Appraising Our Future

Anyone else noticing clarification for market adjustments?

In a recent revision request, I was asked to address items that were already thoroughly covered in my report, which makes me question the caliber of either the individual or computer program reviewing my work. One of the issues raised was the absence of location adjustments for homes located next door to the subject property. Additionally, they requested further support for market adjustments.? In addition to a thorough analysis of the neighborhood and market area, I utilized local market reports provided by both the Wisconsin Realtors Association (WRA) and MLS services. My report included a comprehensive list of all resales in the community, showing a 66.16% increase in sold prices. This data clearly indicated significant appreciation over the past year. I highlighted that much of this increase could be attributed to renovations and updates completed prior to resale. For instance, the home next to the subject property sold for double its previous price following a remodel.? After isolating properties that resold without updates or alterations, the appreciation rate was closer to 9.43%.? Despite providing detailed commentary, explanations, charts, and a sales list, it seems that these were overlooked.? I wonder if anyone even bothered reading my report – probably not.

Another revision request received:

'Appraiser please address / comment the one-unit housing trend property value is noted as Stable but HDI indicates that values are increasing by 4.7% over the last 6 months Per Freddie Mac Warning. Please confirm the one-unit housing property value trend is accurate and supported.'

This is yet another issue—questioning the appraiser’s adjustments without any accompanying analysis. I have absolutely no idea how Freddie Mac's Home Data Insights (HDI) is assessing sales to arrive at a 4.7% increase. Is this based on all sales data? Does it consider the condition of properties? Is it reviewing sales based on ZIP code (which, in this case, includes parts of an entirely different community)? Is it adjusting for seasonal trends? For the softening market? Is it accounting for marketing time within the dataset or expired listings? How is it analyzing the market to derive—not a conclusion, as there’s clearly no thought behind it—but rather a declaration?

While HDI can be a useful tool for understanding broad housing market trends, it has inherent limitations. HDI data reflects regional averages and often fails to capture specific neighborhood dynamics. Additionally, reliance on this tool could unduly influence less experienced appraisers, effectively undermining the independent variable in the origination process.

The Selling Guide Announcement (SEL-2024-07) The Selling Guide has been updated to include changes to the following: Nov. 6, 2024

The recent Selling Guide update emphasizes the critical role of appraisers' expertise in defining market areas—an accuracy and nuance that Automated Valuation Models (AVMs) and HDI tools cannot replicate due to their lack of transparency. Unlike human appraisers, these automated systems provide minimal insight into their calculation processes, leaving stakeholders unclear on how values are determined.

AVMs, specifically, struggle to account for context. Relying predominantly on historical data, they often miss changes in market dynamics or buyer preferences that can vary dramatically even within small geographic areas. In diverse cities like Milwaukee, where neighborhood characteristics can differ significantly, AVMs risk oversimplifying by averaging out essential details that skilled appraisers would recognize. AVMs also tend to overlook the impact of community investments, such as new parks or schools, that can boost neighborhood values.

Another limitation of AVMs is their ineffectiveness in detecting fraud. AVMs rely solely on quantitative data, which makes them susceptible to manipulation, such as exaggerated square footage or false sales data. Experienced appraisers assess property conditions in person and validate data through direct interactions. This limitation of the program is particularly problematic in markets where investors or buyers might try to manipulate trends for profit, underscoring the risks of relying too heavily on technology.

Fannie Mae’s fraud prevention guidelines emphasize the importance of compliance for lenders and sellers in maintaining market integrity. To prevent fraud, lenders must follow strict hiring protocols, ensure that staff are not listed on the FHFA’s Suspended Counterparty Program, and carefully monitor appraisals for any signs of bias or discriminatory language. If fraud is suspected, lenders are required to notify Fannie Mae within 30 days through Loan Quality Connect. Sellers and servicers must also comply with relevant federal, state, and local laws covering consumer credit, equal credit opportunity, truth-in-lending, and privacy. Despite recent expansions in appraisal waiver eligibility, raising LTV ratios to 90% and up to 97% for inspection-based waivers, these changes do not lessen the responsibilities of lenders and sellers to prevent, detect, and report fraud as specified by Fannie Mae’s guidelines.

Lenders using AVMs must understand the basic principles of how values are derived to ensure alignment with sound valuation practices and regulatory standards. While they are not required to know proprietary algorithms, lenders are responsible for performing due diligence to confirm that the AVM’s methodology suits the specific property and market. This includes an understanding of general data inputs, such as comparable sales, market trends, and adjustments, and evaluating whether the AVM’s application is appropriate for the transaction. Lenders are also expected to validate the AVM provider's credibility and accuracy through regular testing, ensuring compliance with standards from the Federal Financial Institutions Examination Council (FFIEC) and other regulatory bodies.

The use of AVMs can complicate compliance with fraud prevention measures due to their “black box” nature, which limits visibility into the valuation process. AVMs do not possess a 'Spidey Sense', they have no means to detect fraud or red flags. This opacity makes it difficult for lenders to verify AVM accuracy and to identify inconsistencies that could indicate fraud.

Ironically, while Fannie Mae, Freddie Mac, and similar entities place ever-greater demands on independent appraisers, they are simultaneously loosening requirements on AVMs and lending guidelines. This shift highlights the risks of over-relying on non-transparent algorithms, which may inadvertently undermine the reliability and accuracy of property valuations. By prioritizing AVM efficiency without equally valuing the expertise of seasoned appraisers, these entities risk destabilizing the market. A blended approach upholds valuation integrity and fosters confidence among all stakeholders in the mortgage origination process.