A look into the difficulties of being a trainee in the current appraisal environment
By Andrew Belt
Today's appraisal industry continues to show signs of weakening primarily due to an aging work force, industry fragmentation, and extremely high barriers to entry. One recently published example stated that the number of real estate appraisers in Massachusetts fell 39% from 2007 to 2012 while appraisal trainees fell 81%. Industry experts and trade groups estimate that the average appraiser is somewhere between 52 and 55 years of age. In addition, the average size of an "appraisal company" is estimated to be 2.2 people, which limits the financial and human resources necessary to develop an organization. And as a result of the housing Armageddon, real estate appraisal boards and the Appraiser Qualifications Board implemented the most stringent appraiser requirements in history and risk further weakening an already fragile industry.
Why is it so difficult to become an appraiser?
Obtaining an appraisal license consists of several parts: 150-200 hours of appraisal education experience, 2000-2500 hours of mentored field experience, passage of an 8 hour proctored exam, and a state board review of four appraisal reports. Now let's break each of these down and discuss the white elephant in the room, money.
To be a certified appraiser (an FHA roster requirement); a person needs 200 hours of college credit or an Associate's Degree. These costs vary dramatically but for the sake of using averages, let's assume $7,500 per year for in-state tuition (not including room/board). The cost of appraisal education varies by provider; however, estimates are $2,500 for online and $3,500 for classroom. Total education cost will run in the ballpark of $20,000.
The field experience portion requires training under a Certified Appraisal Mentor who must have been licensed or certified for two years prior to beginning the field experience. The licensed classification does not qualify as a mentor and therefore eliminates 12,779 possibilities based on asc.gov stats (actually less since some appraisers are licensed in multiple states). The rumor is a person wanting to be an appraisal trainee can call 1,000 possible mentors and get 1,000, "No Thank You" responses (assuming all appraisers are polite). The reasons behind this are pretty simple to understand: mentors don't want to train their competition because all appraisers eventually open their own business; no one offers compensation to a mentor for this valuable training, which requires significant time (see graph below); the supervisor doesn't want to be subjected to possible career ending disciplinary action from the state board review; and the supervisor can't afford to pay the trainee. How can a trainee work for two more years and not make any money?
This is starting to sound painful so let's recap: after two years of college, five weeks of appraisal classes, and two years of field training now it's time to take the eight-hour exam. Assuming you pass the first time, no easy task, the state board then asks you to submit four appraisals to undergo a thorough appraisal review. This timeline varies by state; however, one could expect to wait three to six months for the reviews to be completed. In the event the review appraiser's opinion is that one of the appraisals has a USPAP violation, the mentor appraiser can be officially disciplined by the board, essentially ending his/her career. After all, how many lenders are willing to work with an appraiser who has a USPAP disciplinary action?The estimated time from beginning to end to receive the physical license is approximately five years, barring a variety of potential delays. Lack of compensation for both the appraisal trainee and the mentor combined with extensive cost and time requirements explains why the industry is aging and the number of appraisers is shrinking so quickly.
What's the solution?
An appraisal training program is being proposed with the objective of overseeing the entire licensing process which includes selecting the educational provider, establishing structured timelines, meeting measurable objectives, and selecting the required field experience mentor based on geographical area. To create a win-win situation under the proposal, the mentor benefits by receiving a steady stream of work from industry leading clients, compensation of $25 for each appraisal mentor field inspection, and a three year residual income of $10 per appraisal assignment paid to the mentor by the newly licensed appraiser. The appraisal trainee would receive financial assistance in the amount of $2,000 per month. The cost of the appraiser's course work would be paid by the appraiser or a loan would be provided under terms similar to a government student loan program. At the time the appraiser receives his/her official real estate appraisal license, there would be an exclusive employment agreement for a period of three years in which the appraiser would be a W-2 employee and would receive a graduated fee split arrangement.
Andrew has been in the real estate industry for over 9 years and is a proud United States Marine Veteran of the Iraq War. Andrew's career in the mortgage and valuation industry began after his honorable military service ended in 2003. Belt formed the company on the belief that today's financial firms are in great need of valuation service providers that are built upon the same founding values of our military; SERVICE, LOYALTY, HONESTY and INTEGRITY.
About Valued Veterans: As a service disabled veteran owned small business (SDVOSB), we feel an honor and duty to create jobs and opportunities for returning service members of our military. Therefore, we have developed an "appraiser mentorship" program specifically designed to create rewarding careers as professional real estate appraisers. Working with industry leaders who choose to support Valued Veterans, our mutual commitment will provide superior high quality appraisals and create jobs for our richly deserving military veterans. It is my strong opinion that the men and women who so proudly served our country offer the perfect skills necessary to revitalize the real estate appraiser labor pool. A change that offers a military exception to meet the college level course requirements will be helpful to execute this program at a high level. "The Appraisal Foundation Authorized by Congress as the source of Appraisal Standards and Appraisal Qualifications" hopefully would consider this educational exception and pave the way for success.
