Third Quarter President’s Message
Third Quarter President’s Message
By P. Barton DeLacy, SRA (among other designations)
July 7, 2017
Appraisals? They don’t need no stinkin’ appraisals!
Many of you saw Ken Harney’s syndicated column1 which ominously warned, “For Fannie and Freddie, appraisals are not always necessary.” See the link below. Harney cites quiet policy changes at both government sponsored enterprises allowing transition to “appraisal-free” mortgages. This change is intended to streamline home lending processes and save consumers time and money.
The conventional wisdom seems to be that residential appraisals have now been rendered obsolete by a buoyant market and big data. To paraphrase the bandit in Treasure of the Sierra Madre, they might as well be saying, “appraisals? We don’t need no stinkin’ appraisals!”
Renowned economist and iconoclast, the late J. Kenneth Galbreath famously railed against the term he coined, the “conventional wisdom” of things. He explained how intervening events, not so much ideas, inevitably thwarted such accepted bromides. Conventional wisdom, seen by many as mere prudence, in our context means the stifling conformity of elite opinion.
So, all of a sudden, in the elite opinion of the country’s two biggest enablers of mortgage financing, Freddie Mac and Fannie Mae, appraisals are no longer worth the cost and inconvenience to the almighty consumer.
How soon they forget. Both enterprises are charged with facilitating and expanding the U.S. housing market, and particularly so-called affordable housing. Property values, as confirmed by appraisers in the field, provide the only tangible security for this trillion-dollar industry. It was through no fault of appraisers, but irresponsible underwriting and commoditization of sub-prime rate loans that caused the housing market to collapse, not even a decade ago. But here we go again.
Today, conventional wisdom finds that big data renders the field appraiser redundant. Fannie Mae claims its database of more than 23 million appraisals, together with “proprietary analytics,” is sufficient for reliable value estimates. Of course the database of confirmed sale transactions was harvested from the reports prepared by those very same field appraisers.
Yes, in our smartphone era, Google Maps and Zillow-type services provide leverageable tools, unimaginable even a decade ago. Does this mean the residential appraisal career will disappear like the family doctor making house calls?
But, then, is today’s appraisal report just a regulated commodity – or a professional service requiring highly specialized training, experience, and most importantly, learned judgment?
A seasoned appraiser and ICAP Board member from Peoria, put it best: Valuations are opinions of value and do not lend themselves to a scientific approach. While data is important to the development of the opinion, it is not the only factor. Accurate valuation is a three-legged stool; the opinion of value is only as good as the data, experience, and reasoning used to support it. An AVM [automated valuation model] uses only data and eliminates the other two footings.
Perhaps our regulatory scheme that mandates appraisals for any lending transaction, and blames the appraiser if anything goes amiss, should be more flexible. If a lender feels an appraisal is an unnecessary expense, let her put the onus on the borrower- look to a family’s creditworthiness for collateral, for instance, rather than the property.
Valuers can appear self-serving when insisting on appraisals for every transaction. Perhaps thresholds are appropriate for low loan to value refinances. Again, the underwriting should be based more on the borrower’s ability to pay than the collateral.
As Valuers, we need to raise our profiles as professional advisors to our clients. This may mean being more selective in the work we do. Turbo-tax did not put accountants out of work. They simply pursued higher and better (and more profitable) uses of their time. Eschew the commodity box and charge for your time.
So if the conventional wisdom maintains that appraising is a dying “industry;” question the premise and add the type of extra value to your service that only the appraiser is uniquely qualified to provide.
P. Barton DeLacy, MAI, AI-GRS, CRE, FRICS
2017 ICAP President