The tides of the mortgage industry are changing as we head into 2022, and just like the sand under the waves, we can expect the appraisal landscape to shift along with it. Appraisers, like many other service providers, must adapt to market changes to accommodate their clients’ needs. Whether it is providing appraisal services, underwriting services or title services, a mortgage application cannot proceed without their input.
We have reviewed and analyzed recent stakeholder and government data, and we are pleased to deliver the following analysis and predictions for 2022.
It is fairly well-known that the appraisal industry has a supply and demand issue. Freddie Mac recently released trend analysis of appraisal activity for appraisals submitted to the Uniform Collateral Data Portal. This data clearly illustrates the issue:
- Appraisal volume exceeded the high-water mark of 700,000 monthly submissions to the appraisal data warehouse on multiple occasions in 2021. Prior to 2020 it was a rare occurrence for volume to exceed 600,000 per month.
- The number of appraisers completing appraisals for transactions eligible for sale to the GSEs has remained relatively flat.
In addition to the supply and demand issue in 2021, we also saw continued challenges around appraiser throughput, appraisal turn times and appraisal fees. 2021 also introduced change at the policy level, as appraisal waivers began to slow down and the FHFA’s announcement to allow desktop appraisals.
We’ll dig deeper into each of those topics below, but first we’ll explore one of the biggest driving forces on appraisal: market volume.
2022 Outlook for volume
Mortgage rate predictions for 2022 by industry stakeholders show rates for 30-year fixed mortgages to range from 3% to 4%. As of this writing, in 2021, 31 of 45 weeks had mortgage rates below 3%. The last time the 30-year mortgage rate was at or above 3.5% was in March of 2020. Prior to that, we have to go back to October 2016 to see rates at 3.5% or below.
Meanwhile, the Mortgage Bankers Association (MBA) is forecasting purchase mortgage originations to increase 9% in 2022 and refinance originations to decrease by 62%. Appraisal demand from generators (i.e., HELOC and private clients) is expected to remain stable to slightly declining.
How does this impact appraisal volume? Mathematically, the MBA predictions result in a loss in demand between 30% to 35% for appraisals associated with mortgage originations. As application volume is anticipated to shift from predominantly refinance activity to purchase activity, we anticipate the demand for appraisals in the mortgage sector to decline 15% to 20% with other demand generators pointing toward stability or slightly declining.
In a recent Fitch Ratings analysis on nonbank mortgage origination outlook, analysts stated that “rising rates fueled by the tapering of Fed asset purchases and home price appreciation from the growing disparity between housing supply and burgeoning demand are also expected to contribute to lower volumes and margins into 2022.”
It is worth addressing the overall appraiser supply here as well. Analysis of appraiser credentials in the U.S. shows continued decline. According to 2021 data from the Appraisal Institute, the current number of state-issued appraiser credentials is 93,309, which is more than 3,000 fewer credentials cited in a 2019 Appraisal Institute study, which put the number of credentials at 96,856 in 2016. Attrition and supply continue to be a market concern.
Efforts to date to bolster the ranks of credentialed appraisers has resulted in reducing the rate of decline, but decline continues nonetheless. Perhaps diversity, equity and inclusion efforts by industry stakeholders and the Appraisal Foundation’s PAREA efforts may bear fruit in the future; however, significant impacts to increase the ranks of qualified appraisers are not anticipated in 2022.
According to our analysis of data released by both Freddie Mac and Fannie Mae, the count of active appraisers based on mortgage activity has been mostly flat since 2018, with minor fluctuations. The rise in sales and refinancing activity in 2021 resulted in increased appraiser productivity, ranging between 50% to 100% per appraiser.
How does this convert on a per appraiser basis? With 40,000 appraisers having their appraisal work submitted to the GSE appraisal portal, the median throughput level pre-2020 was approximately 10 appraisals per month, or 2.5 per week. From 2020 through 2021, that throughput level increased to 15 to 20 appraisals per month, or 3.75 to 5 appraisals per week.
And while appraisers have shown they have adjusted processes to produce at a higher level of output on a weekly basis, no significant process changes are anticipated to contribute to be a drag on productivity.
