HUD Cracking Down on Appraisal Reports
We’ve learned that quite a few appraisers are receiving “Notice of Deficiency” letters from HUD/FHA, citing problems with appraisal reports.
Nadlan has seen some of the letters HUD has sent to appraisers: some letters state that a “Notice of Appraisal Deficiencies” will go into appraiser records on file with HUD, along with a warning that “repeated deficiencies may lead to administrative sanctions.”
If there are deficiencies with multiple appraisal reports, appraisers receive letters from HUD requiring them to complete a minimum seven-hour continuing education course to “improve performance in order to remain on the FHA Appraiser Roster.”
Appraisers are required to complete the course within 60 days and provide written evidence of having successfully taken the course. Failure to do so could bring on additional administrative sanctions, according to the HUD letters Nadlan has seen.
We hear that an increasing number of appraisers are getting these letters from HUD, so appraisers need to be on their toes. Clearly, HUD examiners are going through appraisal reports very carefully and making sure appraisers adhere to regulations to the letter.
What are some of the deficiencies cited by HUD?
- In several instances, appraisers were called out for inconsistencies on the size of a finished basement. For example, in one case HUD noted that the appraiser’s report said the house had a full basement of 962 square feet, while the home’s building sketch said it was nearly twice that. The appraiser was asked to account for the difference in size.
- One appraiser was told that three comparable properties that were used in his report were “not reasonable” because they each had updated kitchens with granite countertops while the subject property was to have a kitchen “updated with IKEA kitchen cabinets.” HUD wanted to know why these were considered to be equal.
- HUD asked an appraiser to more carefully explain the adjustment of the value of comparable properties to justify the estimated worth of the subject property. “The appraiser must explain the thought process or rationale for the value opinion,” the HUD examiner wrote, noting that using a price range wasn’t precise enough. In one case, the appraiser was told that the range of values used was too wide to justify the value of the subject property.
At Nadlan, appraisal reports undergo our “triple check” process to ensure accuracy. Though it might seem to be a minor annoyance to appraisers to have their reports questioned, we only do so to protect both appraisers and lenders.
Three Nasty Surprises that Can Delay Closings
Surprises can be good or bad. Surprise parties, an unexpected bonus at work, a wink from a secret admirer – those are all good surprises. A fender bender, a broken heirloom or the need for a root canal? Bad surprises all.
And I’ve learned that surprises in the home buying business are almost always unwelcome. Most mortgage surprises involve a last-minute event that threatens to delay or halt the closing. Those delays can cost both lenders and home buyers money, and can cause ill will and even lost business from borrowers.
Through our years in the business, we’ve witnessed a few appraisal-related surprises that can delay or stop closings. The sad part is, almost all bad surprises involving appraisals can be avoided.
Nasty Surprise No. 1: Where’s the report?
You’ve been working with anxious first-time buyers and their real estate agent, promising them their mortgage will go through in time for the home sale to close. Now the buyer’s rate lock is about to expire and you get a call from the appraiser that his report will be two weeks late because “he’s been slammed.” Everyone’s upset and the agent is threatening to never do business with you again.
How can this be avoided? The key is to find an appraiser who is familiar with the area and not overloaded with work. If you’ve experienced a late report, chances are the appraisal partner you work with doesn’t help manage the workloads of its appraisers. At the very least, you should be kept informed so if something happens beyond anyone’s control, you can take necessary action.
Nasty Surprise No. 2: Your underwriter is shaking their head.
Suppose you were able to calm down the borrower and real estate agent and the appraisal report is delivered, albeit two weeks late. The buyer is packed and the seller has all but moved out of the home. Everything looks great—but then you get a call from your underwriting department. Surprise! The comps used in the appraisal report aren’t “similar enough,” so they are rejecting the appraisal. Now you need to go back to the agent and borrower and tell them that the mortgage is delayed once again.
Believe it or not, the above scenario doesn’t happen to everybody. Some appraisal companies actually double and triple check reports for completeness and accuracy and send reports through the most up-to-date software to make sure they are compliant with all national and regional regulations. They also employ appraisal experts to look at final reports to ensure the report’s quality. Lenders with this kind of appraisal help spend less time on compliance and quality control issues and more time originating loans.
