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The Decline of the Appraisal Industry: An Unsustainable Future

Yuanyin said:
The Decline of the Appraisal Industry: An Unsustainable Future
Once a cornerstone of real estate transactions, the appraisal industry is now facing an existential crisis. A closer look reveals a troubling disparity between the compensation appraisers receive and the escalating demands placed upon them. This unsustainable imbalance is threatening the viability of the profession.

Stagnant Pay Amid Rising Costs
When I started in the appraisal business in 2002, a standard appraisal cost between $325 and $400. Fast forward to 2024, and the fees I receive from appraisal management companies (AMCs) range from $400 to $450, with $500 being a rare high. On occasion, AMCs even try to pass off $350 fees to this day. This amounts to an average pay increase of just 17% over 22 years. In stark contrast, the cumulative cost of living has risen approximately 74.27% over the same period, according to the Consumer Price Index (CPI). Using the CPI inflation calculator, $350 in 2002 equates to $613.80 today. Yet, the average fee appraisers receive from an AMC for an appraisal today is around $425, a far cry from what is needed to keep pace with inflation.

This stagnation in pay stands in sharp contrast to the steadily increasing fees charged to borrowers. The disparity between what borrowers pay and what appraisers earn highlights systemic issues in how the appraisal profession is valued.

Increased Workload and Liability
While pay has stagnated, the workload and liability for appraisers have grown exponentially. Engagement letters now come with a never-expanding list of requirements. Additional policies, such as revised Reconsideration of Value (ROV) procedures, introduce more time-consuming steps without corresponding increases in compensation.

Moreover, scrutiny on appraisers has intensified significantly with the use of lender Automated Valuation Models (AVMs), the Uniform Appraisal Dataset (UAD), and soon, lender-built AI models. Appraisers face greater potential for being labeled biased, increasing the risk of professional liability. They are expected to address every conceivable factor influencing a property’s value for fees appropriate for 20 years ago. To top it off, they must complete these tasks within 48 hours or risk being marked late and seeing their rating with the AMC decline.

A Comparison with Other Trades and Professions
The disparity in pay and expectations becomes even more apparent when compared to other skilled trades:
  • My neighbor recently hired a plumber to replace two shut-off valves under a pedestal sink. The fee was $550 for less than 30 minutes of work.
  • I had new flooring installed, which took one worker two days. The LABOR cost was $2,350, the most competitive of three quotes. (This was in December 2024.)
  • Painting a vacant 950 sq. ft. home with two colors (white ceilings and near-white walls) cost $2,450 - excluding baseboards or trim. I supplied the paint, and two painters completed the job in two 8 hour days. (This was also in December 2024.)
  • My sister-in-law wedding photographer charges $3,500–$5,000 per wedding. An 8-10 hour shift, with image editing outsourced to an editor in Latvia for cents on the dollar. This doesn’t include additional charges for wedding books, framed images, etc. A job paying upwards of $100k a year, requiring far far fewer hours than an appraiser making an equivalent wage.
In contrast, appraisers undergo hundreds of hours of classwork, pass rigorous tests, and complete thousands of hours of apprenticeship training. Once licensed, appraisers drive 30–40minutes one way, measure a home, complete a detailed interior and exterior analysis of the property, scour MLS for data collection, research each comparable, analyze market conditions, and reconcile to 1, 2, or 3 approaches to value. This labor-intensive process, coupled with significant liability, is conducted for around $400, often with a 2–4 week wait to receive payment.

The Unsustainable Model
The appraisal industry operates on a model that undervalues the expertise, time, and the liability involved in the profession. While other trades or professions command higher fees for equally and often less complex tasks, appraisers face mounting demands and stagnant compensation. This disconnect is driving seasoned professionals out of the industry and discouraging new entrants. Without systemic changes to address pay disparities and reduce administrative burdens, the appraisal industry will continue to decline, leaving a critical gap in the real estate process.

The Role of AI in the Future of Appraisal
As the appraisal industry struggles, AI is poised to take on a growing role in the valuation process. Property inspectors may soon upload data, including detailed notes and photographs, to AI-driven models. These models could analyze physical conditions, anticipate market reactions, and generate supportable adjustments based on vast data sets already being compiled. While AI may offer efficiencies, it is unlikely to replicate the nuanced judgment of a licensed appraiser -- today. In the future, however, it will. Since AI cannot form an opinion of value, its outputs may ultimately produce a most probable price or a price range, with lenders adjusting loan terms based on the provided range.

The growing reliance on AI will more than likely diminish the role of human appraisers, reducing the demand for traditional appraisals. It is probable and my opinion that Fannie Mae and Freddie Mac will embrace replacing human appraisers as soon as it is feasible. Given the current fee structure, which lags behind the cost of living and falls far short of other professions, reducing new entries into the field, this shift may occur sooner than expected and could become a necessity for the mortgage market. After all, who else is gonna do it?

Yuanyin
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This is old news of course.

Appraisers have to take things into their own hands. The problem is that they are not capable of doing that. The fault is that of Appraisers themselves. Appraisers are idiots too. If they were smart, then they would see that they need a strong organization and stronger involvement in the profession ---- but that takes cooperation among the majority of appraisers. Too many of them are just looking out for themselves and, at least in the past, would brag about the fact that they could undercut other appraisers and make up by doing larger volumes of appraisals, i.e. cheap-o appraisals.

No, the AI hasn't helped things at all!! They are not doing their proclaimed job of representing the profession. They are more concerned with playing up to the swamp in D.C..

Anyway, this is not the only profession with such problems. It is just as dumb as the others, including physicians.
 
