Wednesday, 29 June 2022 | The Latest Buzz for the Appraisal Industry

A View on Risk: Desktop Appraisals

It appears the FHFA is making good on their promise. Fannie Mae announced on January 19, 2022 that they will be accepting desktop appraisals for eligible loan transactions. The team at Fannie Mae were the first to announce requirements lockstep with their Regulator that desktop appraisals will become a normal part of the appraisal product landscape. Let’s take some time to reintroduce Desktop Appraisals and explore the risks that are presented when a Desktop Appraisal is requested of an appraiser as part of the mortgage application process.

Appraisal Labels

Prior to 2020, the most common appraisal label in the mortgage origination ecosystem was the Full Appraisal. The Full Appraisal was the prevailing appraisal product in use when lenders and other stakeholders obtained appraisals in association with mortgage applications. The Full Appraisal requires the appraiser to complete a viewing of the property being appraised, with no limitations on what was to be viewed (i.e. interior and exterior). The onset of the Covid-19 pandemic in 2020 introduced two new appraisal labels – the Exterior-only Appraisal and the Desktop Appraisal. Lenders and stakeholders allowed for some level of inspection relief with these two new appraisal products. Exterior-Only is self-explanatory, where the scope of work states the appraiser completed an exterior viewing of the physical components of the property and the appraiser relied on other sources to gather property and improvement details. Desktop refers to a scope of work where the appraiser did not perform any level of viewing of the property and relied on other sources to gather property details. All three labels refer to the scope of work completed by the appraiser when completing the assignment.

Appraisers have always had the ability to complete appraisals with limitations on their scope of work, provided it falls within the constraints of their standards of practice, or what is commonly known as the Uniform Standards of Professional Appraisal Practice (USPAP).

Up until recently, mortgage lenders and stakeholders, for the most part, did not have the ability to vary scope of work of appraisal assignments; Full Appraisals were the standard product.

Catalysts of change

We live in a world that is transitioning from the Information Age to the Digital Age. After years of accumulating, cultivating and refining data, there is a greater understanding of real estate data in its current form, and the risks associated with the integrity of data are more measurable and better understood than ever.

During 2020 and 2021 as the Covid-19 pandemic global pandemic disrupted our lives and the way we all do business, regulators, agencies, and the government sponsored enterprises allowed inspection relief in certain circumstances. The markets perceived no additional risk in transactions where the appraiser signing off on the valuation of the collateral being utilized for a credit decision did not physically inspect the property.

Part of the reason why there was no perceived measurable risk attributed to this change in process was because of adapted upfront lender controls that were established, creating guardrails on when inspection relief was appropriate. In turn, appraisers developed, supplemented, and maintained practices to ensure the data provided to the appraiser did not result in a misleading appraisal. Additionally, there was a healthy dose of government stimulus involved to ensure there would be no disruption in the capital markets.

The lender/appraiser ecosystem over time has adapted processes and technologies to achieve appraisal development and reporting that meets regulatory, agency, and investor requirements, as well as meeting the needs of individualized lender risk appetites. Lenders rely on regulation and policy. Appraisers rely on standards of practice and processes. There is a long history of technology advances adopted into the appraisal processes.

Inspection relief was successful as lenders and appraisers developed appropriate processes. What served all stakeholders was an environment of open and clear communication and the use of technologies that provided a level of confidence that risks would not exceed acceptable levels.

The announcement of moving into a reality where a lender’s use of a technology to support a Desktop Appraisal and would not be a hindrance to Fannie Mae acquiring a loan was not a surprise. What has caught some people off guard is the requirements that a Floor Plan be included as part of the Desktop appraisal. Today, for traditional appraisal products, floor plans are only required when the appraiser makes a determination of a functional issue with the floor plan. In practice, less detailed sketches are more common in appraisal reporting. That being said, the floor plan is a tool to factually represent how improvements and living spaces are configured, and is illustrative of the functional aspects of the improvements. It will give the reader of the report, and the person who will be providing the valuation, a visualization of what exists.

Desktop Process Challenges & Risks

The following questions come to mind: Is there a place where a borrower or their agent can get a copy of a floor plan for the collateral they are purchasing and posting as collateral for a loan? Can this floor plan be turned over to an appraiser and be used by the appraiser in the development of the appraisal required for the mortgage transaction? Can appraisers themselves offer floor plans as part of their appraisal service?

