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The Way We Were: COVID-19’s Impact on Appraisals

On March 29, President Trump made the following statements to the American people: “We will be extending our guidelines to April 30 to slow the spread [of COVID-19]. We can expect that by June 1, we will be well on our way to recovery.”

However, Dr. Anthony Fauci, the nation's top expert on infectious disease, has warned that COVID-19 could come back in "cycles," and urged the U.S. to be prepared. The practice of social distancing, first announced by the White House on March 16, has had an impact on every aspect of our lives, as well as the way we manage our business affairs.

Recognizing the impracticality of requiring appraisers to conduct home inspections under the current guidelines, Fannie Mae, acting under the guidance of the FHFA and in concert with Freddie Mac, issued a Lender Letter on March 23, stating:

“Effective immediately, we are allowing temporary flexibilities to our appraisal inspection and reporting requirements. We will accept an alternative to the traditional appraisal required under Selling Guide Chapter B4-1, Appraisal Requirements, when an interior inspection is not feasible because of COVID-19 concerns. We will allow either a desktop appraisal or an exterior-only inspection appraisal in lieu of the interior and exterior inspection appraisal (i.e., traditional appraisal).”

Commenting on this Letter, Ernie Durbin, Chief Valuation Officer, Clarocity, said, “The desktop appraisal is actually preferred to an exterior drive-by by the GSEs.”

As per the letter, “The minimum scope of work for a desktop appraisal does not include an inspection of the subject property or comparable sales. The appraiser relies on public records, multiple listing service (MLS) information, and other third-party data sources to identify the property characteristics.”

According to Bob Murphy, Founder of Collateral Advisors, LLC, and former Director of Property Valuation and Eligibility at Fannie Mae, “These are temporary solutions to a temporary problem. At the same time, this might provide some good data to analyze the effectiveness, good or bad, of using third-party data for subject property information in lieu of an inspection by the appraiser for certain loans.” Murphy added that, currently, “there is no standardized uniform desktop appraisal report.”

Many have chimed in on the obvious shift in the way Americans are doing business in the face of this pandemic, and the probability that some changes will be permanent. In an article that appeared in the Washington Post on March 21, Erik Brynjolfsson, Director of the MIT Initiative on the Digital Economy, was quoted as saying, “There’s a lot of things where people are just slowly shifting, and this will accelerate that. It’s amazing how slowly habits change, where people get stuck in the ruts of doing things, and then you have a shock like this that can change everything. It forces people to overcome the switching costs, figure out something new and say, ‘Hey, this is way better.’”

It is apparent that the way we were is not the way we will be, in the wake of the coronavirus pandemic. The term “social distancing” has become a permanent part of our vocabulary, and at certain times and in certain circumstances, it will remain part of our social fabric.

How will all of this impact the residential property appraisal industry? It seems as though this is one more instance where change is occurring in front of our noses, but people are failing to see the trend.

A little-known fact is that automated valuation technology was developed decades ago at the request of the lending community. They were dissatisfied with the appraisals they were receiving and wanted greater appraiser efficiency (i.e., shorter turn times), as well as more transparency and defensibility. Since then, “alternative valuation products”, many of which had their genesis in AVM technology, have invaded the valuation space that was once the domain of the appraisal profession.

The industry once “owned” by appraisers is now dominated by alternative products, yet appraisers continue to shun technology. As a result, appraisers today control a very small portion of the pie that once was theirs.

In 2017, Fannie and Freddie began accepting some home-purchase loans without any formal appraisal. Instead, they use analytics and data to develop supporting property valuations in house. This has saved consumers tens of millions of dollars in appraisal fees—at the expense of the appraisal industry.

On September 27, 2019, the financial regulatory agencies issued a final rule raising the appraisal threshold for residential real estate transactions from $250,000 to $400,000. Under the new rule, 72% of eligible transactions will be exempt from the appraisal requirement. The final rule requires institutions to obtain an evaluation in lieu of an appraisal.

Today, we also see the sanctimony of the property inspection being diminished. Bifurcated appraisals are gaining acceptance, and with the advent of a viral crisis, inspections are being deemed totally unnecessary in some circumstances.

While there is no indication that property appraisal is going the way of Woolworth’s Five and Dime stores, there is no doubt the industry is experiencing significant change. We see the trend to eliminate appraisal requirements in some circumstances, or to at least soften the requirements from traditional standards. While this does not spell “doom” for the industry, it is a harbinger of things to come. Appraisers must learn to adapt. Quickly.

What does this imply? As the shift toward automated analytics continues, the only way the appraiser can remain relevant is by embracing technology and managing it.

History tells us appraisers don’t perform well with regression-based systems. A decade ago, Bradford Technologies released its CVR technology for use by appraisers. The effort, while admirable, failed because the platform was based on regression. Both appraisers and lenders were displeased with the results, and ten years later fewer than half of all appraisers indicate they plan to invest in valuation technology. In fact, nearly 70% of appraisers cite dissatisfaction with data-driven valuation models as a major industry concern.

Appraiser dissatisfaction stems from a single fact: appraisers don’t trust technology they can’t understand. Most valuation systems use regression or artificial intelligence, and to comprehend either fully requires a level of expertise that is beyond those without dedicated statistical training.

This problem translates to discomfort in the lending community as well. One lender expressed it this way:

“If an appraisal user can’t understand how an appraiser arrived at a value conclusion, and if the appraiser cannot adequately explain the process, the product is worthless.”

An appropriate tool for appraisers must be built around traditional appraisal methodology so it can be both understood and defended. It must allow for meaningful interaction by the appraiser, with safeguards to protect against appraiser fraud. Finally, the product—the report, regardless of type—must be the product of the appraiser, and not a “black box”.

There is a reality inherent to valuation technology that is overlooked. Different methodologies and techniques are appropriate for different products. No one solution is best for all assignments.

For example, pure automated valuation systems (AVMs) are most appropriate for portfolio valuation. The precise value of any given property in a portfolio is often less important than the value of the entire portfolio. Consequently, if some individual valuations are off the mark, results are deemed dependable as long as the mean error (average of all errors) is small.

This approach is less than desirable if the accuracy of each value conclusion is paramount. In the case of individual appraisal assignments, minimizing error is critical, and the best results can be obtained by combining intuitive technology with individual knowledge and expertise.

It is time for appraisal organizations to consider implementing appropriate technology, designed for use by appraisers, and managing the valuation process to take maximum advantage of both system strengths and individual capabilities. As the integration of valuation technology by appraisal organizations proliferates, standardization will be key. It is difficult to fathom how any appraisal group can represent it is better than any other without standardization of process and standardization of product. Technology imposes a degree of standardization which can be maximized with training.

Appraisers have a deep-seated aversion to valuation technology, but they need not, as long as they adopt technology that works for them. With the proper tools they will be able to compete in this changing world—they will be able to adapt to assignments that require less than complete inspections and non-traditional methodologies, such as evaluations, without disrupting their production of traditional appraisal products.

The way we were is not the way we will be. It is time for appraisal organizations to prepare.

About Author: Mark L. Stockton

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Mark L. Stockton began both appraising real estate and banking in the late 1960s. As president of a community bank in the mid ‘70s, he designed and developed the nation’s first comprehensive bank software. It would ultimately be used by one out of every three banks in the U.S. With the help of the University of New Mexico economics department and a renowned real estate litigation firm, Stockton developed the country’s first computerized residential valuation system in 1981, which produced automated valuations (AVMs), appraiser assisted valuations, traditional appraisals, and evaluations. An automated tax assessment system was added shortly thereafter.

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