OK, Com­pu­ter: How Much Is My House Worth?

L'Opinion - - The Wall Street Journal & L'Opinion - Ryan De­zem­ber and Ce­za­ry Pod­kul

The bat­tle bet­ween man and bot has a new front: your mort­gage.

Fe­de­ral re­gu­la­tors have pro­po­sed loo­se­ning real-es­tate ap­prai­sal re­qui­re­ments to en­able a ma­jo­ri­ty of U.S. homes to be bought and sold wi­thout being eva­lua­ted by a li­cen­sed hu­man ap­prai­ser. That po­ten­tial­ly opens the door for chea­per, fas­ter, but lar­ge­ly un­tes­ted pro­per­ty va­lua­tions ba­sed on com­pu­ter al­go­rithms.

The pro­po­sal was made ear­lier this month by the Of­fice of the Comp­trol­ler of the Cur­ren­cy, the Fe­de­ral De­po­sit In­su­rance Corp. and the Fe­de­ral Re­serve. It would in­crease to $400,000, from $250,000, the va­lue of homes that can be bought and sold wi­thout a tape-mea­sure-to­ting ap­prai­ser vi­si­ting a pro­per­ty.

More than two-thirds of U.S. homes sell for $400,000 or less, ac­cor­ding to U.S. Cen­sus da­ta and the Na­tio­nal As­so­cia­tion of Real­tors. If the re­gu­la­tors’ pro­po­sal had been in force last year, about 214,000 ad­di­tio­nal home sales, or some $68 bil­lion worth, could have been made wi­thout an ap­prai­sal, re­gu­la­tors said in their 69-page pro­po­sal.

Some wor­ry, though, that drop­ping ap­prai­sal re­qui­re­ments would in­tro­duce new risks in­to the $10.7 tril­lion mar­ket for home loans.

“We still would pre­fer a hu­man being doing the ap­prai­sal,” said Li­ma Ekram, a mort­ga­ge­ba­cked se­cu­ri­ties ana­lyst at Moo­dy’s In­ves­tors Ser­vice.

One is­sue: Au­to­ma­ted va­lua­tions done by com­pu­ters are lar­ge­ly un­re­gu­la­ted. The 2010 Dodd-Frank fi­nan­cial ove­rhaul re­qui­red re­gu­la­tors to pro­pose qua­li­ty con­trol stan­dards for so­cal­led au­to­ma­ted va­lua­tion mo­dels, but they have yet to do so.

“There are a lot of pro­blems with ap­prai­sals, but there are vo­lu­mi­nous stan­dards,” said Ri­tesh Ban­sal, chief exe­cu­tive of Ap­prai­sal Inc., a New York­ba­sed pro­vi­der of au­to­ma­ted va­lua­tions. “On the AVM side, it’s a wild, wild West. And that just in­vites abuse of all kind.”

Re­gu­la­tors say the im­me­diate ef­fect of drop­ping ap­prai­sal re­qui­re­ments would be li­mi­ted be­cause a vast ma­jo­ri­ty of home loans in that range are bought these days by mort­gage giants Fan­nie Mae and Fred­die Mac, or gua­ran­teed by other fe­de­ral agen­cies. Those ty­pi­cal­ly re­quire ap­prai­sals re­gard­less of home va­lue.

Ap­prai­sals help “en­sure that the es­ti­ma­ted va­lue of the pro­per­ty sup­ports the pur­chase price and the mort­gage amount,” re­gu­la­tors wrote in their pro­po­sal. “Ho­we­ver, the agen­cies al­so are aware that the cost and time of ob­tai­ning an ap­prai­sal can, in some cases, re­sult in de­lays and hi­gher ex­penses.”

Scrap­ping the ap­prai­sal re­qui­re­ment would open a swath of new turf for ups­tart pro­per­ty va­lua­tion com­pa­nies, like Hou­seCa­na­ry Inc., which use ar­ti­fi­cial in­tel­li­gence, al­go­rithms and so­me­times even drones to va­lue homes.

Je­re­my Si­ck­lick, the com­pa­ny’s chief exe­cu­tive, said that re­pla­cing ap­prai­sers with com­pu­ters will speed up home sales by weeks, re­duce costs for buyers and eli­mi­nate hu­man bias and er­ror from the pro­cess of va­luing mort­gage col­la­te­ral.

“The tech­no­lo­gy has rea­ched the le­vel to where this change creates a win-win for the consu­mer and len­der,” Mr. Si­ck­lick said.

Al­though ap­prai­sals are ba­sed on cri­te­ria such as sales of recent com­pa­rable homes, they are so­me­times more art than science. And ap­prai­sers came un­der fire fol­lo­wing the hou­sing cri­sis, shoul­de­ring much blame for in­fla­ting home prices at len­ders’ be­hest.

Their la­test turf bat­tle comes months af­ter a de­feat at the hands of law­ma­kers rol­ling back some fi­nan­cial-cri­sis-era ban­king rules. That change eli­mi­na­ted a chunk of ap­prai­sers’ bu­si­ness by exemp­ting ma­ny ru­ral pro­per­ties from ap­prai­sals.

“The ap­prai­sal pro­fes­sion is suf­fe­ring a death by a thou­sand cuts,” said Joan Trice, chief exe­cu­tive of All­ter­ra Group, a Ma­ry­land firm that tracks the in­dus­try.

Since the hou­sing crash, the num­ber of ap­prai­ser cre­den­tials in the U.S. has de­cli­ned about 21%, to fe­wer than 96,000, ac­cor­ding to a fe­de­ral group that go­verns the pro­fes­sion. Some len­ders have com­plai­ned ap­prai­sers in boo­ming and ru­ral mar­kets are in short sup­ply.

Last au­tumn a ru­ral Ten­nes­see bank as­ked fe­de­ral re­gu­la­tors to waive ap­prai­sal re­qui­re­ments and al­low an em­ployee with some ap­prai­sal trai­ning to va­lue col­la­te­ral. The re­quest was de­nied, but it spar­ked na­tio­nal de­bate over whe­ther there are en­ough ap­prai­sers, and how homes might be va­lued wi­thout them.

Ap­prai­sals ty­pi­cal­ly cost bet­ween $375 and $900 for a single-fa­mi­ly home. Va­lua­tions pro­du­ced by the likes of Hou­seCa­na­ry of­ten cost less than $100 a house. So do bro­ker price opi­nions, which are a sort of per­func­to­ry as­sess­ment per­for­med by real-es­tate agents and even out­sour­ced to of­fice wor­kers in In­dia who use on­line da­ta.

Banks and Wall Street in­ves­tors use these al­ter­na­tives to price port­fo­lios of houses and home loans, since va­lua­tions that are too high or low tend to ba­lance out over pools of thou­sands of pro­per­ties.

Ap­prai­sers argue that ap­proach is un­sui­table for home pur­chases, though. An ap­prai­sal that is off by a few percent could leave a ho­meow­ner owing more than their house is worth or len­ders with in­suf­fi­cient col­la­te­ral to co­ver de­faul­ted loans.

“There’s still no com­pu­ter that can see, hear, taste, smell and touch,” said Pat Tur­ner, an ap­prai­ser in Rich­mond, Va. “Have you ever been in a hoar­der’s house?”


A house for salze in North An­do­ver, Mass. Pro­po­sed re­gu­la­tions would en­able pro­per­ty va­lua­tions ba­sed on com­pu­ter al­go­rithms.

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