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Interior Inspections: Tough Choices for Appraisers
By Isaac Peck, Editor
It’s ironic, isn’t it? And maybe a bit reassuring for appraisers that lenders continue to insist on interior inspections, even during a pandemic. But it’s left appraisers with some hard choices.
Over the past year or so, appraisers have protested loudly at the prospect of having non-appraisers responsible for physical inspections- a la the new bifurcated model. Now, appraisers want to stay home and complete desktop appraisals for reasons of safety for themselves and their families- and a new battle is emerging.
Since the reality of COVID-19’s rapid spread through American communities began to take hold in late February, appraisers across the country have protested the risks involved in continuing to perform interior appraisal inspections.
Performing an appraisal inspection not only places appraisers at risk but also the homeowners and occupants whose houses they are going in and out of, day in and day out.
FHFA directed Fannie Mae and Freddie Mac (the GSEs) to allow for alternative appraisal flexibilities, to reduce the need for interior inspections, and with both GSEs adopting temporary guidelines that allow for exterior-only and desktop appraisals in a variety of scenarios, many within the industry had hoped for some relief on this front.
Unfortunately, the reality of the situation is much more complicated.
Even though the GSEs have issued temporary alternative guidelines that allow for exterior-only and desktop appraisals “when an interior inspection is not feasible because of COVID-19 concerns,” it is still up to lenders to decide whether to pursue a traditional 1004 appraisal or to accept a desktop or exterior-only report.
Initial reports indicate that some lenders are continuing to prefer full 1004 appraisals, including the interior inspection. Thomas Peevler, a Certified General appraiser in Prescott, Ariz. with more than 33 years of appraisal experience, says that since the GSEs issued their temporary guidance on Monday (March 23), he has continued to receive from six to eight traditional interior-inspection 1004 orders every day from his clients (as of Thursday March 26). “In the last few days I have received 15-20 orders from my AMC clients and I have turned down every single one of them. Some of my clients are a little unhappy with me for not accepting the new assignments, but none of the orders offered have been Desktops or exterior only assignments,” says Peevler.
Not understanding why orders are still being placed for an interior-inspection 1004 appraisals, Peevler says he called two of his AMC clients and was told that it is basically a business decision for the lender. “The lender is potentially taking on more risk if they accept less than a full appraisal. If the LTV is 80% or lower, I see no legitimate reason why lenders should object to the exterior-only product, especially if the lender already has a loan on the property and the purpose for the appraisal is a refinance,” Peevler argues.
One of Peevler’s AMC clients told him that they have more than 350 other appraisers that are also refusing to do interior inspections, at least for the short-term, but the lenders are still trying to get full appraisals. This may be because while Fannie and Freddie are now allowing for desktop and exterior-only reports, the preferred method remains the traditional interior-inspection 1004 appraisal, if lenders can find appraisers willing to do them and the homeowners are willing to allow the appraiser into their home.
Bruce Ford, a veteran appraiser in Northern California, says he is also still getting interior-inspection orders as of Friday (March 27). However, Ford says that today (March 30), he just accepted his first exterior-only assignment on a conventionally financed purchase. “I would encourage all appraisers to follow State and National guidelines on all safety precautions when visiting any property,” says Ford.
In a comment left on OREP/Working RE’s Coronavirus (COVID-19) Appraiser’s Discussion and Resource Page (March 20), appraiser Richard Hurtig expresses what many are likely feeling when faced with the choice of doing interior-inspections or being unable to bring in an income to support their families: “Like everyone here I have been put in the impossible position of having to choose between the health and safety of myself and my family and maintaining my livelihood. It is absolutely insane that we are being asked to perform interior inspections in the middle of a worldwide pandemic. I can’t afford not to work so I am taking every precaution I can: pre-inspection screening of homeowners, mask, gloves, and sanitizer. I don’t even enter my house with the clothes I was wearing in the field, changing in the garage, washing them immediately and showering as soon as I get back from field. Any one of us can be exposed in one property and then spread the virus to every other home we go to appraise which could literally kill someone, not to mention ourselves or someone in our family.”
Deciding Not to Inspect
Peevler says he made his decision to forgo interior inspections on March 18 after the first few cases of Coronavirus in his area started to become public. But what got him thinking about it was a call with a borrower. “I had a conversation about COVID-19 with an older woman who was trying to refinance her home. She told me that she didn’t know me, and that she was older and also has a history of respiratory issues. It really got me thinking, and I told her that I’m 73 and also have a history of respiratory issues, and I don’t know that I’d be comfortable going into her house or anybody else’s for that matter,” says Peevler.
Since then, Peevler has declined all orders that include an interior inspection, which has been every order that has come his way to-date. Peevler says he still has the woman’s file on his desk and he told her that he would wait to hear from the lender to see if they would allow an exterior-only valuation. So far, he says the lender hasn’t contacted him, suggesting that they may prefer to forgo the business instead of accepting less than a full appraisal.
Peevler says he’s not surprised. “I’ve been at this a long time. In my experience, lenders aren’t willing to take much risk,” says Peevler.