Nasty Surprise No. 3: The appraisal doesn’t support the sales price.
We’re all familiar with an appraisal that comes in lower than the contract price. Especially in a rising market, home prices are rising faster than comparable closed sales and the closed sales don’t always support the current market prices. Usually the only way to make the deal work is for the borrower to come up with more money or for the seller to agree to accept a lower price.
Do these surprises sound familiar? Give us a call a 1-800-948-2121 or email firstname.lastname@example.org today and let us get rid of them for you! Give us a try and you’ll find your appraisals going much more smoothly, with accurate reports delivered on time.
How do we bridge the “Appraisal Gap”?
Many depressed cities have seen their housing markets decimated and have been unable to attract new residents. One of the reasons is that potential investors are reluctant to put money into buying and fixing up houses because the properties later don’t appraise high enough to reflect the improvements. In fact, rehabbed properties often appraise for even less than the value of the home plus the improvements, discouraging future buyers to invest in the city, a recent report from the Urban Institute says, citing Detroit as a prime example.
What’s behind this “appraisal gap”?
One of the problems is that there are so few comparable properties on which to base an appraisal. Many homes in Detroit and other places have been torn down. That in turn makes it difficult for a prospective buyer to obtain a mortgage, which makes rehabbing unprofitable, which discourages new investment, creating a vicious cycle.
This issue raises the question: What do appraisers do in situations where there are few available comps? We see this situation not only in depressed places like Detroit but also when we’re dealing with unique, “one-of-a-kind” properties.
It takes a seasoned appraiser with broad experience to appraise these properties. Not every appraiser can handle them.
I’ve never had an appraisal where I could not find comps. There are always comps. You may have to look a little harder and deeper to find them, though. A little creative thinking doesn’t hurt, either.
Ideally, comparable properties have sold within 90 days, are located within a mile of the property being appraised, and fall within a certain value range suggested by lenders. But that may not always be possible.
You may have to go back a year or more and go to neighborhoods outside the property’s normal range to find data supporting an appraisal. When there are no recent sales within the immediate area, it is acceptable to expand your search to nearby places that are similar, even if they exceed the lender’s distance recommendations. You can look at historical sales between homes in two similar towns with comparable schools, taxes, crime rates and other factors to come up with a comp. If you do, you will also need to make some adjustments to the appraisal to justify the value. If Town A is historically 10% higher in price than Town B but is otherwise similar, for example, that needs to be factored in.
As long as the appraiser explains his or her reasons for choosing older sales or those outside of the immediate neighborhood, the underwriter will usually accept it.
Everything has a value. These “oddball” properties are just a bigger challenge to appraise. The comps you come up with may not be perfect, and may not be those the lender, Realtor or buyer would have liked. You may get some flak if the appraisal comes in lower than the sales price. But if you’re able to substantiate what you do, you’re on solid ground.
Who Will Handle the Growing Appraisal Volume?
An early spring and low interest rates are combining to create what looks like the start of a strong year for home buying. Mortgage applications increased 2.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 1, 2016. In the last month, the MBA’s purchase application index has been running 20% to 30% higher than the same weeks a year ago.
This is certainly great news for the economy. But will the industry be able to handle all of this new business?
There have been a lot of stories in the industry press about the growing shortage of professional appraisers. It’s real. We’re already seeing a shortage in some areas. Rural areas seem to be affected more than the big cities.
For one thing, the appraisal industry is facing a demographics problem. According to the Appraisal Institute, nearly two-thirds of appraisers are 51 or older, while just 24% are between 36 and 50 and only 13% are 35 or younger. As more appraisers retire, not enough new and younger ones are coming in to replace them. What’s preventing it?
We obviously talk to appraisers all of the time, and a lot of them are simply getting burned out. Increased regulations are part of the problem. While we support the government’s efforts to boost education requirements for appraisers, many of them are overly burdensome.
Then there is the problem of compensation. Regulations and guidelines enacted since the mortgage meltdown have added lots of additional requirements for appraisers, yet their fees have not gone up accordingly.
