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AVMs to Finally Replace Appraisers?
By Isaac Peck, Editor
Since the 1990s, there have been those in the appraisal industry who’ve warned that appraisers would soon be replaced by automated valuation models (AVMs). Rapid technological innovation would quickly render the appraisal profession obsolete and properties would be appraised by computer algorithms combined with “big data.”
Despite decades of gloomy predictions, the appraisal profession and appraisers have proven to be resilient. Rank-and-file appraisers, who are overwhelmingly small business owners, continue to faithfully serve as a cornerstone of the U.S. real estate market by providing unbiased and independent opinions of value for homebuyers who, in many cases, are making the single largest investment decision of their lives. But today, some are saying things may be different.
Fannie Mae and Freddie Mac have both begun implementing their own appraisal waiver programs where an automated appraisal alternative will be accepted in lieu of a traditional appraisal. While the full extent and effects of such programs remain to be seen, this is an issue that appraisers will want to follow closely.
Fannie’s Waivers
As part of its new Day 1 Certainty™ program, launched December 2016, Fannie is offering Property Inspection Waivers (PIWs), which is an offer to waive the appraisal requirement for refinance transactions that meet specific criteria. In its Fact Sheet explaining the change, Fannie writes that the PIW “provides a lower-cost alternative to an appraisal, while eliminating the expense of appraisal-related delays in the origination process.” The Fact Sheet also clarifies that “the majority of refinance transactions will not receive a PIW offer, which means they will require an appraisal by a qualified residential appraiser to establish the market value.”
Those properties that will qualify for the PIW on refinance transactions include one-unit properties, including condominiums, principal residences, second homes, and investment properties. The PIW will extend to limited cash-out refinance transactions up to a 90 percent LTV/CLTV for principal residences and second homes, and up to 75 percent LTV/CLTV for investment properties.
Fannie’s Fact Sheet is quick to note that purchase transactions and the “majority” of refinance transactions will not be eligible for a PIW. Additionally, for a PIW to be offered, a prior appraisal must be found for the subject property in Fannie Mae’s Collateral Underwriter (CU) data, and that appraisal must be associated with one of the same borrowers on the recent loan casefile. The Fact Sheet explains that, “DU will compare the address for the subject property to the property addresses found in CU. When a property address match is found, DU will then compare both the first and last names of the borrowers on the loan casefile to the borrowers associated with the prior appraisal. When a borrower name match is found, DU will then use the information from the prior appraisal to determine if the loan casefile is eligible for the PIW.”
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Fannie’s Fact Sheet also explains why it will not offer an appraisal waiver on purchase transactions, indicating that Fannie relies “on data captured from a full interior and exterior inspection on purchase transactions to power the CU model with up-to-date property and transaction data across the entire country. Having this data on purchase transactions enables us to confidently offer more PIWs on subsequent refinance transactions and offer freedom from representations and warranties on property value.”
Zachary Dawson, Fannie Mae’s Director of Collateral Policy & Strategy, reports that PIW rates historically have been a few percent of the agency’s total loan production, but this could increase to around 10 percent. “Our enhanced PIW program started on December 10, 2016, so delivery volume is still ramping up at this time. We are seeing it used at rates of around 20 percent on limited cash-out refinances thus far,” Dawson confirms.
In terms of how it will affect appraisers, Dawson says the impact should be minimal. “When you spread the incremental number of PIWs offered as a result of this change across the roughly 50,000 appraisers we see work from each year, it’s not a significant reduction of assignments for each appraiser.”
Freddie’s Appraisal Alternatives
Freddie Mac appears to be going a step further with proposed changes to its Loan Advisor Suite, promising that by late spring 2017 it will be offering a “no-cost appraisal alternative,” which will include first-purchase transactions, and stating that this new program will eliminate steps to speed up the process and reduce borrower costs.”
Out of the $909 billion in single family loans purchased by Fannie Mae and Freddie Mac in 2016, Freddie’s share is roughly 43 percent. Combined together, Fannie and Freddie currently hold about 45 percent of the $10.2 trillion in outstanding single-family residential mortgage debt.
