Appraisers Don't Understand

[Non Sequitur]

A post today by the CEO of a national tech platform company. At least someone is saying out loud what has been known for years, but he forgot add one thing-they want it cheap too. Anyway, read below:


A lot of the disagreements on public forums between appraisers and the rest of the industry boils down to the following misconception:

Appraisers believe lenders should care mostly about the quality of the report and using the appraisal as a tool to accurately understand the value of a property

What many fail to recognize though is that the way the industry is set up, the vast majority of mortgage lenders do not retain the risk of a loan (and therefore the risk of the collateral value) because they are selling the loans to the GSEs or other investors

So the incentive for the lender is to meet the minimum quality thresholds and get the appraisal done as efficiently as possible so they can sell the loan and turn around and move onto the next, while providing a good experience for their customer (the borrower)

That's why appraisers who prioritize their service levels are rewarded and those that are difficult to work with (even if their reports are amazing quality) are punished

For appraisers this is an unfortunate reality, but understanding why your customers care about what they do is extremely important to actually solving their problems

 

[Elliott]

GSEs have their own unique set of motivations. They essentially don't have to care about their asset/liability balance sheet since they are in receivership and have the 'full faith' of the US government behind them. The overseeing government like the revenue they throw off.

Consider:

"Fannie Mae (and other GSEs) have been very aggressive in the last 2 years or so in making demands upon banks, credit unions and other lenders for losses caused by allegedly deficient loan underwriting practices performed by the selling institution.

A typical scenario is that the financial institution (FI) receives a Fannie Mae “request” to buy back a mortgage three or more years AFTER the foreclosure, claiming that the initial underwriting by the FI was deficient. What do you do? While each buyback demand has its unique circumstances, we can provide some general observations/comments:
.............
Consider Fannie Mae’s internal and external pressures and motivations. Fannie Mae has recouped billions from the large banks in buyback settlements, but these cases have largely “wound down” now. Fannie Mae appears to view the smaller FIs (with lower volume) as much less interesting to pursue legally, as the investment of resources and likelihood of large recoveries are not cost effective. Moreover, Fannie Mae’s regulator, the Federal Home Finance Association, is putting pressure on Fannie Mae to wrap up its buyback efforts."

Fannie Mae Buyback Demands - SW&M

Fannie Mae (and other GSEs) have been very aggressive in the last 2 years or so in making demands upon banks, credit unions and other lenders for losses caused by allegedly deficient loan underwriting practices performed by the selling institution. […]

swmllp.com

 

[Red Flint]

So the incentive for the lender is to meet the minimum quality thresholds and get the appraisal done as efficiently as possible so they can sell the loan and turn around and move onto the next, while providing a good experience for their customer (the borrower)

A worthy goal is finishing the appraisal as efficiently as possible and meeting a high quality threshold. Over time, this report is likely valuable to an established lender for either a troubled loan, or the possibility of regulator review.

 

[Joe Flacco]

A worthy goal is finishing the appraisal as efficiently as possible and meeting a high quality threshold. Over time, this report is likely valuable to an established lender for either a troubled loan, or the possibility of regulator review.

The high-quality threshold for loans being delivered to Fannie Mae is a CU risk score of 2.5 or lower. What we imagine a high-quality appraisal to be is irrelevant.

CU score 2.5 or lower = Day 1 Certainty = Highest quality appraisal possible

 

[The Bob]

A post today by the CEO of a national tech platform company. At least someone is saying out loud what has been known for years, but he forgot add one thing-they want it cheap too. Anyway, read below:


A lot of the disagreements on public forums between appraisers and the rest of the industry boils down to the following misconception:

Appraisers believe lenders should care mostly about the quality of the report and using the appraisal as a tool to accurately understand the value of a property

What many fail to recognize though is that the way the industry is set up, the vast majority of mortgage lenders do not retain the risk of a loan (and therefore the risk of the collateral value) because they are selling the loans to the GSEs or other investors

So the incentive for the lender is to meet the minimum quality thresholds and get the appraisal done as efficiently as possible so they can sell the loan and turn around and move onto the next, while providing a good experience for their customer (the borrower)

That's why appraisers who prioritize their service levels are rewarded and those that are difficult to work with (even if their reports are amazing quality) are punished

For appraisers this is an unfortunate reality, but understanding why your customers care about what they do is extremely important to actually solving their problems

Lender's don't care about "quality" because they don't judge it the same way we do. And really, how important is the appraisal when a market goes sideways like in 2007-2009? How many "bad" appraisal's get rescued by a sharply rising market? How many "good" appraisal's prevented losses in a market like 2007-2009?

 

[Terrel L. Shields]

hey are selling the loans to the GSEs or other investors

And the GSE won't claw back that money...they hope. But, if the CFPB would cuff the GSEs around the head and shoulders and take away their bonuses (I'd love to see that) then maybe the GSEs would claw back the cash and blacklist the lender. ... nada chance.

How many "good" appraisal's prevented losses in a market like 2007-2009?

Point. When prices collapsed the appraisal was worthless. OTOH, had the GSEs had good appraisals they might not have funded as many fraudulent transactions. I recall one near me that sold for $90k above the list price. OK folks, We all know the AGENT knew it was a fraud. And the buyer bought two houses - both for tens of thousands over list price. AND, the same buyer used a box number in California for one, and a street address for another. And both mortgage documents stated he would occupy the dwelling within 90 days of purchase. Obviously, he took the money and ran. That was Countrywide and Frontier. Great companies...right? And the appraiser? Obviously inflated the value to meet the contract price.

 

[George Hatch]

A post today by the CEO of a national tech platform company. At least someone is saying out loud what has been known for years, but he forgot add one thing-they want it cheap too. Anyway, read below:

I agree with his observations but I think it would mean more to appraisers if it was a lender saying it like this

 

[sputnam]

This began after the passage of FDIC and FSLIC. Bankers could suddenly make riskier loans without worrying about their depositers losing their money. For a while there was a battle between credit siders and collateral siders within the big lenders. The credit siders mostly won based on the numbers. They could make 10 $250,000 loans and if 2 defaulted over the life of the loan, they still made a profit. Piled on top of that was appraisal licensing. Once that came along.. no one much worried about which appraiser was good. They made sure that the appraiser was credentialed. As we all know, some appraisers who are certified... probably shouldn't be.

 

[shrubberyvaluation]

The high-quality threshold for loans being delivered to Fannie Mae is a CU risk score of 2.5 or lower. What we imagine a high-quality appraisal to be is irrelevant.

CU score 2.5 or lower = Day 1 Certainty = Highest quality appraisal possible

Had one in Deanwood DC where all my comps were within a couple blocks and all investor renovations like the subject. They showed me CU scores FNMA 4.0 Freddie 4.2. lender sent me sales to consider I assume from CU that were more distant and dated c4 properties. Sometimes CU is just luck.

 

[shrubberyvaluation]

I agree with his observations but I think it would mean more to appraisers if it was a lender saying it like this

Does there at least need to be a facade that they want a quality appraisal? Don't think they will want to directly communicate in writing that they want a speedy checkbox appraisal that hits the number, screw USPAP.