The home appraisal process could be about to get a makeover, as the Federal Housing Finance Agency has requested public input on its policies and practices regarding the way they’re carried out.
The FHFA is the body that regulates the mortgage financing giants Fannie Mae and Freddie Mac. Home appraisals are an important step in the home buying process, where an independent appraiser estimates the value of a property someone is interested in buying, to make sure it meets the value of the loan the buyer has requested.
The FHFA said it is weighing up a number of proposals regarding the appraisal process, including one that would increase the valuation options for appraisers on loans backed by Fannie and Freddie.
“Modernizing the appraisal process has the potential to create a more streamlined and accurate collateral valuation process,” FHFA Director Mark Calabria said in a statement. “But if modernization is not properly adopted, it could have negative unintended consequences. The comments we receive will inform how we will modernize appraisals to improve both loan quality and the origination process.”
Other proposals being considered include increase the use of appraisal waivers, which means using an automated valuation method based on existing data rather than a human appraiser. The FHFA said it is also considering allowing what it calls “hybrid appraisals” where a third-party collects the necessary information on a home and sends it to a qualified appraiser who will determine the valuation, without seeing the property in person. Finally, it is also considering further adoption of desktop and exterior-only appraisals that became more common during the COVID-19 pandemic, to enable social distancing.
The new proposals have some critics. For example, some say that exterior-only or desktop appraisals might not catch existing problems with a home that could impact its value. Others have raised concerns that waiving appraisals for homes within a certain price bracket might increase unnecessary risk in the secondary market. The problem, critics say, is that automated valuations use previous appraisal data. Without using new and up to date data, automated appraisals might make mistakes in the future.
“If those appraisals are replaced with waivers it would be logical to assume there will be less data in the future,” Tom O’Grady, CEO of Pro Teck Valuation Intelligence, a property data and valuation firm, told MarketWatch. “That could have a dramatic effect on the overall market value of the home,” O’Grady added.
But proponents of automated appraisals say could bring cost savings for buyers and reduce the time it takes to buy a home. The increased sales seen last year have highlighted the shortage of qualified appraisers in the country, which has led to many buyers experiencing delays in closing their loans. The Appraisal Institute reported last year that between 2014 and 2018, the number of appraisers has dropped by more than 10% nationwide.