Reggora’s Brian Zitin Discusses Appraisal Technology With the Mortgage Bankers Association
This article was originally published in MBA Insights.
MBA NEWSLINK: Why is the appraisal process is so important? What are the major impediments in the current process, and is it ready for innovation?
BRIAN ZITIN, REGGORA: The appraisal process is extremely important because objectively valuing the underlying collateral for any type of loan is crucial to properly gauging risk. When trying to value properties at scale though for the millions of homes that change hands every year, it becomes a very difficult logistics problem–especially when the number of appraisers is declining every year and there are regulatory requirements that need to be met.
Although the complexity of the appraisal hasn’t changed much over time, consumer expectations have, and people want things done better, faster and cheaper. As a result, both buyers and mortgage lenders are often impatient with how long appraisals take. To put it simply, in the digital age the appraisal process is stuck using legacy technology from the 1990s and is ripe for innovation.
NEWSLINK: How do these logistics issues affect buyers and mortgage lenders?
ZITIN: These issues affect buyers and lenders in two huge ways. Firstly, the value of the collateral will have an impact on the actual potential loan amount because it changes the loan to value ratio, which lenders use as one of the risk parameters for a loan. So if appraisals are not done accurately, it could negatively impact a borrower’s ability to buy or a lender’s ability to lend.
Secondly, the appraisal takes up a significant amount of time and every day that passes introduces potentially negative consequences for everyone involved. For example, the borrower could lose the deal to someone else, the rate-lock time frame could expire, leading to a more expensive loan or penalties or a host of other potential problems could arise.
NEWSLINK: What role do appraisers play in this process?
ZITIN: The appraisers are the subject-matter experts who know the local area and what factors contribute to value as it relates to real estate. They are the ones actually signing off on the opinion of value for the lender. They are licensed individuals who undergo a lot of training and education to get the job.
NEWSLINK: How have appraisal regulations evolved since the 2008 housing crisis reforms? What role has FinTech has played in this change?
ZITIN: Regulations have changed significantly due to a slew of appraisal independence laws that were enacted intending to reduce bias or influence in the appraisal process. While well-intentioned, these laws have also contributed to a complex and difficult appraisal process.
In my opinion, FinTech has not played a large role until very recently. The appraisal industry has been slow to adapt to new technologies and there are not as many FinTechs in this space compared to other verticals in the mortgage industry such as point-of-sale platforms or loan origination platforms.
This is why it’s such an exciting time to be in the appraisal industry.
NEWSLINK: How do you think mortgage lenders can be partners with FinTech companies trying to help the appraisal space evolve?
ZITIN: I think the key for mortgage lenders is to be open to new technology and processes. Since appraisal has been done the same way for many years, new technology can introduce new and different workflows whether it’s around payment processing, underwriting or ordering.
The lenders that don’t invest in new technology–whether it’s due to lack of prioritization or fear around ripping out old practices–will be the ones that fall behind and can’t compete in the coming years.
What lenders sometimes don’t realize is that no matter how much they automate or improve other parts of their mortgage process, if the appraisal is taking one, two or even three weeks to complete, they will never get to that goal of a one-click digital mortgage.
NEWSLINK: What aspects of the appraisal process do you think can be streamlined the most through automation?
ZITIN: I think all of the logistics around the actual appraisal itself can be streamlined: ordering, status updates, scheduling, underwriting, etc. These are the parts of the process that actually take up the most time and can be significantly improved with technology.
For example, we have built out automated rules-based reviews that automatically review each appraisal for common errors or typos and can address these issues with appraisers up front as opposed to having the lender manually review the appraisal and then ask the appraiser to edit it.
Additionally, we have automated payment processing around the appraisal to streamline a process that right now requires accounting departments to be burdened with individual payments.
Finally, we can instantly allocate an appraisal request with a qualified appraiser that specializes in that type of property within the area requested and provide status updates along the way. These processes added up ultimately cut days, and sometimes weeks, off the finally appraisal turnaround.
NEWSLINK: You mentioned a “one-click digital mortgage” in the future; do you see this as practical? What would it take for us to get there?
ZITIN: I can’t speak as well to the other parts of the mortgage process, but I do believe the vast majority of loans that require an appraisal could be completed in a single day. There will always be exceptions (for example, multi-million-dollar complex properties or extremely remote areas), but I think we can get there.
How we do it is through focused collaboration between the lender, FinTech companies, the government-sponsored enterprises and appraisers. The process seems to be fundamentally shifting to a more data-oriented approach that will lend itself to better logistics and accuracy, which are the keys to getting there.
Everyone is focused on speed, and yes that is important, but maintaining a high level of quality is a requirement to a functional lending environment.
NEWSLINK: So do you think the appraisal industry can be an entirely data-driven industry in the future?
ZITIN: I don’t think the appraisal industry can be entirely data-driven. The fundamental way of valuing any asset requires gathering the various variables that constitute it, comparing it to similar assets with similar variables and reconciling the value between them.
The existing data that is out there, primarily public record data and MLS data, does not do a good enough job of gathering the necessary variables for residential real estate in a high-quality manner. This is why automated valuation models always often have error rates that aren’t tolerable for mortgage lending.
I think someone will always need to at least gather those variables on a property in a high-quality manner, including the interior. Once those variables are gathered though, I do see a future where machine-learning algorithms are better at analyzing data compared to a human. The challenge will be in gathering and refining the data for each inspection so that it is actually usable.