Your Next Home Will Be Appraised By A Robot

Or, more to the point, by a drone and an algorithm. The question in many consumers' minds is who's interests the machines are serving. JL

Ryan Dezember reports in the Wall Street Journal:

The next time you buy a house, your lender might deploy a drone and a computer algorithm instead of a human appraiser. Financial institutions and state banking regulators say that by not having to hire a licensed appraiser, lenders and home buyers will save money and real-estate deals can be completed faster. Appraisers and consumer-advocacy groups argue that it introduces new risks to the $10.9 trillion market for home loans and that computer models and other technology can’t replicate a trained appraiser’s judgment, human senses and experience. “Software is eating real estate. Machines (are) outperforming humans in accuracy.”
The next time you buy a house, your lender might deploy a drone and a computer algorithm to size up the property instead of a tape-measure-toting human appraiser.
Federal regulators are moving to allow a majority of U.S. homes to be bought and sold without the involvement of licensed appraisers, by increasing from $250,000 to $400,000 the value of homes exempt from a human evaluation.
In doing so, they are opening the door to more appraisal work being performed from afar and by computer models.
Proponents of the change, primarily financial institutions and state banking regulators, say that by not having to hire a licensed appraiser, lenders and home buyers will save money and real-estate deals can be completed faster. Appraisers and consumer-advocacy groups that have opposed the change argue that it introduces new risks to the $10.9 trillion market for home loans and that computer models and other technology can’t replicate a trained appraiser’s judgment, human senses and experience.
“Software is eating real estate,” said Jeremy Sicklick, chief executive of HouseCanary Inc., which has trained computers to assess the condition of homes using photos and sometimes employs drones to produce images of properties. “You’re seeing the beginnings of the machines outperforming humans in terms of accuracy.”
HouseCanary, which charges $59 for its 20-page computer-generated property valuations, is among those that stand to benefit from the change. Appraisers, meanwhile, are in danger of losing market share. Appraisals for a single-family home typically cost between $375 and $900.
David Bunton, president of trade group The Appraisal Foundation, said boosting the threshold for appraisals serves to “hollow out the teeth” of lending regulations put in place after the 1980s savings-and-loan crisis. “It will likely prompt many financial institutions to significantly reduce attention to collateral risk management,” he said.
The proposal was made in November by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve. The FDIC and the OCC have approved the change, and the Fed is expected to follow suit. The new rules will take effect once it does.
In its ruling this week, the FDIC said that the increase to $400,000 “approximates more recent house prices and provides an inflation adjustment to a threshold that has not been increased since 1994.”
The $250,000 threshold was set in 1994. That is also the baseline for the S&P CoreLogic Case-Shiller National Home Price Index. According to that oft-cited home-price gauge, a home that sold for $250,000 in June 1994 would have been expected to sell for more than $640,000 in March. At the depths of the housing bust, in December 2011, that house would have been about $445,000, according to the index.
More than two-thirds of U.S. homes sell for $400,000 or less, according to U.S. Census data and the National Association of Realtors. Had the higher threshold been in force in 2017, about 214,000 additional home sales, or some $68 billion worth, could have been made without an appraisal, regulators said.
Regulators say the immediate effect of loosening appraisal requirements would be limited because most home loans in that price range are bought by mortgage giants Fannie Mae and Freddie Mac , or guaranteed by other federal agencies. Those typically require valuations by licensed human appraisers regardless of home value, though Fannie has begun to eliminate appraisal requirements for some refinancing loans.
It would affect loans that are held by lenders or pooled into mortgage bonds without government backing. The market for private mortgage bonds dried up in the aftermath of last decade’s housing collapse, but lately a growing number of loans that could otherwise be bought by Fannie and Freddie are winding up in private bonds.
Moody’s Investors Service has been among those that have warned that eliminating appraisers from deals heightens risks for investors. Alternatives such as broker price opinions—which are a type of perfunctory evaluation performed by real-estate agents and even outsourced to office workers in India who use online data—or computer-driven automated valuation models “would weaken the credit quality of new residential-mortgage-backed securities,” Moody’s has said.