Sadie said:
You are overlooking a key issue. A 30 year mortgage ties up a banks assets for 30 years.
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Not necessarily.
George Hatch said:
My point was the GSEs aren't the only conduit that can participate in MBS and loan securitization business.
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Exactly. One of the lenders I worked with, and who is still around making loans, keeps the ARM's on their books and sells off some of the fixed rate loans (depending on the interest rate environment), without the 'benefit' of F/F.
 
Fernando said:
The chart is right. Government getting involved with home ownership.
Government wants more people to own homes. Maybe to narrow the wealth gap.
I'm afraid they would get lax in giving out many loans especially misusing waivers.
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Long time ago there was a push to get more families into homes and it continues today. I read a study that proves that families that participate in home ownership do better financially and their children do better in K-12 schools. So , your right about narrowing the wealth gap also. So government loans like FHA are great. Homes in Rural area's were penalized because of the difficulty in getting low interest rate home loans . So USDA farmers home low interest loans .

Trump & Dr Ben Carson created enterprise zones in the inner city so that chronic unemployment would go down, which it did.

President Carter economy sucked so this made homeownership nearly impossible. Interest rates were 12,13 and 14%+

. Very few people could buy a home. I heard that he felt guilt over the low homeownership and is the reason he came up with habitat for humanity.
 
Last I read FNMA is securitizing apprx 70% of conventional loans and they also buy government backed loans. something like that,
 
Carnivore said:
Last I read FNMA is securitizing apprx 70% of conventional loans and they also buy government backed loans. something like that,
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I really don't think they want the "outside looking in" to this process…

Describe how securitization mixes loans with various risk profiles for sale.​

​


Answer
Securitization involves a sophisticated process of combining loans with different risk profiles to create marketable securities. This process allows lenders to manage risk and attract diverse investors while providing liquidity to the credit markets.

Risk Pooling and Tranching​

The securitization process begins when loan originators pool together similar loans
1
. However, the composition of these pools can vary in terms of risk profiles:
  1. Homogeneous Pools: Some securitizations may group borrowers with excellent credit ratings and very little risk of default to create a high-grade securitized asset
    3
    .
  2. Mixed Risk Pools: Alternatively, high-quality borrowers can be combined with those who have a higher default risk. This approach improves the overall risk profile of the resulting securities
    3
    .

Structuring Tranches​

Once the loans are pooled, they are typically structured into various tranches, or classes of debt, with different risk and reward characteristics
6
:
  • Senior Tranches: These have higher ratings, greater protection against losses, and typically shorter maturities. They offer lower yields but are considered safer investments.
  • Mezzanine Tranches: These occupy the middle ground in terms of risk and return.
  • Junior Tranches: Also known as equity tranches, these are smaller but designed to bear most of the credit exposure. They offer the highest potential returns but also the highest risk
    1
    .
This tranching process allows the creation of securities that cater to different investor risk appetites from a single pool of assets
6
10
.

Credit Enhancement​

To make the securities more attractive to investors, especially for the senior tranches, various credit enhancement techniques may be employed:
  • Overcollateralization: Including more collateral in the pool than the value of the securities issued
    10
    .
  • Reserve accounts: Setting aside funds to cover potential losses.
  • Third-party guarantees: Obtaining additional assurance for the securities
    10
    .

Risk Assessment and Pricing​

The mixing of loans with various risk profiles requires careful analysis:
  • Bankers analyze the amount and timing of cash flows generated by the collateral, considering scheduled payments, prepayment rates, delinquencies, defaults, and potential recoveries
    9
    .
  • Rating agencies often assess and assign ratings to different tranches, helping investors understand the risk associated with each security
    10
    .
By combining loans with different risk profiles and structuring them into tranches, securitization creates a range of investment products that can appeal to a broad spectrum of investors, from risk-averse to those seeking higher yields
6
. This process also allows originators to transfer risk, free up capital, and continue lending, thus promoting liquidity in the credit markets.

Related
How do different tranches in securitization affect investor risk

What are the main benefits for lenders in securitizing loans

How does the securitization process impact the original borrowers

What role do special purpose entities play in securitization

How are credit enhancements used in the securitization process
https://www.perplexity.AI/search/describe-how-securitization-mi-QWbizU5cSoqr9omfV4Uwsw
 
Last edited:
Carnivore said:
Long time ago there was a push to get more families into homes and it continues today. I read a study that proves that families that participate in home ownership do better financially and their children do better in K-12 schools. So , your right about narrowing the wealth gap also. So government loans like FHA are great. Homes in Rural area's were penalized because of the difficulty in getting low interest rate home loans . So USDA farmers home low interest loans .

Trump & Dr Ben Carson created enterprise zones in the inner city so that chronic unemployment would go down, which it did.

President Carter economy sucked so this made homeownership nearly impossible. Interest rates were 12,13 and 14%+

. Very few people could buy a home. I heard that he felt guilt over the low homeownership and is the reason he came up with habitat for humanity.
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I see a troubling trend in the purchases ordered and in the comps research, where more and more SFR properties are not purchased or owned by individuals but are purchased by LLC companies, investors and in some cases by cash buyers (which the avg person can not afford to do)

More regular working folks are priced out of home ownership in part because of limited inventory bought by LLC 's and investors and the working folk become renters, where they can not build equity, and renters are more transient and do not build stable communities.

I do not see illegal immigrants buying the properties in any scale, large or small like the RW spin. Blame them for everything -the buyers keeping homes out of the hands of owner-occupant buyers re-purchased by American companies, LLC corps and local or out-of-state investors, and RE agents buying and selling to each other etc.

Homeownership was a way to build equity for the avg person
 
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