The influx of new technology into the mortgage industry over the past decade has dramatically changed how lenders, buyers, and vendors conduct their business. However, while technology is pushing the boundaries of age old practices in an effort to establish new industry paradigms, laws and regulations have not necessarily kept pace.
This divide between what is possible through technology but restricted by law is perhaps most evident in the appraisal industry, where recent legislation designed to protect the integrity of the appraisal has also come with unintended consequences. Laws and guidelines like the Home Valuation Code of Conduct, the Appraiser Independence Requirements, and the Interagency Appraisal and Evaluation Guidelines have all served as warranted regulations on the appraisal industry, but have also led to an industry that is skeptical of technology or automation.
As a result, due to concerns over compliance, today’s industry has layers of redundancies and manual processes that lead to fragmentation, opacity, and significant delays. The sudden prominence of third-party intermediaries like appraisal management companies are an example of this fragmentation. Similarly, the concept of manual “appraisal checklists” – checklists that underwriters need to cross off when reviewing an appraisal – are considered the status quo when reviewing an appraisal before its final delivery.
However, after more than a decade since the housing crisis, it’s time for regulatory agencies to recognize that the appraisal industry is poised for a technological overhaul and to reconsider appraisal compliance in an effort to move the industry to a more digitized future. In this endeavor, the industry will likely experience greater transparency, a vastly improved buyer experience, and even a more rigorous review of appraisals themselves. Working cooperatively with government-sponsored enterprises and regulators, financial technology companies can come up with ways to maintain the same level of risk and caution, yet still digitize and automate the existing appraisal process.
For starters, even when regulators are loosening rules around appraisal regulations, it seems like they are adopting a “one foot in one foot out” approach to the process. For example, in situations where appraisal waivers are offered and an automated valuation is accepted, lenders are often still required to send a site-inspector to the property to confirm that everything checks out. Alternatively, Broker Price Opinions – a broker’s opinion of the home value – are also scrutinized as a valuation option. This is especially true in the credit union space where examiners are skeptical of alternative valuations even for back-end purposes such as removing mortgage insurance.
This hesitation is concerning, especially when it appears that the future of appraisals will not be centered around the age old workflow of every home requiring a full in-person appraisal. Instead, the onus will be on the broker or seller to quickly take pictures of their home, upload those into a portal where an appraiser can conduct a thorough valuation that goes through an automated underwriting engine and is delivered to the lender within hours or days, not weeks.
The underlying fear around accepting hybrid models for appraisals is that the valuation will be somehow inaccurate. However, as both big data and technology develop, more advanced systems that involve mobile applications, drone visuals, and more can account for many of the feared discrepancies. In fact, there is a clear benefit to appraisers as well – if an appraiser spend less time driving around and inspecting properties and instead dedicates that time to conducting property research and comparable sales analysis, the industry might benefit from more comprehensive appraisal products as well.
Additionally, there is no doubt that the appraiser will still play a critical role throughout this process. With a risk-conscious approach to appraisals, standard and uniform properties like urban condos or refinanced properties with prior appraisals can be the initial testing grounds for a more automated approach. On the other hand, complex properties that require appraisal expertise will still need to be appraised – indicating that there will still be a need for appraisers in the field in several circumstances.
With an eye on the horizon, it’s prudent for regulatory agencies to rethink the guidelines and laws that limit the ability for technology to thrive and revamp the appraisal industry. Working with new technology platforms and forward-thinking lenders, the industry can craft a new set of guidelines that will remain risk-conscious and ensure compliance, but allow for a new era of appraisal technology to emerge.
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