Bank AVMs Are As Wildly Inaccurate As A Zestimate – But Will Be Regulated As Legitimate Values
By Jonathan Miller
June 24, 2024
Excerpts:
- AVMs are incredibly inaccurate and are being misused in property valuation
- AVMs don’t consider the condition of a home
- The mortgage industry’s push toward automation has reduced valuation accuracy
AVM or Automated Valuation Models have been incorrectly seen as the human-less way to value property. The technology has been drifting into mortgage lending reliance for more than a decade because it has been marketed as having the ease of “pushing a button.”
The Zestimate product by Zillow introduced the consumer to the concept nearly twenty years ago…
The recent ruling to regulate the credibility of AVMs by the OCC and FDIC essentially legitimized the use of AVMs in lending. The driver behind this final rule was to eliminate potential bias in valuations by replacing appraisers with AVMS. Yet the Urban Institute study Revisiting Automated Valuation Model Disparities in Majority-Black Neighborhoods said: But even with data improvement and artificial intelligence, we still find evidence that the percentage magnitude of AVM error is greater in majority-Black neighborhoods. This finding indicates that we cannot reject the role historic discrimination has played in the evaluation of home values.
AVM software is built by humans who have inherent biases. The void in representation by the appraisal industry over the past decade on the AVM issue, to talk about those 200 feral cats living in the house being valued, has enabled AVMs to be legitimized by the federal government.
During my career, I have observed that valuation accuracy has become weaker as technology has expanded in the mortgage process. The wiz-bang concept that the appraisal of a property can be completed at the push of a button is missing the realities of valuation.
To read more, Click Here
My comments: Worth reading. Miller was involved in AVM history and, as usual, has some very interesting stories plus lots of Zillow comments.
For pro-AVM information from AV Metrics and to see how they test AVM accuracy, Click Here I have been following them for many years.
Miller used to send out a very long post once a week. I often just scrolled fast through most of it to get to the appraisal section, but I missed a lot that was worth reading. Now, he has divided it into daily posts.
================================
======================================
Click here to subscribe to our FREE weekly appraiser email newsletter and get the latest appraisal news!!
NOTE: Please scroll down to read the other topics in this long blog post on Mortgage appraisal reviews, AI and ChatGPT, freddie and fannie mortgage forecast, unusual homes, mortgage origination stats, etc
========================================================
$2.8M Private Island on New York’s St. Lawrence River
Excerpts: 6 Bedrooms, 2.5 baths, 4,474 sq.ft., 2.3 acre lot, Built in 1902
The residence was designed by architect Henry Janeway Hardenbergh. He’s best known for his work on the the Waldorf-Astoria and Plaza Hotel in New York. A new owner will reach Sunnyside Island via boat, so a boathouse with two slips is also included.
Features include two primary suites, original millwork, custom cabinetry, a sunroom, and two fireplaces. Best of all, there are wraparound and enclosed porches, where the vistas can be fully enjoyed. On the water is a boathouse with 2 slips, 1 is 8×30 and the other is 6×50. There is also a main dock that is 90 long w/full power hookups.
To read the listing with 44 photos, Click Here
=======================================================
The Illogical Reality of Mortgage Appraisal Reviews
By Dallas T. Kiedrowski, MNAA
Reforming the appraisal review process is essential to maintaining the integrity of the real estate market and protecting consumers and homeowners
Excerpts: In mortgage financing, the appraisal process is often seen as the foundation of accurate property valuation and market stability. However, beneath this façade of reliability lies a troubling rift: while real estate appraisers must navigate stringent licensing protocols and scrutiny, the individuals reviewing the appraisals often operate with minimal oversight, instead leaning heavily on automated systems and algorithms. This stark disparity not only undermines the credibility of the review process but also revives the threat of past missteps, once again jeopardizing the integrity of the entire real estate market.
Once the appraisal is completed, it is reviewed to ensure accuracy and compliance with lending standards. Herein lies the crux of the issue: the person or system reviewing the appraisal is not bound by the same stringent licensing or certification requirements as the appraiser. Despite the rigorous standards imposed on appraisers, the appraisal review process is not regulated in the same way.
