OK, Computer: How Much Is My House Worth? Is a human appraisal needed?
OK, Computer: How Much Is My House Worth?
Proposed regulations would allow the majority of homes to
be bought and sold without being appraised by a human
By Ryan Dezember and Cezary Podkul Nov. 29, 2018 7:00
a.m. ET
The battle between man and bot has a new front: your
mortgage.
Federal regulators have proposed loosening real-estate
appraisal requirements to enable a majority of U.S. homes to be bought and sold
without being evaluated by a licensed human appraiser. That potentially opens
the door for cheaper, faster, but largely untested property valuations based on
computer algorithms.
The proposal was made earlier this month by the Office of
the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the
Federal Reserve. It would increase to $400,000, from $250,000, the value of
homes that can be bought and sold without a tape-measure-toting appraiser
visiting a property.
More than two-thirds of U.S. homes sell for $400,000 or
less, according to U.S. Census data and the National Association of Realtors.
If the regulators’ proposal had been in force last year, about 214,000
additional home sales, or some $68 billion worth, could have been made without
an appraisal, regulators said in their 69-page proposal.
Some worry, though, that dropping appraisal requirements
would introduce new risks into the $10.7 trillion market for home loans.
“We still would prefer a human being doing the
appraisal,” said Lima Ekram, a mortgage-backed securities analyst at Moody’s Investors
Service.
One issue: Automated valuations done by computers are
largely unregulated. The 2010 Dodd-Frank financial overhaul required regulators
to propose quality control standards for so-called automated valuation models,
but they have yet to do so.
“There are a lot of problems with appraisals, but there
are voluminous standards,” said Ritesh Bansal, chief executive of Appraisal
Inc., a New York-based provider of automated valuations. “On the AVM side, it’s
a wild, wild West. And that just invites abuse of all kind.”
Regulators say the immediate effect of dropping appraisal
requirements would be limited because a vast majority of home loans in that
range are bought these days by mortgage giants Fannie Mae and Freddie Mac, or
guaranteed by other federal agencies. Those typically require appraisals
regardless of home value.
Appraisals help “ensure that the estimated value of the
property supports the purchase price and the mortgage amount,” regulators wrote
in their proposal. “However, the agencies also are aware that the cost and time
of obtaining an appraisal can, in some cases, result in delays and higher
expenses.”
Scrapping the appraisal requirement would open a swath of
new turf for upstart property valuation companies, like HouseCanary Inc., which
use artificial intelligence, algorithms and sometimes even drones to value
homes. Jeremy Sicklick, the company’s chief executive, said that replacing
appraisers with computers will speed up home sales by weeks, reduce costs for
buyers and eliminate human bias and error from the process of valuing mortgage
collateral.
“The technology has reached the level to where this
change creates a win-win for the consumer and lender,” Mr. Sicklick said.
Although appraisals are based on criteria such as sales of
recent comparable homes, they are sometimes more art than science. And
appraisers came under fire following the housing crisis, shouldering much blame
for inflating home prices at lenders’ behest.
Their latest turf battle comes months after a defeat at the
hands of lawmakers rolling back some financial-crisis-era banking rules. That
change eliminated a chunk of appraisers’ business by exempting many rural
properties from appraisals.
“The appraisal profession is suffering a death by a
thousand cuts,” said Joan Trice, chief executive of Allterra Group, a Maryland
firm that tracks the industry.
Since the housing crash, the number of appraiser
credentials in the U.S. has declined about 21%, to fewer than 96,000, according
to a federal group that governs the profession. Some lenders have complained
appraisers in booming and rural markets are in short supply.
Last autumn a rural Tennessee bank asked federal
regulators to waive appraisal requirements and allow an employee with some
appraisal training to value collateral. The request was denied, but it sparked
national debate over whether there are enough appraisers, and how homes might
be valued without them.
Appraisals typically cost between $375 and $900 for a
single-family home. Valuations produced by the likes of HouseCanary often cost
less than $100 a house. So do broker price opinions, which are a sort of
perfunctory assessment performed by real-estate agents and even outsourced to
office workers in India who use online data.
Banks and Wall Street investors use these alternatives to
price portfolios of houses and home loans, since valuations that are too high
or low tend to balance out over pools of thousands of properties.
Appraisers argue that approach is unsuitable for home
purchases, though. An appraisal that is off by a few percent could leave a
homeowner owing more than their house is worth or lenders with insufficient
collateral to cover defaulted loans.
“There’s still no computer that can see, hear, taste,
smell and touch,” said Pat Turner, an appraiser in Richmond, Va. “Have you ever
been in a hoarder’s house?”
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