Readers will recall that the so-called “great recession” of 2008 occurred when the United States housing bubble burst. Home prices imploded, homeowners began to abandon their mortgages, and the value of mortgage-backed securities held by investment banks plummeted. This happened, in part, due to unmitigated risk in the home appraisal process. Lenders have since implemented resilient risk-management processes and yet this does not mean home appraisals are without liability. What follows are the five principle risks lenders seek to mitigate.
Five Home Appraisal Risks to Be Aware Of:
1. Appraiser-Associated Risk
Lenders must use a certified and licensed appraiser. Regulators Fannie Mae and Freddie Mac offer certain exceptions, but these are rare. In general, for an appraisal report to pass muster, it must be prepared by a credentialed and credible appraiser. You can check the credentials of a real estate appraiser through your state’s responsible agency. Basic information about an appraiser’s license status is usually available for free online.
2. Market Risk
The real estate market is a shifting and volatile entity. Lenders thus take pains to fully assess market conditions to ensure they are able to recuperate value from any properties they may be forced to foreclose.
3. Data-Related Risk
Related to the above is the risk of rapid changes in key data used to establish the value of a home. This is a serious concern in both a rapidly rising or falling market as the comps (recent sales of nearby similar properties) used to establish the value of a piece of property may falter inaccuracy by the time a deal is closed.
4. Collateral Risks
Despite the security provided by a home appraisal, no loan is free of risk. To further mitigate liabilities, lenders seek to identify additional collateral factors that may jeopardize their investment. These include, for instance, nearby infrastructure that could impact a home’s value such as transportation hubs or industrial development as well as issues related to the way a home is used.
5. Discriminatory Risks
Since 2019, the U.S. Department of Housing and Urban Development’s Office of Fair Housing and Equal Opportunity has received a tenfold increase in reports of racial discrimination in the home appraisal process. This disproportionately impacts buyers but lenders also have reason to be concerned about the impact of racial discrimination on home valuation. An under- or over-valued home, after all, disrupts the security of a loan issued for the home’s purchase.
Lenders learned many hard lessons in the aftermath of the 2008 housing market collapse. Processes were put in place to manage the risks described above and yet many of these same concerns are bubbling back up as the Covid-19 pandemic wreaks new havoc on the real estate market.
Whether you are a mortgage lender or home buyer, Appraisals Unlimited can help you better understand how to protect yourself from inherent dangers in the home appraisal process. For more on this, do not hesitate to contact us either by calling 781-449-7600 or emailing us at office@appraisals-unlimited.com.
If you have an immediate need for a commercial or residential real estate appraisal, fill out the brief form below or order an appraisal online. We are the most trusted appraisal company in New England and New Jersey, performing more than 9,000 appraisals every year!
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