HousingWire recently spoke to Chris McLain, division president of Valuations for Consolidated Analytics, about the current appraisal market, AI innovation in valuations and valuation products for HELOCs and second-lien mortgages.
HousingWire: How is the market for appraisals changing in 2024?
Chris McLain: We all thought radical change was coming … a decade ago. Then we did more of the same. But since the pandemic, the pace of change has really accelerated.
On the demand side, the pendulum of order volume took a hard swing to the low side, but it is poised to swing back hard. Housing demand is increasing, so as the market finds balance, demand will increase volume again. Also — low rates don’t last forever, so the perceived “interest rate lockdown” will resolve itself. As more homeowners are forced to sell due to needs (job changes, household changes, etc.), those low rates will snap back into the market. Then the incentive to “stay-and-play” will be gone, and that home will be liquid again.
The product environment is rapidly changing. Data, artificial intelligence and analytics are all way beyond what we had in 2016 or even in 2019. Technology is growing at an accelerated pace. This means that where valuations used to be a fundamental menu of options, we’re now on our way to a dictionary-sized menu — something specialized for every situation. Appraisers have to adapt to this new environment, and AMCs have to accommodate the changes for appraisers. We expect that in 2024, there will be a strong demand for valuation services, but it will no longer be all 1004s — it will be a spectrum.
HW: Are you seeing much repurchase activity, and how do you respond to it?
CM: We have seen an uptick — a couple of years ago, they were very rare, whereas over the last six to 12 months, we’re seeing significant increases. When it concerns an assignment we worked on, we have a specialist team evaluate the complaint and advise our client on their response.
We also assist clients with repurchase demands on loans we did not provide services. This can be done proactively by taking a representative portfolio sample and evaluating it for repurchase risk. Or it can be a reactive way — responding to a repurchase demand. We have solutions that will research the specifics of the demand in detail, evaluate the likelihood of success and form a defense and response. For investors, we can assist with finding problematic appraisals and evaluating them for a potential putback using the same process.
HW: How is artificial intelligence being integrated into the property valuation and appraisal process?
CM: Artificial intelligence (AI) is increasingly integrated into the valuation process, bringing about significant advancements in efficiency, accuracy and data-driven decision-making.
Beyond AVMs, AI is utilized in property valuations for predictive analysis, natural language processing, workflow optimization, quality control and risk assessment, regulatory compliance and more, leading to improved quality and faster turn times. AI is reshaping the real estate valuation and appraisal process by improving assessments’ speed, precision and efficiency.
While AI contributes valuable insights and automation, it’s crucial to underscore that human expertise remains vital for interpreting data, considering unique property characteristics and making informed judgments. AI is a valuable tool to support appraisers and appraisal management companies, enabling them to deliver more reliable and data-driven property valuations.
HW: With higher rates, the market for home equity lending continues to grow. What are the most common valuation products for HELOCs and second-lien mortgages?
CM: In home equity lending, several common valuation products can be used to determine the value of a property, helping lenders assess the risk and equity available for borrowing. It’s important to note that the choice of valuation product may be influenced by regulatory requirements, loan-to-value ratios, investor overlays and the lender’s risk tolerance.
Lenders should work closely with their AMCs to understand which valuation product is most appropriate for their home equity lending needs. A cascade or waterfall of disparate products often makes up an effective valuation strategy.
For example, because of their low cost and fast results, an Automated Valuation Model (AVM) with a property condition report could be an ideal solution for borrowers with high credit scores and low loan-to-value (LTV) ratios. As the risk grows, other more in-depth and human-powered solutions like a broker price opinion (BPO) or hybrid appraisal would better fit the risk. For higher LTV transactions and borrowers with adverse credit, more traditional solutions like a full 1004 appraisal may be needed. The key to an effective strategy is to match the appropriate valuation method to the transaction risk, and a good valuation partner can help advise on this strategy.