In an interview with Working RE, Lisa Tibbitts, Director of Public Relations at Freddie Mac, offered additional insights into Freddie’s approach. “Our new Loan Advisor Suite features include a no-cost automated collateral evaluation (ACE) that is designed to help reduce costs for consumers and lenders,” says Tibbitts.
In explaining why Freddie believes it will be able to accurately value homes, Tibbitts reports that Freddie “has over 40 years of historical data to draw on. When we combine all this historical data with advanced analytics, we believe we can produce accurate valuations. Appraisal accuracy is something we’re very interested in,” argues Tibbitts.
In terms of what kinds of properties Freddie will offer ACEs on, Tibbitts is quick to stress that appraisers will remain “absolutely vital to the great majority of loans,” but indicates that ACEs will be used on “properties where Freddie can easily leverage data and models.” Tibbitts reports that Freddie hasn’t yet released information on the specific conditions that would trigger the use of an ACE, but emphasized that it will be used mostly where there is a homogenous stock of housing. “When we have properties that are unique, with no others like it, that’s when appraisers are absolutely needed and where appraisals will be most valuable,” says Tibbitts.
Tibbitts argues that there is a backlog of appraisals in some cities within the U.S., and a main benefit to Freddie’s new program is that it may help alleviate the current shortage of appraisers and provide cost reductions to borrowers. “The key to reducing backlogs is not using appraisers in areas with homogenous housing stock,” argues Tibbitts.
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When asked to reconcile the fact that most appraiser shortages/backlogs occur in rural areas where Tibbitts concedes appraisals are necessary, and that there is typically an abundance of appraisers in sprawling cities where homogenous subdivisions are most common, Tibbitts says only that Freddie Mac believes appraisers are the lynchpin of the housing market. “Our program will only cover a subset of loans and appraisers will absolutely remain vitally important in the great majority of home purchases. To suggest otherwise would be irresponsible,” says Tibbitts.
Scott Reuter, Freddie Mac’s Chief Appraiser and Director of Valuation, is a second generation appraiser, holds a Certified General credential, and has over 30 years of experience in valuation and risk management. Reuter leads a team of 10 Certified appraisers and reports that he and his team will be monitoring the accuracy of the automated tools to test their results. “As we begin the initiative, we’re going to sample data from the portal and order independent desk reviews of properties, with all of that information going through an internal review team. We can then refine the systems and improve our models. This will ensure that whatever we do from a valuation process perspective aligns with our view of quality,” says Reuter.
In terms of what Freddie is hoping to accomplish by offering automated collateral evaluations (ACEs), Reuter says the goal is to better serve the public. “An appraisal is part of a risk decision. If there is a subset of loans where we can make that risk decision without an appraisal by leveraging responsible innovation, then we should do that. Our charter calls on us to provide liquidity; it doesn’t say ‘order an appraisal on every single property.’ While the ACE is something that goes counter to my appraiser DNA, I understand it and for a small subset of the safest loans, Freddie’s goal is to better serve the public,” Reuter reports.
When asked why Freddie is choosing to offer ACEs on purchase transactions, going a step further than Fannie Mae’s initiative which only offers waivers on select refinances, Reuter says that the decision will be based on a variety of factors. “A purchase transaction brings together an independent buyer and seller at an arm’s length. They have agreed on a variety of things, including market value, independent data points, and the property’s valuation. Properties go through a tremendous amount of rigor. So in areas where we have very rich or robust analytics on a county or MSA level, and the buyer is bringing 20% down or more, then it might be appropriate to offer an ACE,” says Reuter.
For appraisers worried about the end of a profession, Reuter argues that is not the case. “We will overwhelmingly still need to order, grade, score, and consume appraisals. Our data systems are modeled off of appraisal data, so it won’t work without appraisals. But, that doesn’t mean we will need appraisals on 100 percent of loans,” Reuter says.
