Ninth District bankers have expressed frustration in outreach meetings with a perceived inability to find qualified appraisers. In this article, we document some trends in appraiser availability and how bankers can address this challenge.
The number of appraisers has fallen nationally. The Federal Financial Institutions Examination Council (FFIEC) Appraisal Subcommittee’s 2012 Annual Report reports that the number of appraisers has declined nationally by approximately 15 percent since 2007.
According to industry sources, the primary source of the overall decline is the decreased demand for appraisers that occurred during the credit crisis. Specifically, the mortgage crisis resulted in a significant decline in the need for residential appraisals. As a result, many appraisers retired or left the industry. This outflow made it more challenging for firms in need of appraisals—even if they did not have loan growth—to acquire them.
The drop in demand in many areas also has led to changes in the regional availability of appraisers. Some of the remaining appraisers have moved to parts of the country experiencing more loan growth. This shift benefits some areas of the Ninth District. For example, the number of approved appraisers has grown in western North Dakota. Of course, this shift has left other banks with few options.
The Appraisal Institute expects the number of appraisers to further decline by 25 percent to 35 percent over the next 10 years due, in part, to the high cost of entry into the appraisal field (in terms of both time and funds). Higher costs have already led to reduced entry into the position. These costs will likely continue to increase. Prospective appraisers must also meet required fieldwork experience standards to become licensed. Candidates obtain this experience through an apprenticeship or mentoring program with an existing appraiser. In 2015, changes to the formal education and mentoring requirements adopted by the Appraisal Foundation are expected to further decrease the number of new entrants into the appraisal field. Note that the Appraisal Foundation sets the minimum licensing and testing standards for all appraisers to obtain their license or certification. While individual states may add higher standards, Ninth District states have not done so in a significant way.
What can bankers do in the face of reduced appraiser availability, realizing that examiners cannot waive the appraisal requirements? Options include the following:
- Understand which transactions may not require an appraisal and use evaluations in these cases. The appraisal regulation notes three general “exceptions” in which an evaluation may be used:
- The transaction is for less than $250M.
- The transaction is a real estate secured business loan under $1,000M in which repayment is not dependent on the sale or cash flow of the real estate.
- The transaction involves an existing extension of credit.
- Where appropriate, make use of the “abundance of caution” exception to appraisal requirements. Remember, though, that the credit file must document that the use of this exception is appropriate at the time the credit is extended.
- Develop or expand in-house real estate valuation expertise, potentially to include having a certified appraiser on staff if cost effective. Some banks have developed a strong internal real estate valuation policy and program that helps them meet most of their valuation needs.
- Internally discuss and document in board minutes the appraisal barriers your bank is facing and develop a plan to overcome them. Thinking about ways to address the lack of appraiser availability in advance may better prepare management to address the situation in the context of a specific loan.
- Consider whether a group of local banks may benefit from supporting a prospective appraiser through the certification process (perhaps with a commitment from the individual to practice locally for a period of time).
These suggestions will not address all cases where the shortage of appraisers delays the ability to close loans in a timely manner. There may still be situations where a bank is faced with the prospect of deciding to close a loan without first obtaining the mandated appraisal or of losing the loan prospect. Should the bank choose to make the loan prior to obtaining the appraisal, examiners will be required to cite the violation. However, their assessment of a bank’s risk management program related to collateral valuation will consider the extent to which management and the board have identified risks associated with the program and taken steps to mitigate that risk. By demonstrating that management and the board understand and have proactively taken measures to mitigate risks associated with the lack of availability of appraisers, a bank should be able to avoid examiner criticism of the risk management program.
