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Argent and Olympus join forces
Will technology replace appraisers?Charlie W. Elliott Jr., MAI, SRAAVMs, appraiser's role, government guarantees,
For at least 10 years or so, there has been a buzz going on in
lending and appraisal circles. It might be occurring in the office
cafeteria, trade publications, professional association meetings or
at conferences. It has to do with a question that can cause quite a
stir depending upon which camp you are in and how you put shoes on
the feet of your children and bread on the table. It all started,
as best as I can remember, back in the 1990s. This was just about
the time when automated valuation models (AVMs) were first being
used on a significant scale. This new tool was greeted with
enthusiasm by lenders and not so enthusiastically by appraisers.
You don't need an MBA from Harvard to understand why these two
camps--lenders and appraisers--might be at odds. Lenders are quick
to tell anyone who will listen that the appraisal is the most
difficult part of the mortgage-lending puzzle. Why would two groups
of professionals be at such odds on an issue that involves what
many would consider a common sense approach to protecting the
interest of the average citizen and taxpayer?
Herein lies the problem. For all practical purposes, the
government guarantees (in one of two ways) all loans made in our
country. The first guarantee is through the government-sponsored
enterprises (GSEs), such as Fannie Mae and Freddie Mac, which
purchase mortgages from lenders. This system allows financial
institutions to replenish their supply of mortgage capital so they
can make additional loans once their capital is exhausted. The GSEs
are not allowed to buy loans that do not meet their collateral
guidelines, which, in most cases, require the opinion of a
certified appraiser. The second guarantee is through the Federal
Deposit Insurance Corporation (FDIC), which guarantees depositors
that their money is safe when deposited in banks and other
financial institutions. These deposits cannot be considered safe if
banks make portfolio loans that are not sound.
In our country, there are very few mortgage loans that the GSEs,
the FDIC or both do not cover. We need not go back further than the
savings-and-loan debacle of the 1980s to understand why federal
regulators require that government-backed mortgage loans are
properly underwritten and secured. Federal law changed after the
multi-billion-dollar bailout through the Federal Institutions
Reform, Recovery and Enforcement Act of 1989 (FIRREA). Among other
things, this law requires that federally backed loans, depending
upon the degree of risk, are secured by properties that have been
appraised by state-certified real estate appraisers. After this law
was passed, all professional real estate appraisers were required
to become state certified, thus providing the mortgage industry
with the environment in which we work today.
Given that the government is on the hook for most mortgages, for
all practical purposes, many lenders are not using their own money.
It is in their best interest to make as many loans as they can, as
economically and expeditiously as possible. Appraisers can become
an obstacle in the path of the lending process. Appraisers can
delay the closing of the transaction by a week or more while the
appraisal is being prepared or from an opinion of value, which
prevents the loan from being made. For these reasons, most lenders
would prefer to not have an appraisal prepared. Appraisers, on the
other hand, typically see non-appraisal evaluations as inferior to
true appraisals and as a threat to their livelihood. This concept
may be better understood by loan originators if they considered the
possibility that their job could be eliminated due to new
legislation requiring all banks to take loan applications over the
Internet, thereby eliminating the loan originator.
Federal guidelines have loosened up in recent years, permitting
loans to be made, in some cases, without a certified appraisal. In
many of these cases, the alternative is an AVM, a collateral
evaluation tool born strictly out of technology. Depending upon
whom you talk to, it appears that about 15-20 percent of all first
mortgages are made using an AVM as an exclusive property evaluation
tool. Said another way, some 80-85 percent of all loans now require
a certified appraisal supporting the value of the collateral prior
to closing. On equity lines, which banks usually keep in their own
portfolio, lenders report that AVMs are used on an estimated 50
percent of the loans as an exclusive method of collateral
evaluation. The remaining 50 percent require some sort of
appraisal. The question is whether the industry will permit more,
or all, collateral evaluations in the future to be made via AVMs,
thereby eliminating the need for an appraiser.
While undoubtedly, there will be many collateral evaluations
performed electronically in the future, there are a number of
reasons why the appraiser's role is critical to the collateral
evaluation process. There are two reasons that guarantee that the
services of many appraisers will be needed in the future. The first
is that while AVMs can provide accuracy in many instances, they are
generally not as accurate as a certified appraisal. This is
especially the case in less-populated areas that have a less than
homogenous stock of housing. Certified appraisers inspect houses
and make judgmental decisions in a way not possible by electronic
evaluations. Issues such as making allowances for design and
appeal, property condition, property location as well as proving
that the property actually exists can be challenging to the most
accurate AVM. Only people can do these things and there will always
be a need for this service.
Second, in today's market there is more concern about fraud and
the solvency of the GSEs. While this is not to say that appraisers
cannot and do not participate in fraud, fraud is less likely when
an independent appraiser is hired to locate the property, evaluate
it and make a report of their findings. The key here is
independence, where an unbiased party to the transaction engages
the appraiser. There is also quite a stir today on Capitol Hill
about the financial strength of the GSEs. Any legislation designed
to address GSE financial strength will undoubtedly favor the use of
more, not fewer, appraisals.
There will always be low-risk situations where appraisals are
not required. To prove this, loans are made to individuals that
require no collateral at all and are based solely on the borrower's
perceived ability to repay the loan. In such cases, if a house is
thrown in as additional security for good measure, having an
appraisal may be less necessary. Contrarily, a loan made to someone
with questionable credit in an area where housing values are
unstable or where there are few comparable sales will most surely
require a certified appraisal. It has been my observation that in
some geographic areas, AVMs either cannot be performed at all or
have an accuracy deviation that can amount to 50 percent or more of
the value of the property.
So, the lender and the appraiser should get used to one another.
For the foreseeable future, the appraiser's job is safe and the
lender can expect to use them. Oh, and one last closing thought. In
many if not most cases, AVMs provide values less than that of an
appraisal due to the age of the comparables and the shortcomings of
the AVM to reflect adjustments. Lenders may just be able to make
more and larger loans with the help of the appraiser when AVM
values are lagging behind the market.
Charlie W. Elliott Jr., MAI, SRA is president of ELLIOTT
& Company Appraisers, a national real estate appraisal company.
He can be reached by phone at (800) 854-5889, by e-mail at
[email protected] or through the company's Web site at www.appraisalanywhere.com.
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