February 15, 2022

Are Appraisers Really Necessary for Home Mortgage Financing?

Are appraisers really necessary for home mortgage financing? This is one of the 

I want to start off by telling you a little bit about myself, only because I think it's important to preface this topic.

Where I grew up, there was a commuter railroad line that ran through my town that ran on electricity; 600 volts of electricity to be precise. The electricity was provided by a third rail, which is a essentially a steel rail that's elevated about eight to 10 inches off the ground and runs parallel to the rails that the train's wheels ride it on. And as you can imagine, anyone who would touched that third rail would be killed instantly by electrocution.

To create a barrier to against falling on the third rail and being killed, the railroad company, which was the Baltimore and Ohio railroad company, placed one inch by a six-inch planks of wood that were suspended above the third rail. Now, when we were kids, about 13 years old, we would walk on top of those wood planks above the third rail as sort of a macho thing to prove our fearlessness.

So, what does walking on the wood planks over the third rail have to do with today's topic? Well, in this article, I'm going to talk about a subject that many people consider to be "the third rail" of real estate appraisal topics. And that's the question of whether real estate appraisers are really necessary for home mortgage financing.

I can already hear the howling and the obscenities from the real estate appraisers who do residential mortgage appraisers. But, before you prejudge my motives for this question, consider this...

When I started my real estate appraisal career, I made a very good living appraising houses for mortgage lenders. I have literally appraised thousands of homes and I have nothing but the highest level of respect for the people who appraise homes today.

This is because, as I have said many, many times in many of my classes and in front of many real estate groups that I've spoken to, I strongly believe that appraising a home is one of the most challenging appraisal assignments anyone can undertake. And, that's because there's so much emotion attached to home buying that influences the price people pay for a home. And that emotional influence makes it very, very difficult to form a rational financial opinion when you're dealing with an irrational emotional event.

So please don't consider this article to either be an attack on or put down of residential real estate appraisers, because that's absolutely not the intent or purpose of this article

All that said, let me give you some background that many of you may not be aware of. First of all, there was a time, and it wasn't too long ago, when the only residential mortgage loans that used independent real estate appraisers were mortgages that were either guaranteed or insured by the federal government, being either VA or FHA loans, respectively. This practice continued from about forever through the early 1980s; conventional mortgage lenders, didn't use independent appraisers.


Conventional mortgage lenders, which were generally local savings and loans, made loans using the money in the savings accounts of their depositors. These banks took the position that it was their duty to protect their depositors and to make the decision whether or not the property value was sufficient to justify the loan requested. So these bankers physically went out and looked at the properties themselves. They looked at all of the sales they thought were relevant, and they actually walked through the houses they were considering to use as collateral. It was not uncommon to see two or three or four people from the bank walking through a house. I know this is true because I've personally seen it many times.

These banks also serviced all of the loans that they made. In other words, they kept those loans in their portfolio, in that bank. The people who borrowed the money and made the mortgage payments made their payments to that bank from the day they got the loan, until that loan was paid off. And this worked pretty well for decades.

However, because these bankers serviced their own loans, and the fact that banks had to maintain a certain amount of cash reserve, these banks had a limited amount of capital available to loan which was determined by the amount of a money they had on deposit.

Then in 1980, the Carter administration signed legislation that deregulated the banking industry, including savings and loans. Now, without getting into the weeds and this very interesting subject, the banking industry changed dramatically overnight.

Then, some smart folks on Wall Street figured out a way to sell bonds and use the residential mortgages as the payment mechanism and as the collateral for those bonds. And in 1983, the Federal National Mortgage Association (Fannie Mae) started buying those bonds. The way it worked was that the money Fannie Mae paid to buy the bonds went back to the banks and provided more money for the banks to loan

However, one of the requirements that Fannie Mae created as a condition for buying those bonds was that the real estate collateral had to be appraised by an independent appraiser, not the bank. This requirement by Fannie Mae is what caused the boom in the appraiser population and the boom in mortgage collateralization. At the same time, all of these events were bolstered by the Reagan administration whose economic policies kicked off an amazing level of economic growth. All of this started in about 1983.

