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A Keen Eye

This piece originally appeared in the December 2021 edition of DS News magazine, online now.

There’s little evidence to suggest a deluge of foreclosures is about to hit the market. Still, economic forecasts show that foreclosures are already on the rise and expected to tick back up again later this year or in early 2022. That means appraisers need to be ready.

Here’s the good news: the prognosis for 2022 is for a sound and strong housing market. Economists are calling for continued home price appreciation well into 2022 as demand for housing continues to be strong.

There is also evidence that the supply imbalance is beginning to correct itself with more owner-occupied inventory steadily increasing, which should alleviate some of the runaway house price increases we have seen in some markets. However, it’s important to not read an increase in supply as a flood of homes suddenly comes onto the market and disrupts pricing. At most, what economists expect is a normalizing of the market that puts behind us the ultra-competitiveness we have seen in 2021.

Against this backdrop, economists believe that any possible inventory coming to market as a result of homeowners exiting forbearance is a good thing. Distressed homeowners can take advantage of current market dynamics and sell their homes for top dollar.

The reality is that there will be some homeowners that won’t be able to reconcile payments. We are already seeing defaults increase. According to ATTOM Solutions, default notices, scheduled auctions, or bank repossessions spiked 34% in this year’s third quarter. That momentum is likely to continue well into the new year following nearly a year and a half of a foreclosure moratorium. How much of a spike will really depend on how lenders choose to address distressed borrowers who are behind on their payments, but it is not going to be anywhere near the figures we saw during the Great Recession of 2009. We are in a unique situation today, as underwriting has been much stronger than it was in the previous period of rapid inflation for the housing crisis. We’re in a situation today where we’ve never been, and we haven’t been this prepared to be able to absorb downturn.

Nonetheless, appraisers should be ready to pivot to address the eventuality of increased foreclosures and appraisals for loan default activity. That means being objective and completing the appraisal process just as they would for any other transaction type, whether it’s for a refinance or a purchase. That may sound easy, but appraisers need to be mindful that they aren’t approaching foreclosures with a potential bias towards the transaction type.

For foreclosures, one of the biggest limitations for appraisers is that they won’t have access to the property. That will require extra steps on the part of the appraiser to try to ascertain the condition of that property, whether it’s through increased due diligence of the town records for building permit activity or any other data collection activity.

Generally, appraisals in preparation for foreclosure are done on an exterior basis, and they’ll be driving by the property or someone will be driving by the property to make some type of an assessment.

However, appraisers need to be aware that this could expose them to certain biases, even though there is no chance they’ve come into contact with the inside of the property, much less the borrower and therefore could have demonstrated bias, right? Despite the arms-length nature of the foreclosure appraisal, it should not be considered at zero risk of a biased transaction, unconscious or not.

The key is to stick to the facts and avoid factors that may lead them down a path into a potentially sticky situation. One example is focusing on the racial makeup of a neighborhood. This should not be considered as a factor in developing your professional opinions. Most appraisers will know this, they are trained on this, but it’s always a good reminder that it should not be a consideration.

Ultimately when it comes to foreclosures, or really any situation, appraisers need to always be mindful that they are charged with providing useful data and reliable and accurate results. It’s not just the number that you’re providing; you are in charge of data collection, providing conclusions that are appraisal-related, and providing useful information to the client to base a decision.

As the market shifts and pivots, appraisers need to stay on top of things to see what is happening with prices and what’s happening with values.

Right now, we are coming out of a very overheated market. In some places, things are still overheated because of that lack of inventory and because of deflated interest rates that have driven up demand for refinances. This dynamic has had some impact on affordability, part of the metrics analyzed by appraisers when deriving conclusions.

Here are some questions to consider: What is the level of inventory? What is the pace of sales activity? When will buying activity in a particular market burn through inventory? All of these points must be considered when correctly valuing any asset, particularly distressed assets.

Other important considerations: available distressed inventory, sources of purchase financing, and the occurrence of all-cash purchases. As the appraiser, you have to read the market very, very carefully.

In conclusion, the prognosis for the market, in general, is moving towards more stabilization. While foreclosure activity is anticipated, it is not anticipated to be disruptive to the marketplace in the near term. Whether appraising to support the purchase or refinance transaction, or loan default activity, the appraiser is required to complete assignments without bias and a level of professional competency showing an understanding of market forces and influences.

About Author: Ken Dicks

Ken Dicks is a professional appraiser and Director of Appraisal Compliance & Initiatives for Reggora, a firm that provides appraisal management technology for lenders and appraisers.

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