How to value a property in the time of Covid-19
New valuation models and appraisal methods are gaining ground - but not everyone's sold
These days, Quinn Rawh drives from property to property wearing a mask and gloves and makes sure to have documentation that explains his work is deemed essential, just in case he gets pulled over.
When the appraiser, who mainly works in Queens and Nassau counties, arrives at a house, residents are often still there. They switch on all the lights and open doors so he can walk through without touching anything.
Apart from that, not much has changed in his day-to-day work, despite being in the thick of a global pandemic that has confined millions to their homes.
“It’s the same pace, to be honest with you,” said Rawh.
That’s exactly what government officials are hoping to hear.
As unemployment soars and business activity grinds to a near standstill, government officials and the real estate industry maintain that real estate deals should still be happening.
Owners looking to take out a line of credit against a property or buyers and sellers still in the market need to be able to close on loans to keep mortgage markets in motion. So, regulators and federal agencies have relaxed rules to help them do so, even as JPMorgan Chase tightened its home lending standards and halted home equity line of credit applications.
Government-sponsored enterprises Fannie Mae and Freddie Mac were the first to suspend requirements regarding appraisals by issuing guidance allowing exterior-only and desktop appraisals to replace interior appraisals for certain home loans.
By mid-April, the agencies, which back most residential mortgages, expanded the range of home loans that could be closed with exterior appraisals or even desktop appraisals, which don’t require an appraiser to make in-person visits. In the case of Fannie, that even includes certain cash-out refinances — a move considered unimaginable by some credit rating agencies only days earlier. Bank regulators went even further, allowing certain commercial and residential loans to close without an appraisal.
Other federal agencies, including the Federal Housing Finance Agency and the U.S. Department of Veteran Affairs, have since followed Fannie and Freddie’s lead and issued similar guidance. Lenders, many of which will likely sell loans to the government-backed agencies, are taking note and changing their appraisals orders.
John Moffatt, director of mortgage operations at Better.com, is one of them.
“We originate to the standard where we have to sell loans,” he said.
Though some banks — among them First Republic Bank and Citibank — had already modified appraisal methods, most agree that Fannie and Freddie’s guidance informed the majority of lenders.
Since the guidance was issued, Clear Capital, an appraisal management company, has reported that desktop appraisals now account for half of its appraisal business.
The sea change represents an opportunity to companies that develop valuation technology, such as automated valuation models that can provide property values to lenders in some cases without an appraisal or other inspection.
House Canary, a firm that provides automated property valuations for institutional investors, is one of them. Jeremy Sicklick, the firm’s CEO and co-founder, claims the government-sponsored enterprises’ temporary guidance has driven major lenders to inquire about his firm’s valuation methods.
Clear Capital has also developed a digital platform to facilitate desktop appraisals by standardizing data collection from a property and feeding it to appraisers who then value the real estate without visiting it.
Kenon Chen, an executive at the firm, called Fannie and Freddie’s guidance “validation” of the company’s approach. He said demand has surged over the past few weeks, though that is likely because the company decided to make it available for free.
Chen said the free version is an effort to ensure loans originated via desktop or exterior-only appraisals don’t become problematic for lenders.
He sees the emergency measures as a chance to demonstrate that appraisers can give accurate valuations without going into a home. But if foreclosure or delinquency rates spike for loans originated under the relaxed rules, it will become a cautionary tale.
Lenders and credit rating agencies will be watching closely.
Roelof Slump, who oversees residential mortgage-backed securities at Fitch Ratings, said the credit rating agency had asked for home loans originated under the guidance to be flagged so “we can query them over time [to see] if there’s anything unusual about the performance.”
He expects Fitch will not assign higher credit enhancement, which would indicate higher risk, to the loans.
Slump’s counterpart at DBRS Morningstar, Sagar Kongettira, confirmed it was also requesting loans with modified appraisals to be flagged. He said that his agency would validate each flagged appraisal and may assign higher credit enhancement if the valuations aren’t supported.
Some question how property value could be determined by any method in a time of profound economic distress, particularly for commercial or multifamily properties that rely on rent.
“If a house is burning, the fire department is still putting out the fire. You’re not going through the ashes to determine what the value of the property is,” said Jonathan Adelsberg, a partner at Herrick who handles commercial deals. He said deals that do continue will likely run into problems.
“It’s going to be a profound amount of work cleaning it up,” he predicted. “There will be people in trouble who will be losing their properties when the dust settles.”
Doug Mitro, who heads valuation operations for Radian Group, which runs an appraisal management company, said he is seeing more and more appraisers put disclaimers related to Covid-19 on their reports.
Those disclaimers are necessary “given that the economics of the area may change and they may change rapidly,” he said.
Mike Flood, who leads the Mortgage Bankers Association’s unit on commercial and multifamily policy, disagreed.
“Capitalism works for a reason,” he said. “There’s a lot more that goes into whether to close a loan other than a property inspection. Where there’s a good deal to be found, they’ll close a loan.”
Earlier this week, banks announced an extraordinary new rule: Certain loans can close without an appraisal. Regulated institutions will have up to 120 days after the loan is closed to conduct an appraisal or evaluation.
It was quickly met with criticism. Douglas Krieser, president of the American Society of Appraisers, said the rule ignores technological advances and the relaxed guidance on appraisals conducted without entering a property. He said it could incentivize lenders to push appraisers to inflate valuations, a practice common in the lead-up to the 2008 crash.
“The pressure appraisers will likely receive to conform may be significant, especially if the economy continues to plummet,” he said in a statement. “While that kind of pressure is illegal, the ways it can be applied aren’t always clear-cut.”
Though the rule only applies to loans kept on banks’ books, industry experts expect it will be mirrored by other entities. Within days, the National Credit Union Administration, an independent federal agency, approved the same rule for its members.
Rawh, the appraiser, is hoping more of his business will become exterior-only or desktop appraisals even though he continues to perform interior appraisals.
“I’m a little uncomfortable going to people’s houses,” he admitted. “I would never have called them and said, ‘Hey, I want to go out and work.’”
Write to Erin Hudson at firstname.lastname@example.org