Why Are Appraisal Prices So High?

I hear this question frequently from licensed loan originators and Realtors: “Why are appraisal prices skyrocketing all of a sudden? Is there an appraiser shortage?

The reasons for the appraisal price increase are many and the solution will be multi-factorial.

I attended a Washington State Mortgage Bankers Dinner meeting recently, and we had an appraisal panel that included two senior appraisers and two people who own Appraisal Management Companies and a great moderator. I was sitting way in the back due to having to crawl through our notoriously difficult evening traffic.  Being in the back of the room gave me an interesting advantage because people who sit in the back like to chat back and forth with each other and verbally sub-tweet whoever is speaking.

There were some great statistics shared by the appraisers on the panel, including the number of licensed appraisers.  People reading this article who are from other states, the following numbers are only for WA State, BUT the number of licensed appraisers in your state pre and post-meltdown are likely available from your state licensing department.

Is there an appraisal shortage? In WA State, at the top of the bubble, we had about 5000 licensed appraisers.  Today we have about 3500 licensed appraisers, so yes, we are down about 1500 licensed appraisers since 2007. With that said, there’s also NOT an appraisal shortage if you consider that real estate  is a cyclical industry and at some point, things WILL slow down.  Appraisal management companies are trying to balance their staff, just like mortgage companies have to do.  We don’t want to hire, educate and train hundreds of people, only to have to lay them off a year later. With the dip in interest rates leading up to the Nov 2016 election, the mortgage industry experienced yet another refi rush, which overloaded the capacity of ALL appraisers to produce their product within a turn-around time that had previously been counted on by all parties.  In the greater Seattle area, home buyers needing to purchase with a mortgage loan were bidding against all-cash offers and had to put down YUGE earnest money deposits and agree to close within, say 30 days or lose their deposit. Then, all appraisal management companies (AMCs) were getting calls asking for “rush” appraisals on all purchase money loans.  So every refinance got automatically de-prioritized. Very frustrating all around.

So is the solution to ramp up appraiser training and recruiting?

Appraisers were the ones who received the consequences of the Savings and Loan fiasco in the 1980s. After the S&L crisis, the appraisers were  required to obtain more education and training.  There are several different levels of licensure within the appraisal industry, which I am NOT an expert in, and if you really want to get woke about the appraisal industry, I highly recommend following Jonathan Miller everywhere he appears. Once an appraiser is newly licensed, there’s a specific number of hours he or she must spend being supervised by a senior appraiser until he/she can appraise on his/her own.  And there are different levels of licensure. The highly competent, senior appraisers that we all want doing our appraisals are called Certified General Appraisers and they can appraisal all kinds of different types of property beyond just single family homes. Duplex, triplex, fourplex, small apartment buildings, vacant land, industrial property, hotels, office buildings, large industrial parks, and so forth.  If you were a certified general appraiser, would you rather appraisal a hotel for $4000. or a residential single family home for $400? Do you want to spend your time mentoring a junior appraiser or appraising an office building for $5000?

So is the solution to raise prices?

Back to the mortgage banker’s dinner meeting.  One of the panelists asked the audience, “How many of you remember when appraisals cost $200?” Lots of hands went up. I remember when appraisals cost $125. I was processing 200 files and it took 6 months to get an appraisal.  The guy next to me laughed and said he remembers when an FHA appraisal was only $50.  Let’s get real, readers: Appraisal prices were stuck at $400 for a really long time. We were due for a price increase.

“But Jillayne, the prices are really, really high now!”

But readers, did we forget that during the real estate bubble, there was lots of collusion between appraiser and loan originator? Laws have been put into place (The Mortgage Disclosure Improvement Act of 2009, and plenty of state laws) making collusion a prohibited practice. The mortgage companies decided that one way to prevent collusion was to have their staff work through an appraisal management company (AMC.) The AMCs hire and supervise appraisers and the AMCs will take a cut of that $400 appraisal fee.  Appraisers had been working for half of what they were making before the meltdown.  We were due for a price increase.

But $800 for a baseline appraisal fee is unfair!

The TRID rule that went into effect October 3, 2016 requires ZERO tolerance on fees charged to the borrower, in which the borrower is not allowed to “shop” for that service.  Almost all mortgage companies now, do NOT allow the borrower to shop for their appraisal company.  Zero tolerance means no more bait-and-switch on appraisal fees.  Example: Before TRID, appraisal fee quoted to the borrower was $400., then appraiser asks for an additional $200 due to distance of the property. Then appraiser asks for an additional $200 because it’s a difficult-to-comp property.  It’s only fair, IF we’re NOT allowing the customer to “shop” for the AMC, to obtain an accurate quote up front.  So we’re seeing the baseline cost of an appraisal of $800. Rush fees will always be more than the baseline.  Individual appraisers within an AMC can and do set their own uber surge pricing.  Yesterday an LO told me the appraiser quoted $2400, and the homebuyer agreed to pay it because if the loan was not able to close within 30 days, she would lose the $50,000 earnest money deposit she had to put down to win the bid over the other all-cash offers.

“This is insane!”

Appraisers would say, “This is capitalism!” And the appraisers aren’t all that motivated to bring in a whole bunch of new appraisers. The appraiser panelists at the mortgage banker’s dinner told us that they’re fine working 20 hours a day, making bank. Because they know the industry is cyclical and this won’t last forever. They’re setting the extra money aside for leaner times.  The appraisers then asked the following question:

“Should we relax the strict education and internship requirements and just start hiring high school graduates to do your appraisals?

I looked around at the mortgage bankers in the room.  Lots of men with gray hair in suits and ties crossed their arms, looked around at each other, and shook their heads “no” to the appraiser panelists.  No, we don’t want that. We LIKE having experienced, professionally licensed, competent appraisers to tell us what our collateral is worth. One of the ideas from the panelists is for our industry to rely more on Automated Valuation Models along with appraisal waivers for loans that make sense. Example: 50% downpayment on a purchase or 60% Loan To Value, owner occupied refinance with an 800 credit score.  But we’d need to be able to sell the paper to Fannie/Freddie.

Another idea is to go back to mortgage companies cutting out the AMCs and hiring someone to select a group of appraisers that would be paid direct by the mortgage companies. This way, there’s still a firewall between LO and appraiser but the mortgage company can select local, experienced, competent appraisers and pay them a respectable fee for their service.  More control over quality AND price, but the lender then takes on an additional responsibility to guarantee that firewall.

Every time a mortgage loan is sold to Fannie Mae, Freddie Mac, or insured by FHA/VA/USDA someone at the bank or mortgage company that funded the loan signs a document that says something like this: “I, signer for the company, hereby certify that there has been NO collusion between appraiser and loan originator or anyone at my company. Furthermore, if it discovered later that there was collusion, I, signer for the company, hereby agree that our company will repurchase the loan.”

No bank or mortgage company wants to repurchase even one loan.

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206-931-2241 or jillayne@ceforward.com