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Re-Evaluating the Traditional Appraisal

After the Mortgage Bankers Association (MBA) proposed raising the threshold for requiring manual appraisals from $250,000 to $400,000, Collateral Analytics examined [1] how raising this threshold would impact the mortgage industry as a whole.

The MBA originally wrote a letter to the US Comptroller of the Currency, the Chairman of the Federal Reserve Board of Governors, and the Chairman of the FDIC, requesting the elimination of manual appraisals from the mortgage underwriting process when mortgages are $400,000 or less, stating “MBA supports the agencies’ desire to raise the threshold for appraisal exemptions as a means of leveraging technology to better serve consumers, while also preserving crucial safety and soundness standards.”

According to Collateral Analytics, around 19.4% based on MLS (multiple listing service) sale transactions and about 14.6% based on public records would be impacted by the new proposed guideline. Collateral’s study suggests this slight move to eliminate traditional appraisals, from even a modest subset of residential mortgages, is a baby step toward modernizing the regulation and underwriting process for homebuyers. Without traditional appraisals, automated valuation models (AVM) would still be necessary during the underwriting process, performing the same tasks as humans but processing more data. However, AVMs may not reach the target price lenders may be pressured to achieve.

According to a study from Calem, Lambie-Hanson, and Nakamura (July 2017) from the Federal Reserve Bank of Philadelphia, the current system of price disclosure (to appraisers) creates a flaw in the risk management system. According to the study, when appraisals exactly hit the purchase prices or refinance target prices, no real information is gained by lenders and that “…we find that appraisals are less predictive of default than automated valuation model estimates.”

Most lenders still use traditional evaluation processes, even though 68% of all homes are under $312, 500 the typical threshold for a $250,000 mortgage, and eligible for automated appraisal methods combined with inspections on property condition. Eliminating the traditional evaluation will require a fresh look at this issue.