A good comparison is a local accountant who prepares tax returns, according to Reuter. TurboTax and other “Do-It-Yourself” tax software undoubtedly took work away from local accountants and tax professionals, but many people, even small business owners like appraisers, might still need the services of an experienced accountant. “What that local accountant has lost, due to new software and technological innovation, is the 20-something year old’s return, the college students, and the part-time workers. Simple tax returns can now be done by taxpayers, but there is still a demand for tax professionals. Some appraisers are upset that the cookie-cutter appraisals may not be in such demand in the future, but demand for appraisal services will continue on more complex assignments, rural areas, and where we don’t have sufficient data. We expect a significant majority of the mortgage loans to require traditional appraisals,” argues Reuter.
AI Responds
These latest changes by Fannie and Freddie prompted the Appraisal Institute (AI) to write a letter to Freddie Mac’s regulator, Mel Watt, Director of the Federal Housing Finance Agency, warning that Freddie Mac’s decision to waive appraisals for first-purchase transactions is especially risky because these are “transactions with the highest risk to the agency.” Unlike refinance transactions where previous appraisal information is typically on file, the AI points out that purchase transactions “generally have less information available to the agency” and that forgoing an appraisal omits valuable data such as the appraiser’s interior inspection, the condition of the property, and more.
AI’s letter also makes an important point that appraisal alternatives or “waivers” are nothing new. Leading up to the real estate crash of 2007- 2008, Fannie and Freddie were issuing appraisal waivers en masse. After the GSEs were taken into conservatorship back in 2008, it was discovered that as many as 30 percent of mortgage loans held by Fannie and Freddie had received such waivers, according to AI. Even after the crash, a separate report from the Government Accountability Office reports that Fannie and Freddie only required appraisals for 85 percent of the mortgages they purchased in 2010 and 94 percent in 2009. In other words, the GSEs have long used AVMs or waivers as alternatives to appraisals and the practice dates back to the early 2000s.
However, AI warns that Freddie’s latest move to use these tools for first purchase transactions is especially foolish. “Freddie Mac’s decision to veer away from fundamental risk management practices appears to harken back to the loan-production driven days in the years leading up to the 2007-2008 financial crisis…which turned out to be disastrous for the entire economy,” the AI warns.
Future for Appraisers
Appraisers have responded to Fannie and Freddie’s new changes with a mix of shock, outrage, indifference, and a few “I told you so’s.” Richard Hagar, SRA argues that while change is coming to the industry, appraisers are and will remain an integral part of the valuation industry. “AVMs are not going to take over the job of an appraiser any time soon. Houses change: some get larger, some remodeled, some add an accessory dwelling unit (ADU), some have massive interior damage, while others burn down. County records rarely or very slowly reflect those changes,” Hagar says.
Another reason that appraisers will be needed well into the future is that automation gets stale quickly when fresh data stops flowing in. “AVMs need lots and lots of current data. They need appraisers to feed the beast with updated information regarding the condition of the subject property, surrounding uses and market changes. Without appraisers submitting updated information, the accuracy of the AVMs begins to degrade within six months,” says Hagar.
In terms of valuing commercial property, Hagar says the accuracy of AVMs gets even worse. “AVMs fail miserably when valuing most commercial properties. The primary value component of commercial properties is the income and it takes humans to coax monthly income amounts out of most commercial building owners. Can you imagine some machine calling up an owner of a multi-million dollar shopping complex and asking for the monthly income and vacancy factor? Human interaction and in-depth market research are needed to uncover vital commercial data, so an appraiser’s expertise on the commercial side is indispensable,” argues Hagar.
While AVMs won’t replace appraisers, Hagar notes they are by no means “useless” (as some appraisers argue) and their use can be expected to continue in the future. “AVMs have a place in a valid business model when it comes to providing yearly updates on the value of a block of loans held by banks, Fannie Mae and most private lenders.
Many of these institutions have hundreds of billions of dollars’ worth of mortgages, and regulations require banks to compare existing loan balances on a portion of mortgages against current property values. AVMs do this quickly and reasonably for the dollars spent,” says Hagar.
