Blind Squirrel and Acorns

[timd354]

The killer app for enabling the AVMs will be when some title company or third party database company uses a team of "raters" to go out and do a driveby inspection of every property that gets listed in the MLS; reads the listing, and then rates that property against a specific rating scale. Then if/when the property does enter into contract or does sell later on, a clerk can make phone calls to "verify" the terms and enter that info into the database. And this can all be done using semi-skilled unlicensed technician types, not licensed appraisers.

So what? It still won't be an appraisal. If at some point the lenders convince regulators this is a better system, have at it.... even without regulators, I don't' see how any prudent investor in loans would prefer this, or what it would do to interest rates. I don't even see a big cost savings (especially since the consumer pays for the appraisal).

It costs to hire teams of unlicensed technician types and property inspectors and property raters and then correlate the info and produce estimates , and it assumes a lot of reliability of the info coming from these unlicensed technical types. (whoever they are, they won't have much vested in this...if they are low wage people what do they care if info is correct or not, and what training will they have to know the difference?. (Maintaining and updating databases is expensive and time consuming. I don't see much cost savings, or superior results, but there are always entrepreneurs trying to make money so efforts in this direction will continue.

Aside from unknown property condition, which can be resolved through a property inspection. One of the biggest issues that negatively affects AVMs is the inaccuracy of public record/property assessor data in some areas. In the future, that may be much less of an issue and AVM's may be become a much larger threat to take business away from appraisers than today.

However, don't kid yourself about the possible acceptance of AVM's by investors in the future. As someone in the secondary market I can tell you for a fact that many investors and in the secondary market have a general distrust of the value estimates produced by appraisers - there is a general perception that there is an overall upward bias in appraisals (even after the bubble), and believe that most adjustments are not based upon sound statistical analysis of market reaction, but are either just a wild guess or, at best, are usually based on inadequate analysis. And these investors do have a point - Let's face it, using a paired sales analysis to derive adjustments is dubious fat best from a statistical perspective, yet this is how most residential appraisers claim to derive most adjustments when what is really needed to derive a an accurate estimate of market reaction to a particular feature would to be conduct a regression analysis using data from many sales.

Residential Appraisers need to up their game or they do face the possibility of losing a business in the future as AVM models improve. From an investor's perspective, there would be absolutely no reason to utilize appraisers if they concluded that collateral risk can be better managed using AVM's. That is not the case today, but it could be the case at some point in the future.

 

[J Grant]

How do you suggest appraisers "up their game"??? Appraisal reports are very comprehensive now and contain more information then ever, and turn times are very efficient. What is missing, or needs to be added?

Imo, if lenders or regulators or both decide to replace appraisals with AVM's, or a hybrid AVM/ appraisal or evaluation (since regulators increased AVM to at least an evaluation now), so be it. Appraisers may have a place working with these products, or not.

If investors have more confidence in AVM's, so be it. I have no idea of overall their values are more reliable or the information contained in them is comprehensive enough. The lack of upward bias in an AVM is laughable though...the AVM is going to spit back info with the sale prices, whatever they may be, and in a rising market , would be interesting to see how an AVM would compute price estimates or factor in a pending subject contract. Can an AVM differentiate between a flip sale, a builder sale or resale etc? Prices may climb higher if only AVM's are used. Who knows, since it has not been done as primary ...and has been upped to evaluations or lender purposes now. Am sure if the value estimates are too low, RE agents would be screaming for a "better" product.


Would be also interesting to see who gets the "blame" for "killing" a deal, once the appraisers are out of the picture. No more appraiser to blame for coming in low! The AVM did it! I suppose the RE agents or buyers or sellers will file complaints against...who? The lender for deriving the AVM or evaluation value that "killed" their deal, or was "wrong" in their eyes?

Why wouldn't'; an AVM value be as hotly contested or challenged as an appraisal value, (or more so?

Who will review them, or will they all be accepted at face value?

How will the potential for fraud or pushed values be addressed?

While a computer per se might not be capable of having an agenda, a lender or operator of an AVM can.. If their AVM's are producing too many "low " valuations which affects business, what is to stop the lender' or whomever is producing them from tweaking the program and getting higher value estimates?

Let it happen, I'll be enjoying the spectacle if and when it becomes the predominant lending model.

 

[Scott Kibler]

Then do away with appraisers and hire home inspectors instead. Have your computer provide the likely value range and the inspection report to ensure your borrower doesn't go immediately bankrupt replacing and repairing obsolete components. Alternatively, persuade your secondary market participants to stop mandating checklist orientated credit and collateral evaluation and encourage employees and vendors to use their brains when vetting loan applications. The secondary markets created this monster and they are the only ones with the power to kill it.

 

[timd354]

So what? It still won't be an appraisal.

If investors determine that something else aside from appraisal allows then to manage collateral risk as well as or better than appraisals, why would they care if whatever that is not an appraisal? (whether it is an AVM, an appraiser assisted AVM, or multiple BPOs).

It is already happening on the non-origination side of the business, where BPOs are used much more often than appraisals in default servicing. The VP of Claim Management at my company insists that BPO's are much more useful than appraisals for his purposes based on his 30 years of claims/default servicing experience in the industry. He told me that his former company used to use both appraisals and BPO's to value properties on defaulted loans until they determined that BPO's were more accurate than appraisals in estimating what the eventual sale price of a REO would be when sold by the lender/servicer. His conclusion is why obtain and appraisal when you can order three BPO's for less than the cost of a REO appraisal and those BPO's are more likely to accurately predict the eventual sale price of the REO when sold by the lender/servicer (which directly affects the amount that we may have to pay in a claim made under our MI policy). Even though I am an appraiser and reflexively favor appraisals over BPOs, I have no evidence that my claim management VP's conclusion is incorrrect

 

[DTB]

Then do away with appraisers and hire home inspectors instead. Have your computer provide the likely value range and the inspection report to ensure your borrower doesn't go immediately bankrupt replacing and repairing obsolete components. .