Instead, many lenders rely on automated valuation models (AVMs) and tools such as Fannie Mae’s Collateral Underwriter (CU) to assess the accuracy of appraisals. This reliance on automation introduces several layers of complexity and potential inaccuracy into the system.
The use of Collateral Underwriter (CU) by Fannie Mae to review appraisals introduces a potential bias. CU is designed to assess the quality and accuracy of appraisals by comparing them against a comprehensive database of property data. While this automated system can identify discrepancies and outliers efficiently, it is not immune to the influence of Fannie Mae’s purchasing objectives.
To read more, Click Here
My comments: This article is definitely worth reading. It has many details and analysis from an experienced appraiser. The article is a long, so you may want to scroll down to “Implications of the Current System,” a summary. Then, you can go back to more details in the article.
====================================================
Are you getting too many ad-only emails?
4 ways to get only the FREE email newsletters and NOT the ad-only emails.
1. Twitter: https://twitter.com/appraisaltoday Posted by noon Friday
2. Read on blog www.appraisaltoday.com/blog Posted by noon Friday. You can subscribe to the blog in the upper right of each blog page. NOTE: the popular ads with liability tips are below the first topic on my blog posts.
3. Email Archives: https://appraisaltoday.com/archives
(posted by noon Friday) The link is above and to the left of the big yellow email signup form. Newsletters start with “Newz.” Contains all recent emails sent.
4. Link to the 10 most recent newsletters (no ads) at www.appraisaltoday.com. Scroll down past the big yellow signup block. The newsletters have abbreviated titles, taken from their blog posts.
To read more about the 4 ways, plus information on why I take ads, etc.
====================================================
The Generative Shift: A Thorough Examination of AI in Appraisal by Jim Amorin, CAE, MAI, SRA, AI-GRS, CDEI
Review by Craig Gilbert, ASA, SRA, CRP
Excerpts: The publication delves deeper than simple technological scrutiny; it explores the moral, regulatory, and communal impacts of integrating AI within the appraisal sector.
Amorin skillfully navigates the reader through AI fundamentals, scrutinizes
the capabilities and limitations of tools like ChatGPT, and delivers insightful case studies that highlight AI’s transformative effects on appraisal practices.
This critique thoroughly explores the content of the book, accentuating its
principal revelations, strengths, and potential areas for further inquiry, while
providing an incisive critique of its implementation and its influence on the
profession.
4. On the Limitations of GPT Models:
“GPT models, despite their sophistication, do not ‘think’ or ‘understand’ in
the human sense. Instead, they smartly reconstruct data they have been trainedon.” (Chapter 7) This excerpt provides an essential caution about the inherent limitations of AI models such as GPT. Amorin points out that although these tools can create remarkable outputs, they do not possess genuine understanding and are capable of generating biased, erroneous, or nonsensical content. This underscores the necessity for human oversight and the critical appraisal of information produced by AI.
5. On the Future of AI in Appraisal:
“Imagine an appraiser working on a valuation assignment and, with a simple
query, receiving instantaneous insights into current market trends, recent sales in the vicinity, or even predictive analytics about future property value fluctuations.” (Chapter 7)
—————————————————————
To read more about this topic, plus 2+ years of previous issues, subscribe to the paid Appraisal Today. To subscribe go to www.appraisaltoday.com/order
Not sure if you want to subscribe?
Sign up for monthly auto renewal for $8.25!
Cancel at any time for any reason! You will receive a prorated refund.
$8.25 per month, $24.75 per quarter, and $89 per year (Best Buy)
or $99 per year or $169 for two years
Subscribers get FREE: past 18+ months of past newsletters
What’s the difference between the Appraisal Today free Weekly email newsletter and the paid Monthly newsletter? Click here for more info.Subscribe to Monthly NewsletterIf you are a paid subscriber and did not receive the June 2024 issue emailed on Tuesday, June 3, 2024, please email info@appraisaltoday.com, and we will send it to you. You can also hit the reply button. Be sure to include a comment requesting it.
==============================================================
Freddie and Fannie June Forecasts
Freddie Mac U.S. Economic, Housing and Mortgage Market Outlook – June 2024
June 20, 2024
We now project 2024 total home sales to be 4.82 million (previously 4.89 million), and 5.27 million in 2025 (previously 5.29 million).
