The federal government, with the reluctant support of the two leading professional appraisal organizations, has sanctioned the use of computerized, appraisals using algorithms and computerized databases of property data to determine a property’s value.
Can more widespread use of computer-driven valuations by programs called Automatic Valuation Models. or AVMs, in mortgage origination be far behind?
Millions of homeowners use AVMs to check the value of their homes on a half dozen web sites. Even though more sophisticated versions have been developed for professional use, AVMs have seldom been sanctioned to valuate properties for mortgage approvals.
In its new HARP 2.0 refinancing program the Federal Housing Finance announced two weeks ago, the Administration approved valuations by “reliable” automated valuation models provided by Fannie Mae and Freddie Mac to determine the value of the property. Where a “reliable” AVM is not available, however, they must use an appraisal. Using AVMs for valuation will save homeowners the cost of a professional appraisal and speed the refinancing approval process.
Actually, lenders refinancing loans through Freddie Mac are allowed on a limited basis to value the home using Freddie’s Home Value Explorer AVM. HARP 2.0 may bring Fannie Mae’s AVM usage more in line with Freddie Mac’s.
Jonathan Miller, President/CEO of the Miller-Samuel appraisal firm and a leading critic of AVMs as well as the appraisal management companies (AMCs) that have emerged in recent years to provide lower cost appraisals than traditional appraisal practices, attacked the policy last week.
“There are no reliable AVMs I am aware of, the quality of appraisers working for AMCs is very poor, most AMCs have AVMs and AMC’s dominate the mortgage appraiser space. Banks will likely choose only based on cost since that’s all they ever do and both valuation services, AMC appraisers and AVMs, provide crappy reliability.
“An AVM costs something like $7 today and a bank appraiser for an AMC is $200 (50 percent of market rate). Since both stink, banks will go with the cheaper version,” wrote Miller on his Web site.
Even Fannie Mae, whose automated underwriting system Desktop Underwriter® was one of the first widespread applications of automated valuation models, states on its Web site, “At present, we believe AVMs have generally not evolved sufficiently to fully replace traditional appraisals and human judgment for the origination of first lien mortgages. In addition, Fannie Mae does not approve or endorse third party AVMs or insured or warranted property valuation products.”
HARP 2.0’s expectations modest-refinancing of one million loans or so-but the program’s changes in the way loans are originated, including appraisals, could be more significant over time:
“While we recognize that the GSEs (Freddie and Fannie) have developed their own AVMs, it is our understanding that until now, they have been primarily utilized as a check on the collateral valuations accompanying mortgages offered for sale to the Enterprises. Under the HARP Phase II changes, it appears that AVMs will now become a primary tool - rather than a backup or limited use one - to value collateral for mortgages eligible for refinancing under the program. As a consequence, we believe it is essential that effective quality control standards are in place at the GSEs so as to reduce the possibility that unreliable AVMs are utilized in significant numbers of refinance transactions, with the inevitable accompanying risk of a further weakening of the Enterprises financial viability,” wrote Jack Washbourn, president of the American Society of Appraisers.