What impact could this appraiser shortage have on the mortgage and home buying industry? Closings will be delayed, maybe by several weeks, depending on the area. Eventually, appraiser fees will start to skyrocket. Already, we’re seeing appraisers in some rural areas charging $800 for an appraisal, about double what lenders are usually willing to pay.
So, what can be done to reverse the trend and make the job of appraiser more attractive?
For starters, appraisers need a raise. It’s long overdue, and fully justified.
Technology could also prove to be a boon to attract younger people into the profession by changing the way appraisers work and helping them be more efficient. In the field, we use lasers for more accurate measuring and upload data into our smartphones. In our office, every report is sent through the most up-to-date software. This ensures each appraisal report is compliant with all national and regional regulations. It has really changed the way we write and deliver reports, and even more improvements can be expected.
If you’re interested in learning about a career in the appraisal industry or know someone who is, please contact us.
Are All Appraisers Alike? No Way, and Here’s Why
Lots of products have become commoditized over time: milk, eggs, gasoline, tissues, you name it. Even mortgages. To most consumers, a loan from one lender is pretty much the same as any other. That being the case – at least in the consumer’s mind – they do the logical thing: They go with what’s cheapest.
Residential property appraisals, unfortunately, have lately fallen into the same boat. Although appraisers – and hopefully mortgage lenders and other industry professionals – understand that the quality of each appraisal can differ drastically, this is not always readily apparent to consumers, especially when the property valuation comes into too low for their liking.
You can forgive consumers for their lack of awareness. They don’t deal with appraisers every day. Appraisals from different companies are prepared on forms that look alike. Even the words and codes they use are now uniform due to industry regulations, adding to the perception that they’re all the same.
But lenders know better. After all, they know that a mortgage from Company A isn’t the same as one from Company Z. There are lots of things besides price and rate that differentiate one lender from another: speed and personalized service, to name just two.
It’s no different with appraisals. In fact, all appraisals – and all appraisers – are definitely not alike. Anybody can find an appraiser by Googling for one online. But how do you know if you’re picking the best one for your property and your client to get the most accurate valuation? Do they truly know the area, right down to the neighborhood? Are they using the best comparables or just the most convenient ones? How long have they been in the business, and is their licensing up to date? Is their valuation being checked for thoroughness and quality?
Appraisal management companies like Nadlan Valuation are the main way to separate the good from the bad and the downright ugly. We vet each appraiser to ensure the property analysis is performed by the best-equipped professional for the task. We assign each based on their expertise with specific types of properties in a particular area or region. We then review the quality and accuracy of their work and evaluate the data on the properties they analyze.
Besides protecting consumers from overpaying for a home, appraisers and AMCs protect lenders from making loans on properties whose values don’t support the transactions. How many loans went into default during the housing and mortgage crisis because the property wasn’t really worth anywhere near what the lender or the consumer thought it was and the homeowner walked away?
AMCs not only save lenders a lot of time and energy on the front end in finding the right appraiser for the job. We save you even more on the back end by making sure the value of the property and the loan amount all add up because the appraisal was done correctly and professionally.
Finding the right appraiser to provide the best valuation at the right price is one of lending’s most important tasks. Don’t leave it to chance – call us at 1-800-948-2121 or visit us online at Nadlan Valuation. We’re experts because we’re appraisers too.
Have you Signed Up for FHA’s EAD? Phase 5 Registration Opens
The FHA’s Electronic Appraisal Delivery (EAD) portal June deadline will be here before you know it, so don’t let it sneak up on you! Use of the EAD portal will be required for all FHA-approved mortgagees, effective for FHA case numbers assigned on or after June 27, 2016. Lenders and appraisers need to get signed up for one of the “onboarding phases” to start using the portal. Phase 3, which opened in December, closed yesterday, February 15. Registration for Phase 5 opened yesterday.
FHA’s EAD will be to the government-insured mortgage market what Freddie Mac and Fannie Mae’s Uniform Collateral Data Portal (UCDP) is to conventional conforming loans. The EAD portal is a web-based technology system that enables the electronic transmission of appraisal data and reports to the FHA by FHA-approved mortgagees and/or their designated third-party service providers prior to loan endorsement.