Unfortunately, a centralized source measuring market-level appraisal turn times does not exist. Data is often limited to anecdotal experience by individual lenders, users of appraisal services and reporting by a handful of appraisal management companies. In general terms, prior to 2021, it was common for appraisals to have an average turn time between 9 and 12 days. Based on analysis of three national AMC quoted turn times on their websites, in 2021, the turn time range expanded to 8 to 21 days. Those states having the fewest number of appraisers often show the longest cycles. These numbers are in line with what we see lenders experiencing using the Reggora platform.
While pipeline volume plays a large part in the equation, the geography and the supply of appraisers in particular markets are contributing factors and the range of turn times can vary significantly across localities within the marketplace.
The National Association of Realtors projects 2022 home sales activity to be slightly lower than 2021. As a result, we should expect to see overall appraisal turn times improve. To keep this in perspective, a 20% decline in demand when production is 3.75 appraisals per week results in a decline of one appraisal per week per appraiser. For locations where the supply of appraisers is abundant and the appraisal process itself can be completed in a standardized amount of time, we anticipate a return to pre-2021 levels with turn times of 8 to 10 days.
In locations where there are limitations on the supply of appraisers, or the amount of time it takes to complete an appraisal is extended due to lengthy drive times and data-challenged locations, only modest gains are anticipated and extended turn times will continue to be the norm.
Of course, fluctuations will occur due to seasonality, as the appraiser supply is anticipated to remain fixed and demand is variable. If there is heightened risk of either supply side or demand side variations, then the above predictions would need to be revised.
Due to the supply and demand crunch, appraisal fee escalations and upward pressure on fees has received much attention in 2021. As we expect market volume to drop by at least 20% to 30% moving into 2022, it is anticipated that some relief of fee pressure will occur; however, complex submarkets, complex properties and appraisals in locations deemed difficult, where the appraiser is required to expend more time on an assignment, will continue to see fee pressure. The introduction of desktop and potentially of alternative products, should also assist in helping fees to come down from their 2021 levels, but they will most likely stay elevated compared to historic norms.
GSE Appraisal Policy
Both Fannie Mae and Freddie Mac have underwriting programs that allow lenders to waive the requirements for an appraisal in certain circumstances. No or low cash-out refinance applications receive the largest share of waivers. From June 2020 through May 2021 the percentage of appraisal waivers increased, and activity averaged approximately 385,000 per month. However, when looking at waiver activity measured from January 2021 through June 2021, the data show a decline of approximately 11.5%. We expect that number to continue to decline as refinance activity slows down.
In addition to appraisal waivers, desktop appraisals have also been a topic of conversation among the GSEs. In October, the FHFA announced that desktop appraisals, similar to what was allowable during the COVID-19 appraisal flexibilities, will be allowed as we move into 2022. We also expect desktop appraisals to replace some of the loans that were previously qualifying for appraisal waivers. Finally, we also see a possibility for the introduction of an even broader set of alternative appraisal products that incorporate new technology and processes to further address issues with turn times, racial bias and supply constraints.
The topic of racial bias in real estate, and in appraisal, has been a hot one. 2021 brought forward the Property Appraisal and Valuation Equity (PAVE) Interagency Task Force to address inequity in home appraisals. PAVE is required to bring forward a final action report in 2022. And while it is unknown what the final recommendations will be, PAVE’s focus is multi-pronged, and recommendations are anticipated revolving around government oversight, industry practice, consumer and practitioner education and making available high-quality data to combat racial inequality.
There’s a lot of change happening across the industry, and the foundation for appraisal is more like sand than stone. As we head into 2022, we can expect some balancing and displacement to occur. While demand for appraisal services is anticipated to drop due to less refinance activity, we will also see increased demand stemming from fewer appraisal waivers and more desktop appraisal products. And while turn times and fee pressures are anticipated to retreat back to pre-2020 levels, there remain supply pressures, particularly in geographically challenged markets. There will also be a focus on responding to the anticipated PAVE task force recommendations, whether they be on a regulatory front or through establishing new industry practice.
One thing is for certain: As change happens in 2022, appraisers will need to rely on their skillset to measure, analyze and navigate that change.