In terms of how he plans to charge for exterior-only assignments if any do come his way, Peevler reports that he doesn’t plan to deeply discount his regular fees. “As an example, let’s say that I do one appraisal per day and my fee is $500 for a full interior-inspection appraisal. For an exterior-only assignment, I’m still doing all the work, setting up my file, doing my research, going by the subject, the amount of driving I’m doing, it’s all the same. It takes me an average of 30 minutes to do an interior inspection. So why would I accept a 2055 assignment for $300? The assignment still takes a full day. So if I discount my fees, I might lose $200 a day for every exterior assignment performed,” says Peevler.
When Will Lenders Change Direction?
With the situation rapidly developing, it may be a matter of time before lenders change their policies and begin ordering the lesser appraisals. However, this is likely to vary widely across the country depending on how many appraisers are willing to do interior inspections, the severity of the Coronavirus outbreak in a given locality, state laws, and even the willingness of the homeowners to allow an appraiser on to the property.
Woody Fincham, President of Accurity Fincham and Associates, Inc. in Charlottesville, VA confirmed on Friday (March 27) that his firm is also seeing mostly traditional interior-inspection 1004 orders, and is still performing them with caution. Fincham reports that out of the last 50 appraisal orders his firm has accepted, three of the homeowners have refused to allow the appraiser interior access to the property. “We are still doing interior-inspections and the majority of our mortgage clients are still ordering the traditional interior-inspection 1004 appraisal. I suspect that lenders are not excited about taking on extra risk by forgoing the interior-inspection and don’t appear to be defaulting to desktop or exterior-only products, at least not yet,” says Fincham.
However, it does appear that some lenders are beginning to change their policies, albeit slowly. A practicing appraiser recently forwarded to Working RE an email from Valuation Link, an AMC, that was sent to its appraiser panel, which reads: “As many of you are aware Fannie and Freddie have allowed the use of Desktops to be utilized on purchase assignments and exteriors on some refi’s. Quicken Loans is beginning to greenlight this approach on some of their purchases. This is not across the board and can only be done if you are engaged in completing the desktop.”
Quicken Loans is the nation’s largest home mortgage lender, so a change in policy from Quicken, even if only partial, may prompt other lenders to follow suit.
VA, HUD/FHA, USDA Follow Suit
Fannie Mae and Freddie Mac issued guidelines on March 23 that allow flexibility in waiving interior appraisal inspections in a number of cases, then on Friday (March 27) the Department of Veteran Affairs (VA), the Department of Housing and Urban Development (HUD/FHA), and the US Department of Agriculture all issued similar guidelines. While each has its own unique guidelines and requirements, the result is an allowance of desktop and exterior-only appraisal reports in lieu of interior inspection appraisals in a very broad array of circumstances. (To read the VA’s new policy, click here, for HUD/FHA’s latest guidelines, click here, for USDA’s latest guidelines, click here.)
Echoing the guidelines issued by Fannie and Freddie, HUD/FHA and the USDA leave the question unanswered of whether the lender can (or should) order an interior-inspection appraisal, indicating that they will accept desktop and exterior-only appraisals- “when an appraiser is unable to complete an interior inspection of an existing dwelling due to concerns associated with the COVID-19 pandemic.”
However, the VA took its guidelines a step further, essentially leaving the decision to conduct an interior-inspection up to the appraiser, writing that “Lenders may not direct the appraiser to conduct an interior inspection.”
Appraisals are Essential Services?
Complicating matters further on the question of interior-inspection appraisals are stay-at-home orders in states where they are in effect, which have exempted appraisal services or declared them “Essential Services.” Bill Garber, Director of Government and External Relations at the Appraisal Institute, shared this State by State Report that outlines how appraisal services are classified for most states that have issued State-at-Home orders as of March 26th.
The majority of states listed with Stay-at-Home Orders provide an exemption for appraisal services. Several states, California included, cite Homeland Security/Cybersecurity and Infrastructure Security Agency’s (CISA) list of 16 Critical Infrastructure Sectors (click here for a full list). Financial Services is listed as one of the Critical Sectors, and while there was initially some confusion about whether appraisal services performed for banks are exempted under the Financial Services exemption, on March 24, a statement issued by Steven Mnuchin, U.S. Secretary of the Treasury, clarifies that “Essential workers also include key third-party providers who deliver core services.”
Garber says that the bank regulatory agencies have affirmed Mnuchin’s guidance. “Those agencies have always included appraisers in their third-party classifications, so while that statement is not explicit, it helps and represents the most definitive statement yet,” says Garber.
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Click here to read the full release: Valuation Practices during COVID-19
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About the Author
Isaac Peck is the Editor of Working RE magazine and the Vice President of Marketing and Operations at OREP.org, a leading provider of E&O insurance for appraisers, inspectors and other real estate professionals in 50 states. He received his master’s degree in accounting at San Diego State University. He can be contacted at firstname.lastname@example.org or (888) 347-5273.
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by Philip Beck
I agree with Peevler.-
by GERARD C RECORD
I have also refused interiors in the New York area for the last two weeks. Any competent appraiser can determine, to a great degree, their ability to achieve credible results with a 2055, especially if there are interior photos available. Within markets where there is not sufficient data, I have so indicated. At the same time I have offered to measure the GLA, take all exterior photos and report on the interior based on the borrower’s input if I find it credible. Personally, i do not take the necessary certifications lightly. If anything, I’ve found less chance of undue influence under these conditions.-