be one of the first to market with an app that allowed the borrowers to use a carefully guided but easy-to-use tool to take their inspection photos according to all key guidelines, geo-coded and timestamped the photos, and then send them direct to the appraisers.

SECOND WAVE OF DELAYS

As states opened up, we saw demand return quickly. We anticipate this will further grow as we reach a full easement of restrictions in all states over time. We feel the backlog from spring volume may just add to Summer and Fall demand, so we are advising lenders to be aware of added turn-times and potential fees as appraisers do charge more when demand is greatest. Further, we believe this temporary crisis will not have quelled the housing shortage we were experiencing pre-virus. With such demand for conventional homeowners and private investors alike, the industry will need to continue to address these appraiser issues that impact consumers with significant delays and higher costs.

The pre-COVID exemptions and waivers were easing pressures slightly, but it was still too early to access at what risk to these taxpayer backed agencies. And while there has been success with hybrid and alternative valuation products, they are best used in lower risk scenarios.

At the end of the day a computer cannot see non-conforming conditions on a property, smell carpets soaked in pet urine or a nearby waste site that may drive down value. We need to continue to grow the appraiser pool by making it a more attractive profession, limiting barriers, and expanding the tool belt. Alternative technologies, further exemptions, and added tools that emerged during the COVID-19 crisis should be valuable resources as we continue to grapple with these challenges.

John Tedesco is senior vice president of business development at Appraisal Nation.