Instead of being made obsolete, the most notable change that technology is bringing to the appraisal industry is actually a sharpening of skills and an improvement to appraisal practices, suggests Hagar. “Technology, increased access to data, and the many tools that are now at an appraiser’s disposal increase the value that appraisers bring to the table, but it also means that more is demanded of appraisers. If appraisers fail to provide accurate market analysis, fail to properly measure the subject, fail to inspect the comparables, fail to provide support for their adjustments and keep using the same old ‘rules of thumb’ that we were using back in the 1990s, then big data is going to be flagging these appraisals and questioning their utility,” says Hagar. “If the descriptions and accuracy of an AVM and appraisals are equally poor, then which one is better? The AVM is of course, since the bank can obtain results for $50 in five minutes.”
The solution, according to Hagar, is for appraisers to embrace technology to improve their practice. “We appraisers are no stranger to change. The practice of appraising real estate continues to evolve and it should come as no surprise that more is now being required of appraisers than ever before in terms of support, techniques and data analysis. If appraisers fear that the increased use of AVMs will replace us, then we should up our game, and provide a product that is better than the output of a computerized AVM. Appraisers who are willing to adapt and leverage technology to improve their techniques will see it pay off in spades. The real estate industry will long have a need for professional appraisers who are masters of their craft and provide up-to-date, supported, and market driven opinions of value,” says Hagar.
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About the Author
Isaac Peck is the Editor of Working RE magazine and the Director of Marketing at OREP.org, a leading provider of E&O insurance for real estate appraisers, inspectors and other real estate professionals in 50 states. He received his Master’s Degree in Accounting at San Diego State University. He can be contacted at Isaac@orep.org or (888) 347-5273.
Send your story submission/idea to the Editor: isaac@orep.org
by Eric
I used to carry a staff person to help keep up with demand but now MY resources have been decimated as well as the extra TIME WASTING policies forced upon the appraiser. It’s like we are being forced to drown in others stupidity and then being blamed for it.
-by Rocky.A@gillop.com
As others mentioned, the Institute should be putting together a class action suit. The AVMs and data mining that has taken place since the advent of UAD has come off the backs of appraisers without compensation. Where are those guys when you need them?
-by Edd Gillespie
Rocky,
I am under the impression that appraisers who publish appraisal reports that end in the secondary mortgage market do so for a fee. In other words they are hired, often at a fee that is ridiculously low, to provide fact based opinions of market value. Where in any contract of such employment is there any prohibition on what the client can do with the report once it is delivered? “Intended use” limits the appraiser’s liability not the client’s use of the report.
And the AI is not there to solve this problem nor will it. It is a problem individual appraisers must solve. No one will do it for them. The clients are not stealing anything, appraisers are essentially giving it away. It’s sort of stupid, but not illegal.
-by Rocky.A@gillop.com
Did you have hear of proprietary information? Did you ever hear of any politicians leaking information and getting into trouble? Did you ever hear of patent pending? The appraiser states on line. The appraiser states on Page 1, at top, intended use for (blank) , I’ve never given permission to build a data base. What about the privacy we are hearing so much about (Dodd-Frank) ? Aren’t your UAD ratings private? What’s going on in the political landscape right now? I see some intertwining. Using my info for alternate purposes other than a loan decision? Like Ricky told Lucy “Someone gots some esplainin to do Lucy”.
-by Edd Gillespie
Mr. Peck,
Notwithstanding comments to the contrary, it is important to understand that Fannie & Freddie while providing the critical need for liquidity in the real property economy, are used by the banks to transfer risk of loss in single family mortgage lending. Both agencies give consumer (i.e. borrower) protection lip service, but their function is to shift loss from the banks to the taxpayer.
Appraising for the secondary mortgage market continues to a large degree because of a misunderstanding on the part of lenders as to what the law requires and because the banks see appraisers as an additional resource to absorb risk. Even cursory review of single family residential lending practices provides the inescapable impression that competition among the lenders focuses on cost and speed. Appraisers practicing in this field have felt the pain. Read any blog frequented by appraisers and the dialogue will contain complaints about low fees. Put two and two together and it is impossible to avoid the conclusion that the SFR lenders control a significant portion of the appraisal industry.