The Appraisal Buzz takes a look at the June issue of the FHA Watch and we highlight some of the most intriguing articles. To view the whole issue yourself click HERE for a PDF version. In this month's edition Ed Pinto talks about the FHA responsibility for underwater loans and puts a spotlight on the FHA's current insolvency
FHA Is Responsible for 1.5 Million New Underwater Loans
The Federal Reserve estimates that about one-third of the 11.1 million underwater home loans in the United States are FHA-insured. These 3.6 million underwater FHA loans account for nearly half of the FHA's 7.4 million outstanding loans. Since about 72 percent of all outstanding FHA loans date from 2009 or later, a reasonable estimate would be that about 1.5 million of recent FHA borrowers are underwater.
This comes as no surprise since the FHA continues to combine minimal down payments (average of 4 percent) with slowly amortizing thirty-year loan terms. As a result, earned homeowner equity (the combination of down payment and scheduled loan amortization) amounts to less than 10 percent after four years, or about enough to sell a home at the break-even point if home prices stay steady. However, prices have declined nationally about 7 percent since mid-2009, with lower-priced homes declining even more. When combined with borrowers' low FICO scores and high debt-to-income (DTI) ratios, the result is a continuation of the FHA's destructive lending—lending that has resulted in 20–25 percent of recent borrowers facing a 10 percent or greater likelihood of foreclosure.
Spotlight on Insolvency
FHA's Position Worsened in May, with an Estimated Current Net Worth of –$22.11 Billion and a Capital Shortfall of $41–61 Billion
The current estimate for the FHA's net worth is –$22.11 billion, down from –$16.95 (adjusted) billion and –$21.36 (adj.) billion in September 2011 and April 2012, respectively. This is the result of an increase in the number of sixty-days-plus delinquent loans and continued monthly losses in excess of monthly cash flow. The number (852,608) and rate (11.29 percent) of sixty-days-plus delinquents remain substantially elevated from June 2011 levels (749,204 loans and 10.55 percent). The FHA's capital shortfall also increased by about $900 million from April 2012 as a result of growing delinquencies, along with a growing book of risk-in-force. The capital shortfall (adj.) stands at $41 billion (using a 2 percent capital ratio) and $61 billion (using a 4 percent capital ratio).
Since September 30, 2011, FHA Watch's estimate of the FHA's current net worth, based on generally accepted accounting principles (GAAP), has decreased from –$17 billion to –$21 billion. Thus, with two-thirds of FY 2012 over, the FHA has lost $4 billion in net worth. This compares with the FHA's projection of an increase in capital of about $8 billion during FY 2012.
Starting with this issue of FHA Watch, a second difference between the FHA's government accounting principles and private GAAP has been added to the analysis. Under GAAP, upfront premiums charged on loans are earned over a time frame that matches the expiration of the underlying insured loan. The FHA charges substantial upfront premiums (currently 1.75 percent of the loan balance). Since 2008, it has guaranteed over $650 billion in mortgages, the preponderance with thirty-year terms.
Since 2009, the FHA has charged an upfront fee that has ranged from 1 percent to 2.25 percent and has averaged about 1.6 percent.[i] It currently takes this entire upfront fee immediately into income and, as a result, has recognized $10 billion in income since the beginning of 2009. Under GAAP, upfront premiums on thirty-year loan terms would be brought into income over a period of between twelve and sixteen years.
While access to the FHA's records would be needed to do a precise calculation, a reasonable estimate is that, under GAAP, the FHA would have been permitted to recognize only about $2 billion to date, not the full $10 billion in upfront premiums. The $8 billion balance would be accounted for as a liability relating to unearned upfront premiums. This $8 billion accounts for over 25 percent of the assets claimed by the FHA in its 2011 Actuarial Review. As a result, the FHA's net worth has dropped by $8 billion and its capital shortfalls have increased by the same amount, as compared to previous FHA Watch estimates.
For the monthly data tabulation, see table A1 in the appendix. All the months have been updated to take this additional calculation into account.
Since 1989, Mr. Pinto has been a consultant to financial services industry, focusing on credit and valuation policy, housing policy, loan marketing, and product development. He is the author of the paper entitled: "Government Housing Policies in the Lead-up to the Financial Crisis" (2010). He has also written about the shortcomings of appraisal practices in the lead-up to the financial crisis and the steps that need to be taken to re-establish the appraiser's role in mortgage lending. In the late 1980s he served as Fannie Mae's chief credit officer. His research and commentary views are regularly cited by national media including the Wall Street Journal, New York Times, Washington Post, Fox News, CNBC, Nightly Business Report, and Bloomberg. He has appeared as a witness before the House Financial Services and House Oversight and Government Reform committees.
Current List of Closed Banks Updates
The Farmers Bank of Lynchburg
Clayton Bank and Trust
June 15, 2012
June 26, 2012
Security Exchange Bank
Putnam State Bank
Harbor Community Bank
First Community Bank
June 8, 2012
Farmers' and Traders' State Bank
First State Bank
Carolina Federal Savings Bank
Bank of North Carolina
First Capital Bank
F & M Bank
June 25, 2012
Alabama Trust Bank, National Association
Southern States Bank
May 18, 2012
May 30, 2012
Security Bank, National Association
May 4, 2012
June 4, 2012