Some big banks are doing away with appraisals......HUH?!?

By
Industry Observer with No longer practicing real estate as of 2008.

I was reading the paper online this morning, like I do everyday and came across an article where the writer spoke to an appraiser and was asking questions about what they do.  One of the questions caught my eye right away....

Q: You mentioned that some big banks are doing away with appraisals. How do you think the role of appraisers will evolve in coming years?

A:
A direct federally regulated lender has a lot of leeway if a loan is under $250,000. The bank can decide not to get an appraisal if it wants. A couple of years ago one of the largest banks in the country had a meeting with its local approved appraisers. The bank said it had made a business decision to forgo appraisals in about 50 percent of its loans.

Depending on other factors such as creditworthiness, tax assessments and even an AVM (automated valuation model -- "computer" appraisal like those on Zillow), it could bypass the appraiser. The reason the bank gave for this decision was it wanted to lower borrower's closing costs to compete better with other lenders. When asked about increased losses due to not having an appraisal, the answer was that the bank had priced these additional losses into the loan.

I believe that appraisers will still have an important function in helping lenders make proper loan decision in the years to come. In addition, we will still be needed for many other reasons, including the settlement of estates, the transfer of assets into a trust, division of assets for a dissolution of a marriage, relocation appraisals, estimating market value for possible sale, etc., etc.

Ok, am I the only one that thinks the banks are *STUPID* for using comps off Zillow instead of sending a real person out there to look at the home?  How does Zillow or any other AVM know what upgrades these homes have to offer?  Usually they don't.  They only way to get an accurate idea of what the home has to offer, is to actually go look at it.  A lot of the information on Zillow is not even correct, and they want to base comps off of incorrect information?   Good grief!!

The reason the bank gave for this decision was it wanted to lower borrower's closing costs to compete better with other lenders. When asked about increased losses due to not having an appraisal, the answer was that the bank had priced these additional losses into the loan.

So then the buyer is paying for a "possible loss" throughout the entire loan instead of just paying the roughly $350 for an appraisal upfront?  Is the buyer made aware of this?  Is the buyer even given an option?

Anyone know what "large bank" this is that is doing away with their appraisals?  I have never heard of such a thing until now!

What are your thoughts on banks doing away with appraisals?

Comments (21)

South Austin Real Estate Blog
Sky Realty South Austin - Austin, TX
Unbelievable!!!!!..  so by doing bad loans, we are now faced with making bad decisions ? or is this someones way to divert the obvious bad choices?  Professional appraisals are not bad choices, they protect everyones investment.  ZILLOW is so wrong I can't believe a real business is taking it as a professional appraisal.
Dec 17, 2007 12:15 AM
James Gordon
Sibcy Cline Realtors® - Cincinnati, OH
REALTOR, PBD SFR SRS
Becky in my area the lenders that use an automatic appraisal system pull the data from county records not zillow.
Dec 17, 2007 12:16 AM
Ron Parise
LocateHomes.com - Cape Coral, FL

I would bet that one of the reasons some banks are going this way is to avoid mortgage fraud. 

Dec 17, 2007 12:20 AM
Matthew J Blum - (retired from the business)
Palm Beach Gardens, FL
Becky, The way some banks do away with it is all based on Loan-To-Value.  I have one right now that has a 30%LTV...The lender looks at recent sales in the area and figure safely that is will be ok.  If the person is doing higher LTV's  an appraisel will always be required.
Dec 17, 2007 12:25 AM
Becky Troutt
No longer practicing real estate as of 2008. - Bradenton, FL
James, our County records are not always correct either.  Usually something is wrong, whether it be the number of bedrooms, bathrooms or square footage.
Dec 17, 2007 12:33 AM
Becky Troutt
No longer practicing real estate as of 2008. - Bradenton, FL
Matt, thanks for some clarification.  However, doesn't the buyer end up paying more throughout the life of the loan if the banks have "priced these additional losses into the loan" as stated by the bank above?  How many thousands of dollars extra will they pay for what would have been a $350 appraisal?
Dec 17, 2007 12:58 AM
Matthew J Blum - (retired from the business)
Palm Beach Gardens, FL
Becky, In the case of my loan it does not effect the rate. However, It really would depend on the program that the client is using. I always tell me people their is not free lunch. When people offer you no closing cost or they pay the closing cost... the rate will be higher. 
Dec 17, 2007 01:12 AM
Jon Sigler
Coldwell Banker Realty - South Windsor, CT
South Windsor Homes for Sale 860-306-8029