That's the future as I see it.

(Are you still inspecting? I may have one for you in Des Plaines, if my offer is accepted.)

 

[Scott Kibler]

Yep. I got the license ten years ago in anticipation of this very possibility; investor demand, not your specific job although I am very happy to take it on for you. I still believe I'm right but premature.

 

[J Grant]

Then do away with appraisers and hire home inspectors instead. Have your computer provide the likely value range and the inspection report to ensure your borrower doesn't go immediately bankrupt replacing and repairing obsolete components. Alternatively, persuade your secondary market participants to stop mandating checklist orientated credit and collateral evaluation and encourage employees and vendors to use their brains when vetting loan applications. The secondary markets created this monster and they are the only ones with the power to kill it.

Great post, Scott!

BTW, speaking of value ranges...sure, a computer could come up with a value range, or a point value . Whether it is a computer or a person though, at a point value is needed to base the LTV on, whether for a purchase or refi amount or HELOC limit.

I would LOVE to see the lenders taking the heat for this when and if they replace appraisers! No more appraiser to blame for coming in low, or coming in at a value someone in the food chain does not like!!

Who, in the system , is going to take the heat for the point value? The AVM operator? The loan officer? The UW? What lucky person are they going to elect to take responsibility for the point value and be open to lawsuits and challenges?

And who and what would ensure these products...E and O for AVM's? If there is none, then would banks have to be more responsible for some of the losses? Would interest rates go up?

( AVM's have been upgraded to evaluations for a reason for lending products, )

I hope it happens in my lifetime so I can enjoy the spectacle and the fallout. IF the IRS can be hacked and giant retailers hacked and online banking hacked, once these become relied on for primary loan decisions and purchases, the potential for fraud and hacking will be on a much larger scale than individual appraisers are capable of.

Right now, appraisers are licensed, scrutinized and have a lot to lose by committing fraud or pushing value.. But an unlicensed, low paid staff person made to run AVM's all day who sees an opportunity to make some side money, tweaking loan or purchase values for an investor? What does that person have t o lose other than a crappy low paid job?

 

[Scott Kibler]

If investors determine that something else aside from appraisal allows then to manage collateral risk as well as or better than appraisals, why would they care if whatever that is not an appraisal? (whether it is an AVM, an appraiser assisted AVM, or multiple BPOs).

It is already happening on the non-origination side of the business, where BPOs are used much more often than appraisals in default servicing. The VP of Claim Management at my company insists that BPO's are much more useful than appraisals for his purposes based on his 30 years of claims/default servicing experience in the industry. He told me that his former company used to use both appraisals and BPO's to value properties on defaulted loans until they determined that BPO's were more accurate than appraisals in estimating what the eventual sale price of a REO would be when sold by the lender/servicer. His conclusion is why obtain and appraisal when you can order three BPO's for less than the cost of a REO appraisal and those BPO's are more likely to accurately predict the eventual sale price of the REO when sold by the lender/servicer (which directly affects the amount that we may have to pay in a claim made under our MI policy). Even though I am an appraiser and reflexively favor appraisals over BPOs, I have no evidence that my claim management VP's conclusion is incorrrect

I can see the logic as RE sales people actually work closely with buyers and sellers and are therefore more in tune with what motivates their decisions. Appraisers are removed from the participants and often negligent in interviewing sales people to gain adequate understanding of these motivations. However the most active agents, those with the best data pretty much never accept BPO work. That's for newbies and those with nothing else going on.

 

[J Grant]

It is already happening on the non-origination side of the business, where BPOs are used much more often than appraisals in default servicing. The VP of Claim Management at my company insists that BPO's are much more useful than appraisals for his purposes based on his 30 years of claims/default servicing experience in the industry. He told me that his former company used to use both appraisals and BPO's to value properties on defaulted loans until they determined that BPO's were more accurate than appraisals in estimating what the eventual sale price of a REO would be when sold by the lender/servicer. His conclusion is why obtain and appraisal when you can order three BPO's for less than the cost of a REO appraisal and those BPO's are more likely to accurately predict the eventual sale price of the REO when sold by the lender/servicer (which directly affects the amount that we may have to pay in a claim made under our MI policy). Even though I am an appraiser and reflexively favor appraisals over BPOs, I have no evidence that my claim management VP's conclusion is incorrect

You are speaking of almost a secondary use for appraisals...that of eventual risk of default. I am not sure if you work for a PMI insurance company or what your company does. However, as you say, it is a non origination side of the business.

Appraisals now are used mostly on the origination side, with a different purpose (.

As far as valuing REO's for sale prices, if RE agents are doing the BPO's and then using them to set the list prices, of course the sale prices will closely relate, it is a closed system at that point.

These default service uses of an appraisal are not the purpose of an origination appraisal for lending purposes, which is to provide a market value opinion as well as other property information so lenders/ clients can make decisions , based on that information being relevant on effective date.

 

[factsandtruth]

I can see the logic as RE sales people actually work closely with buyers and sellers and are therefore more in tune with what motivates their decisions. Appraisers are removed from the participants and often negligent in interviewing sales people to gain adequate understanding of these motivations. However the most active agents, those with the best data pretty much never accept BPO work. That's for newbies and those with nothing else going on.

I agree with you 100%. Most of the BPOs are done by new agents learning markets and earning extra money gaining new potential clients....