There has been no end to the blows and bruises to the appraisal profession, especially since the housing finance crisis of over a decade ago. The most recent kerfuffle over bifurcating the process has the appraisal community in turmoil.
First, let’s define what bifurcation means, why it has entered the lexicon, and what the hopes and promises are for each stakeholder. I’ve spoken to every single stakeholder within housing finance about this topic, so I think I have gained a pretty broad perspective. It is always important to understand the motivation behind the proposal.
Let’s just break this down into FAQs for digestible chunks of information. As a side note, please understand I am speaking not to facts, but as to my opinion. I have no inside knowledge to actual studies performed on these pilots. Unfortunately, they have not been shared publicly.
Q. What is a Bifurcated Appraisal?
A. It is one whereby one party performs the inspection, and another completes the analysis. The current pilots are allowing unlicensed persons to perform the inspections.
Q. Why is this considered modern?
A. Well, I don’t know. I personally believe this is where the myths about shortages and lack of independence collides with reality and old-fashioned common sense. How can injecting two different vendors be faster or cheaper? I can see where having one appraiser inspect, who is unrelated to the analyst, might support greater independence. However, I also see where that would add many days to the actual turn times. Net-net I see no lift at all.
Q. Can a non- appraiser do the inspection?
A. Under the pilot programs, the answer is yes: That is the real insanity of it all. No one under the guise of “safety and soundness” can possibly say that inserting an unregulated party, subject to USPAP, state appraisal agencies, or banking regulators, is a sound idea. I simply do not believe that FHFA, Fannie Mae and Freddie Mac’s regulator will ultimately allow this to happen. Again, please understand that these are my personal opinions.
This is a very slippery slope. The original intent of FIRREA was to require an appraisal on every federally regulated transaction. The slide into the abyss came when a footnote to FIRREA exempted all Fannie Mae, Freddie Mac and FHA loans. Say what? Somehow this landmine has remained untripped for decades.
Q. Is there a path that a bifurcated appraisal might be a benefit to the housing finance system?
A. Yes, I believe that this affords a tremendous opportunity to allow trainees to perform inspections under the guidance and accountability of their supervisor. If there is a risk of a shortage of well -trained, licensed, or certified appraisers, this is a great path. I do find it ironic that under the current practices, no one will allow trainees to inspect. However, under this pilot program, anyone can inspect.
I believe accountability is a fundamental tenet of a safe and sound appraisal process. The entire housing finance system would benefit by greater controls and accountability.
Q. What might the motivations be for this bifurcation?
A. Some of the reasons given have been that there is a shortage of appraisers and this will allow anyone, say an Uber driver, to do the inspections. Anyone knows that an appraisal begins the moment you receive the order. If an appraiser is no longer required in the field, how will they know what the market trends are for new features and designs? How will they see a neighborhood gentrify? How will they see the influences of the new shopping center or boarded up properties?
I see these pilots as creating unnecessary turmoil for the appraisal community. The focus should be on making appraisals better, not cheaper. With new technologies, efficiencies will come, but cheaper it may never be. I believe underpaying our current workforce has helped set up a shortage going forward.
I understand the GSEs desire for more data, but here is where I think there is a chasm in the logic: I don’t believe that data and information are the same. Appraisers are local market experts. They add context to the data that an algorithm cannot. Someday with rigorous machine learning, models will get better. But today we aren’t even close. Machine learning, by the way, requires human input of meaningful intelligence. It should add jobs, not subtract them. Compensation should increase, not decrease. If you want modernization, it will cost money. Residential real estate is the largest asset class in the world. Let’s find a way to ensure the valuation process is more credible going forward.
Q. Should appraisers who don’t accept the notion of allowing non- appraisers inspect be labeled Luddites?
A. Nice try. Since appraisers are to be put in the category of “buggy whip manufacturers,” it is a difficult position for them to defend. But I hear from risk managers and others involved in the secondary market that this proposal is “simply stupid.” (Their words, not mine.)
There are so many ways that the appraisal process could be streamlined and automated. Many of the problems fall outside the purview of the appraiser, such as the ordering process. So much time is wasted by all stakeholders with fee quotes trolling for the cheapest (not best) appraiser for each assignment. This needs to stop.
A huge effort is underway to Modernize the Appraisal Process and is being driven by FHFA, Fannie Mae and Freddie Mac’s regulator. Modernization is a good thing. I have no doubt many appraisers would love to automate areas of the process that are redundant, manual, or should simply just be excised from the process altogether.
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