Increase in Exempt Threshold Could Lead to Surge in Digital Valuations
What’s that drone doing hovering over a property?
Soon that sight may be the norm on homes for sale.
The days of human appraisers may be coming to an end for homes priced under $400,000, if regulation proposed by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve gets approved.
Previously, only homes valued under $250,000 could be purchased or sold without the use of a human appraiser. That threshold is potentially being raised to $400,000, opening up more business for drone-monitored and computer-generated home valuations. The vote is nearly there, awaiting expected agreement from the Federal Reserve before the regulation takes effect.
While the appraisal industry is concerned the change could negatively impact real estate at large, the brokerage side of the business predicts the threshold hike should have minimal effects on homeownership and the home-buying experience.
Stephen S. Wagner, 2019 president of The Appraisal Institute, tells RISMedia that the organization continues to “oppose this effort by bank regulators that threatens consumer protection and safety and soundness.”
“While we’re not surprised, we are very disappointed that the federal banking regulatory agencies have focused on regulatory relief at the expense of protecting homebuyers,” Wagner says. “The consequences could be substantial.”
The Association for Valuation Professionals (MBREA) agrees, stating the threshold increase will only create vulnerabilities, increasing risks that could prove devastating should we see another market crash.
“Raising the threshold is an unwise decision and is further evidence that banking regulators learned nothing from the last decade’s Great Recession,” says Steve Sousa, MBREA executive vice president. “They are willing to ignore their responsibility to protect federal financial and public policy interests.”
Additionally, Sousa says this is simply the latest cause for concern in an industry that continues to struggle as it maneuvers other policy shifts.
“Raising the threshold has to be looked at in conjunction with what else is impacting the appraisal profession,” according to Sousa, which include the following:
- “The GSE’s move to waive appraisals and expand the use of bifurcated appraisals.”
- “The NCUA increase in the commercial threshold to $1 million.”
“Disregard of prudent lending practices with a reliance on questionable automated valuations places the real estate market on the edge of a slippery slope,” warns Sousa.
Other industry practitioners, however—particularly those in the brokerage space—are less worried and largely support the decision to increase the exempt price range.
“I really like this decision,” says Chance Brown, broker/owner of CB&A, REALTORS® in Houston.
Creig Northrop, president and CEO of Northrop Realty, a Long and Foster company in the greater Baltimore/Washington Metropolitan area, agrees, stating he believes the proposal is “fantastic.”
Brown says the success is already evident within the refinance segment, as the change has influenced certain transactions.
“It only makes sense that it would make its way to purchase contracts as well,” says Brown. “I believe that this will really only impact a small number of transactions because of the loan types that this is currently available to, but I hope that it will expand.”
“It’s just the growth of the market,” Northrop emphasizes. “An appraisal in that price isn’t going to make a difference.
If the threshold inches upwards of $400,000 in the future, however, Northrop could see cause for concern.
“In these lower price points, the value is not going to be overinflated. Now as you get over $400,000, and the higher you go, the more negotiations take place and there’s a percentage issue,” Northrop says.
But with over two-thirds of homes in the U.S. selling for under $400,000, according to the Census Bureau, appraisal organizations say the impact is being severely downplayed.
“While it’s unclear how many transactions will be affected, increasing the appraisal threshold from $250,000 to $400,000 will negatively impact many consumers across the country,” says Wagner, adding that the primary threat is to the “safety and soundness of the nation’s mortgage system” because it allows consumers to enter into financially harmful transactions.
Meanwhile, Sousa predicts the most influence will be related to Fannie Mae and Freddie Mac mortgages.
“Taken alone, this increase in the residential threshold will have a minimal impact; however, when coupled with Fannie Mae’s and Freddie Mac’s foray into appraisal waivers, the impact is bigger,” says Sousa.
Where the line gets blurred is with the involvement of technology. While some believe drone-operated and computer-generated valuations are the future of real estate, removing the human touch has long been opposed by industry professionals across the spectrum of roles.
“I see the humanistic value,” says Northrop when speaking of licensed appraisers. “An appraiser can go to the location and physically see the upgrades. Using tech or AI is like using Zestimates—it’s basically the same thing. It has no idea what surrounds the house or what is inside. They just can’t see that.”
Sousa says it’s impossible to stop the big data train, but that the limitations on this tech are “significant” when used for “predicting home values through automated valuation models” (AVMs). This is because the AVMs only consider “yesterday’s data,” unable to assess market trends in real-time, he says.
Wagner agrees, stating “AVMs are only as good as the data entered into them.”
