The pandemic and Federal Housing Finance Agency (FHFA) drove the next wave of appraisal modernization
Appraisal modernization efforts began in the late 1990s with the development of various automated valuation models (AVMs) and appraisal waivers (AWs) for conventional loans delivered by Fannie Mae and Freddie Mac (the Enterprises). Initially authorized for use in eligible refinance transactions, both technologies were eventually approved for use in eligible purchase transactions.
Although each Enterprise interpreted the data from AVMs differently, it was a step toward modernizing the traditionally labor intense and time-consuming appraisal process.
In 2010 the Federal Housing Finance Agency (FHFA) introduced the digitization of appraisal data through the Uniform Appraisal Dataset (UAD). The UAD provides standardization in the classification of appraisal data, including a standard set of abbreviations to use in the most common types of appraisal reports.
The Uniform Collateral Data Portal (UCDP) was launched the following year as a vehicle for the standardized and conventional appraisal reports incorporating the UAD to be uploaded for delivery to the Enterprises.
Although there have been incremental changes and enhancements to appraisal completion and delivery since 2011, the emergence of the COVID-19 pandemic quickly pushed modernization efforts forward.
In early 2020, due to safety concerns for all stakeholders involved in the appraisal process, the FHFA allowed for certain “flexibilities” when completing appraisals. Those flexibilities included extended time to complete appraisals and the extended use of desktop appraisals for certain mortgages and properties.
Several months after authorizing temporary property valuation flexibilities, the FHFA acknowledged that outdated rules and regulations may curtail the traditional property valuation process. The agency also saw the need for, and benefit of, alternate appraisal completion and delivery methods.
In late December 2020, the FHFA issued a Request for Input (RFI) for comment-gathering on appraisal policies, practices, and processes.
Based on an analysis of the information gleaned from the RFI responses along with readily available, robust, reliable, and abundant digital data on homes and neighborhoods, earlier this year, the FHFA announced that it would accept appraisals conducted remotely—without the physical presence of an appraiser for qualifying Fannie Mae or Freddie Mac backed mortgages as a regular course of business.
“What was one of the temporary flexibilities has now become an established option for originating enterprise loans,” said Sara Thompson, FHFA Director.
The FHFA also made hybrid appraisals a permanent method for completing appraisals for loans delivered to the Enterprises. With a hybrid appraisal, an appraiser completes the valuation remotely based on the information provided by a third party through a physical inspection.
Hybrid appraisals can be conducted in several ways, including the appraiser inspecting the outside of the property using video technology for the interior information and digitalized information such as MLS information and public records to complete the remaining requirements. Another option is having a third party other than the appraiser conduct the physical inspection and using online data to complete the appraisal.
As noted in The Future of Appraisals article in the upcoming issue of Mobility Magazine, when authorized for use, Hybrid or Desktop appraisals as an alternative to a traditional in-person is voluntary. The appraiser usually has the right to inspect a property if necessary personally.
“I prefer to physically inspect the properties to better determine the type and quality of materials used in the home. Often, that’s not possible using a desktop or hybrid appraisals, and sometimes, third parties, including homeowners and real estate agents, don’t know,” says Byron Miller, owner of BM Appraisals. “Also, the cost of liability is the same regardless of how the appraisal is completed.”
When utilized, often, all the steps to complete an appraisal can be performed through a single software application. The benefits of using a comprehensive software application include:
- Access to online documentation through a single platform
- Greater communication to other stakeholders in the appraisal process (homeowners, loan officers, real estate agents, other appraisers, etc.)
- Ability to remain compliant through the use of standardized forms and requested information
- Greater transparency
Lenders See Considerable Value in Appraisal Modernization
Lenders also see considerable value in the appraisal modernization methods approved by the FHFA, according to a survey conducted by Fannie Mae’s Economic & Strategic Research (ESR) Group.
ESR surveyed senior mortgage executives using its quarterly Mortgage Lender Sentiment Survey®. The survey revealed that:
- 94% of the surveyed lenders agreed that appraisal modernization efforts are valuable to the industry.
- Similarly, nearly all lenders agreed that current tools, such as Collateral Underwriter® (CU®), help manage collateral risk (94%). They noted that the tools provide an extra layer of due diligence and boost lenders' confidence in appraisals.
- "Shortening loan origination cycle time" was overwhelmingly cited as the most important potential benefit of appraisal modernization, followed by "enhancing appraiser capacity" and "lowering consumer/borrower costs." The benefits associated with appraisal quality and risk management were also considered important by many lenders, including enhancing data quality, increasing confidence, reducing errors, and lowering repurchase risk.
- Lenders cited "the speed of industry-wide adoption" as the most significant implementation challenge, followed by "integration with loan origination systems" and "integration with GSE automated underwriting systems."
- "Inspection-based appraisal waivers" and "nontraditional appraisals (e.g., desktop appraisals or hybrid appraisals)" were cited as the areas most likely to benefit from adoption. Additionally, one-third of lenders think it would be helpful to "incorporate tools such as image recognition or GIS (geographic information systems) into the scoring logic of underwriting or quality-control tools (e.g., CU)."
As history has shown, modernization in the appraisal industry is ongoing. The recognized value of modernization efforts is often realized incrementally, as more users of modernization tools become accustomed to implementing them in the appraisal process.