The appraisal industry has been under a great pressure for several years now. Increasing demand, shrinking pools of aging appraisers, evolving data and technology, growing regulations, and difficult entry barriers into the profession, are just a few of the items that have contributed to the current climate over the past 10 years.. Now add the impact from the Covid-19 pandemic and the industry challenges expand even further. The impact is being felt by mortgage lenders and borrowers across the nation and they will need to navigate these concerns in the new world.
As one of the premier mortgage service providers in America for real estate valuations we work with over 26,000 appraisers, 1,400 national lenders, and over 6,000 independent mortgage brokers as we perform 150,000 residential and commercial appraisals annually across all 3,143 counties in America. We also work close with federal regulators, state licensing boards, numerous industry associations, along with institutional and private capital investors to understand key critical needs and key touchpoints impacting the industry.
First let us talk supply and demand, the key pressure on the industry. With Millennials becoming the largest generation in American history, housing demands are at an all-time high both for the Single Family and Multi-Family Rental markets as well as first time homeowners. The National Association of Realtors is predicting 12 million new homeowners over the next 10 years. The second biggest generation, Baby Boomers, are starting to downsize. Both the selling and buying in their transactions typically require an appraisal; granted large portions of the selling may overlap with many of these Millennial home buyers. Additionally, interest rates are at an all-time low driving a refi boom and requiring valuations in many cases.
The 2019 Fact Sheet from the Appraisal Institute (AI) highlights 79,000 active appraisers in America. Less than 50% of those are active residential field appraisers; that means many others may work for an organization like ours doing quality control or review work, may serve as Chief Appraisers for public and private organizations, work directly on staff for a lending institution, or perform only commercial asset class appraisals. The AI Fact Sheet notes several other important facts. First, that number of active appraisers is down more than 10% in 5 years and has been on a steady decline for more than 10 years. The average age of an appraiser is 55+. More than 50% of appraisers have been in the industry over 20 years, while less than 16% have entered the industry in the past 10 years. Nearly 41% of the appraisers which were surveyed in 2018 by the National Association of Appraisers responded that they plan to retire in the next 10 years.
All of this is exacerbated regionally. Rural areas always have been dramatically underserved by appraisers by nature of lower populations, but even cities and states can deviate significantly. Clearbox, host of the annual Valuation Expo (largest expo for the valuation community) reported 2017 that metro Atlanta has 60 appraisers per 100,000 people, San Francisco had 30 per 100,000 people, while Cincinnati had 14 for 100,000 metro residents – and shrinking. In Illinois their state appraisal board reported nearly 1,500 new trainee licenses issued in 2005 and only 53 licenses ten years later, in 2015. Following the housing market recession of 2008, increased regulations, added risk, and stagnant fees had compounded with added education and trainee requirements to deter many from entering the industry.
This supply and demand pressure has been dramatic and painful to the lending industry across America. Initially, it has added costs to appraiser fees and delayed turn times; it has also extended times that killed rate locks, delayed closings, and added to loan expenses. In recent years, the impact forced federal agencies, lenders, and key decision makers to take measures to combat the challenge. Some measures pushed to increase supply with reduced barriers to becoming an appraiser trainee, scaling back the added education requirements and field hours. Other measures focused on reducing demand.
In 2017 and 2018, Fannie and Freddie adopted and expanded waiver policies that allowed low risk borrowers with previous appraisals on file and higher down payments to secure appraisal waivers. In 2018, Fannie reported 60,000 of their 1.2 million loans (5%) received a waiver. Other exemptions from the Federal Reserve and FDIC were put in for commercial properties under $250,000, and then in 2018 that was raised to 500,000. In 2019, the FDIC raised the residential exemptions from $250,000 to $400,000 and required alternative valuations for items below that for non-GSE loans. In September of 2019, HousingWire reported these waivers represented 750,000 residential loans in 2017; the updated threshold stated that 2017 data would have added an additional 214,000 appraisal waivers. Government entities also started using bifurcated reports, or what many of us know as hybrid reports (although technically there are some differences). These reports allow the appraisers to complete key portions of the report from home while other methods can be used to acquire photos and inspections.
As we entered 2020, those changes were still being significantly outpaced by the growing demand from new home buyers, low-rate refi’s, and new construction. In addition to the conventional demand the rapidly growing demand from private capital investors acquiring residential assets through Private Lenders, REITS, Family Funds, Institutions and more have surged. In 2005 it was projected that this represented 5% of all residential lending in America; many experts suggest that the overall number has grown closer to 12%-15%. Further, these private lenders who fund investors with fix-&-flip loans, rental loans, refi’s, bridge loans and more have seen a dramatic boom in recent years with the emergence of a secondary market.
In March of 2020 ATTOM Data released their 2019 Home Flippers report. They reported an 8- year high with over 245,000 homes flipped in America in 2019. That alone represented 6.2 percent of all lending in America for $32.5 billion in Financed Flips in 2019. Rental programs were even stronger for these private lenders and had more than doubled in recent years, while public and private REITs contributed even more with greater residential rental asset acquisitions than ever. In 2019. NAREIT (National Association of Real Estate Investment Trusts) reported their 2018 holdings now had 150,000 single family rentals and over one million multi-family units. All this driving valuation demand.
In the beginning of March, we saw record breaking volume for ourselves and many of our clients. By mid-month this all came to a screeching halt with Covid-19 shutdowns. The conventional Spring/Summer house buying flood that normally backlogs appraisers and drives added delays had turned into a trickle; virtually no one was house hunting while in quarantine. The secondary market funding, which helped the private lending boom was now on lock down.
Government agencies like Fannie and Freddie were scrambling to find ways to accommodate the lending that was continuing. The laws that would allow appraisers to enter a home to inspect or leave their own homes was different state by state and county by county. The law in some states deemed appraisers as essential workers in line with inspectors and contractors, while others deemed them unessential. Exemptions were being made to allow conventional single-family interior 1004 reports to be done as an external drive-by reports, and the agencies began allowing lenders to use a desktop report in certain circumstances. GSEs and lenders began evaluating further alternatives. As an alternative to in-person inspections, HomeLink, Appraisal Nation’s app, allows borrowers to use a carefully guided tool to take inspection photos according to all key guidelines. These pictures are then geo-coded and timestamped, and sent directly to the appraisers. This became a valuable tool for many lenders.
As states begin to open, we are seeing demand return quickly. We anticipate this will grow as we reach a full easement of restrictions in all states over time. We feel the backlog from spring volume may just add to summer demand, so we are advising lenders to be aware of added turn times and potential fees as appraisers do charge more when demand is greatest. Further, we do not believe this temporary crisis will have quelled the housing shortage we were experiencing pre-virus. With such demand for conventional homeowners and private investors, the industry will need to continue to address these appraiser issues that impact consumers with significant delays and higher costs.
The pre-Covid exemptions and waivers were easing pressures slightly, however, it was still too early to access the risks these taxpayer- backed agencies would face. While we have been seeing great success with our hybrid and alternative valuation products, we recognized they are best used in lower risk scenarios. At the end of the day, a computer cannot see non-conforming conditions on a property. They cannot smell carpets soaked in pet urine or a nearby waste site that may drive down value. It’s important to grow the appraiser pool by making it a more attractive profession, limiting barriers, and expanding their tool belt. Alternative technologies, further exemptions, and added tools that emerged during the Covid-19 crisis should be a valuable resource as we continue to grapple with these challenges.