The ubiquitous rumors of AVM dominance in the appraisal industry have not yet come completely true, but rapid and profound change in technology is occurring as we speak. Indeed, the pace of technological change is difficult, if not impossible, for most of us to keep up with, but keep up we must if we are to remain relevant. And now artificial intelligence is available which can accomplish all the analysis required in appraising as well as the emerging demand for market trend prediction.
Unless the law requires it, there is no guarantee that lenders will continue to hire appraisers, but if there is to be a future in real estate appraising practitioners must be trained to incorporate rapidly changing technology into their practices. It is difficult to imagine the necessary training can take place “on the job” or in a CE class, which leads to the conclusion that appraisers must turn to institutions that provide advanced education.
-by Michael Panisch
If this AVM thing is going to happen I as an appraiser WANT ROYALTIES $$$ every time MY APPRAISAL is used for another purpose. I created the report, the analysis of the market conditions, comps, photos, data verification, etc.
-by J. Rich
I would suspect a class action law suit will be in the works soon.
-by John Pratt
I can understand waiving an appraisal in a refinance especially if the lender holds the current mortgage. They not only have the information on the subject property they also have the payment history of the borrower therefor they have the necessary tools to do a risk evaluation. A waiver on a purchase transaction is a different thing. The sales price is set by the owner/seller and the listing agent, what would make anyone think that the listing price has any relationship to the actual market value. The owner/seller thinks that the home is worth more than any other homes in the neighborhood and want the highest possible price. The listing agent wants to make sure he gets the listing so he is not going to refuse to list it at the owner’s price so now you have 2 individuals with motivations that are not related to the market values setting the listing price. Now add to this that they know there will be no appraisal. Add a potential buyer moving into a new neighborhood or town with no knowledge of the market to the mix along with the selling agent who is not concerned about the appraisal meeting the sales price and what do you have? You have a sales price with no relationship to the market, only the potential buyer has a real interest of what is the real value of the property.
-If waivers of appraisals on purchases becomes the norm we will see skyrocketing home prices that will exceed what we saw in the 2003 to 2006 time frame. This will be the next Real Estate bubble and crash.
by AgnesT
The AI better keep the pressure on! They dropped the ball on the last two crisis. These new products line the pockets of software engineers. When it hits the fan, the politicians
-are going to be looking for the usual scapegoat. The AI better do its job.
by Marty
The Truth Behind the Use of AVM’s
-While mortgage lenders and even secondary lending giants like Fannie Mae and Freddie Mac may portray the use of AVM’s as to save consumers time and money, it’s about making them more money. That’s right, you see with AMV appraisal, lenders, Fannie and Freddie can allow a (PIWs) which is a Property Inspection Waiver, currently used for refinance transactions, but it means that no appraiser must come out to the property and inspect it. So, the biggest investment of one’s life may all be left up to a computer. So, you are buying a home, an appraiser may uncover a potential safety hazard or a problem that may cost hundreds or thousands to fix, after you have already purchased the home and the computer AMV will never know. On a refinance transaction, the home may be falling apart, roof caved in etc. and the AVM would never know. Then if the borrower’s defaults, when the refinance money is not used to repair the home, the tax payers are left in the end holding the bag. Why would they do this you may ask? Why indeed. The quick and simple answer is money! Appraiser are un-biased, they don’t care if the home sells for five thousand or five hundred thousand. Their full and un-biased assessment will be the same and often, the appraiser will come in with a valuation that is below the contract price because the data to support such a price is not there. Meaning the home just is not worth the price being asked because other very similar homes in the area have recently sold for less, and therefore saving the un-suspecting buyers from paying too much. The department of veteran’s affairs has a regulation on this called Tidewater, I’ll explain this later. Now then, every time an appraiser’s valuation does not come in at or above the contract price, the lender may not be able to close the deal, meaning there are many less deals out on the market for Fannie and Freddy to buy. Hence, is why they want to use AVM’s, and in case you’re wondering, yes AVM’s can easily be manipulated. Remember the saving and loan crises in the 1980’s. Even more recent in 2007/2008 housing burst was in the end all because of bad loans being made and knowingly manipulated. Tidewater I mentioned, VA regulation says that if a VA appraiser is un-able to reach a valuation conclusion to justify the contract price, the appraiser must notify the point of contact on the loan. Then within 48 hours the lender, agent can present data they may have been missed and or may help to support the contracted price. The appraiser then considers this new data if any, and decides and reconciles a value. If the value is still un-able to be supported all parties are on the same page. This is why everyone should insist on an actual trained professional appraiser.