Given the slight change to the sales outlook, we forecast total mortgage originations to be $1.71 trillion in 2024 (previously $1.73 trillion) and $2.07 trillion in 2025 (previously $2.08 trillion). For-sale listings continue to trend upward without a corresponding rise in sales, although listings are still at low levels relative to recent years. This is driving some regional markets, mostly concentrated in the Sunbelt, to begin exhibiting a more equal balance between supply and demand. We believe this development is consistent with our view of decelerating house price growth through the rest of the year.
To read more, Click Here
————————————————————————————————–
Fannie Mae Economic and Housing Outlook
Economic Developments – June 2024
Home Sales to Remain Sluggish in 2024 as Buyers Run Up Against Affordability Constraints
Excerpts: We now project 2024 total home sales to be 4.82 million (previously 4.89 million), and 5.27 million in 2025 (previously 5.29 million). Given the slight change to the sales outlook, we forecast total mortgage originations to be $1.71 trillion in 2024 (previously $1.73 trillion) and $2.07 trillion in 2025 (previously $2.08 trillion).
For-sale listings continue to trend upward without a corresponding rise in sales, although listings are still at low levels relative to recent years. This is driving some regional markets, mostly concentrated in the Sunbelt, to begin exhibiting a more equal balance between supply and demand. We believe this development is consistent with our view of decelerating house price growth through the rest of the year.
To read more, Click Here
My comments: I have only included excerpts on mortgage origination forecasts.
====================================================
NAR Settlement: What It Means for Appraisers
by Isaac Peck
While real estate agents and brokers are frantically wondering if the sky is falling, with some brokers preemptively retiring or getting out of the business, the general sentiment in the appraisal community has been much more muted. …Most question whether this monumental piece of real estate news will have any effect on them at all.
Should appraisers care about the NAR settlement, and will it have any effect on how most appraisers perform their work? Here are the details of the settlement and what appraisers need to know.
Why Should Appraisers Care?
While this landmark legal case has the potential to really change how real estate agents and brokers do business, one question largely unaddressed by the hundreds of journalists covering this issue is how all this will affect appraisers.
Many appraisers and key stakeholders in the valuation space have begun discussing, most recently at the 2024 Association of Appraiser Regulatory Officials (AARO) Spring Conference in Nashville.
Danny Wiley, senior director of single-family valuation at Freddie Mac and Lyle Radke, senior director of collateral policy at Fannie Mae, gave a joint presentation at AARO in which the audience questioned how appraisers (and their regulators!) should view the issue.
The consensus from Wiley and Radke is that nobody really knows how the market(s) are going to respond, but the government sponsored entities (GSEs) will monitor the situation closely.
The central question arising for appraisers is: At what point, if any, does an appraiser need to adjust for seller-paid commissions?
At the AARO conference, Radke and Wiley suggested that many appraisers simply don’t want to spend the time to calculate the adjustment for concessions. However, the GSEs are signaling that this will be a key focus for them going forward, implying that appraisers who refuse to adapt to their standards will likely be on the receiving end of warning letters, board complaints and loan buyback demands.
At the moment, however, the GSEs (along with the Federal Housing Authority) have indicated they will not treat the seller’s payment of the buyer broker’s commission as a concession or an interested party contribution (IPC).
The GSEs directly addressed the uncertainty around this issue created by the NAR settlement in writing, noting that because “buyer agent fees have historically been fees customarily paid by the property seller or property seller’s real estate agent,” they will be excluded from the financing concession limits.
However, Fannie leaves the door open to reassess the situation later, writing: “It is Fannie Mae’s standard practice to continuously evaluate its requirements to determine whether updates are appropriate based on changes to the market and industry. Fannie Mae will continue to monitor and assess the impact of the proposed NAR settlement and other real estate agent commission lawsuits to determine if any updates to its requirements are necessary.”
Moving Forward
While appraisers are in a “wait and see” dynamic right now, Capilla advises keeping a close eye on your local market over the next 12 months. If we see markets begin to shift on how commissions are paid, there’s definitely a potential risk for appraisers who aren’t doing data verification that they really should’ve been doing all along.”