Both EAD and UCDP help the appraisal process become more transparent. We believe the appraisal industry will become accustomed to the new FHA portal just as quickly as it did with UCDP. It is the latest in the overall effort to bring digital efficiency to the business to improve analytics, enhance risk management and attract private investors back to our industry.
While each phase is approximately 60 calendar days in duration, FHA expects that many mortgagees who are not building a direct interface to the portal can be on-boarded within five to seven business days.
The table below shows the schedule for the remaining phases remaining in the onboarding process.
If you have any questions about EAD or need help in signing up, please give us a call at 1-800-948-2121 today.
8 Predictions for 2016
2016 is shaping up as a pretty good year for the residential housing and mortgage businesses. What’s the reasoning behind that thinking? Read on for Sam Heskel’s predictions.
1. Home price gains will moderate in 2016 following three years of strong increases, especially in California and the Northeast. Prices for many homes have gotten ahead of themselves, so we can expect some easing in these areas. At the same time, other areas that have not risen as strongly may start to play catchup. As a result, it should be a fairly attractive, affordable market for homebuyers in many areas.
2. More Baby Boomers will start to cash out of their houses, which will put more houses on the market, which will also lead to greater supply and therefore more moderate home prices. That will in turn attract more millennials, who will have a greater supply of inventory to choose from. An improving job market will also enable more millennials to become home buyers.
3. Mortgage interest rates will go up in the first two quarters of 2016. On the long end, rates probably won’t rise that much at all as economic growth remains subpar. That will keep mortgage borrowing rates affordable and near historic low levels.
4. Loan originations will be higher than those forecasted by the MBA, Fannie Mae and Freddie Mac, who are all predicting about 10% declines in loan production, largely due to a steep drop in refinancings as interest rates rise. We believe refi volume will be better than expected, given the continued low rate environment, while purchase mortgage originations will be strong.
5. Rental prices will finally hit a wall in 2016, which will drive more consumers, particularly millennials, into buying their own homes, also supporting the idea of a strong housing market in 2016. With a little help from the mortgage and real estate industry, we can hammer home the fact that buying makes more financial sense than renting.
6. The appraisal industry will clearly benefit from this scenario, with increased demand for appraisals on both refis and purchase mortgages.
7. TRID will turn out to be not as horrific as the industry expected. While closings are now taking longer, the industry will learn to adapt.
8. FHA’s EAD will be to the industry what Fannie Mae’s Collateral Underwriter was in 2015. EAD portal is a web-based technology system that enables electronic transmission of appraisal data and reports to FHA by FHA-approved mortgagees and/or their designated third-party service providers prior to loan endorsement. Like CU, we believe the industry will become accustomed to the new review check. Both EAD and CU help the appraisal process become more transparent.
Some Appraisers Aren’t Happy with New FHA Guidelines
New Federal Housing Administration appraisal requirements are now in effect. Originally scheduled to go into effect last June 15, they became mandatory on September 14. We are hearing that some appraisers aren’t happy with the new guidelines, and feel that they will make the inspection process longer. The changes are included in the Single Family Housing Policy Handbook, also known as HUD Handbook 4000.1.
The handbook, which is the reference manual for all FHA 1-4-family home loans, including condominiums, is intended to supersede several previous HUD handbooks in their entirety. It contains numerous updates that both appraisers and borrowers need to know about. In general, the new regulations include some more stringent requirements that put appraisers in a better position to help protect borrowers from making an unwise purchase or to find out about a hidden problem.
Remember, though, an appraisal doesn’t take the place of a full-blown property inspection performed by a licensed and competent contractor.
Here are some of the key changes:
• Appraisers must now complete a three-year – not just one year — history of prior comparable sales and listings. In addition, the information must come from two sources, including local MLS and public records.
• Appraisers are required to take or provide photos of comparable sales, listings, pending sales and rentals. The photos must be taken at an angle to cover both the front and the side of the property, when possible. MLS photos are acceptable to show the condition at the time of sale. However, appraisers must include their own photographs as well to document compliance.
• Appraisers must also provide photos of all rooms in the property, plus any recent updates or renovations. For two-to-four-unit properties, there must be photos of hallways, foyers, laundry rooms and other common areas. Deficiencies or other conditions requiring inspection or repair must also be photographed.
