COVID-19 brought many changes to the housing industry as stay-at-home orders forced companies in the space to re-think the mortgage process. From drive-through closings to drone-guided inspections, industry experts got creative to meet the growing demand for new homes for a surge of homebuyers and homeowners who wanted to take advantage of low interest rates.
The appraisal industry was no exception, creating hybrid or remote models to conduct an appraisal and home inspection without physically entering the home as COVID-19 cases rose. During the pandemic, the Federal Housing Finance Agency (FHFA) began allowing for desktop appraisals, or an appraisal that can be performed from a desktop without a physical property inspection. It is an alternative appraisal method that is essentially a compromise between an automated valuation model (AVM), entirely done by software, and a traditional appraisal.
In October, FHFA Acting Director Sandra Thompson announced at the MBA’s annual conference that Fannie Mae and Freddie Mac would begin permanently accepting desktop appraisals for conventional loans, noting that “frictions in the appraisal process” can slow down turn times, especially in rural areas.
“This can help each appraiser complete more loans in a day, and it can also help rural communities more readily obtain a necessary appraisal when the borrower is purchasing a property,” Thompson said. “This certainty should allow lenders, borrowers, and appraisers alike to take advantage of the efficiency gains that desktop appraisals can provide.”
But not everyone was happy with the news that desktop appraisals would now be a permanent option, and some appraisers have been hesitant to get onboard. However, valuation experts claim that the ability to implement the desktop appraisal could be critical for the digital mortgage experience, and therefore important for a lender’s success.
HW Media CEO and Founder Clayton Collins recently conducted a webinar, which was hosted by Reggora, with several industry leaders in the valuation space to discuss the changes and what it means for the housing industry moving forward.
He was joined by Lyle Radke, Fannie Mae senior director of collateral policy; Freddie Mac Chief Appraiser Scott Reuter, Brian Zitin, Reggora co-founder and CEO; and Scot Rose, Class Valuation chief innovation officer. The webinar was attended by nearly a thousand industry participants, including lenders, valuations experts and third-party fintech companies. When asked if they plan to leverage desktop appraisals in the next year, 62% of respondents said yes, 36% said maybe and only 2% said no.
Why desktop appraisals and why now?
The FHFA’s decision to permanently allow desktop appraisals was a major milestone for appraisal modernization efforts and will push fintech companies to build out product offerings on the spectrum between an AVM and a full appraisal. Today’s modernization efforts could turn the valuations industry from a binary system, where borrowers either get a waiver or a full appraisal, into a system where there are multiple options in between.
“The hope is that it makes other additional product offerings available, and it increases efficiency in the process,” Reuter said. But appraisers are also currently at a breaking point when it comes to capacity and the amount of work they can continue to take on. Appraiser capacity issues during peak times present a complication to the mortgage process and increase turn-times for the overall mortgage process.
Coming out of the pandemic, the housing industry learned there are several ways to get through the mortgage process, and companies are now finding more flexible, innovative solutions.
“We are right off of all of our learnings from COVID-19 flexibilities with desktop and exterior-only reports,” Reuter said. “Appraisers really did a tremendous job. We didn’t see any increased risk. In fact, when appraisers were completing these reports, they were typically going a little bit above and beyond the minimum requirements.”
Because appraisers were consistently thorough and exceeded the basic requirement threshold when desktop appraisals became, in many cases, necessary, the market did not see increased levels of risk. This gives the housing industry the perfect segue into making desktop appraisals permanent.
Assessing the risk of desktop appraisals
The pandemic gave the housing industry time to test and learn the risks that could be involved with desktop appraisals. In fact, in a sense, it became one of the largest test-and-learns ever conducted, according to Reuter.
Reuter explained that when the government-sponsored enterprises (GSE) want to test a new product or initiative, they will put together a pilot pro-gram to test it out and improve it. The mortgage giants partner with several lenders to see the results of the new product.
“As awful as the pandemic was, and elements of it still are, it did afford effectively a large test-and-learn in this space,” he said. “So, we learned an awful lot from that.”
Trusting third-party data can present risks of its own, but appraisers have already been considering third-party data for quite some time, Reuter said.
“It’s incumbent on the appraiser to verify and determine they have accurate, reliable, credible information,” he said. “Appraisers can consider and develop anything they deem credible, so the appraisers are really on the front line and have been on the front line of third-party data utilization for a long time.”
But the question of risk management can’t be solved in a one-size-fits-all scenario. First, stakeholders must identify what the risks could be, and weigh it against the risks of not doing it that way, Radke explained. For example, during COVID, the risks of a desktop appraisal would have been weighed against the risk of an appraiser physically entering a home during the pandemic.
The demographics of the appraiser profession also come into play when considering risk exposure. As loan volumes surged after interest rates hit new record lows during the pandemic, turn times for appraisers became prolonged as they struggled to keep up with demand.
However, the GSEs have a mission to ensure liquidity in the housing market and promote access to credit for Americans who want to buy homes.
“When you have a bottleneck in the process that may take months in the worst-case scenarios to resolve, that is a restriction on access to credit,” Radke said. “That’s contrary to our mission. So, we’re looking at the fact that the median age of the appraiser today is somewhere in the upper fifties. More than half of appraisers are within 10 years of traditional retirement age. There’s a big chunk of appraisers who are already past traditional retirement age, who’ve just come through a period where we really experienced an appraiser shortage.”
“We’re doing all we can to recruit new appraisers, but in the meantime, we have a capacity issue,” Radke continued. “This is getting back to the risk question: How do you manage the risk of not having appraiser capacity when you need it? And the answer is: You’ve got to find ways to make your appraisers either more efficient or dedicate them to the more pressing problems.”
