Dalrymple : Why do appraisals take so long?
June 8, 2016
Why do appraisals take so long to get done for a residential loan application, and why, sometimes, does a second appraiser end up doing the appraisal?
Appraisals have always been the major delay in mortgage loan processing, and that situation hasn't improved since the financial crisis. In fact, it's worsened.
It's all part of the massive regulatory overhaul mandated by the Dodd-Frank act in the wake of the Great Meltdown of 2008. Problem appraisals didn't create the housing bubble that saw property values shoot into the stratosphere, while mortgage loan underwriting standards disappeared into the mortgage backed securities muck.
But they were certainly one of the elements that got a lot of bad publicity as Congress focused on the devastation in the wake of the bursting of the bubble. When things go bad in housing, appraisers inevitably get a lot of blame: after all, an appraisal is required for virtually every residential loan funded.
Under the best circumstances, appraising real estate is an imprecise effort to hit a ball park figure that has current credence. Appraisers are always a bit out of step with the market, behind it in value when it's rising, or too high in the value estimate when it's falling.
In the seven or eight years preceding the crash, the appraisal process, like everything else connected with mortgage loans, got sloppy, and, in just enough cases to raise concern, often fraudulent.
Mortgage lenders and brokers could order appraisals from their favorite appraiser, and weren't shy about threatening to pull thousands of dollars worth of business if they didn't get the valuations they, and their borrowers, wanted. Thus, appraisals helped pump up the bubble to the point of popping.
So, the Dodd-Frank Act, and ensuing regulations, came down hard on appraisers, just as it did on bankers, and mortgage brokers.
A residential valuation is based on the market value of the real estate. This is determined by comparable sales, and that's where it gets sticky, because very few pieces of real estate are exactly alike. To arrive at a reasonable market value, an appraiser has to make dollar amount adjustments for the differences in the sold comparable properties, and the one that's the subject of the appraisal.
Differences in square footage and amenities, such as garages, basements, and luxury features, all go into the adjustment mix. Location is also a major area of consideration. If one or more of these adjustments gets to the point where it is too much, one way or the other, as expressed as a percentage of the total value, then that appraisal might be deemed unacceptable by a lender.
Comps, as they're called in mortgage lending, are a problem in rural areas, and especially in the mountain communities and resorts of Colorado, such as Grand County. Metropolitan areas, of course, have a raft of comps for the majority of properties simply because of the sheer number of transactions, and the similarity of urban subdivisions.
But rural and resort properties tend to be different, occasionally unique, and sales are much fewer in number. The most ethical and professionally competent appraiser can sometimes find it almost impossible to come up with a report that meets today's general guidelines, which certainly are not designed for the Colorado Rockies.
So, it's not uncommon for a home buyer, along with the seller, broker, and lender, to be marking time, nervously awaiting the appraisal report, as the closing deadline approaches.
Pat Dalrymple is a former bank president who has been making mortgage loans in western Colorado since 1967. He's currently an advisor to Grand Mountain Bank's Mortgage Lending Outreach Initiative. He welcomes your questions on lending and banking, and can be reached at email@example.com.