Increase in Exempt Threshold Could Lead to Surge in Digital Valuations
What’s that drone doing hovering over a property?
Soon that sight may be the norm on homes for sale.
The days of human appraisers may be coming to an end for homes priced under $400,000, if regulation proposed by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve gets approved.
Previously, only homes valued under $250,000 could be purchased or sold without the use of a human appraiser. That threshold is potentially being raised to $400,000, opening up more business for drone-monitored and computer-generated home valuations. The vote is nearly there, awaiting expected agreement from the Federal Reserve before the regulation takes effect.
While the appraisal industry is concerned the change could negatively impact real estate at large, the brokerage side of the business predicts the threshold hike should have minimal effects on homeownership and the home-buying experience.
Stephen S. Wagner, 2019 president of The Appraisal Institute, tells RISMedia that the organization continues to “oppose this effort by bank regulators that threatens consumer protection and safety and soundness.”
“While we’re not surprised, we are very disappointed that the federal banking regulatory agencies have focused on regulatory relief at the expense of protecting homebuyers,” Wagner says. “The consequences could be substantial.”
The Association for Valuation Professionals (MBREA) agrees, stating the threshold increase will only create vulnerabilities, increasing risks that could prove devastating should we see another market crash.
“Raising the threshold is an unwise decision and is further evidence that banking regulators learned nothing from the last decade’s Great Recession,” says Steve Sousa, MBREA executive vice president. “They are willing to ignore their responsibility to protect federal financial and public policy interests.”
Additionally, Sousa says this is simply the latest cause for concern in an industry that continues to struggle as it maneuvers other policy shifts.
“Raising the threshold has to be looked at in conjunction with what else is impacting the appraisal profession,” according to Sousa, which include the following:
- “The GSE’s move to waive appraisals and expand the use of bifurcated appraisals.”
- “The NCUA increase in the commercial threshold to $1 million.”
“Disregard of prudent lending practices with a reliance on questionable automated valuations places the real estate market on the edge of a slippery slope,” warns Sousa.
Other industry practitioners, however—particularly those in the brokerage space—are less worried and largely support the decision to increase the exempt price range.
“I really like this decision,” says Chance Brown, broker/owner of CB&A, REALTORS® in Houston.
Creig Northrop, president and CEO of Northrop Realty, a Long and Foster company in the greater Baltimore/Washington Metropolitan area, agrees, stating he believes the proposal is “fantastic.”
Brown says the success is already evident within the refinance segment, as the change has influenced certain transactions.
“It only makes sense that it would make its way to purchase contracts as well,” says Brown. “I believe that this will really only impact a small number of transactions because of the loan types that this is currently available to, but I hope that it will expand.”
“It’s just the growth of the market,” Northrop emphasizes. “An appraisal in that price isn’t going to make a difference.
If the threshold inches upwards of $400,000 in the future, however, Northrop could see cause for concern.
“In these lower price points, the value is not going to be overinflated. Now as you get over $400,000, and the higher you go, the more negotiations take place and there’s a percentage issue,” Northrop says.
But with over two-thirds of homes in the U.S. selling for under $400,000, according to the Census Bureau, appraisal organizations say the impact is being severely downplayed.
“While it’s unclear how many transactions will be affected, increasing the appraisal threshold from $250,000 to $400,000 will negatively impact many consumers across the country,” says Wagner, adding that the primary threat is to the “safety and soundness of the nation’s mortgage system” because it allows consumers to enter into financially harmful transactions.
Meanwhile, Sousa predicts the most influence will be related to Fannie Mae and Freddie Mac mortgages.
“Taken alone, this increase in the residential threshold will have a minimal impact; however, when coupled with Fannie Mae’s and Freddie Mac’s foray into appraisal waivers, the impact is bigger,” says Sousa.
Where the line gets blurred is with the involvement of technology. While some believe drone-operated and computer-generated valuations are the future of real estate, removing the human touch has long been opposed by industry professionals across the spectrum of roles.
“I see the humanistic value,” says Northrop when speaking of licensed appraisers. “An appraiser can go to the location and physically see the upgrades. Using tech or AI is like using Zestimates—it’s basically the same thing. It has no idea what surrounds the house or what is inside. They just can’t see that.”
Sousa says it’s impossible to stop the big data train, but that the limitations on this tech are “significant” when used for “predicting home values through automated valuation models” (AVMs). This is because the AVMs only consider “yesterday’s data,” unable to assess market trends in real-time, he says.
Wagner agrees, stating “AVMs are only as good as the data entered into them.”
“While they might be acceptable in some uses…in most cases there are too many variables involved to rely on AVMs. A qualified, competent and credentialed appraiser who conducts a detailed onsite inspection, thoughtfully collects data and carefully analyzes all that researched information is best suited to provide an independent, reliable and credible opinion of value,” says Wagner.
But Brown has a more optimistic view on AVM tech as it progresses.
“It only makes sense for this practice to grow,” he says. “In areas where comps are difficult to find or vary widely, we will still absolutely need the human touch; however, when possible, I believe that being able to take a week or two out of the transaction is an amazing leap forward.”
The exemption threshold has not been increased since it was set in 1994. According to the Wall Street Journal, had this higher threshold been imposed in 2017, about $68 billion worth of, or 214,000, home sales could have closed without the use of a human appraiser.