This piece originally appeared in the August 2022 edition of MReport magazine, online now.
The COVID-19 pandemic resulted in unprecedented changes in the way industries conduct business. Like everyone else, the mortgage industry adapted to lockdowns by adjusting day-to-day operations. Mandates, social distancing recommendations, and health concerns led Fannie Mae and Freddie Mac—the government-sponsored enterprises (GSEs)—to relax property appraisal guidelines, allowing appraisers to conduct exterior-only inspections. While the change made sense from a public health perspective, drive-by appraisals presented challenges, raising the likelihood of inaccurate or insufficient data leading to deficient valuations.
Perhaps this perception of an abbreviated process is why, when it comes to appraisals, the mortgage industry has been slow to embrace this evolution. However, this seems to be changing with announcements made by the GSEs in early 2022. The GSEs revealed that beginning in March 2022, they would implement new rules allowing lenders to use Desktop Appraisals (Desktops) for loans that meet certain eligibility criteria.
This announcement paves the way for a new era in the appraisal profession, opening the door for continued evolution and modernization within the space. In the interest of refreshing readers’ memories, we’ll briefly outline the differences between traditional appraisals and the new Desktop or Hybrid Appraisal options currently available.
As readers probably know, traditional appraisals rely on the footwork and expertise of a credentialed appraiser. An appraiser completes a personal physical inspection of the home’s exterior and interior, taking measurements, evaluating its condition, and documenting its features, such as the type of foundation, construction materials used, and any other contributing factors impacting the value of the property.
To provide the most credible valuation of a home, the appraiser also researches county and municipal records to find information about the property and the surrounding neighborhood. For example, the sales prices of the most comparable homes in the area provide key data to help them complete their market analysis.
Under the new guidelines, the appraiser does not have to physically inspect or set foot on the property. Rather, the appraiser prepares a valuation based on an existing floorplan and other readily available and verifiable data about the property. This data may be provided by the homeowner, the builder, a buyer’s or seller’s agent, and public records such as assessor data. The recent sale prices of comparable homes are still required for market analysis in determining a property’s value.
Occasionally, real estate sales agents submit floorplans from a builder along with their multiple listing service (MLS) photos. As part of the desktop appraisal process specifically, GSEs require floorplans to include exterior measurements used to calculate the square footage, along with interior walls, doorways, staircases, points of ingress and egress, and the appropriate room labeling.
There are many forms of Hybrid Appraisals, sometimes referred to as bifurcated appraisals, whereas the data collection process and the data analysis process are separate. With a Hybrid Appraisal, the appraiser completes his or her valuation of a property by leveraging data collected by a third party, including the potential for exciting technologies like 3D scanning, to provide accurate floorplan data and a comprehensive digital view of the property (more on this later).
It should be noted that GSEs do not review and approve all emerging technology used in the Hybrid Appraisal process. They only require appraisals to meet the guidelines of the designated form. If their requirements are met and the data is accurate, the means used to acquire that data is not relevant.
Desktop Appraisal Eligibility Requirements
The new Desktops are not eligible on all loans. To qualify, a mortgage must meet the following requirements:
- The loan must meet “accepted mortgage” requirements. An accepted mortgage falls within a risk class in which the lender deems the borrower’s creditworthiness acceptable.
- Desktop Underwriter (DU) must indicate that the mortgage is eligible for Desktop appraisal.
- The purchase must be for a single-family residence, including a home in a planned unit development. The new rules exclude refinance loans.
- The mortgage must have a loan-to-value ratio (LTV) of 90% or less. Mortgages with LTVs higher than 90% require a traditional appraisal, including exterior and interior inspection.
Potential Challenges Posed by the New Rules
The new rules mean change, which comes with several advantages and risks. Understanding compliance requirements is key to advancing the industry. While the new rules provide greater flexibility and have the potential to increase efficiency, compliance errors can lead to higher buyback rates. Short-term challenges may include:
- Floorplan discrepancies: According to Fannie Mae, when more than one appraiser measures the same property, one out of five times their measurements differ by more than 10%. Such divergences can lead to errors in Traditional Appraisals (hence the new ANSI measurement standards).
