Appraisals are costing bankers more money and, in some cases, business.
Recent regulation has altered the fee structure and required more independence between bankers and appraisers. As a result, scores of appraisers have abandoned their trade. Bankers, overwhelmed with a need for re-appraisals, are finding it more expensive and time-consuming to get valuations. In some cases, the changing landscape is costing bankers real estate loans.
"These rules have caused the appraisal industry to be buried with appraisal requests which, in effect, has lengthened the appraisal time period," says Michael Jacobson, the president and chief executive of NebraskaLand National Bank in North Platte.
"My belief is there was more focus on appraisal requirements to serve as somewhat of a break or anchor to hold banks back from doing more [real estate] secured transactions."
Jacobson points to a client who handles built-to-suit commercial buildings for large energy companies and who has been a timely paying borrower for 15 years. The client needs a loan for a new project. Before the financial crisis, banks could get a preliminary appraisal with a valuation range and offer a "right-size loan," based on the lowest valuation, to get the project started while awaiting a formal appraisal. That option no longer exists.
The builder must "get busy building that building but the problem is I've got to go out and get an appraisal" before making the loan, Jacobson says. For a large project, it could take anywhere from 120 to 180 days to get an appraisal, he says.
Delays occur partly because there are not enough appraisers, especially those who specialize in commercial properties, to keep up with increasing demand. There are 37,887 active appraiser certificates and 13,277 licenses in the United States, according to the Appraisal Subcommittee of the Federal Financial Institutions Examination Council. Nationally, that would be roughly five certified appraisers for every U.S. bank, though one appraiser could hold multiple certificates.
"A lot of us are single practitioners so you have to do one appraisal at a time," says Richard Gilmore, a senior appraiser in California who specializes in commercial properties and agriculture. "For guys who have a strong reputation and are doing well, it's easy to get one or two commercial projects and be backed up 30 to 60 days."
Gilmore says many appraisers left the industry after 2009, when the Home Valuation Code of Conduct — now a part of the Dodd-Frank Act — essentially stopped bankers and mortgage brokers from directly working with appraisers. The rule was meant to create greater independence by mandating "customary and reasonable" fees. Instead, bankers use third-party appraisal management companies that take a cut from the appraiser's fee.
"People aren't coming into the industry because they can't make a lot of money at it," Gilmore says. "We saw fees go down by a third to half" since the AMCs took over.
Borrowers and banks have sued appraisers over the new valuations, which are often lower than expected because distressed properties serve as the only comparables in certain markets.
Such litigation fears make the appraisal business even less appealing, Gilmore says. "Appraisers have their neck stuck out on a lot of these things," he says.
Dodd-Frank amplified the Appraisal Subcommittee's role in monitoring appraisers, while also increasing registration fees in the industry.
New regulations requiring more independence from appraisers have forced many banks to build in-house appraisal groups that are separate from loan origination. Bankers have seen higher costs from expanding these departments just to keep up with the need for re-appraisals. Many loans that once needed just an evaluation now require a full-blown appraisal when there is even a slight change in a loan's terms or overall market valuations.
"Banks can't get a new deal done because we're all out validating old values" on existing loans, says Barry Harvey, the chief credit officer at Trustmark (TRMK) in Jackson, Miss. "What we've found is what a production person used to do in one day, it now takes us seven days."
Trustmark recently added three employees to its in-house appraisal team; the company may need to add resources to reduce turnaround times.
U.S. Bancorp (USB) in Minneapolis also revamped its home-appraisal process in light of Dodd-Frank. The company's in-house unit is overseen by Todd Loudenslager, a senior risk officer.
"This is part of an effort to establish a higher standard of compliance" and improve "our ability to analyze, understand and measure the risk associated with appraisals," Loudenslager said in an interview with American Banker earlier this month.
Bankers agreed that some of the regulation was warranted in light of fraudulent activity, particularly in dealing with residential markets.
"We have a better analysis," Harvey says, adding that a commercial appraisal costs $2,000 to $5,000 nowadays. "But it does come at a price."