At the time, there was no such thing as licensing or qualifications for real estate appraisers, You could be driving a bread for truck this week and be a real estate appraiser next week, as long as you learned how to fill out the Fannie Mae form.

But, after a few years and the economic crash of the late 1980s that included the crash of the savings loan banking industry, all of which simultaneously occurred, but having nothing to do with appraisers, the push to require appraisers to become licensed became a serious issue. Real estate appraiser licensing ultimately became law and went into effect on January 1st, 1992.

This law required real estate appraisers to be licensed to do federally related transactions, which include mortgage loans. And, most states initially required licensing of appraisers for most other types of assignments at the time.

But since the inception of real estate appraiser licensing in 1992, the appraisal industry has been slowly but surely dying. Subsequently, very few people have entered the industry for a variety of reasons. And, the average age of a real estate appraiser today is over 65 years old. In fact, the population of real estate appraisers has diminished to about 30% of what it was in the early nineties.


But, since then, there have also been tremendous changes in the availability of data from the internet, which was only in its infancy when appraisers became licensed in 1992. However, today, the Internet is ubiquitous; it's everywhere. And it's got the most up-to-date information available at the click of a computer mouse. Anyone literally anywhere there's an Internet connection can get the most current and complete sales data on almost any residential property sold in the United States, including getting photos and videos, if they were created. One can also obtain all of the relevant documents, such as the deed and mortgage, in just a few mouse clicks.

So with all of these data immediately available to home mortgage lenders, the question that's begging to be answered is, are really estate appraisers really necessary for home mortgage financing?

You know the answer just as well as I, and the answer is NO - real estate appraisers really are not necessary for home mortgage financing. However, Fannie Mae still requires, that property has to be appraised by an independent appraiser before they will buy a mortgage loan.

But this term, "independent" raises the issue of how independent are residential mortgage appraisers who get upward of 80% of their business from one source, being an appraisal management company?

I'm not suggesting that appraisers are doing anything improper or legal, because I don't think that's what's happening. But believe it or not, appraisers are human. And like all humans, they have concerns for the security of their livelihood, which certainly can skew their perception and their independence.

Comparing today's residential mortgage appraiser to when I started doing home mortgage appraisals back in 1983, I had about 10 or 12 different lender clients. So if one gave me a hard time or wanted me to hit a certain number, I would just tell them to kiss me where the sun don't shine, and I'd never look back


But, today's residential mortgage appraiser is frequently getting 80-100% of their business from one source. So, just how independent do you think those appraisers can be? Do you think they're going to tell that source to kiss off? Or, do you think they're going to submit to that client's wishes? I'll let you decide the answer to that for yourself.

So where does the real estate appraisal industry go from here?

After doing this for about 50 years, I don't have an answer to this question. But, I do believe that if the residential mortgage appraisal business continues to operate as it's currently structured, it's probably going to collapse under its own weight of inefficiency.

Should mortgage lenders be required to have their collateral property independently appraised? Yes, I believe they should, if only to assure the public that they're not going to be on the hook to bail out more banks in the future. But, I also believe that's a very hollow assurance,

Frankly, there have to be other structural changes in the way appraisers are hired, and also in the regulations that govern them.

In my opinion, a very good starting point would be to eliminate the practice of providing a copy of the sales contract to the appraiser. Let's face it, by providing the appraiser with a copy of the sales contract can only serve to influence the appraisers value opinion. There's no other justifiable reason to give the appraiser a copy of the contract. If it's not to influence them, because there's nothing in that contract that's of any relevance to them; there is absolutely nothing relevant to the issue of value about the property in the contract of sale.


How can someone form an independent opinion when they're being influenced by a document that tells them the price of the transaction they're involved in?

This is only one of the changes that should be made. But, I'll address them in a future post.

I hope I've shed a brighter light on this topic that will improve the process of helping to streamline the mortgage financing process, reduce the cost to the consumer by eliminating the appraisal management company, and to benefit residential mortgage appraisers.

I'd like to hear any thoughtful comments, observations, suggestions you might have on this topic.

Contact me privately if you'd rather not post a public comment.


amc, appraisers, homebuyers, market value, mortgages, real estate

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