Wednesday, July 29, 2015

Increased Turn Times and Fees Because of Lender Requirements

In 2015, appraisers who do a lot of residential lending work have seen a large influx of requirements that are taking their toll on the industry.  These requirements have cost borrowers, extended turn times, and caused deals to fall through.  Let me explain.

When you do a lot of work in one area, you get a feel for its market.  So when I recently received two assignments in the same area from two different lenders, I noticed something interesting.  Lender A's client specific requirements were less than a page.  Lender B's client specific requirements were 28 pages long!  Putting that into perspective, the report itself could be between 15 and 23 pages.  Lender A's report took about 8 hours to complete which included travel time, data gathering, analysis, and reporting.  Lender B's report is currently at 15 hours spread over 7 days, and it still isn't closed.  Sometimes these requirements are so stringent that it is not possible to complete the assignment.  This directly effects borrowers three ways: they pay more for the appraisal, it puts a tighter squeeze on their time frame, and the deal could fall through due to the strict requirements.  Sometimes it could take me 2 hours just to get a quote back to a client because you have to read through all the requirements and determine if there is sufficient market data for what they are wanting.  I've even had to charge an additional complexity fee for some of the requirements.  
  Three areas I've noticed that are causing these problems are: lenders are mixing conventional and FHA requirements, reviewers not reading the reports and relying on scrubbing software, and the Collateral Underwriter (CU).  The CU is Fannie Mae's portal application that screens all incoming appraisals, and it has been causing problems since it's implementation in January of this year.  Without getting into the details, lender requirements have spiked since the CU has been rolled out.  It is not mandatory to submit to the CU, and I've personally had only 1 run in with it since January.  The other area concerns the type of loan that is applied for. 

Traditionally, if a borrower is pursuing a conventional loan, then the requirements were cut and dry.  Not any more.  The lines are being blurred between Fannie and FHA to the point that appraisers have to use both sets of requirements to complete an assignment.  One of the unintended consequences of this is one set of requirements causes the other to be out of compliance.  For example, Fannie has done away with the line, net, and gross adjustment guideline, but FHA hasn't.  If I'm working on a conventional assignment, I'm not required to comment if these guidelines are exceeded, but if the lender has an additional requirement needing me to comment on line, net, and gross adjustments, then I've got to comment because of the FHA guideline.  This is only one of many instances, but they all cause the assignment to take longer.  Not only that, they cause additional problems for reviewers.

The length of a report varies with the assignment, but recently they have been growing due to all the additional documentation and addenda that we have been adding. This has caused almost all my reports to be delayed between 2-7 days once the report hits the QC or review department.  I can't tell you how many times I get revisions from reviewers asking for comments or information that is already in the report.  This is because QC and reviewers no longer read the reports but rely on software programs to scrub the reports looking for their requirements.   I have one client that has 80% of its revisions kicked back because this, which caused the whole process to be delayed.

In spite of this, there is hope.  I have a handful of clients that receive priority scheduling and lower appraisal fees because they: don't mix lending requirements, keep their loans in house, and have review departments that take their time and read the report which results in almost no revision requests.  These lenders are a pleasure to work for!  I believe these lenders have a fair advantage over its requirement laden competition because the can deliver a quality product quicker.  Does this mean the appraisal that has less requirements is inferior?  Not at all.  An appraisal that is developed and meets one page of requirements is just as accurate as the report that is developed and meets 30 pages of requirements.  

In conclusion, appraisal turn time and fees will likely continue to rise because lenders are demanding more and more out of appraisers, it's simple supply and demand.  The increase in lender requirements, blurring of loan types, unnecessary revision requests, and the CU will also take its toll on the mortgage industry.    While lenders who have concise lending requirements and a QC/review department that actually do their job will enjoy an edge over the competition.  


Sunday, July 19, 2015

Machinery & Equipment Appraising Coming Soon!

It's no secret that most appraisal shops are one person shows.  We may not be a one person show, but I wear a lot of hats other than chief appraiser for our company.  Between production, answering phones, IT guy, accounting, and marketing I stay pretty busy.  Unfortunately, that means that writing articles and marketing tends to slip through the cracks from time to time.