The announcement has been welcomed by some in the marketplace as building a process aligned with digital modernization of real estate appraisals, whether their goal is motivated by customer service, speed, or cost. The announcement has been met with less enthusiasm by others. The guidance is specific where needed, to fit the needs of Fannie Mae. It clearly gives respect to the standards to which appraisers must adhere to when producing services and to continue to earn a livelihood while assisting lenders and the GSEs with meeting their mission.

Like any appraisal product, there are risks associated with use. Risks to the appraisers producing the report and risks specific to the lenders who will be relying on the Desktop appraisal product to base credit decisions.

Appraiser-specific risks

For the appraiser, the greatest risk lies in relying on information that may be erroneous and result in the appraiser providing a misleading appraisal.

The Fannie Mae guidance is clear that appraisers must have sufficient information to develop a credible report. When relying on information or data provided by other parties, including parties with a financial interest in the sale or financing transaction, the data is to be verified by a disinterested source. This is in lock-step with the appraiser’s requirement to complete appraisals consistent with USPAP. When an appraiser relies on work done by others, the appraiser is required to have a reasonable basis for believing the individual(s) are competent and to have no doubt that the work is credible.

There are no exceptions to this USPAP requirement, the appraiser is required to take the necessary steps to ensure that the information relied upon will not create a situation that misleads the intended user. Whether it is a floor plan or a sale price of a property, in practice, the appraiser develops processes and procedures to gain confidence that the obtained is accurate. The Covid-19 operating environment showed us we were all capable of developing and incorporating effective processes, and the recent requirement stating floor plans are required will provide opportunity for further refinement as we move forward.

Lender-specific risks

Lenders will need to review and potentially adapt their appraisal ordering processes and appraisal quality control standards and procedures when underwriting the Desktop appraisal to ensure FNMA or any other intended user that the requirements are met. There is no relief to the lender when it comes to adhering to GSE-specific underwriting standards and processing procedures if the loan is to be sold to a GSE.

Fannie Mae’s announcement states the lender will be required to ensure:

1) the appraisal form ordered and received from the appraiser coincides with what was indicated in their automated underwriting platform message (Form 1004 Desktop);
2) the appraisal includes a floor plan;
3) and the appraisal meets all other requirements.

The control for each item above is through review and validation via the lender’s Quality Control process. Some lenders will have the ability to automate some of this process, but there will be a need for some manual process, as the ability to determine adequacy of the floor plan, or the ability to measure that all appraisal requirements are met, is not something that can be 100% automated through processes and technologies commonly used in the marketplace today.

The risks to the lender if those conditions are not met, can be presented either through denial of purchase or in the event of default, the requirement to repurchase the loan or make whole on any losses in the event the lender is found at fault.

There is one other lender risk I want to touch on, the risk that is posed when a decision by the lender is made to order a traditional appraisal after a desktop appraisal has been completed. Both Fannie Mae and Freddie Mac are clear in their selling guides that certain conditions must be met if a lender decides to obtain multiple appraisals. Quoting the Fannie Mae Selling Guide, “If the lender obtains more than one appraisal for a loan due to applicable law, regulation, lender policy, or otherwise, the lender must adhere to a policy of selecting the most reliable appraisal rather than the appraisal that states the highest value; document the reasons for relying on the appraisal, and submit the appraisal selected by the lender through the UCDP prior to delivery.”

There are going to be situations where the result of a desktop appraisal is going to conflict with the lender’s desired outcome, particularly early in the process when lenders and appraisers are figuring out effective and efficient processes. While this is not an uncommon occurrence of what happens today, there is one distinction- the Desktop appraisal product is optional. How a lender chooses to make that initial decision to obtain a Desktop appraisal, with or without input from the borrower, or pre-emptively sharing information with the borrower of potential consequences of relying on a desktop appraisal product (i.e. timing and cost), will have implications on the risks associated with any decisions further down the loan process line. Lenders will need to understand implications to any policies, procedures, or practices associated with reconsiderations of value or the decision to obtain another appraisal.

Operational and Reputational Risk Implications

The risks above speak not only to operational risk but reputational risk. Lenders, appraisers, and consumers will need to understand that there will be situations where the Desktop appraisal is off the table even when the automated underwriting system provides messaging that a desktop appraisal is permissible.

