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The remote work revolution has spawned yet another evolution in real estate transactions.
Beginning March 19, 2022, Fannie Mae and Freddie Mac will accept remote desktop appraisals nationwide on eligible transactions without the appraiser ever stepping foot on the subject property, the Federal Housing Finance Agency (FHFA) announced.
Fannie and Freddie will accept desktop appraisals created with information from existing sources such as appraisal reports, multiple listing service (MLS) data and public record data.
The property information needs to be from a participant or source who does not hold a financial interest in the appraisal outcome. Appraisers also need to include a floor plan of the subject property when conducting desktop appraisals. For eligible transactions, the appraiser will use the Uniform Residential Appraisal Report (Desktop). [See Fannie Mae Form 1004 Desktop]
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The pandemic planted these seeds of change beginning in 2020. From April 2020 through May 2021, Fannie Mae and Freddie Mac implemented temporary flexibilities on appraisals, allowing them to be conducted entirely remotely or through a hybrid model. The purpose of these implementations was to keep the mortgage market functioning amid a patchwork of federal and local pandemic restrictions.
The need for greater flexibility in mortgage origination — and constantly shifting housing market conditions — necessitates evolution within the mortgage industry, according to FHFA’s acting director.
Desktop appraisal’s test run during the pandemic allowed Fannie and Freddie to gather feedback from real estate professionals who opted for the remote model.
Eligibility requirements
To be eligible for a desktop appraisal, a transaction needs to be for:
- a one-unit property, not excluding those with an accessory dwelling unit (ADU) or units within a planned unit development (PUD);
- a principal residence;
- a purchase transaction (including new construction);
- a property with a loan-to-value ratio (LTV) less than or equal to 90%; and
- Fannie Mae’s Desktop Underwriter (DU) system, to receive an “Approve” or “Eligible” recommendation.
Ineligible transactions include:
- two- to four-unit properties;
- condominium and co-op units;
- manufactured homes;
- construction-to-permanent mortgages;
- second homes and investment properties;
- refinances;
- energy-efficient mortgages;
- secondary mortgages such as community seconds mortgages;
- community land trusts;
- DU casefiles that receive an “Ineligible” recommendation; and
- manually underwritten mortgages.
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Desktop appraisal challenges and opportunities
This change confronts appraisers with new challenges and opportunities in the field.
But the appraisal industry has endured its fair share of regulatory, educational and technological changes since its adaptation as a specialized occupation arising out of the Great Depression.
One urgent challenge for the appraisal industry is the appraiser shortage stemming from an aging population and rigorous education and experience requirements for new entrants. Those who wish to join the profession in California need to complete 1,000 work hours in at least six months while working under the supervision of a certified residential or certified general licensed appraiser.
As of 2019, the number of licensed California appraisers had fallen to a new low. The total appraiser population in the state plunged below 10,000 licensees for the first time since recording began in 1993. The number of active licensees is even lower, estimated to be around 8,000. For reference, the total population of appraisal licensees peaked slightly above 20,000 in 2007, according to the Bureau of Real Estate Appraisers (BREA).
Although there are fewer appraisers in the field than before, today’s appraisers are better educated, better compensated and more tech-savvy than in previous generations.
In fact, appraisers have placed a greater focus on tech when hiring. Firms are at a competitive disadvantage when they rely on outdated technology. This is particularly true when an appraisal company wants to attract and retain the newest generation of appraisers. This demographic, steeped from a young age in rapidly shifting technological advancements, anticipates using the latest technology in their work.
As the older generation of appraisers approaches retirement age, the younger generation will step up to the plate armed with today’s budding innovations in tech. The BREA’s more stringent licensing and certification requirements will lead to greater earnings for appraisers, thanks to their high level of training and relative scarcity within the trade. As of 2020, the annual salary of a property appraiser averages around $88,000 in California, according to the Bureau of Labor Statistics.
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Another challenge for today’s appraisers involves the traditional method for collecting valuation data. The traditional method relies on an appraiser visually inspecting the interior and exterior of a property. For properties in rural areas, an appraiser needs to allocate extra time to drive from property to property.
Demand for rural space is increasing as well, making these treks into the countryside increasingly common for residential appraisers when they rely exclusively on traditional methods of gathering data. As of 2019, the U.S. mortgage market is larger in rural communities than in urban ones, according to Freddie Mac.
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Appraisal bias
Another long-term — but newly salient — challenge plaguing the appraisal industry is the racial appraisal gap.
Racial appraisal gaps have made troubling headlines recently within the real estate industry. Racial bias within the appraisal process is now under scrutiny thanks in part to a sea of reports that surfaced in 2020 on how non-white homeowners received greater valuations after hiding personal items like photographs that identified the homeowner’s minority status. In a common refrain among these reports, one family replaced all traces of Blackness (including portraits, photo cards — even books by Black authors) with those of a white family — and their home’s valuation went up 40% upon reappraisal.
