Mortgage companies are increasingly turning to computer algorithms to appraise seller’s homes, and a new federal proposal may see the practice become even more widespread, the Wall Street Journal reports.
According to the Journal, federal regulators want the majority of U.S. homes valued at less than $400,000 to be exempt from a requirement that says the appraisal must be carried out by a human. The proposal would enable more appraisals to be done by algorithms, and has been approved by the Comptroller of the Currency and the Federal Deposit Insurance Corp. It only needs final approval from the Federal Reserve before it takes effect.
The impact of this could be widespread, as more than two-thirds of U.S. homes sell for $400,000 or less, according to data from the U.S. Census Bureau and the National Association of Realtors.
Lenders say the move would have big benefits, as home buyers would be able to save money on the cost of hiring a human appraiser. It would also speed up closing times, they say. Not surprisingly though, appraisers themselves have criticized the move, saying more automated appraisals could introduce greater risks to the $10.9 trillion home loan market. They say that technology cannot substitute for human judgment.
But those who make the algorithms disagree.
“Software is eating real estate,” Jeremy Sicklick, chief executive of HouseCanary, Inc., a company that offers automated appraisals, told the Journal. “You're seeing the beginnings of the machines outperforming humans in terms of accuracy.”
HouseCanary charges $59 for its 20-page computer-generated property valuations. In contrast, a human appraisal for a single-family home usually costs between $375 to $900.
The immediate impact of the new proposal would be limited though, as most home loans valued at $400,000 or less are purchased by mortgage financing bodies such as Fannie Mae and Freddie Mac. These entities still insist that appraisals are performed by a human, irrespective of the value of the property. So the majority of affected loans would be those held by lenders or pooled into mortgage bonds that aren’t backed by the government.
However, things could change in future as Fannie Mae for one has made moves that suggest it’s becoming more open to the idea of automation, recently changing its appraisal requirements for some refinancing loans.