The Journey to a More Efficient and Fair Home Valuation Process
The method of establishing residential property values for mortgage lending hasn't evolved much for several decades. Obtaining a traditional appraisal is one of the most time-consuming and costly parts of getting a home loan, and, as recent studies have shown, vulnerable to bias risk. But that's changing, as the industry is on a journey of continuous improvement to make the process more efficient and fair.
For decades there was just one way to confirm the property value for home purchase or refinance loans: an appraiser visited the property armed with a clipboard, tape measure, and camera, then performed an analysis and submitted a report. In recent years, the gear might have been upgraded to a tablet computer and laser measuring device, but the process was the same. As an alternative, Fannie Mae offers appraisal waivers on some mortgage loans sold to us when we have enough information to feel confident in the property value estimate. Over the years, we've enhanced waiver offerings based on improvements in data digitization, analytical techniques, and data sources. But it has been "all or nothing" – the full traditional approach or no appraisal – with no in-between options.
This binary approach no longer fits the industry's needs and is not consistent with how other mortgage risks are managed. A far better approach is a spectrum of options to establish a property's market value, with the option matching the risk of the collateral and loan transaction. The spectrum balances traditional appraisals with appraisal alternatives. Options range from use of automated valuation models to validate the estimated property value, to collection of updated property data to confirm the model value, to alternative-scope approaches like desktop appraisals and hybrids, to a traditional appraisal. This valuation spectrum mitigates appraisal pain points including long wait times, rising fees due in part to a shrinking appraiser workforce, and risks of human bias.
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Our recent analysis of nearly 2 million appraisals found some divergence in values received by Black and white borrowers refinancing their homes. There are many possible reasons why an appraisal would be either overvalued or undervalued. To minimize the chance that the race of a borrower or homeowner is one of those reasons, Fannie Mae and our industry partners are taking concrete actions such as increasing the use of alternative-scope valuation approaches.
New ways of working support fair and impartial appraisals
The traditional appraisal process relies heavily on human observations that can be subject to conscious or unconscious bias. Alternative-scope appraisals involve significant reliance on objective data and a more arms-length process between the appraiser and the homeowner or buyer. Appraisers perform desktop appraisals using data from various parties, including real estate agents, homeowners, and builders, as well as appraiser files and secondary data sources such as public records, online satellite imagery, and multiple listing services. Hybrid appraisals use a neutral third party to visit the property and collect data that is transmitted to the appraiser for analysis. Both approaches have the benefit of reducing contact between borrowers and appraisers, thus lowering the likelihood of valuations being affected by personal or unconscious biases. Alternative-scope appraisals are made possible by better use of data, technology, and process design – powerful tools that are driving more factual, objective, accurate, and reproducible home valuations. For example, our appraisal modernization pilot using hybrid appraisals shows a meaningful reduction in confirmation bias versus traditional appraisals. (Confirmation bias refers to the appraisal confirming the purchase sale price or the refinance value estimate.)
Appraisal waivers saved mortgage borrowers $2 billion in two years
Fannie Mae estimates that appraisal waivers on loans sold to us saved mortgage borrowers nearly $2 billion in 2020-20211. When we offer an appraisal waiver through our automated underwriting system, it is because we are confident that the estimated property value submitted by the lender is consistent with expectations in the current market. Appraisal waivers are most often appropriate for home refinances, eliminating contact between an appraiser and the homeowner, and speeding up the refinance process. Waivers are also offered for some purchases, especially with a large down payment or a recent previous sale of the home. Continuous fine-tuning of our waiver methodology allows us to maintain and expand waiver offers in a safe and sound manner, reserving the limited appraiser capacity for where it is needed most.
Modern appraisal methods save time
Fannie Mae has been working with mortgage lenders, appraisers, and industry technology providers for several years to test digital innovation and alternative ways of conducting appraisals. In our test-and-learn activity with some of the most innovative mortgage lenders and vendors in the business, using property data collectors combined with analysis and valuation by professional appraisers is saving an average of five days versus traditional appraisals.
Modern appraisal methods are helping to fill the appraiser gap
The residential appraiser workforce is aging, and there is a shortage of appraisers in many places – especially rural areas – which increases wait times and costs for an appraisal. But appraisers can be more productive with desktop appraisals and hybrids because they don't have to schedule appointments or visit properties but can still access comprehensive property information to confidently fulfill the valuation request.
Even with increased reliance on automated valuation models and use of property data collectors, appraisers remain essential to the mortgage origination process. That is why Fannie Mae and many others continue to invest in programs such as the Appraiser Diversity Initiative and appraiser educational resources to attract and train the next generation of appraisers.
Improving the valuation process is changing the way appraisers work and empowering them with more career opportunities. Instead of spending much of their time scheduling appointments and driving to properties to collect information, appraisers can devote more time to doing what they are trained to do: analyze property data and form an expert opinion of value. They can potentially increase their earnings by completing more appraisal reports in less time. And increasingly, appraisers can choose to work from home, accessing multiple online data sources along with property information collected or facilitated by other parties using technology such as 3-D scans, virtual inspection technology, and purpose-built mobile applications. Trained appraisers will also continue to have career opportunities supporting appraisal technology, such as helping to build and maintain property data collection mobile apps.
Envision the results
Like with any continuous improvement journey, this will take time and have its pain points along the way. But the results will be worth it. This future state holds great promise to deliver more effective, efficient, and impartial home valuations for millions of homeowners across America.
1 Fannie Mae analysis based on loan delivery data from Jan. 2020 through Dec 2021.