This month I've taken some time to gain the necessary knowledge to expand our company into appraising machinery and equipment.  I've been working with the National Equipment Business Brokers Institute (NEBBI) to get my certified machinery equipment appraiser (CMEA) designation, and I will be focusing on the Pennsylvania region once everything is wrapped up and my certification is official.  I'm looking forward to this new challenge, and expansion of our company after a history of only appraising residential real estate in Kentucky.  If you are an owner of a business that has several pieces of capital equipment, an attorney; CPA; or broker that deals with machinery and equipment, stay tuned for more information about how our upcoming service could benefit you.



Thursday, March 19, 2015

Appraising Fire, Wind, and Water Damage in Hardin County

Most home owners share the same fear of losing their investment from fire, wind, and water damage.  If you look at your home as an investment, a stewardship, or just a roof over your head, chances are you hate it when you have to shell out your hard-earned money to repair your property.  As an appraisal company, we provide appraisal services to help in these situations. 

You may be asking, “How can an appraiser help me with my loss?”  I just got done appraising a home that was damaged by fire.  The problem with fire, wind, and water damage is you never know when it’s going to happen.  As an appraiser, one of the key parts of our assignment is the effective date of the report, which in the case of a fire would be just before it was damaged.  Once we start the assignment we have to reconstruct the features, amenities, and condition of the home.  The more accurate the reconstruction, the more accurate the appraisal will be.  Reconstructing the property requires applying what is known as a hypothetical condition.  A hypothetical condition is a condition that is contrary to reality, and this is where you can help yourself out. 

Do you remember when you finished your latest project on the honey-do-list and felt the feeling of accomplishment?  Did you take a selfie of you and your new landscaping, bookshelf, or deck project?  I hope so, because that selfie of you and your project are now a snapshot in time of the investment you’ve made in your property and its current condition.  Tuck these pictures away somewhere that won’t be damaged or lost, and if you are ever in this situation your insurance agent, adjuster, or appraiser will love you for them.  One step better would be to hold onto all your receipts from said project. 

I hope you never find yourself in this situation.  If you’ve been fortunate enough to not have gone through this, keep paying your insurance premiums
and take some pics of your stuff!

Wednesday, February 25, 2015

Appraising in Elizabethtown, KY

I always like it when homeowners ask meaningful questions during the inspection portion of an appraisal assignment.  Today I took 20 or so minutes to explain to a first time homeowner the up and down side to property updates.  Yes, you can spend money on things around your home that won't create a return on the investment.  Take the 8' custom-stitched athletic logo in the basement carpet as an example.  What updates have you seen that make you scratch your head and say,"really?"


Wednesday, January 21, 2015

Appraising in Radcliff & Market Conditions

 January is always a good time to see what our local markets have been doing for the past year.  For those of you in the Radcliff market, you may or may not be aware of where we are in the Real Estate market.  Over the past year, two events come to mind that will have long term effects on the local economy.  Of the two, Ft. Knox is the most apparent.

Just over 18 months ago, we started hearing about government furloughs and the early deactivation of the Duke Brigade Combat Team.  Since then, additional cuts are in the works to bringing the gains we saw during the BRAC to pre-2007 levels.  Heightened security and gate closures have also affected our local small business along the Wilson Rd corridor.  We have also seen Ft. Knox open its older housing community (Knox Hills) to the local rental community for qualified families.  This essentially flooded Radcliff’s rental market with 1302 new rental units which now makes Radcliff a renter dominated market according to the US Census Bureau (See my previous article from April 2014). 

The second event we saw was the victory of Mike Weaver as Radcliff’s new Mayor.  In light of what had been going on with Ft. Knox, both candidates campaigned on bringing more business into our city, which I agree with.  If a community is dependent on a single employer, when that employer has a reduction in force or goes out of business, the community suffers also; however, if the community has a diverse commercial and industrial base, the reductions of one employer has less of an effect on the community as a whole.  What would happen to Georgetown, KY if Toyota decided to pack up and go to Brazil?

Shortly after Mayor Weaver’s appointment, he named JJ Duvall as the new head of the economic development for Radcliff.  JJ is Radcliff’s former Mayor, just as Mayor Weaver was the former head of the economic development for Radcliff.  With the roles being reversed, time will tell if Radcliff can finally get some new commercial/industrial business in the area which we need very badly. 