Impact of desktop appraisals on the housing industry
One of the greatest impacts the desk-top appraisal could have on the housing industry is to improve turn times. During the pandemic, loans were averaging more than 45 days to close, according to data from ICE Mortgage Technology.
“Through the last several years that we’ve been testing this idea of keeping the appraiser at their desktop and augmenting them with third-party information, we’ve actually seen an improvement on the appraisal management side,” Rose said. “We’ve seen up to a 70% reduction in revision rates coming from our customers to us. When you compare the digital process to the traditional process, 50% less of the time we go back to the appraiser on revision requests from us to them.”
As less friction is created during the process, and the introduction of technology frees up more appraisers to complete the valuation faster, days to close could start to decrease. In fact, Rose predicts this could create the opportunity to get appraisals back in as little as 24 to 48 hours.
“By unlocking a new option that has the potential to have faster turn times, it’s going to remove that bottleneck from the overall digital mortgage process,” Zitin said. “That’s why for lenders who are looking to optimize speed to close, appraisal has to be on that checklist. Otherwise, you’re never going to get there.”
Desktop appraisals are also paving the way for a much more streamlined experience for stakeholders, including consumers, borrowers and lenders. As technology companies roll out new desktop appraisal options, making sure users feel comfortable with the technology and the process — and that the data is reliable — will be critical to success.
Appraiser education and flexibility are critical to adaptation
Having the right amount of data and information that appraisers can depend on will be important in order to implement appraisal technology. If appraisers use information that is potentially false, they will still be held liable for trusting that information, according to Zitin. Earning appraisers’ trust and proving the value of data will likely take time and effort to build.
“We’ve worked with a lot of appraisers who came in out of the gate feeling as though they were against this process,” Rose said. “When they all of a sudden see and understand what can be delivered to them and in such a comprehensive fashion, it really inspires confidence in all of our appraisers.”
As the housing industry moves forward with this next step, reliability and education will be critical to adoption. Desktop appraisals have the potential to help revolutionize the digital mortgage industry and the housing industry overall. But as fintech providers and other stakeholders begin to develop these options, they must work with appraisers to gain a better understanding of their needs and processes, and to gain trust.
Coming out of the pandemic, technology was not just an option but the only way to serve borrowers during stay-at-home orders and heightened COVID-19 cases. As the industry continues to remain flexible when it comes to work location, new technology and new processes, the valuations industry should seize the opportunity to bring change that could increase the number of home-owners and open up access to credit.
The following Q&A features Lyle Radke, Brian Zitin, Scott Reuter and Scot Rose:
HousingWire: What exactly do appraisers not like about desktop appraisals?
Lyle Radke: It’s a remote appraisal. When I was out in the field appraising, you were getting out in the nice, bright, sunny morning and getting a little fresh air. It’s kind of fun. There’s an emotional attachment there. Some appraisers will miss that.
Scot Rose: Some of the misconceptions are prior experiences that some appraisers have had. We’ve been working through piloting. There are lots of different vendors, lots of different solutions and they’ve experienced potentially some or a few or all of them.
When they get exposed to the augmented processes with advanced technologies, they tend to change their minds very quickly. We’ve worked with many appraisers who came in feeling as though they were against this process. But when they see and understand what can be delivered to them and in such a comprehensive fashion, it really inspires confidence in all of our appraisers.
Brian Zitin: Where most appraisers are getting held up is liability. And that’s because they were still liable for using the information that is potentially provided by someone who’s not themselves. So they have to trust this information or verify it. And I think that right now, disseminating the correct information around how to verify that and what is acceptable is essential.
Because, to some extent, appraisers already do this today with MLS photos. They use MLS photos that they did not capture for comp, and they have to try to validate those and verify that they’re accurate. Now there’s a slightly different version of that with these floor plans and other things like that on the subject property. It’s a liability concern that eventually will get remediated over time through continuous messaging and education like we’re doing today.
HW: What kinds of homes or loans will be eligible for desktop appraisals?
Lyle Radke: We intend for this to be used for purchase transactions and there are some other limitations. The reason we are requiring for purchase is because the presumption is, in most cases, a purchase would have a recent MLS listing, which is a robust data source that can help inform the appraisal process. We are not allowing it for refinances or any type of cash-out or rate-term. We’re also not allowing it for second homes or investment property purchases. From a mission perspective, we felt like it was really important to focus on homeownership. It needs to be a single-family residential. And then the last thing I would say is that there’s an LTV cap. So using the contract price as a proxy for value, the LTV cap is 90. So, taking the proposed loan amount, divided by the contract price, it needs to be 90% or less.
HW: Why have floor plans become a cause for concern?
Scott Reuter: This is a new piece of information that we’re asking for. It’s not because of the availability that some of the appraisers have angst and concern about that. The availability of floor plans really varies market by market. In some markets, it’s very common to attach and include a floor plan on the online listing when you’re marketing the property. In many markets, however, it’s not. That does put the appraiser in the position of trying to source that.
HW: What role do desktop appraisal and valuation innovation play in the overall digitalization of mortgages?
Brian Zitin: In terms of the digitalization overall, as everything else in the mortgage process continued to get better in the last two years, appraisal turn times actually got worse. Appraisal continues to be a bottleneck around the overall ideal one-click mortgage. By unlocking a new option that has the potential to have faster turn times, it’s going to remove that bottleneck from the overall digital mortgage process. That’s why lenders who are looking to optimize speed to close, appraisal has to be on that checklist. Otherwise, you’re never going to get there.