• Appraisers must make more than just a “head and shoulders” inspection of attics and crawl spaces, although HUD prefers full entry, if possible. If those spaces are not accessible, the appraiser must state that fact in the appraisal report. The crawl space must be free of trash, debris and vermin.
• HUD has dropped the requirement that appraisers check the “fall distance” between the property and a power line or tower. However, the appraiser is still required to notify the borrower if the dwelling is located within an easement or if it appears to be located “within an unsafe distance” of a utility line or tower. In addition, power lines may not pass directly over the dwelling or any related property improvement, such as a pool or spa.
• Cabinets and built-in appliances are considered part of the property and must be present and operational. As a result, the appraiser must operate and ensure that cabinet doors and drawers, as well as dishwashers, stoves, refrigerators and other appliances, are in working order.
• The appraiser must also state which of the property’s utilities are on and operating. If they’re not, the appraiser must refer the matter to a third-party inspection, where it must be fully explained.
• The appraiser must also operate and observe the plumbing system to ensure there are no foul odors and that water pressure is sufficient, including running faucets while the toilet is flushed.
• For condominiums and multifamily properties, all common areas and elements must be inspected, including lobbies and foyers, hallways, laundry facilities, storage areas and recreation facilities.
• The appraiser must also report any known environmental and safety hazards – including defective lead-based paint, mold, toxic chemicals and radioactive materials – that may affect the health and safety of the occupants, the property’s ability to serve as collateral, and its structural soundness. This rule also covers contaminants in the soil, including methamphetamine-contaminated property and wood-destroying insects. The appraiser must analyze and report any long-term stigma caused by the meth contamination and the impact on property value or marketability.
We’ve heard from some appraisers who are very upset with the FHA changes. They feel that inspections will now take much longer. There are also some appraisers who believe they have more liability due to the new FHA guidelines. A few appraisers are declining FHA orders since the new guidelines went into effect, and yet others are asking anywhere from $50 more to double the original appraisal fee.
Stay tuned for further developments on the FHA guideline changes.
Let’s Shine a Brighter Light on Appraisal Fees
Appraisers and the appraisal management companies they work with don’t see eye to eye on everything, but there is one issue where both do agree: namely that the fees each charge should be separately disclosed to homebuyers.
One of the gray areas of the Consumer Financial Protection Bureau’s proposed “Know Before You Owe” mortgage disclosure rule concerns appraisal fees. These fees often include two separate charges, one from the appraiser who actually does the on-site inspection and analysis of the property, and one from an appraisal management company (AMC) – if one is used – that manages the entire appraisal process. These two fees are often lumped into one, which misleads the consumer into thinking that the appraisal “fee” is too high. Unfortunately, the CFPB currently favors keeping this separation of the two fees optional rather than mandatory, which will only serve to keep some consumers asking questions.
The CFPB needs to get in line with the rest of the industry. The Federal Housing Administration (FHA) allows disclosure of the fee paid to the appraiser, and many states already allow or require the appraiser to disclose the fee paid within the appraisal report. Recently, appraiser coalitions in 23 states asked the CFPB to require separation of the fees at the closing table. We agree.
In fact, both appraisers and AMCs perform separate functions, and are compensated accordingly. Consumers have a right to know what each entity does and how much each charges. If it makes for a more informed consumer, the better for all of us.
Independent appraisers work directly with consumers and lenders who employ them to value real property. The client, typically the lender, pays fees directly to the appraiser. The lender then passes the fee along to the consumer.
Appraisers often work through an AMC, which recruits and employs appraisers based on their expertise in the mechanics of appraising, as well as their competency with property values in a particular area or region. Each appraiser is prescreened and certified by the AMC to match the right appraiser to the right job to ensure the appraisal is performed by the best equipped professional for the task.
AMCs then review the quality and accuracy of the appraiser’s work, track and manage the data on the properties they appraise and make sure they’re in compliance with all national and state regulations. AMCs provide internal quality control and primary reviews of reports before they reach the lender’s or broker’s desk.
AMCs facilitate any communication issues that pop up between the underwriter and the appraiser. The AMC is also charged with paying the appraiser in a timely fashion.
Some states require that AMCs be registered and licensed, which can cost upwards of $2,000 per state.