Some of this boils down to the nature of appraisals. Appraisal is an inherently subjective practice teetering between art and science. Still, the reports illustrate a clear pattern of devaluation of minority-owned properties that too often hinges on who answers the door.
Eliminating these appraisal biases is a growing concern of the FHFA, who vows to promote equitable access to mortgage credit for all people and communities, including underserved communities.
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In response to this crisis, the California legislature passed Assembly Bill 948 near the end of 2021.
As of January 1, 2022, California buyers, sellers and homeowners who receive an appraisal value they believe to be below market value may file a complaint form provided by the California Bureau of Real Estate Appraisers (BREA). The form also allows complainants to provide their demographic information, which the BREA will study in an effort to better understand appraisal gaps.
In addition, all licensed California appraisers will need to complete three supplementary hours of continuing education requirements every four years beginning January 1, 2023. The extra education hours will encompass cultural competency and bias elimination training.
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Embracing the change
Despite these notable challenges, wide-ranging in scope as they may be, opportunities await the appraisal and mortgage industries.
Those opportunities include making the valuation process quicker, more efficient, less costly and more equitable — all without sacrificing accuracy.
Appraisers who embrace this new technology will find themselves ahead of a steep learning curve, as they have in the past.
However, the implementation of permanent desktop appraisals has some appraisers concerned about using incomplete or unreliable property information all without ever physically setting eyes on the interior or exterior of a property. Appraisers will also be relying more closely on floor plans than ever before.
Beginning March 2022, desktop appraisals will be an option for eligible homes where property data is plentiful and accurate. Those who remain skeptical about their ability to remotely estimate a home’s value may still choose to rely on the tried and true traditional approach that physical observations provide.
But at least now an alternative is available, particularly useful for homes way out in rural communities when ample, reliable data exists.
Although it’s not an easy time for appraisers, mortgage holders and other industry professionals, desktop appraisals represent a futuristic shift for those willing to embrace change.
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I would like to ask about the optics of antitrust of this program. We are all for progress, but the field must be equal for everyone, right?
For example, credentialed and regulated apprentices are blocked from inspecting without supervision. Meanwhile, unregulated individuals with no oversight can do this.
The concept of blocking commerce to elevate a few fortune 500 companies is very SUS. This is what regulatory capture looks like in real-time. It will be much more costly for consumers and does not give them all of the most affordable and competitive options.
I think the comment regarding de-valuation based on who answers the door is disgusting.
I’m from Illinois and I have to agree with both of you. Having a third party go out and take the photographs and give me commentary regarding the condition of the home is a bad idea. I’m also a broker here. I don’t know how many times I’ve had clients come out and look at homes based on the photographs in the M LS system. Nine times out of 10, the home never looks like what it looks like in the photos. Plus, the agents are taking photos of the best features of the property in the M LS, not the deficiencies of the property. The banks have been wanting to get the appraisers out of the field for a very long time because we get in the way of their profit when we don’t come up to the sale price on a sale.
This is going to be a nightmare for homeowners, lenders, agents and appraisers. Visually inspecting properties from both the exterior and interior as well as visually perusing the neighborhood is mission critical to doing an accurate appraisal. All these new products do is make appraisals less reliable!
I think that the article would carry more weight if the author was an appraiser that was working in the field and was more familiar with what the appraiser really does when he/she inspects and measures the home and other building on the property. Fannie now requires that appraisers provide a sketch or floor plan that meets ANSI standards and if the appraiser does not go to the home how would they ever be able to verify that the measurements on the sketch meets ANSI standards. The sketch is provided to the appraiser by a third party who is unknown to the appraiser.
Secondly, the author stated that the objective of these changes was to reduce the cost of the appraisal report to the customer, if you reduce the fee to the appraiser why would anyone want to become an appraiser? You stated that the average appraiser’s income is $ 88,000/yr. This number is distorted for the Residential Appraiser since it includes Certified General Appraisers which make much more than Residential Appraisers, also you have to pay all your expenses including your FICA taxes, no benefits, no vacations and no other benefits. To become an appraiser you must have a college degree and then work under a Certified Appraiser for 1,000 hours which could be at NO pay or you may have to even pay the Certified Appraiser a fee for them to train you.
This does not include the latest ghost in the closet of every appraiser, the new regulations in California that borrowers or probably anyone else involved in the loan request can file a Claim of Discrimination against the appraiser just because they think the value was too low. When this happens the appraiser might as well close his/her door and go find another job because they are effectively out of work just because there was a claimed filed against them even if it not true.
The bottom line is some players in the industry want someone to go on-line and run an AVM and have an appraiser sign it. why? The appraiser’s signature. Because Federal and State Regulations require the appraiser’s signature on the evaluation of the property.