Is Freddie Mac planning to eat your lunch or have they already started? Are they planning to stay for dinner? What can we do?
Will AVMs displace appraisers? AVMs have been making steady inroads for years, but as they do so, are they meeting their claim of greater accuracy and savings to the consumer? I personally believe the answer is no. While AVMs may be a terrific way to back check an appraisal provided by a licensed professional, broad usage puts the public at risk.
According to Freddie Mac, “Home Value Explorer® (HVE®) is a Freddie Mac automated valuation model (AVM) that generates an estimate of property value in seconds. HVE simplifies the mortgage process by streamlining the collateral valuation cycle. For more than 20 years, Freddie Mac has effectively employed AVMs internally for its own risk and portfolio management. Lenders and real estate professionals who need fast, accurate value estimates can benefit from the proprietary data, modeling expertise, industry knowledge and long-standing reputation that Freddie Mac and HVE bring to the market.”
Wow, touting the accuracy of their AVMs over the last 20 years, am I missing something?! Nine years ago, Congress effectively appointed FHFA as conservator (receiver) of Fannie Mae, Freddie Mac. On September 6, 2008, FHFA placed Fannie Mae and Freddie Mac into conservatorships. Subsequently, Fannie Mae and Freddie Mac, together, received $187.5 billion from taxpayers. So much for the effectiveness employed by Freddie Mac’s AVMs internally, for their own risk and portfolio management.
The Appraisal Foundation made this statement regarding AVMs “An Automated Valuation Model (AVM) is a computer-generated estimate of a property’s value that a lender might use in some circumstances to assist in evaluating the collateral for a mortgage. The output of an AVM is heavily dependent on the quantity and quality of the data input. With proper use, an AVM can help support the findings of an appraisal, but when used alone its output may not be credible.”
Freddie Mac is marketing their AVM to lending institutions around the country claiming the following advantages:
- “Automated collateral evaluation, an option to waive an appraisal for certain mortgages. Increases efficiency and reduces costs in the origination process for lenders and homebuyers, while also providing immediate certainty with respect to the appraisal.
- Automated income and asset validation, quickens borrower qualifications saving you and your borrowers time
- Expanded homeownership opportunities for borrowers with no credit score, the ability to evaluate borrowers without a credit score.
- Immediate certainty for collateral rep and warranty relief gives you confidence in the loans you sell to us. You’ll receive notification of eligibility through an indicator in Loan Product Advisor.
- Improved feedback and layout of results, allows you to quickly and easily find and execute clear underwriting feedback for faster processing.
- Intuitive and easy to navigate.
- Take full advantage of the entire Freddie Mac credit box and suite of loan programs to originate more loans.
- Source more correspondent business with an improved overall experience, including enhanced Loan Product Advisor workflow and ease-of-use through a loan origination system vendor.”
Freddie Mac claims their AVM contains 81 Million properties; where did all this data come from? Appraisers? As a community we need to begin thinking about intended use by intended users. We will explore this more in future ‘Food for thoughts.’
Dave Denson, appraiser and owner of Quick Turn Appraisals in California, wrote the following regarding the disadvantages of an AVMs:
“1. Whether the house is really there – A computer can’t drive by a house to see if it’s actually located where it’s supposed to be, has four walls and a roof, and really is a four bedroom split level and not a one bedroom shack.
2. Whether unique features of a property might add to or detract from market value – So a computer returns an estimated value of $150,000. Did it account for the sewage treatment station next door? The railroad tracks nearby with trains that blow their whistles every night? The school district? The desirability of its tree-lined street versus the next street over?
3. How long ago the property was assessed – Many AVMs and free online services rely on public assessment records. In many states, for example, assessments may only be required every three years — the value may be nearly three years old in that case. Some states mandate that an assessed value not increase beyond a certain percentage, even if sales activity indicates the property has appreciated far more. When you use an AVM or free online service, you risk a lower value than reality.
4. What makes the comparables comparable – A computer might compare your subject property to another property with similar square footage sold three months ago a quarter of a mile away. Even if that “comparable” property is in a different, less desirable school district, fronts a four-lane, 55 M.P.H. street, and is flood-prone. Or even if the property was sold under duress, such as in a divorce situation, or not at arm’s length, such as to a family member. A computer simply does not know all the adjustments that might need to be made to a “comparable” property’s sales price.
5. Whether a market is declining – Automated valuations use data from recent, nearby sales. If those sales were completed at the peak of a local housing market, the computer will think the trend is going up. Even if a professional appraiser knows that the overall neighborhood is beginning to experience a downturn. As a lender, don’t get stuck with a property that’s been overvalued by a computer.
6. Whether there is a conflict of interest –
7. What qualifications, designations, experience and education the preparer of the value has – When you work with an appraiser, you can be confident we’re highly qualified, ethical and prepared to complete your assignment professionally and with good judgment. Most of the time, you don’t know the qualifications of whoever is behind those free online values, and they couldn’t compare to an appraiser’s if you did. And if you’re relying on an automated valuation, you’re cheating yourself out of an appraiser’s education, experience and expertise.”
Basically, what Dave is saying is there is no replacement for boots on the ground, and I couldn’t agree more. Beware of HAL! (lit.ref. Space Odyssey)
What can the appraisal community do to protect their future and the future of many American dreams? Let us know what your thoughts are.
On another topic, please let us know what type and topic you would like to see as a continuing education course. We are in the process of releasing our Concept to Completion Seminar on the heels of our Appraising Energy Efficient Residential Properties, and cherish your input.
Good luck and do good work,