New USPAP Q&As published March 6, 2025

[timd354]

Every profession has good and bad.

All of these complaints should be fixed by correcting panel management and engagement practices. You are not going to fix it by trying to make bad appraisers good.

I don't disgree with these assertions. The only thing that I will say is that appraiser engagement now is way better than it used to be when mortgage brokers and loan officers picked the appraiser. However, there is still room for imrpovement.

In my view, the easiest and qucikest way to improve the situation would be for the GSE's and Ginnie Mae to much more quickly bar lenders that have excessive default rates and/or have consistently bad QA results. Unsurprisingly, originators who use bad appraisers usually also have increased deficency rates in other aspects of mortgage originations.

 

[Joe Flacco]

Secondary market complaints should be entirely directed at the seller of the loan.

As far as that appraiser knows, he's doing a great job. He's getting orders from his customers and his customers are probably happy with his work.

 

[timd354]

Every profession has good and bad.

I would argue that maybe 10-15% of resdiential appraisers are actually good while 10-15% are really bad and the remaining 70-80% of residential appraisers are basically adequate. BTW, I think that these percentages are pretty similar in a lot of professions.

The merely adequate appraisers are good enough to appraise most non-complex properties without difficulty. Where they get themselves in trouble is when they try to appraise something that is complex, atypical or in a market that they don't work on a regaular basis. They also get themselves in trouble when they perform aprpaisals that have an intended use that is different from a typical mortgage lending aprpaisal.

The really bad appraisers fall into two buckets (although there is some overlap between the buckets). The first bucket includes appraisers who are simply incompetent. This bucket does not worry me too much, because their substantandard appraisals are typically pretty easy to detect. The other bucket includes appraisers who are dishonest. The ones I worry about the most are the ones who are smart, but dishonest as they may have the ability to create an inflated appraisal report that appears to be of good enough quality to fool most underwriters.

 

[Mark K]

99% of the transactions at Walmart occur without shoplifting because everyone knows there are measures in place to discover and punish the crime. Take those away, and guess what happens.

That's true but Wallyworld will prosecute shoplifters and put them in jail.

VERY VERY few mortgage fraudsters have ever been prosecuted, much less gone to jail.

The banksters are once again manipulating the system, lowering standards in order to make more loans that, in all likelihood, should not be made. And wouldn't be made if the banksters had to accept some of the risk. They want to milk this cash cow until it dies and then they'll figure out another riskless (to them) scheme, backed by the taxpayers.

 

[Joe Flacco]

I don't disgree with these assertions. The only thing that I will say is that appraiser engagement now is way better than it used to be when mortgage brokers and loan officers picked the appraiser. However, there is still room for imrpovement.

In my view, the easiest and qucikest way to improve the situation would be for the GSE's and Ginnie Mae to much more quickly bar lenders that have excessive default rates and/or have consistently bad QA results. Unsurprisingly, originators who use bad appraisers usually also have increased deficency rates in other aspects of mortgage originations.

I'm confused by this solution because appraisals don't really have anything to do with default rates unless there is fraud involved.

Barring sellers with high default rates won't fix appraisal quality issues. That has to be manually done by panel management and engagement practices.

Better than before or not, AMC panel management and QA is a joke. I would say it is not any better than before. Their job is to make it look like it is better than before.

 

[CGinMN]

Do you know how much of a discount that the originating lender has to eat when they resell a repurchased loan on what is called the "scratch & dent" market for mortgage loans?

Whatever the discount, it is probably more than made up by all the origination fees they made off of high appraisals that didn't result in repurchase.

In my view, the easiest and qucikest way to improve the situation would be for the GSE's and Ginnie Mae to much more quickly bar lenders that have excessive default rates and/or have consistently bad QA results. Unsurprisingly, originators who use bad appraisers usually also have increased deficency rates in other aspects of mortgage originations.

Better than before or not, AMC panel management and QA is a joke. I would say it is not any better than before. Their job is to make it look like it is better than before.

AMCs like to point the finger and say the lender is responsible, all the while failing to implement changes to their model that would impact the outcome. Meanwhile, the lender points the finger at their AMC because they're outsourcing QA to them. This ensures nobody has to take the blame and change their practices. The best solution is to put it all under one roof and work with ethical appraisers who do good work and pay them well.

 

[timd354]

I'm confused by this solution because appraisals don't really have anything to do with default rates unless there is fraud involved.

Barring sellers with high default rates won't fix appraisal quality issues. That has to be manually done by panel management and engagement practices.

Better than before or not, AMC panel management and QA is a joke. I would say it is not any better than before. Their job is to make it look like it is better than before.

We find that lenders with high defualt rates typically fall down in all parts of the origination process, including appraisals. Conversely, we typically find few appraisal issues with lenders with low default rates. I don't know why you would find that surprising.

By the way, during times when the real estate market is functioning well and home prices are increasing, default rates are typcially a driven less by loan to value ratios than other factors such as credible score, DTI, job stability, etc. (though high LTV loans do default at higher rates than lower LTV loans in all markets). However, when real estate markets decline or go flat for extended periods, loan to value ratios (or equity) have a more sigificant effect on default rates, thus the extent that the origination appraisal was inflated (if it was inflated) most certainly will affect default rates. Additonally, the defualt rate is only one of two components that causes losses in the secondary market, the other component is severity (which is the measure of how large the loss is on a defaulted loan) and appraised values (if inflated) most certainly have a negative impact on severity.

 

[Joe Flacco]

We find that lenders with high deafult rates typically fall down in all parts of the origination process, including appraisals. Conversely, we typically find few appraisal issues with lenders with low default rates. I don't know why you would find that surprising.

By the way, during times when the real estate market is functioning well and home prices are increasing, default rates are typcially not driven by loan to value ratios. However, when real estate markets decline or go flat for extended periods, loan to value ratios (or equity) have a singificant effect on default rates, thus the extent that the origination appraisal was inflated (if it was inflated) most certainly will affect default rates. Addiitonally, the defualt rate is only one of two components that causes losses in the secondary market, the other component is severity (which is the measure of how large the loss is on a defaulted loan) and appraised values (if inflated) most certainly have a negative impact on severity.

What you are saying shows that you as a secondary market insurer do not actually care about the appraisal development or appraisal adjustments. You just care about the valuation being reasonable.

That is what the problem is. You don't really care about how the appraisal is developed. That is how the secondary market thinks, that is how the loan sellers think, and that is probably how the appraisal providers for those sellers think.

 

[TerryRohrer]

when real estate markets decline or go flat for extended periods, loan to value ratios (or equity) have a more sigificant effect on default rates

No doubt correlated, but unlikely that LTV has any causation on default rates. That is the basis for GSE logic, though, which concludes that since alternative "valuation" products are reserved for the highest equity loans (where borrowers have skin in the game, too), those products are more "accurate" than traditional appraisals because they tend to have a lower default rate. Of course, then using the same mentality of greed that led to the Great Recession, since that was true during a long, upward trend in the housing market and is largely untested in a flat or downward market trend, they now extend the use of the unaudited products to near 100% financed loans. As always, creativity is enhanced when profits are privatized and losses are socialized.

 

[timd354]

Whatever the discount, it is probably more than made up by all the origination fees they made off of high appraisals that didn't result in repurchase.

It does not take more than a relatively small number of repurchases push a smaller lender into bankruptcy.....I have seen it happen more than once. Also, when the mortgage market slows down, the model you describe of offsetting losses from repurchases by earning fees from other originations that they don't have to repurchase typically falls apart in specdtacular fashion.