When performing a Desktop Appraisal, the appraiser may be reviewing conflicting measurements and floorplans from builders and assessors and will need to decide what is the most credible source—without setting foot on the property or measuring it themselves and without the use of assumptions. This presents an obvious challenge and often will result in the appraiser declining the appraisal assignment and requiring a conversion from the Desktop to a Traditional Appraisal, adding significant time delays to the process.
- Insufficient information: To complete a Desktop Appraisal, the appraiser must have sufficient information to develop a credible appraisal. In fact, the new guidelines stipulate that an appraiser must decline an assignment when sufficient information is not available. In such a case, the appraiser must rely on the traditional appraisal method.
Moving Forward With Exciting Digital Technologies
Desktop Appraisals have the potential to make the appraisal process significantly more efficient for eligible loans. This may be even more true when appraisers employ new technologies already provided by some industry leaders. These advances make gathering the required information even easier and more reliable, which bodes well for busy appraisers and the mortgage industry as a whole. For example:
New 3D scanning technology creates a digital twin of the property.
- Scans of the exterior and interior of a home are stitched together to create a 3D image of the property and produce highly accurate floorplan exhibits that meet both the GSE requirements and ANSI Standards without setting foot on the property.
- Produces an interactive virtual tour to determine a home’s fine details, from the quality of construction, to the condition of the property, including the brand and year of manufacture of those readily observable mechanical systems and appliances.
- Comprehensive reporting tools provide geolocation and time-stamping, documenting when and where the scan was performed.
- Improved quality assurance with advanced algorithms, machine learning, and artificial intelligence that quickly run the appraiser’s report against hundreds of rules, saving time and proactively identifying possible issues.
- Drag-and-drop data extraction can be integrated with any appraisal software to bring data together into a credible valuation.
Using these advancements does not have to sacrifice accuracy. In fact, specifically with Class Valuation’s technology, after more than 15,000 transactions, statistics show significantly reduced underwriter revision rates (by more than 70%). And perhaps more impressive is the reduction in appraisal turn times. To date, we’re seeing an average of two days saved in the process nationwide, and in some particularly complex markets, we are seeing turn-times cut in half.
Appraisers and AMCs (Appraisal Management Companies) who want to maximize the efficiency of Desktop Appraisals, while minimizing errors and revisions, should ask their partners to provide these advanced technologies or should seek out those who do.
A Brighter Outlook
3D property scanning technology takes Desktop to a whole new level. But along with facts and statistics, there are several less tangible benefits that are just as important.
First, finding solutions to allow valuation professionals to spend more time analyzing data and opining on the value or real property, rather than driving to properties, measuring the improvements, and acting as a photographer. As appraisers spend more time in the office, the Desktop and Hybrid processes will streamline the mortgage timeline even more, benefitting both lenders and consumers.
More streamlining could take effect as the market adapts. Over time, it stands to reason that the use of these technologies would make more data on more properties available at the time of list. This would mean appraisers could have all the data required to complete an appraisal at the time it is ordered and immediately begin the valuation process—rather than waiting for data collection to be done.
Desktops also allow appraisers to leverage the use of an apprentice in a more meaningful way, where they can excel in more advanced responsibilities, such as the selection of comparables and authoring well-crafted reports that support a valuation.
Finally, modernization will expand the industry and attract new entrants into the profession. Young professionals are more likely to enter a career with a more streamlined apprentice program where they can leverage the latest technologies, rather than an elongated training process still reliant on antiquated technologies and processes.
So, while Desktop Appraisals may not be the end-all-be-all solution for the future of the industry, it is most certainly a strong step forward to make way for a brighter future for everyone in the appraisal space.