ABA Banking Journal
By Monica C. Meinert
As president and CEO of a community bank serving America’s heartland, Kansas banker Shan Hanes is acutely aware of the many challenges bankers in rural markets face. But there’s one in particular that’s become too big to ignore: an acute lack of certified appraisers.Hanes’ bank, First National Bank of Elkhart, is a $78 million institution located close to the Kansas-Oklahoma border that primarily does agricultural lending. Over his 25-year career in banking, Hanes has seen the appraiser market shrink dramatically; the closest appraiser to the bank is now 45 miles away, while the appraiser he often prefers to use is twice that distance.
“Whether it was an agricultural loan or a residential real estate loan, you used to just call around and order an appraisal,” he says. “We had a handful of guys in the area we’d call around to, and whoever we thought could get it to us quickest was who we went with.”
But that’s all changed over the past several years. “On the ag side, I would say we wait a minimum of 90 days now, sometimes longer. If it’s complicated or one that may not have a lot of comparable sales, we can wait four to five months,” he adds.
These timeframes are becoming the norm in rural areas, and even in some urban markets where real estate sales are booming. With an abundance of work coming in and not enough appraisers to go around, the shortage is creating headaches for lenders, frustrations for customers and a competitive disadvantage for banks.
Roots of the problem
Like the financial industry, the appraisal industry is facing a talent shortage as baby boomers near retirement with few new trainees entering the field to fill their shoes. Since 2007, the appraiser workforce has shrunk by more than 20 percent, and there appears to be no end to the decline in sight—the Appraisal Institute estimates an additional 25 to 30 percent drop over the next decade.
“The biggest challenge I see in the appraisal industry is that they have made it unreasonably difficult to get certified so that you can be a fully productive and producing appraiser,” observes Nate Franzen, president of the agri-business division of First Dakota National Bank, a $1.5 billion institution headquartered in Yankton, S.D. “That has really created a lack of interest in the next generation to enter that career field.”
Unlike many fields where a four-year degree can gain a prospective hire immediate entry, becoming a certified appraiser is a time-consuming process that can take almost as much time as completing an advanced degree, Franzen explains. For instance, to become a certified residential property appraiser, candidates are required to have a minimum of 200 education hours and complete 2,500 hours of training under the supervision of a certified appraiser. For certified general real property appraisers who can appraise all real property types, the requirements are even higher.
“A lot of certified appraisers don’t want the headache of getting bogged down by training and mentoring a young appraiser,” Franzen adds. He says that First Dakota—which does a considerable portion of real estate lending through its Dakota Mac subsidiary—has started to build its own internal appraisal team out of sheer necessity.
“We were very fortunate to find a veteran experienced appraiser who was willing to come work for us,” he says. “That person has been our mentor, and we are in the process of adding to that team to get younger people certified.”
Currently, the bank has two trainees—one who is nearing completion of his training, and another just starting out. “Probably in two and a half to three years, we’ll have a three-person appraisal team,” Franzen says. “But it’s a slow process.”
Hanes points out that veteran appraisers may not see an appeal in training someone that might later become a competitor for business. And on top of that, taking on a trainee comes with a considerable amount of responsibility and risk. “As long as that apprentice appraiser is under the mentor, the mentor is actually responsible for that trainee’s appraisals,” he explains. He’s talked to several appraisers who point to this as the key reason they are hesitant to become mentors. “If everything’s not right, or [the trainee] misses a value, the mentoring appraiser can lose his license. And that, to me, is almost a bigger barrier to entry than training their competition,” Hanes adds.
A growing inconvenience
According to a recent Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, appraisal-related issues are accounting for a growing share of home closing delays. In April 2016, appraisal issues were responsible for 10.7 percent of delayed closings. By August, that figure had grown to 15.6 percent—a 50 percent jump in just four months.
It goes without saying that appraisals are an essential part of the mortgage process—they are required by law for nearly all transactions of $250,000 or more. “Unfortunately, when a client needs to borrow money, they’re going to use land to collateralize that loan, and we can’t close that loan until we have the appraisal in hand,” Franzen says. “Any delay in having an appraiser who’s able to get out there and do the work they need to do sets back our ability to propose the loan and get the funding needed to the client.”
And even when the bank finds an appraiser with the time or willingness to take a given job, they’ll still be faced with increased costs, Hanes says. When he first became a banker, he recalls that commercial real estate appraisals typically ran around $1,000. Now, “I don’t know that I’ve seen one less than $4,000 in the last 5 years.”
Making things even tougher for rural bankers is the ever-increasing competition from government-sponsored Farm Credit System banks. In addition to the tax advantages they enjoy, Farm Credit lenders have another leg up on traditional lenders: they have their own internal appraisal staff.
In Franzen’s market, Farm Credit Services of America is the bank’s main competitor. “They can turn around appraisals within a week,” he says. “We’re at a competitive disadvantage if we can’t do the same thing.”
Meanwhile, in Kansas, “we’ve lost a few deals,” Hanes admits. “Farm Credit’s got the reputation that you get an appraisal by Friday, and we have the reputation that it’s going to take 90 days, so that’s the frustration from the customer’s standpoint. They’re afraid they’re going to lose the deal, that the seller is going to back out, then all of a sudden, the bank is the bad guy because we’re not moving forward with it.”
Finding a solution
There’s a growing consensus among bankers and appraisers that solving the shortage problem should involve a careful re-evaluation of the current training criteria, and the Appraisal Qualifications Board—the body that sets training standards for appraisers—has already begun exploring potential changes to those requirements. Other solutions have also been proposed that may require congressional or regulatory action, such as raising the de minimis threshold for transactions requiring an appraisal. ABA has been actively engaged on this issue and will continue to work with interested stakeholders as solutions are proposed.
In the meantime, Franzen says he makes a point to train his lending team to keep the lines of communication open with customers as they work to mitigate frustrations and manage the reputational risk to the bank as a result of longer appraisal turnaround times.
“Our lenders have become very good at communication and keeping our clients abreast of the process and where the loan is,” he says. “It can be a challenge, because there are unforeseen things that pop up that delay the process, and so you have to really warn your clients of what can happen with these transactions. It’s a juggling act, and something that really needs to be managed.”
ABA Works to Address Appraiser Shortage
As bankers across the country continue to face the challenges resulting from fewer certified appraisers, ABA is working with regulators, appraisal organizations and other interested stakeholders to address the problem so that banks can continue serving their customers and growing their local economies. The association believes that markets will require both urgent measures now to sustain the efficient processing of existing financing needs, as well as long term changes to address more fundamental problems.
Over the past year, ABA has called on regulators to increase the de minimis transaction threshold at which bankers may use an evaluation instead of an appraisal by a licensed professional from $250,000 to $500,000, and to clarify the definition of “federally related transactions” with respect to appraisals.
The association has also been in communication with the Appraiser Qualifications Board to provide feedback on the AQB’s proposal for addressing the appraiser shortage. In comments to the board, ABA supported decreasing the number of experience hours required to obtain an appraiser certification, and a proposal to remove the bachelor’s degree requirement. ABA further urged the AQB not to abandon its examination of whether it should accept relevant experience in other fields to count toward the experience hour requirement needed for certification.