Lenders will need to manage borrower expectations and provide guidance to appraisers on what they consider acceptable practices, particularly in what is deemed reliable when data is provided by others, in particular persons with an interest in the outcome of a transaction.

Appraisers, in turn, will need to communicate with their lender clients what conditions will prevent an appraiser from moving forward with the scope of work limitations that are presented in completing a Desktop appraisal.

Conclusion

While the Desktop appraisal has the potential to provide a shift in how appraisals are completed going forward, it is going to be important that appraisers, lenders, and those parties involved in real estate transactions work together to ensure the integrity of the data is at the point where it needs to be to instill confidence and reliability to those parties relying on the processes. The marketplace has been calling for modernization and digitization of multiple processes in the mortgage origination workflow, including how appraisals are developed. The necessary steps to assemble and develop critical data on the property being appraised has not changed significantly in more than 20 years, with exception to incorporating digital imagery and relying on internet applications to source key data and information.

One of the world’s largest acquirers of mortgages has given notice that they will not stand in the way of incorporating the use of modern technology when it comes to collecting primary data on collateral. Technology and appraisal providers have been positioning themselves to accept and benefit from this process change. While it is clear there will be a need for mutual understanding of what will be required to attain a result that meets the needs of both the lender and the appraiser, it is also becoming clearer of the risk of potential outcomes when the choice is made to work in the environment of data collection technology advancement, or not.

Responses

  1. My biggest client and one of the biggest AMCs in the country only pays $125 for a desktop. That’s a reduction of $250 per appraisal for me. Why is the appraiser always the one who pays the price for any changes?

  2. Requiring a sketch and floor plan eliminates the time and cost savings of producing a desk top appraisal. Does anyone at FHFA realize we get the sketch from measuring the dwelling during the property inspection? Requiring a sketch means we cannot complete the new “Desk Top” assignment from the “Desk.” It means we have to go measure the house and inspect the interior. Please don’t try to convince me a realtor or homeowner can provide a sketch from a phone app and get the size of the any moderately complex home design correct. Measuring a house is not that easy. Also, talk about a conflict of interest…
    If you want want a product that’s faster and less costly, then you are going to have to accept less accuracy with regards to the measurement of the dwelling. MLS and/or County Assessors records can be used in most cases as an acceptable source for the size of the improvements.
    Get rid or this ill advised sketch requirement and lets get some work done.

  3. My concern is not the new sketch requirement in itself. My concern is the “reliable” data source possibly being an individual who has a vested interest in the outcome of the appraisal (homeowner for one). The thought of the appraiser relying on an individual who has an interest in the outcome of a desk-top appraisal is a little unsettling with regard to liability. I would be signing off and owning the appraisal I completed guaranteeing the information is correct without really knowing if the floor plan being provided is accurate. Yes, disclaimers can be imposed however the thought of an appraiser relying on unvetted 3rd parties and swearing to accuracy of the information they provide goes against every principle regarding the appraiser independence. Not to mention how the E&O companies may react specifically in increased premiums while all other parties are going to expect a reduced fee. Also, the degree of information they are asking for may require significant additional work and time. Given the liability concern alone I am doubtful I will be able to accept such assignments for fear of being made an example of if what is believed is incorrect. The jury is still out on that.

  4. FNMA is expecting a reduction in turnaround times and fees for desktop appraisals. However, they still maintain the same requirements for accurate data and even a floor plan. I don’t see a way (currently) to rely upon a 3rd party to accurately/reliably provide a floor plan OR accurate data about the characteristics of the property without a meaningful increase in the amount of time it takes to complete the research for one of these. Now, instead of a 20-45 minute site inspection, I will need to speak to several more people on the phone, potentially do a video walk-through of a home, somehow acquire a floor plan from a 3rd party, and even then still potentially visit the site if the property has external factors that can only be quantified/verified in person. Sloped lot? Better be taking time to study some elevation maps. Highway noise? Hope your third party provides an accurate measure of the impact. View and location appeal? Again, extremely difficult to reliably gather in 3rd party. All of this to say I don’t believe this is going to accomplish the goals FNMA and partners have set out to achieve: reducing turn times and fees while maintaining risk.

