The nation’s home appraisal process is behind the times and needs a major, long-term overhaul, according to a white paper prepared by appraiser Joan Trice and members of the Collateral Risk Network, whose more than 300 members represent lenders, government agencies, Wall Street, vendor management companies and appraisers.
Trice, who is currently working as a consultant for NAHB in its ongoing efforts to address the appraisal issue, is preparing a primer geared to providing association members with information on the appraisal system and appraiser’s role that will help them head off problems with valuations of their homes.
The appraisal process has not been examined since the Great Depression, Trice notes in her paper,“Reengineering the Appraisal Process Redux,” an updated version of which was published last month.
“A survey of every major participant in the mortgage sector will point to comparable sales selection as the fundamental flaw in the appraisal process,” she writes.
“Manually typing ‘three comps on a grid’ is not only outmoded and inefficient,” Trice says, but “the lack of transparency has allowed gross incompetence and fraud to thrive.”
“We need a well-crafted, coordinated, synchronized, holistic road map. And that is our proposal. Create a task force that engages all stakeholders. Write the plan and create a single authority to execute that plan,” she concludes.
Trice says that “most of us deeply entrenched in the appraisal profession are aware of the problems, have good insight as to how to solve them, yet we have serious impediments to stifle that innovation.
“And it is indeed innovation that will lead us out — new methods, thoughtful regulation, sound technology and bright ideas.”
In the massive reengineering project she envisions, participants would include appraisers, lenders, mortgage brokers, appraisal management companies, ratings agencies, real estate agents, home builders, regulators, Wall Street, the GSEs, the Federal Housing Administration, Veterans Affairs and mortgage insurers.
Basing the value of a home on comparables is “entirely outmoded,” she says, given the availability of data in an electronic format.
“The use of databases, technology, statistics and local knowledge must take a larger role in the interpretation of market reaction to differing property characteristics,” she writes.
That would include an examination of historical sales data going back to least 24 months in order to establish trends in the marketplace and allow for more thorough reporting of market conditions.
Trice also advocates including a longer perspective on the value of the property that would assess its future marketability by taking into account long-term sustainable aspects of the property, the normal and local market conditions and its current use and alternative appropriate uses.
This type of perspective, she says, “considers and adjusts for the impact of volatility in the housing market.”
Among other ideas presented in the white paper, Trice discusses the need for:
- Providing a range of values for a property instead of a single value
“In the current economic environment, a single point of value is extremely difficult to estimate even by the most experienced appraiser. Value ranges ultimately make more sense and are more in keeping with the realities of the market.
- One unifying set of policies and procedures for appraisals
“Appraisers do not have a clear road map to complete an appraisal for a mortgage transaction. There are Fannie Mae guidelines, Freddie Mac guidelines, interagency guidelines, FHA rules, VA rules. On top of these, there are individual lender guidelines. There are state requirements. There is USPAP (Uniform Standards of Professional Appraisal Practice). There are numerous education providers, each of whom has a slightly different approach to application of theory.”
- Software that can assist appraisers in the valuation process
“Appraisers can be empowered if they have the software that can consume large amounts of data, and in so doing, can provide the analytics that the market demands.”
- New appraisal forms
“The appraisal process has been defined by Fannie/Freddie forms that walk appraisers through a series of procedures to arrive at an opinion of value. New forms should be considered that remove the time-consuming processes of data collection that have no bearing on the value conclusion. Appraisers are wasting valuable time focusing on many of the wrong elements.”
- A national property database accessible by lenders
“An inventory of all land and improvements thereon tied to the mortgage instrument would allow a measure of ‘all things real estate’ in real time. The real estate market has not kept pace with the stock or commodity markets. Real estate is the largest asset class in the world yet we can’t effectively measure it, study it or analyze it.”
Trice also voices concern over the dwindling competence of appraisers in a profession that is not keeping the talent pool it needs at a time when the average age of an appraiser is estimated at about 54 years old.
“While the focus is on the current crisis of declining home values, no one is paying attention to the impending crisis of the graying of the appraisal profession,” she writes.
“We are dying off, becoming technically obsolete and we aren’t preparing the next generation.”
At least part of the answer, she suggests, is turning around the recent decline in the fee structure.
Citing a number of barriers for new appraisers entering the market, she also advocates “a plan sponsored by lending institutions to promote proper training and education of appraisers” as “critical to a sustainable appraisal profession.”
For more information on appraisal resources available from NAHB, email Steve Linville, or call him at 800-368-5242 x8597.