At Nadlan, we’re in favor of full disclosure of the appraiser and AMC fees. As an AMC, our view is that we have nothing to hide. We perform a valuable service, which costs time and money, and should be compensated accordingly, and the consumer should know that.
Because of our work, appraisal reports can be turned around faster and with more accuracy. That benefits consumers first and foremost. Homebuyers have a right to know the costs associated with a real estate appraisal, and should have full trust in their lender and its vendors.
Think of this: appraisal fees are too low
One of the most common questions we get from both mortgage lenders and homebuyers is: Why are appraisal fees so high?
Borrowers look at the closing cost estimates their lender sends them and see a charge of $350 to $500 for an appraisal and wonder why it costs so much.
First of all, appraisers haven’t gotten much of a raise in about 15 years, even though their workload, responsibilities and liabilities have grown during that time. Appraisal fees have gone up the equivalent of 1% or so a year over that time.
Yet appraisers are being asked to do a lot more work today. Lenders are asking for more comparable sales and active listings, There are also more forms to fill out than there were 15 years ago.
Nowadays there’s a lot more regulation, too – meaning paperwork – and its resultant liability. Fifteen years ago, there wasn’t a Dodd-Frank law or the Consumer Financial Protection Bureau. Those laws and regulations are certainly beneficial to many, but ensuring compliance with them adds to appraisers’ costs, plus the penalties can be steep if an appraiser makes even the slightest mistake, whether it’s inadvertent or not. Factor in the cost of individual state regulations and licensing fees, and it’s easy to see why the appraiser’s cost of doing business has escalated in the past 15 years.
And try becoming an appraiser today. The level of education required to become one is much higher than it used to be, and getting licensed is a lot harder. Years ago, prospective appraisers apprenticed with senior appraisers before they got their licenses. Now lenders won’t accept an appraisal from an apprentice, so even becoming an apprentice is very difficult.
Let’s not forget that another party has been added to the appraisal process, namely appraisal management companies like Nadlan, to manage the entire appraisal process. Appraisers and AMCs perform separate functions, and are compensated accordingly.
Appraisers do the actual, on-site property inspection and valuation. But anybody can find an appraiser by looking in the phone book. AMCs like Nadlan protect all parties to the deal – the lender, the buyer and the seller — by vetting each appraiser to ensure the appraisal is performed by the best equipped professional for the task, assigning each based on their expertise with properties in a particular area or region.
We then review the quality and accuracy of the appraiser’s work, track and manage the data on the properties they appraise and make sure they’re in compliance with all national and state regulations.
Because of our work, appraisal reports can be turned around faster and with more accuracy. That benefits both homebuyers and lenders. But all of that costs money.
Perhaps lenders and consumers need to think of an appraisal as a very inexpensive insurance policy. Remember that the home will likely be the consumer’s biggest purchase–and financial liability–of their lifetime. It seems to me that paying a few hundred dollars to protect yourself from overpaying for the next 30 years is a pretty small price to pay.
A scenario we see all of the time: a consumer is willing to pay $300,000 to buy a home, but our professional appraisal says the property is worth only $280,000. What does the consumer do? Usually, their first reaction is to challenge the appraiser’s valuation, claiming that it will cost them the deal. But then, after they cool down, they go back to the seller and ask them to lower the price. More often than not, they meet in the middle. The appraisal just saved the buyer $10,000. Now suddenly the appraisal fee doesn’t look so high!
Appraisers also protect lenders from making loans on properties that don’t measure up. How many bad loans were banks stuck with because the property wasn’t worth anywhere near what the bank – or the consumer – thought it was? Loans that exceed the value of the property are much more likely to default.
Appraisers and appraisal management companies provide a valuable service. If anything, they’re not paid enough for what they’re expected to do. It’s time to realign perceptions with reality, as thinking of appraisals as over-priced is doing everyone damage in the long run.
Call 1-800-948-2121 or email email@example.com today to learn more about working with Nadlan Valuation, and find out how we can help you close more quality loans quickly. We also ensure the appraisals on your loans are compliant, reducing risk. The result? Lenders save both time and money, and can rest assured the appraisals on their loans conform to today’s regulations.