  5. I have been an appraiser for over 20 years, and it has not gotten easier. I feel Desktop Appraisals are going to be a major part of future business for appraisers. A number of factors come to mind why Fannie Mae decided to use them for loan transactions. The current number of Appraisers to handle loan transactions with the future loan numbers possibly much higher. The ability to handle the transactions in a timely manner. The ability to simplify the whole process. I will be willing to do Desktop Appraisals with an understanding of fee, time spent, and personal liability.

  6. I agree. I plan on declining these at all cost. I have seen some of the apps. Borrower can download and you can walk them through measuring. This will not make things easier. It will be harder. Even on an easy house to measure. But what about more complex homes? What if they don’t have a smart phone? What if they are disabled? What if they are elder? What if there is a language barrier? What if it’s tenants who don’t want to help measure? There is no way we will be able to scan the property anywhere close to the way we do in person. Even with cooperation from the owner.
    What about comp photos? With the COVID “desktop” appraisals that were done in the last 2 years, were still required to drive the comps. Are they ready to finally let that go? Since I have started (21 years ago) there has always been talk of getting rid of appraisals / appraisers. But nobody wants to take on the liability. Someone has to lay their eyes on the property. We could all sit around for hours and tell stories of crazy things we have seen on site.

  7. Thank you Ken for a very well written article. Over 30 years, I have seen many efforts at streamlining the appraisal process. Big data has certainly helped in areas such as understanding and supporting changes in market conditions and many of us remember when we had only “one liner” MLS data with no digital photos. Few would argue that advances in MLS data and photos has allowed us to do a better job and to it quicker. But not all progress is really progress. The biggest tools in our tool box still include on-site observations, digging beyond the data (realtor phone calls for “between the lines nuances”) and even talking to neighbors or owners of comparables. Oh, and let’s not forget good old common sense. I am as reluctant to accept a sketch of a home provided by a homeowner or Realtor as my dentist would be to accept my drawing of my own teeth over his/her visual inspection. Further, I have worked in numerous states and counties over my career and have found tremendous discrepancies in public records. Some data is consistently good and therefore reliable – but some is not. We simply cannot do our jobs as appraisers without reliable data and my data isn’t reliable until it has been verified by ME!
    I agree with Grant Murphy (one of today’s respondents to your article) that external factors, both positive and negative, are difficult to truly understand without a site visit to the subject AND comparable properties. Does the property back to a freeway or have a view of a lake? In my service area there are properties with both influences. I have rarely, if ever, known a realtor to volunteer negative external information. Conversely, I appraised a property last summer that backed a private quarry pond and fronted a freeway. The listing cited it as lakefront and made no mention of the noise. This last week I appraised a lakefront property at Lake Tahoe that had view/site/locational adjustments exceeding $5,000,000. I did NOT get the information necessary to support those adjustments from my desk chair.
    We are the eyes and ears of the underwriter and they deserve excellent appraisals in order to do their job well and protect the interests of the lender, market participants such as buyers and sellers, Wall Street investors, and the housing market segment of the economy! I DO NOT WANT TO READ THE SEQUEL TO “THE BIG SHORT”!
    Yes, it’s all about risk management and if someone is applying for a 20% LTV then “desktop away”, but for a typical LTV, managing the risk by obtaining a credible appraisal free from dangerous shortcuts has always been, and still is, crucial.
    In a 2020 conversation with a chief appraiser of one of the largest banks in the country, I asked him what changes he saw in appraising during the rapidly increasing market we were experiencing at Lake Tahoe during the “Bay Area Covid-19 Exodus”. Here is what he said: “One thing hasn’t changed and I tell that to FNMA and other chief appraisers for the biggest lenders across the country. The key for the appraiser is to do your research, know your market and support your adjustments. Then you can say, ‘You may not like my value, but you will know how I got there.’ That is where your job begins and ends”.
    In the non-conforming and complex market I work in (and love) I just don’t see how I can provide reliable appraisals sitting on my butt!

  8. This is so bad. I appraised a home where the realtor forgot to list an additional interior half bath in their listing. I also had a realtor tell me that my square footage was off so she was going to measure it herself. It turned out the house was too complicated for her to do it so the bank moved on with my appraisal. You cant send your appraiser trainee but you can rely on a Realtor / Homeowner for the sketch / floorplan.

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