Federal regulators early in November proposed loosening real-estate appraisal requirements to enable a majority of U.S. homes to be bought and sold without being evaluated by a licensed human appraiser, according to a recent article featured in the Wall Street Journal. That potentially opens the door for cheaper, faster, but largely untested property valuations based on computer algorithms. The proposal, made by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Federal Reserve, would increase to $400,000, from $250,000, the value of homes that can be bought and sold without an appraiser visiting a property.
According to U.S. Census data and the National Association of Realtors, more than two-thirds of U.S. homes sell for $400,000 or less. That would have meant that about 214,000 additional homes at a value of about $68 billion, according to the WSJ article, could have been made without a human appraisal.
Is this shift truly a possibility? Many don’t think so, at least for now. First of all, according to regulators, the immediate effect of eliminating appraisal requirements would be limited because a vast majority of home loans in the $400,000 or less price range are bought these days by mortgage giants Fannie Mae and Freddie Mac, or guaranteed by other federal agencies. Those typically require appraisals regardless of home value.
Then there are the additional risks that come in not using a professional that performs the actual appraisal. Automated valuations done by computers are largely unregulated, even with proposed control standards for automated valuation models made under the 2010 Dodd-Frank financial overhaul. To date, this has not been done.
Additionally, appraisers argue that using computerized valuations is unsuitable for home purchases. An appraisal that is off by a few percent could leave a homeowner owing more than their house is worth or lenders with insufficient collateral to cover defaulted loans, cites the WSJ article. As one appraiser was quoted, “There’s still no computer that can see, hear, taste, smell and touch.”
Even with these risks and limitations, regulators say that they are also aware that the “cost and time of obtaining an appraisal can, in some cases, result in delays and higher expenses,” and something needs to be done. Replacing appraisers, according to companies that sell valuation tech products, will speed up home sales by weeks, reduce costs for buyers and eliminate human bias and error from the process of valuing mortgage collateral. Appraisals typically cost between $375 and $900 for a single-family home. Valuations produced by computers often cost less than $100 per house.
We’ll be keeping our eyes open on this development at RPS, as we provide insurance protection for Real Estate Appraisers with Professional Liability or Errors & Omissions (E&O) coverage. Coverage is designed to provide protection against damages and claims expenses arising out of an act, error or omission that results in failure to render professional services for clients. Coverage applies to errors and omissions in the performance of professional services as a real estate appraiser, notary public, expert witness or as a member of a real estate accreditation, standards review or similar real estate board or committee. It is available to individual residential, commercial real estate appraisers and trainees.
We provide our agents and brokers with the ability to quote and bind coverage with much more ease using our on-line portal.