“While they might be acceptable in some uses…in most cases there are too many variables involved to rely on AVMs. A qualified, competent and credentialed appraiser who conducts a detailed onsite inspection, thoughtfully collects data and carefully analyzes all that researched information is best suited to provide an independent, reliable and credible opinion of value,” says Wagner.
But Brown has a more optimistic view on AVM tech as it progresses.
“It only makes sense for this practice to grow,” he says. “In areas where comps are difficult to find or vary widely, we will still absolutely need the human touch; however, when possible, I believe that being able to take a week or two out of the transaction is an amazing leap forward.”
The exemption threshold has not been increased since it was set in 1994. According to the Wall Street Journal, had this higher threshold been imposed in 2017, about $68 billion worth of, or 214,000, home sales could have closed without the use of a human appraiser.
Liz Dominguez is RISMedia’s associate content editor. Email her your real estate news ideas at ldominguez@rismedia.com.
All they care about, and all they ever want is faster, and cheaper.
Been true for the last 30 years I’ve been in the business.
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Comment How will a drone or a computer take in to account a remodeled kitchen or bathroom for example?
The appraisal report we see most often for residential real estate is an 8.5″ X 14″ page made up of formulas. The human element, and rules limiting its impact on appraisals, have taken the subjective observations of the appraiser largely out of the process anyway. Most appraisers do not look at the elements of the structure or its construction in favor of allowable price per square foot limits placed on categories of space based on use. The fantasy here is that the appraisal industry thinks it is still actually valid as an indicator of current comparable market value. With the rapid growth of the automated valuation and investor offer/purchase process booming on the internet, how does the full service agent compete? Unfortunately appraisals, however accurate, are now drawing on flawed market data driven by the automated valuation and investor offer/purchase industry. This is the element that the full service agent has to explain to a potential seller who is now looking at lower community property values. This is largely because the appraisal of their property will be based in part on any recent sales to this lowball investor offer/purchase process. So, a few questions remain: “Does an appraisal materially benefit a Seller, given the skewed data pool?”
Does the appraisal benefit the Buyer?
It is not a case of “if” but “when” the market crashes. And it is stated, (at least implied), that the market can’t loose enough in lower priced residential to make a difference. How fast the foreclosures tsunami of 2006-2012 has been forgotten. Not sure about other areas but around my location, most of those were in the low end of the market. Of the hundreds of foreclosure appraisals I did, only a few were above $300K. Most were below $150K. Loans now being advertised like they were in 2002-2006 with no income, no asset, no credit score verifications. But if fits right in with realtors unbridled greed to up sell no matter what and the bankers desire to make loans on those same properties. After all, once the house closes and the loan is sold, there is NO liability. Now, with no appraisers involved either so no appraisal E&O, guess it is up to the US Treasury. After all, didn’t we teach those in the financial sector the last time that there was NO downside to their actions. Did even one financial sector decision maker see the inside of a prison? Appraisers, some closing attorney’s, some obvious fraud loan rings, but not those at the local institutions that obviously were over selling but no consequence.
Considering that most algorithms still fail to accurately value homes should be a red flag. I do not see how you can remove the human element, which would be required in many cases to establish differences beyond the number of bedrooms and square footage, for example.
It could prove beneficial for some, but in the case of bad evaluations, what’s the option for recourse?
Since an appraisal is a matter of opinion, each appraiser has a different opinion. When the down fall of our market came and it was blamed on the appraisers, that was not correct, it was the Lender.
Impossible for the market to change , as a rule due to appraisers, when you have a willing seller and buyer that should constitute a sale.
This is a pandora’s box. Properties will be over valued (not taking into account deferred maintenance), and undervalued (not taking into account upgrades etc.). The only time I see the automated valuations work, is areas of homes that are very similar (only 3 or 4 basic models in a subdivision). As Realtor’s we often have disagreements with appraisers, but how can we possibly deal with an AVM generated in some corporate office, no where near the property.
Comment
I see both sides of this issue. Computers, drones, data cannot replace experienced professionals and likely never will. But I strongly disagree with the notion that the lender is interested in protecting the consumer. That is not true. They only are concerned about their own interests in the transaction. The only reason appraisals are done is for the banks – they are the client, not the borrower.
If they want to speed up time get rid of management companies who shop for cheapest price and delay getting an appraisal done. The reason for the problem before was not appraisers it was lenders doing loans that people should not have like interest only etc.
