A few weeks ago there were a flurry of comments on MBS Live from members expressing concern about a sudden increase in appraisals reflecting market values well below what had been expected. In some cases the low appraisals had merely required the restructuring of the loan, in others they killed the deal. There were enough of these comments that we decided to see if there was a trend or if we could identify any cause for this apparent phenomena.
We spoke to several of the loan officers and sales managers who had reported receiving multiple low appraisals, but we could discern no particular pattern. At first it appeared that it was refinances that were being affected. Matt Hodges, sales manager for Presidential Mortgage Group, said over 50 percent of his refinancing appraisals had come in low over the previous few weeks but none of those for purchases. This made a certain amount of sense, he said, given that appraisal requests for refinancing cannot carry any guidance about value or the size of the intended loan. Requests for purchase appraisals, on the other hand, are accompanied by the sales contract making appraisers at least aware of the approximate target.
Hodges, who is located in Charlottesville, Virginia, gave us a recap of some of the appraisals he had received. A property that had been appraised for purchase a year ago at $448,000 but when the owner sought to refinance the new appraisal was for $418,000. This despite an increase in the Federal Housing Finance Agency's Home Price Index for the area of 3.36 percent. Another sale a year ago at $400,000 was appraised earlier this month at $390,000. Both appraisals were appealed, but the appraisers refused to consider the comps submitted by area real estate agents that supported the higher values saying that they were not adequate.
The most glaring example reported by Hodges was an appraisal that came in at $665,000, as expected, but it was then discovered that appraiser was not on the lender's approved list. A second appraisal come in $40,000 below the first with no overlapping comps. Hodges said they could get a third appraisal but that low value is going to hang over any decision made by that lender.
Scott Valins, principal of Scott Capital Group in New York City, cited another strange example. Earlier this year, he arranged financing for a unit in a building in Jersey City with an appraisal of $590,000. That owner referred another unit owner to him to refinancing a larger unit, one with an unobstructed view of the Manhattan skyline. The owner was looking for an appraisal of $680,000 which Valins viewed as reasonable since the most recent sale in the building had closed at $711,000. The appraisal came in at $580,000, $10,000 lower than the earlier appraisal for the smaller unit without a view.
Timothy Baron, licensed loan originator with NOVA Home Loans based in Tucson said that he couldn't recall receiving a single low appraisal last year but had received three within the past week; two purchases and one refi, all conventional loans. He was awaiting an appraisal for a VA purchase loan the day we spoke but emailed me later to say it had come higher than needed.
Nathan Miller, Mortgage Loan Originator for eRates Mortgage is licensed in 15 states and said he has been seeing problems scattered across those states, specifically mentioning Indiana, Michigan, Oregon and California. Most of his problems were originally with refis but he thinks the problem may be growing with purchases. He said that the loan types are varied, some VA loans, a few FHA but most have been conventional or conforming - people who had bought within the last few years and were hoping to get rid of private mortgage insurance or FHA premiums. He hasn't had many reviewed because of the expense involved with his appraisal management company but in the past has found that nine out of 10 reviews come back unchanged.
We also asked the Mortgage Bankers Association if they were aware of an uptick in low appraisals. A spokesman said, "The Association ha(s) not heard from its members about this specific issue."
If we assume that a pattern of low appraisals has emerged in recent weeks then we have to ask why. There were several ideas about possible contributory factors. Valins, for instance, said the heavy recent volume loan applications may be leading to some sloppiness on the part of appraisers. A surprising suggestion and one that we heard several times was the influence of the internet. Hodges said that owners considering refinancing often make sites such as Zillow their starting point and he suspects that sellers do so as well. The comps on these sites, Miller said, are not scrubbed or selected as carefully as a real estate agent would. Baron also thought this might provide a partial explanation saying that while these sites provide ballpark figures that are useful to determining trends they aren't intended to give absolute values. Still homeowners take them to heart and use them as a basis for expectations about what they can expect to realize through a refinance or a sale.
Baron also noted that underwriters and real estate agents sometimes see comps one way while appraisers view them in an entirely different light. They don't always accept a comp we think is a good one as even relevant to the subject property, he said.
A spokesman for the Appraisal Institute discounted any recent unusual appraisal trends. A formal statement to MND reads: "Bottom line is that this is an age-old issue that real estate agents, lenders and consumers have complained about for years, but it has no more bearing in fact today than it ever has. Appraisers are independent, third-party experts paid a flat fee to develop a credible, reliable opinion of value. They have no reason to provide a value that is "too high" or "too low" ... although, of course, those involved in a transaction may see it as such from their perspective."
The fact that counterparties don't always see eye-to-eye on valuations is not lost on us, nor on the mortgage professionals we interviewed. That said, there is no denying that the topic is coming up significantly more often in the origination community during the first quarter of 2015. Certainly, some of it could be based on the factors discussed above, but what we found most interesting and curious is that there was one new explanation that can't be chalked up as an "age-old issue."
While it's possible that it's simply a new justification for an age-old issue, almost everyone we spoke to mentioned Fannie Mae's new Collateral Underwriter (CU). It was also the least divisive issue among those who mentioned it. They agreed that--while not being a direct cause of the low appraisals--it was, as Valins put it, at least correlated with the phenomenon. CU is a new tool which came on line on January 26 and will soon provide lenders with a foundation for future waivers of representations and warranties as to property value for loans backed by Fannie Mae. CU provides a risk score on individual appraisals which will allow segmentation of appraisals by risk profile, allowing lenders to identify appraisals with heightened risk of quality issues, overvaluation, and compliance violations.
Miller said he thinks appraisers are being ultra conservative as CU is rolled out, afraid of backlash from appraisal management companies. This was echoed by Baron. "My personal opinion," he said, "is that appraisers are being overly conservative in choosing comps because of CU. If CU questions the comps, adjustments, etc., the appraiser would have to do a lot of extra work to justify them. I had anticipated that CU would cause delays because of this extra work, but it seems that appraisers are one step ahead and are being ultra conservative, thus avoiding the extra work in the first place. I haven't spoken to an appraiser about it, this is just my interpretation of what I am seeing."
If it is CU that causing the low appraisals or even magnifying the impact of other factors it will hopefully be a short-lived phenomenon. One lender told its employees "Where we do not anticipate any problems with the CU interface, we are anticipating a heightened array of misunderstanding and appraisal revision requests. We believe the understanding of the CU processes and findings should evolve rather fast."
In our view, the fact that it's new limits anyone's ability to accurately comment on its effects. It also means we can't simply chalk recent perceived changes up to the "age-old issue" mentioned by the Appraisal Institute until more time has passed. One thing's for sure: there's enough consensus here to merit further examination and consideration. What are you seeing?