by Barry Noble
Why put it out with a title like that? You scare the pants off so many appraisers when it is a minimal slow down of potential work by not requiring an appraisal or a BP0. I, as a Broker, and a Certified Residential Appraiser, don’t agree BPOs should be allowed. I’ve noted they trend towards making deals work rather than honestly look at comparable values.
-by TruthBTold
Mr. Hagar really bugs me! All conscientious appraisers, and 12 yr. olds know what is required to do a good job. Mr. Hagar ignores the elephant in the room. The issue is banks and AMC’s have created economic hardship for most appraisers. Their requests and guidelines often contradict USPAP and valuation guidelines. One stand of principal by an appraiser will lead to no more work. There is a cruel, mafioso-like system amongst AMC’s to suppress appraisal fees. The more suppression, the more profit for them. Appraisers are doing what they can to put food on the table for their families. It’s a question of do we go bankrupt now or hang in there until we can find something else. Mr. Hagar is still spewing bank influenced propaganda that most appraisers are incompetent! Everyone in mortgage lending is increasing profit and becoming more efficient except the appraiser. I recently took a green certification class given by the AI. Energy efficiency is clearly a wave of the future that can add value to a property. By the second day at lunch, the conversation amongst the appraisers was “who is going to pay us for the time and effort it will take to do a proper green appraisal”?
Instead of Mr. Hagar being Captain Obvious, he should be blogging about appraiser rights and free enterprise.
-by Jim
Fannie Mae says” Additionally, for a PIW to be offered, a prior appraisal must be found for the subject property in Fannie Mae’s Collateral Underwriter (CU) data, and that appraisal must be associated with one of the same borrowers on the recent loan casefile. The Fact Sheet explains that, “DU will compare the address for the subject property to the property addresses found in CU. When a property address match is found, DU will then compare both the first and last names of the borrowers on the loan casefile to the borrowers associated with the prior appraisal. When a borrower name match is found, DU will then use the information from the prior appraisal to determine if the loan casefile is eligible for the PIW.”
-Sounds to me like they are essentially reusing our appraisal to establish value. If we were to do that without starting a new file we would be in violation of USPAP but Fannie Mae CAN do it. Hmmm sounds messed up to me.
by Timothy C. Andersen
Thanks Issac and Richard for your takes on the future of our industry! There are so many opportunities available, if we are but willing to take advantage of them. Education, i.e., expertise in many appraisal and analytical areas, appears to be the key to becoming “…masters of [our] craft”… So, as long as the GSEs need well-analyzed, up-to-date, and well supported data and conclusions, we have job security. Therefore, as we provide those, we also prove that we are the keystones to the mortgage lending process, while AMS and the like are merely tools at our disposal. Please continue with these high-quality articles! They help us stay on top of our games!
-by Timothy C. Andersen
Thanks, Isaac, for your analysis of the situation! And thanks, Richard, for advising us to become masters of our craft! This article is a great preview into the future of real estate appraisal.
-by Jaydee
My fellow appraisers. STOP cutting your own throats. The lenders keep coming up with “new products”. You don’t have to look at the property, it’s a desk review, the Realtor will provide you all the information (BPO). Just sign your name on it and lend your expertise and “stamp” to approve this new product that will eventually replace you. Because YOU proved that their new product is “trustworthy”. You want or need to be “employable” for the next decade or two? Stop doing this type of work. For all our sakes!!
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