So, what have these two events and Radcliff’s economy to do with each other?  Since the start of the government furloughs, we have seen a steady decline in the median sale price in Radcliff.  This is combined with an increase in Real Estate Owned Property (REO), and an increase in inventory which stifles demand.    Speaking with a local investor, it is also becoming difficult in securing financing for investment property in Radcliff.  The rest of the county doesn’t seem to be effected as much by these changes.  When you look at the amount of Real Estate sold in the coverage area for HKARs MLS, 2014 is a little higher than 2013, except Radcliff.   On the plus side, it’s a great time to buy!  

Wednesday, January 14, 2015

Big Data and the Collateral Underwriter

I would like to express my concern about the implementation of the CU in January.  Unlike major changes in the recent past this one is being sprung on appraisers in just a few short months, and few are aware of its impact.  Fannie Mae is serious about this, and the Appraisal Institute's recent article revealing that Fannie is doing away with the 10, 15, and 25% rules confirms this.  

If someone is not familiar with multi-variable regression they may not see the correlation between the two, so let me explain.  Regression is backed by complex mathematical formulas that extract components of value by comparing a large number of properties from multiple sub-markets.  On the surface this sounds fine, but I use regression on a regular basis, and even with directing the process, the regression will occasionally output values that are not typical in our markets.  For example, I performed an analysis on a home located on Audubon Pkwy in Louisville, and one of the regressions output was an adjustment for fireplaces to the tune of $14,000 which was not used in the report.  Adjustments like this rapidly increase line, net, and gross adjustments which is why Fannie has rapidly done away with these rules.  Gross adjustments are still a good indicator of overall similarity.  Regression is rapidly being considered the 4th approach to value.  The problem with this is we don't know if the data is accurate, and Fannie has no intention of allowing us access to it.

According to Fannie Mae, "CU leverages an extensive database of property records, market data, and proprietary analytical models to analyze key components of the appraisal including data integrity, comparable selection, adjustments, and reconciliation."  What this means is that reports ran through the CU (or VA's version, FHA will not be far behind) will be scrutinized based off these models.  If you are not using your "$14,000" fireplace adjustment in your report, then it will be flagged.  I've also heard that the CU will be comparing our data and adjustments to our fellow appraisers.  On the surface that sounds fine (which is at the heart of being peer reviewed), but Fannie's statement doesn't mention any of this.  It's extensive database it the only thing that was contributed to by our fellow appraisers.  

If Fannie is comparing all adjustments to the "analytical models" then we have a fundamental problem.  In their recent update to the selling guidelines concerning our analysis of adjustments, " The appraiser’s adjustments must reflect the market’s reaction (that is, market based adjustments) to the difference in the properties."  I don't see where we are to base our adjustments on statistics or analytical models.  In my practice, I use statistics and analytics to support my market data, not the other way around.  

Although the use of the CU is not mandatory, I'm sure lenders will jump on board.  What does all this mean?   1. If an appraiser is not using regression as their primary approach to value, then their reports could be riddled with flags.  Bradford Software conducted an experiment after they got access to the CU.  They submitted a non-regression derived report from a reputable appraiser, and the CU assigned it a risk level 5.  The same report was then submitted after regression was introduced and the risk level returned at 2.  Bradford did not say if there was a significant difference in value or if there was a change in comp selection.  2. We will now be reviewed and scrutinized not our peers, but by a mathematical algorithm.  I'm sure lenders will copy and paste these flags as revisions and send them back to the appraiser for explanation.  Even if the appraiser took due diligence in deriving their adjustments from the market, they will be inundated by a tidal wave of revision requests.  Lastly, I see appraising as part art part science.  What will the outcome be when the CU tries to analyze an appraisers "gut instinct"?  

I have been using a regression tool for several years, but in light of the upcoming changes I’ve been looking into other companies that provide this service.  If you have a favorite regression product, feel free to share and why you are pleased with it.

In conclusion, Fannie Mae, VA, and FHFA are all gearing up for some form of analytical review.  We will not have access to this data, and our reports will now be compared to the CUs database.  Our adjustments will be judged against statistics and analytics instead of the market's reaction.  Lastly, appraisers who do not use regression as the primary approach to value could find themselves swimming in a pool of revision requests.  Thank you for taking your time to read this.  Stay tuned for a series of articles on what it going on in the Hardin County area in regards to the changes happening on Ft. Knox.