I held RM, SRA, IFA certifications before licensing ever existed. Then my Maryland License was #000081 my partner was #00003. Could see this coming for 30+ years. Appraisal is a ruined proffesion now. Not neccasary? When I started the forms could be filled out with a pencil. Yes I am old and there is nothing new that can provide a better valuation than an appraiser who’s walked through thousands of properties from West Baltimore to Chevy Chase, Bethesda and Patomac. Alan and Allene you have it right. My advice? Buy a drone or get out of appraisal. A greeter at Walmart will soon be better.
I have seen where there is less than 80% loan to value the appraisal has been waived, but I think it should be up to the buyer giving them the option. In writing the buyer chooses actual appraisal or drive buy/drone.
The appraisal numbers are only as good as the appraiser. When we get someone from a different local, or state, since we border another so closely, they have played havoc on some of my deals, as they don’t know the area! And, when the appraiser calls and asks what the contract price is, I would like to know why they ask, as it’s their job to out a number on it! This is something that I’ve never understood, and they always come in at the context price! Go figure!
The real risk is not on the upper end of the price range. The real risk is using an AVM, which has at least a 15% error factor, when one is buying a $200,000 or $300,000 home with 3% or less down. The loan could easily be upside down on the closing date! The taxpayer, once again, will be holding the bag. Worse yet, it invites a 2008 institutional collapse all over again!
Comment: Calling on NAR to rally realtors to vote against this.
CommentWait until they come after Northrup’s paycheck, he’s the next wonderful no real estate agents. They can go back to selling cars
Goodluck, dont matter the people will bail the banks out like in 2008..bad loans based on no appraisal can be too easily obtained and leave the public holding the bag..
Another catastrophic recession in the making. Appraisals with no feet on the ground? I can provide reference to incredible numbers of properties under and over valued by geographic boundaries and simple room number counts.
Updates and improvements will have no value.
Condition has been, good, fair, or average.
Good or Bad human appraisals have always kept perceived values in check. To believe a computer logarithm can do the same, in my opinion a technology disaster.
CommentYep, this is all about corporate greed at the expense of the consumer. Yes, AI and technology are helpful, but it’s not even close to accurately appraising a home. This is “fake news” the financial corporations have been saying to get rid of the middleman, the appraiser. This is just another scheme the financial institutions have implemented to realize their goal of controlling everything in buying and selling real estate, including its worth. For many years Fannie was the enforcer of appraisal rules guidelines and procedures, to the dismay of lending institutions who wanted more control to “manipulate” their deals. Just a short time ago Fannie Mae was bankrupt and headed for extinction. Today, Fannie has removed several of the basic rules and procedures they have upheld for all these years to protect the consumer, and miraculously just purchased a multi-million dollar state of the art building. Ironically, all of their new policies, procedures and rules are in-line with what the financial institutions have been trying to do for years. Can you say PAYOLA! The automated system that Fannie is using to assist them in determining property values is data they have extracted from the appraiser’s appraisal reports, without compensation. This data will get old, what will they rely on next?
How will they fly drones within 4 miles of an airport, which is not allowed, under current regulations…
This would the mean the end of my business. I can’t make a decent living now and less appraisals would sink the ship. Thirty plus years down the drain, because of politically motivated garbage. Well, there’s always welfare.
Comment Do it, so we can be busy again when everything goes bad.
Comment Really a bad idea! There are certain things that would not be discovered or revealed without a personal onsite visit by a qualified appraiser. I think this could unleash a rats nest of law suits, safety issues and false evaluations for the lender.
Comment: Thank you for covering this, as a real, real estate appraiser I recently had first hand experience of where this is a bad thing. A buyer from out of the area made an offer on house that was $40k over the highest sale in the past year. The house had been vacant for over a year and had a non-conventional heat source that may have been damaged, other maintenance issues as well. Had she waived her right to an appraisal and used an alternative method the purchase price could have been supported by sales from a neighboring lake community but in reality should not be supported.
Additionally, just yesterday I received a message from someone who was selling a very nice looking 1400sf house but had concerns because it was not sitting on a permanent foundation. The foundation consisted of stacked 4×6 pressure treated posts. This was not noticeable in the photos. The lifespan of PT lumber laid in dirt can be as short as ten years. This could be a nightmare for potential buyers.
One less way to protect the buyer in a bidding market and without the comparison the quality of the home…… hurts the first time buyers and the areas that the market is not average at $400,000. Consumers lose again! More reason to work with a Realtor that know the area and market.
Appraisers don’t like the idea because it will eliminate their job.
Realtors love the idea because it is a quicker sale and they don’t have to worry about a low opinion of value or a home in need of repairs messing up their quick sale.
The author this article didn’t even bother to ask a lender their opinion, that is the one that counts!