A new proposal to reduce the number of homes requiring in-person appraisals could save home buyers and those attempting to refinance hundreds of dollars, and speed up the process. This may sound like a well-timed holiday blessing, but appraisers who would be affected by the change say it could also pose all sorts of problems.
The plan would require human appraisals only for purchases of homes costing $400,000 and up. The current threshold is $250,000. It’s likely that automated evaluations would take their stead. This is significant because it would be the first increase since 1994, when median home prices hovered around $130,000, according to the Federal Reserve Bank of St. Louis. They’ve now more than doubled, to a median $295,000, according to the most recent realtor.com® data.
The proposal was developed by the Federal Deposit Insurance Corp., the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency. It could take months, if not years, to be approved.
If approved, it could save buyers and homeowners attempting to refinance about $500, which is the average cost of an in-person appraisal. Skipping the appraisal visit would also likely lead to quicker closings.
The proposal “could provide meaningful burden relief from the appraisal requirements, without posing a threat to the safety and soundness of financial institutions,” said a press release issued by the FDIC. The agency did not respond to requests for comment.
But it would not apply to loans sold or guaranteed by the U.S. government. They include Federal Housing Administration, Department of Housing and Urban Development, and Department of Veterans Affairs mortgages as well as those guaranteed by Fannie Mae and Freddie Mac.
What are the downsides to fewer in-person appraisals?
“Automated valuation models are when you throw a lot of data in the hopper and flip the switch; it churns, and it spits out a value,” says Miller. “[But] the problem with that is AVMs are wildly inaccurate.”
That’s because these programs don’t know if sellers have a meth lab or 100 cats in their home, or if they are hoarders—all of which can drag the value way down.
Mortgage lenders are similarly skeptical.
“If I’m lending $400,000 I would absolutely require an [in-person] appraisal,” says Richard Bettencourt, president at National Association of Mortgage Brokers. “I want to make sure the structure’s there.”
And if homeowners have kept their properties in tiptop condition, these models can overestimate how much these homes will fetch on the open market. That sets unreasonable expectations for the sellers, who will be reluctant to part with their properties at a lower price, leading them to sit on the market even longer.
“They get anchored by the wrong number, and they live and die by it,” says Miller.
And while in some cases sellers may get more than their homes are worth or buyers may get a real deal, in other cases they might lose out.
“If the number is wrong, then there’s a winner and a loser,” says Miller.
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