by Jerry Ernst, as seen on azcentral.com, Sept. 2017
Whether you support Trump or not, there’s no denying POTUS is pro-business. His agenda to deregulate banking recognizes the cumbersome over-regulation that occurred as a knee-jerk reaction to the subprime mortgage crisis and resulting bailouts.
Consumer protections are vital, but a sound system must balance value and safety to consumers with a level of compliance that isn’t so complex even seasoned bankers are reluctant to lend—which is where we are today. It’s paralyzing growth and preventing the very results it’s intended to provide, and it’s very promising to see this recognized.
“The regulators are running the banks,” says President Trump in this recent CNN interview.
One area that needs re-evaluation is appraisal management, which has a powerful impact on Arizona’s economic recovery and home prices.
Intended as layer of consumer protection to prevent collusion between real estate agents, lenders and home appraisers to drive up the value of homes, appraisal management agencies act as intermediaries, and it’s now illegal for lenders or real estate agents to directly communicate with an appraiser about a specific property address.
This sounds beneficial, but problems arise in fast-moving real estate markets with rapidly changing home prices. Compounding the issue, only one appraisal is allowed, so an inaccurate appraisal cannot be overruled by a more accurate one. The lender can submit comparable appraisals to the management agency as part of a correction request, but in years of working with appraisal management companies, Horizon Community Bank has not seen a single appraisal have its original decision adjusted.
How is this a problem? Appraisals often operate in a vacuum of information, relying on an educated guess at a home’s value and comparable property values from a drive-by viewing and public record. The appraiser can’t request a tour of someone’s private home to get a fair evaluation of value inside the home. Since fixtures, lighting, flooring, kitchens and bathrooms cannot be estimated from the exterior of a home and can vary widely in value, comparable properties might not be comparable at all. Realtors who go in homes and have ideas of their interior value can’t speak to the appraiser, and less than one percent of appraisals receive the requested adjustment from the appraisal management companies. The square foot price a home buyer is expected to pay can be severely over or under the actual value.
In a real estate bubble where homes are rapidly changing in price, such as the Phoenix and Denver markets, appraisers struggle to project accurate values, caught in the middle by government regulation and appraisal management agencies. Everyone loses. Because public records and comparable property sales don’t reflect the rapid increases in value, the appraisal can come in too low and the sale falls apart, with sellers not willing to sell their property at less than actual market value, banks not authorized to finance a loan that exceeds the appraised value, borrowers who don’t have cash on hand to fill the resulting gap with a larger down payment, and appraisal management companies that can’t or won’t consider adjusting the appraisal.
The process needs to be changed quickly to meet the needs of a market with rapidly fluctuating home values.
Deregulation doesn’t have to mean we remove ALL regulation, but instead soften areas where it’s too strong. Allowing communication and price adjustments where necessary in the consumer’s best interests can be accomplished in a way that doesn’t compromise fair market value of a home or provide so much wiggle room that collusion becomes a possibility. Can Trump make this happen? I don’t know, but welcome the deeper dialog his efforts can trigger.
Jerry Ernst is President/CEO of Horizon Community Bank, a locally owned bank with branches in Mesa and many of Arizona’s rural markets.