This article was initially published on the Mortgage Bankers Association blog.
In late August, the Wall Street Journal predicted robots and data may soon dominate the home appraisal industry. It highlighted the fact that regulations around the appraisal are loosening, which is opening up a door for new valuation technologies to enter the appraisal space.
The Journal's article explained how the future of appraisal industry will be rooted in predictive technology, artificial intelligence and automation. Through these observations about the future of the appraisal, it also remarked on a larger industry trend regarding the aging of both its labor pool and legacy technologies.
It is no secret across the mortgage industry that appraisals are one of the most costly, prolonged and frustrating parts of the lending process. In today's digital economy, both lenders and borrowers expect a seamless and accessible lending experience. This expectation often falls short during the appraisal component of the lending/borrowing process.
The reason for this is straightforward: the appraisal process is stifled by both excessive regulations and outdated software. The combination of these two factors leads to a predominantly manual process that occurs during one of the most critical periods of the loan origination cycle.
Changing the workflows that enable these inefficiencies is where technology can play a critical role. New technology can provide the industry with logistics optimization, accessibility and automation that streamline the manual processes of the appraisal. In a nutshell: the industry is ready for a technological transformation.
Current State of the Industry
To appreciate how the appraisal industry can change, it is prudent to understand the state of the industry today. Following the 2008 financial crisis, the federal government passed a series of laws intended to govern the actions of mortgage lenders and secondary markets. Among other things, the legislation was designed to oversee how lenders and appraisers interact in order to implement safeguards around the integrity and independence of the appraisal itself.
At a high level, these laws limit how lenders are able to interact with appraisers, which has resulted in the rise of costly internal processing departments at lending institutions as well as the prevalence of appraisal management companies. Additionally, the government sponsored enterprises have enforced certain quality standards that have prompted lenders to implement extensive quality control systems around the final appraisal product. Although a rigorous review of the appraisal is welcomed, this step of underwriting has proven to be costly, lengthy and manual.
While these are just a small sampling of the regulations that now govern the appraisal process, these laws have contributed to the appraisal industry's fragmentation and an inability to optimize appraisal logistics. Today, lenders, vendors and other third parties all use different technologies, most of which have limited capability and poor user interface.
The decade-old regulations have also had a significant impact on the industry's labor pool. The bulk of appraisers today are heading toward retirement and fewer new appraisers are entering the market due to high barriers of entry and reduced fees. These factors have affected lenders' ability to solicit appraisals in certain areas in a timely manner and lead to growing concern in the industry.
New Demands in a Digital Age
As more and more of the lending process is digitized from point of sale systems to automated title companies it is becoming increasingly clear that the current appraisal process is simply inadequate. The appraisal industry must evolve to meet the heightened expectations of borrowers and lenders.
There are two primary areas of innovation in the appraisal industry. The first involves improving upon existing technologies and optimizing normal appraisal processes--things like inspection scheduling and quality control. The second area focuses on the use of data and advanced valuation models to fundamentally change how the appraisal process takes place.
To maximize appraisal logistics and workflows, the appraisal industry must adopt platforms that use new technology and AI to automate manual tasks. Everything from underwriting to payment processing to order allocation itself can be managed by automated systems that use data and technology to "verticalize" the currently fragmented and manual system.
By allowing technology to optimize the logistics and steps around the appraisal process, lenders can expect reduced turn times, high quality appraisals and a more digital appraisal experience.
Once logistics optimization occurs, lenders and tech companies can then focus on how to revolutionize the appraisal workflow. The key question here is, does every property need a full appraisal when it comes to risk management?
The immediate answer is no. Recently, regulators passed a law that increases the threshold on residential transactions requiring an appraisal to up to $400,000 in value (up from the previous $250,000). Fannie Mae and Freddie Mac even offer appraisal waivers on some loans and are now exploring new models of appraisals called hybrid or bifurcated appraisals.
These new types of appraisals allow third parties to complete an inspection of the property on their own and send that information to appraisers who can appraise the property from their desktop based on the inspection data.
This change recognizes that certain properties are standardized and generally low risk and therefore do not require a full, lengthy appraisal. The market must continue to trend in this direction and embrace the change.
The appraisal industry is ripe for innovation and there are certainly workflows that are poised for overhaul. However, it is clear that only an influx of high-capacity, modern technology will truly be able to serve as the catalyst the industry needs, especially given the new opportunities that are available.
The Wall Street Journal may very well be correct that robots and data will soon change the way we consider home valuations. But this will only be possible if lenders, regulators and tech companies are prepared to collaborate and reimagine the appraisal.
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