This is not anything new.  For example Ohio Savings/Amtrust has offered if the automated underwritting allows for a property inspection waiver.  No appraisal.  It saves the borrower money, and the deal time.  No, you can't get this waiver on deals where it is 100% financing, and you won't get it on properties which are to far from the median price in the area, and only on conforming loans.  The deals the automated system says yes to a property inspection waiver are pretty solid deals, often 20% down, very strong credit, and other assets.  No 580 W2 stated, 100% no reserves buying a house that is way over priced.  Loans that have property inspection waivers do not have any higher rate or cost as a result, in fact as a result of no appraisal the customer saves money.

Zillow is well know for having information that is not accurate and not what is used in these AVM's.  Lenders have started using AVM's for some time, and are using them more and more.  Almost all 2nd. mortgages at major lenders are based on AVM's.  They use more accurate information, and are based on a certainty rating, if that is not high enough then a real appraisal is ordered.  Large acreage, condo, multi family, rural area all things AVM's don't work for.  The cookie cutter cape in a decently built up suburban area, an AVM is a big cost and time saver and will save the borrower money. 

When it is an option I talk with the borrower about the fact that no traditional appraisal is required on their loan.  They can chose to go with the AVM and save money, or order a traditional appraisal and have the peace of mind that a human has checked the value not just a computer.  Most opt for no appraisal believe it or not.

Jon Sigler, HomePro Financial, LLC - 860-656-6018 

Dec 17, 2007 01:35 AM
Richard Sweum
1st Security Bank - Everett, WA
PIW's (property inspection waivers) and exterior only appraisals are useless.  If I am a buyer, I want to make sure that the property I'm buying is worth what I'm paying for it.  I would hope that the bank lending the money would want the same assurance. 
Dec 17, 2007 01:37 AM
Richard C. Decker,P.A.-Realtor Broward County FL
RE/MAX Partners - Fort Lauderdale, FL
Maybe this is one of the 'bad' ideas that floated in the boom times, and hopefully more reason will be applied in the future models and a return to the 'good' things in previous lending models.
Dec 17, 2007 02:47 AM
Robert Elfand
Oviedo, FL
RAA

Becky -- AVM's have been around for years with both sides arguing the pros & cons.  As an appraiser, while researching MLS and public records, I see many transactions that I find questionable for one reson or another.  An AVM (statistical model) can not discern why the property may have sold higher or lower than the median neighborhood price which may skew an automated valuation.  The AVM's are usually insured while the lenders also build in a tolerance factor that should cover minimal deviations and this was a great way to cut costs.  As we currently see, AVM's are having HUGE issues in today's market because markets shift so quickly. 

 

Dec 17, 2007 03:09 AM
Mana Tulberg
805 County Real Estate - Camarillo, CA
Real Estate Agent - Camarillo CA
Becky, All I have to say is WOW. Is this for real? As a matter of fact my next door neighbor was asking me about this issue yesterday. How would an appraiser sitting behind his computer would know about the awesome view she enjoys everyday compare to her next door neighbor who has almost no view?!!!!!
Dec 17, 2007 03:22 AM
Esko Kiuru
Bethesda, MD

Becky,

First off it sounds a little far-fetched, but it could be the result of that lender finding appraisals unreliable enough to forgo them. It sure does reduce the closing costs by about $300-$400, but the increased interest rate adds much more to the total cost of the loan. And more profit to the bank. Let's wait and see if the practice becomes more common.

