Wednesday, September 21, 2016


If you're buying, selling or refinancing a home these days, chances are you're hearing a lot of complaining about appraisals.

The cost, the turnaround the times, the difficulty of even finding an appraiser to take the assignment... sometimes it feels like the whole world of appraisals has turned into a bureaucratic, over-regulated cesspool.

In fact, for the first time, I just had a client pay $1,000 for a rush order appraisal, which basically meant getting it turned around in 14 days.  

But before you complain to me (or your lender) about the soaring cost and uncertain response times of appraisers, it's worth a few minutes to explain why this is happening.

Long story short, after the subprime financing meltdown and Great Recession of 2008-2009, government regulators began doing an autopsy on the housing market collapse and much of the blame, rightly or wrongly, was ultimately dropped at the feet of the appraisal industry.

Too many incestuous relationships between independent contractor appraisers and value-dependent subprime loan originators, weak licensing standards and a lack of regulatory oversight were cited as primary reasons so many bad loans were made during this toxic era.


In fact, one of the main reasons I picked up and left California at the end of 2005 was the unhealthy and unsustainable practices of the mortgage finance industry.  

In much of Southern California, where I lived, home prices had doubled inside of seven years... not necessarily because of economic conditions or a massive migration of new residents who could afford $700,000 starter homes... but because in the subprime era, people could buy homes not based on qualification, but simply desire.

Hence, the market flooded with low quality, over-extended buyers.  Values surged.  The bubble inflated.  I lost faith in the market.  And then I sold my house and moved to Colorado.

But I digress.  

In the aftermath of the mortgage meltdown, the Consumer Finance Protection Bureau (CFPB) was born and became federal law in July of 2010.  Often referred to as "Dodd-Frank" (named after the architects of the new bureaucracy, who also signed off on virtually all of the polices which led to the subprime meltdown... but again, I digress), the new agency created sweeping new regulations for the mortgage, appraisal and finance industries.

Among the key provisions... 

1) Appraisers valuing homes with loans that would be sold to Fannie Mae or Freddie Mac (more than 80% of all mortgages are sold to Fannie/Freddie) would need to give up their independent contractor status and become employees of Appraisal Management Companies, a new entity that would pool appraisers together and make random appraisal assignments to avoid conflicts of interest between individual appraisers and mortgage companies and originators.

2) Appraisal Management Companies would be allowed to mark up the cost of appraisals to cover their administrative, licensing and management fees.

3) Licensed Appraisers would now be required to have at least an Associate's Degree (AA) and Certified Residential Appraisers would require at least a Bachelor's Degree (BA) in order to keep their licenses.

In addition, continuing education requirements increased and a new disciplinary process was put in place that would ensure appraisers who overvalued homes would face reprimand, suspension or revocation of their licenses.

So, six years later, here's what you have.  

In some states, as many as half of the licensed appraisers have quit or been regulated out of the business.

Appraisal Management Companies now add as much as 40% to the cost of an appraisal for "administrative, licensing and management" fees.

Individual appraisers routinely turn down assignments for any property that isn't a "slam dunk" on value for fear of having their work audited.

And many of the most experienced, most competent appraisers have opted out of the mortgage finance chain to preserve their independent contractor status.  These appraisers now focus on doing work for private lenders, divorce and estate attorneys, and others with appraisal needs that don't funnel into the Fannie/Freddie pipeline.

The bottom line is that an appraisal which may have cost $400 five years ago will cost $750 to $1,000 to obtain today.  And instead of getting an appraisal in a week, it could take a month to see a finished report.

I'm not telling you if it's good or bad... I'm just telling you why it is.  You can draw your own conclusions.  

"Reforming" anything always comes with unintended consequences.  It's debatable whether you are getting a better, more accurate appraisal than before Dodd-Frank.  But it certainly is going to cost you more, and it's going to take a lot longer to arrive.