Stephen Sousa
Is faster and cheaper always better? Many would exclaim, “of course!” but, when it comes to valuing residential real estate the answer should be a cautious “maybe.”
Let’s start by examining Fannie Mae’s and Freddie Mac’s (GSEs) foray into appraisal free lending. Through the magic of big data, the GSEs are able to determine how much a house is worth and offer the borrower the option of not having a formal appraisal as a requirement for getting a mortgage.
This sounds like a great deal until you think back a decade when many homeowners overpaid for their houses and ended up in foreclosure when the economy soured. When a borrower opts to waive the appraisal the borrower also opts to forego a professional opinion about the house’s value and knowing if they are overpaying for the house. A slip-up in the economy, resulting in erosion in property values, will cause appraisal free loans to face a greater than average prospect of over-lending and default.
Two more salient points about appraisal waivers: first, when approving a waiver, the GSEs use big data to confirm an estimate of value provided by the lender. Second, the lender who delivers a loan under the appraisal free program also benefits from having all future liability for the loan’s performance waived by the GSEs. This is a sweet deal for lenders whose only goal is to close as many loans as possible.
Data Usage
The ability to leverage and couple together vast amounts of data using today’s technology is opening the door to even greater change in the appraisal process with alternative valuation products or hybrid appraisals gaining traction in some sectors.
One example has the appraiser completing the appraisal from the comfort of their office utilizing a (hopefully) reliable site visit report prepared by an unrelated property inspector selected by the lender. At the same time, the appraiser is provided lists of sold properties and other public record data, often unverified, to use in the report. One drawback of using public record data is the risk that the data is out of date and inaccurate. Often, building size (gross living area) in public records is an example of data that is in need of correction but, this won’t happen without an experienced person taking measurements.
There’s no denying the impact technology is making on the appraisal profession and there’s no denying appraisers have to aware of the changes and be willing to adapt to meet the needs of appraisal customers. At the same time, we must be cognizant of the intended and, more vitally, the unintended consequences of change.
The value an appraiser brings to the process cannot be duplicated by computers that are unable to perform the same level of research and analysis as an appraiser. Appraisers study not only the data of closed sales, but also study and identify trends in the marketplace; analysis that big data is not able to produce as the trends are not yet “data.”
Big data also lacks eyes on the property, especially on the inside. It does not know if improvements were made and if those improvements were permitted. It will not see property conditions that would raise red flags for an appraiser and would be catalogued in the appraisal report. In short, all big data does is make an estimate of the possible value of a house without the benefit of all the facts.
The public should be worried by the GSEs aggressive return to much looser underwriting and appraisal standards, given they remain in conservatorship after the taxpayer funded, multibillion-dollar bailout of just a few years ago. With Congressional action moribund on the future of the GSEs, their unbridled actions are setting the stage for the next housing crisis.
We’re happy to report that representatives of the MBREA met with U.S. Rep Michael Capuano and staff from Sen. Elizabeth Warren’s office to voice our concerns and, one day soon, we look forward to Congress stepping up to protect homeowners and taxpayers by establishing reasonable risk management boundaries for the GSEs.
Stephen Sousa is executive vice president of the Massachusetts Board of Real Estate Appraisers (MBREA), a Boston-based association for valuation professionals that was founded in 1934.
