Measuring Appraisal Value Alongside Property Value
Housing price gains and the critical role of valuations during the recovery may require lenders to watch over an appraiser’s shoulder.
“Today and going forward, the biggest challenge from the lender perspective is evaluating the appraisals and the market an appraisal is completed in, and assessing the justification of the appreciation in that market,” says Clint Cornett, CEO of ValuTrac Software, who also is a licensed appraiser in Texas where he has worked for the past 20 years.
“I’ve seen it all, the good, the bad and the ugly,” he adds. Any time there is a property value shift in the market the hardest thing for a real estate appraiser is to justify the price, especially appreciation. Appraisals are completed based on historical property data, he says, an appraiser has to also analyze the current data whether it is pending sales or posted listings, then reach out and get feedback “from the soldiers on the ground, so to speak, the real estate agents,” who are involved in all these transactions and know what the buyers are thinking.
But since that is the case at least when appraisers have the required experience and knowledge to prepare a high-quality appraisal report, lenders and servicers also need to have trained staff that can properly evaluate an appraisal report.
“As the purchase market comes back appraisers are going to play a more prominent role in the market,” says Kelly Adkisson, an executive with Accenture Credit Services. Lenders will focus on streamlining operations in order to meet purchase transaction timelines, she says, and as importantly, they need be aware of the fact that “because the focus has been on refinancing,” some underwriters may have not seen an appraisal in over 12 months, and may need training.
Many underwriters and loss mitigation staff have to be up-skilled so they can “accurately assess the market values of appraisal reports,” she argues, so training has to start now, before the market gets busy with the new purchases.
In the recent past the Home Affordable Refinancing Program has been a primary driver of origination volumes, but HARP has eliminated the requirement for appraisals so in most cases “appraisals are not necessarily required” if the lender or servicer receives a valuation from Fannie, Freddie or another reliable provider of AVMs, she said. Depending on loan characteristics lenders are using AVMs, appraisals or both, “since AVMs have not evolved enough to replace a traditional appraisal and the human judgment element of making an evaluation.”
As the market changes and lenders focus on purchase transactions, says Adkisson, and due to key limitations to using AVMs, the industry may not count on AVMs at all.
For example, there is a lag between the external market data that is used with an AVM and the most current market data. Because there is a lag in the time that data becomes relevant, “AVM data do not necessarily reflect that a borrower knocked down a wall and added a bedroom last month,” she added, AVMs may show how many rooms or bathrooms are in the property but not how the house has been kept or if there was vandalism or other damage on the property itself.
She finds predominantly AVMs are being used for HARP loans while traditional appraisals are routinely used with other refinancing. Lenders also use AVMs for appraisal quality control checks, as well as to train staff to detect valuation report data gaps.
Training based on best industry practices is an effective way to help loan underwriters and loss mitigation staff to detect data gaps or misinformation in a property valuation report.
Lenders and servicers need to be able to assess whether a valuation report properly reflects market value, and is supported by the data, “as well as ensure that operations staff and underwriters are up-skilled, especially underwriters who may have not been exposed to working with appraisals because they may have been focusing on refinancing,” she said.
In such cases it is important to offer training so they recognize opportunities to revise property valuations, or know how to use quality control to detect data gaps in the origination process and prefunding. “It is important for servicers who also are originators to have the right governance and procedures in place. The AVM value triggers an escalation with the appraisal value so there’s a defined way how that is escalated and reviewed in the decisions made.”
Lenders and servicers are now focusing on streamlining operations as they transition into a purchase market because cycle times are going to become increasingly more important. “Borrowers will have the luxury of a transaction taking from 60 days to 90 days to close, so with the timeline pressure of a purchase transaction it will be increasingly important for lenders to streamline and reduce the cycle time.”
Operational challenges of incorporating appraisals into the real estate valuation process as the market switches from refinancing to purchase include the challenge of getting underwriters and processors, who haven’t seen an appraisal in months, to read and assess appraisals as the market evolves toward purchases, she said.
Property values are going up in many markets across the country, agrees Cornett. In the Dallas-Fort Worth area there’s an uptick of prices and demand that surpasses the supply.
“Buyer demand is higher than what we have seen in years and that is driving prices up. Properties that may have been in the market for only two or three days are seeing multiple offers. Today the sellers are really having options well above the list prices,” he said.
In the past few years regulation about government supported refinancing through HARP “and the overall increase in popularity of AVMs has sidetracked traditional appraisals,” but going forward as the market changes direction appraisers will once again be in demand.
The AVMs that are being completed right now also are based on historical data, price trends, he said, but the appraiser has to evaluate the data changes to justify appreciation. “AVMs will never replace the appraiser. But it’s more useful on the servicing side, when reviewing a loan portfolio.”