Dec 17, 2007 09:47 AM
Becky Troutt
No longer practicing real estate as of 2008. - Bradenton, FL

Kinda interesting that several of you guys have mentioned this is not anything new, yet many of us have never heard of banks opting not to do appraisals.

Dec 17, 2007 11:11 PM
Sherri Sherpy
iLoan
NMLS #287770
I agree...it's not new.  I just hope it doesn't add to our housing and valuation problems that already exist in so many markets.
Dec 18, 2007 02:05 AM
Sara Goodwin
Ashcroft & Associates - Portland, OR
Portland, Oregon Appraiser

Hi Becky - Great post...

In regards to your entry:

"Kinda interesting that several of you guys have mentioned this is not anything new, yet many of us have never heard of banks opting not to do appraisals. "

Being an appraiser as well as working for a big bank as a loan processor in the past, I will say that both sides are correct.  As a processor, we would 'fast track' customers with higher credit scores, lower loan amounts or more money the bank and just use AVMs rather than sending an appraiser out... however, if those same customer's went through a broker to get to their bank, an appraisal would be mandatory - Perhaps it was to jack up the closing costs through brokers thus discouraging consumers from going thru their competitors... maybe it was simply because they could... I'm not sure -

But it seems to me in this day and age, it would certainly be prudent for banks to use appraiser's one hundred percent of the time just to settle the minds of shareholders if nothing else.

PS - I intend on linking this post to the appraisers group later today with your ok - thanks

Feb 08, 2008 09:13 AM
Jay Beckingham
Christensen Financial Mortgage - Port St Lucie, FL
Seniors ROCK!

no, you're not stupid. i have little to no use whatsoever for zillow and i've been involved in mortgage lending for 30 years.

the appraiser is my eyes. it's about value and many other charactoristics.

all real estate is local, and today more than ever i think both lenders and my clients are well served by using a local pro for the appraisal.

Feb 08, 2008 10:40 AM
Anonymous
Jason

A big benefit to the banks to do away with the appraisers is they can use a low ball AVM report to lower the HELOC's of consumers, and their exposed risks...This is what happened to me...Three doors down from me a comparable home without the interior updates mine has sold for $750,000 last August...I received a letter from Washington Mutual the other day saying that they were substantially decreasing my credit line because an AVM report concluded the value was $425,000 !!!

T hey said I can get a licensed appraiser to do another appraisal, but I have to use the company they say and I have to pay for it !!!! I don't think I should have to pay for this..They should be required to get a fair valuation to make their case for the decreased credit line...

Apr 03, 2008 08:00 AM
#19
Benjamin Smith
Apex Appraisals & Consulting - Powder Springs, GA
Atlanta Area Appraiser
Appraisers have been fighting this battle for a long time and even though so many throughout the industry agree that having a appraisal is a much safer avenue, banks will continue this practice for as long as it proves to be a money maker for them.
Apr 03, 2008 01:11 PM
Anonymous
Ed Gillespie

Becky, I had a transaction recently where the buyer got an accepted offer on a Fannie Mae owned home for $160k.  The appraisal came in at $115k and now the seller says they'll only accept Homepath financing (no appraisal required) at the agreed price of $160k.  They buyer cancelled the deal, but had he not ordered the appraisal, he may have decided to pay (finance) the $160k.  This is good for Fannie Mae since, without the appraisal, they can accept the highest offer and sell the home for more than the appraised value.  Buyers applying the principle of substitution would realize they could buy another similar home in the vicinity for about $115k not $160k.  However, later on when comps are pulled for another transaction in the neighborhood, records will show this home sold for $160k and not appraised value of $115k. If this practice on Fannie Mae homes becomes widespread, I believe we may see home values in some neighborhoods artificially inflated.

Oct 08, 2009 02:45 PM
#21