To read more, Click Here
My comments: I am waiting for Fannie to say something definite and am so glad I don’t sell homes. With few sales, it will be awhile before local markets decide how to handle the commissions. Keep a watch on your market.
==============================================================
Bodie State Historic Park by Oscar Vasquez
13 California Ghost Towns: From Gold Rush To Ghosted
After the California gold rush, more than mines closed down. Whole California towns dried up, the buildings lost to history…until now.
In the mid-1800s, thousands arrived in California to chase their dreams of wealth and prosperity. For a time, many achieved it. Still, most of California’s gold and silver mines panned out in the early 1900s; only the dilapidated, empty “Ghost Towns” remained.
We dug up 13 of California’s most famous and a few little-known ghost towns. At least one ghost town was purchased by a brave soul, who is documenting the harrowing renovation process.
The ghost town of Bodie (photo above), located at Highway 270, Bridgeport, CA, was once a booming gold-rush town. It still sits in a state of arrested decay—as the California State Parks system has not restored any of Bodie’s buildings or streets, but they are here for the curious to visit and enjoy. The town of Bodie was a gold-mining town once populated by 8,000 people in the late 1870s. “People flocked to Bodie and transformed it into a boomtown” until its ultimate bust in 1942, when mining officially ceased, according to the parks service website. “It looks much the same as it did when over 50 years ago, the last residents left.” There are no commercial facilities here, like food or gasoline, so plan your trip accordingly.
To read more about all the abandoned towns, Click Here
For more information on Bodie, Click Here
================================================
HOW TO USE THE NUMBERS BELOW. Appraisals are ordered after the loan application. These numbers tell you the future for the next few weeks. For more information on how they are compiled, Click Here.
Note: I publish a graph of this data every month in my paid monthly newsletter, Appraisal Today. For more information or get a FREE sample go to www.appraisaltoday.com/order Or call 510-865-8041, MTW, 7 AM to noon, Pacific time.
My comments: Rates are going up and down. Many appraisers are not busy. Some are busy, usually with non-lender appraisals.
Mortgage applications increased 0.8 percent from one week earlier
WASHINGTON, D.C. (June 26, 2024) — Mortgage applications increased 0.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Applications Survey for the week ending June 21, 2024. This week’s results include an adjustment for the Juneteenth holiday.
The Market Composite Index, a measure of mortgage loan application volume, increased 0.8 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 10 percent compared with the previous week. The Refinance Index was essentially unchanged from the previous week and was 26 percent higher than the same week one year ago. The seasonally adjusted Purchase Index increased 1 percent from one week earlier. The unadjusted Purchase Index decreased 10 percent compared with the previous week and was 13 percent lower than the same week one year ago.
“Mortgage rates were mostly lower last week, with the 30-year fixed rate declining slightly to 6.93 percent, the lowest level in more than three months,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Lower rates, however, were still not enough to entice refinance borrowers back, as most continue to hold mortgages with considerably lower rates.”
Added Kan, “Purchase applications did see a small increase after adjusting for the Juneteenth holiday. Government purchase loans, primarily FHA and VA, saw gains of more than 2 percent over the previous week, as homebuyers in those segments sought to take advantage of the recent rate relief.”
The refinance share of mortgage activity decreased to 35.1 percent of total applications from 35.2 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 6.1 percent of total applications.
The FHA share of total applications increased to 13.1 percent from 12.7 percent the week prior. The VA share of total applications decreased to 13.8 percent from 14.8 percent the week prior. The USDA share of total applications remained unchanged at 0.4 percent.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) decreased to 6.93 percent from 6.94 percent, with points unchanged at 0.61 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate decreased from last week.
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $766,550) decreased to 7.04 percent from 7.12 percent, with points increasing to 0.6 from 0.48 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.
The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 6.82 percent from 6.79 percent, with points increasing to 0.99 from 0.93 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The average contract interest rate for 15-year fixed-rate mortgages decreased to 6.46 percent from 6.47 percent, with points increasing to 0.75 from 0.60 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The average contract interest rate for 5/1 ARMs increased to 6.29 percent from 6.27 percent, with points decreasing to 0.5 from 0.96 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.
The survey covers over 75 percent of all U.S. retail residential mortgage applications, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks, and thrifts. Base period and value for all indexes is March 16, 1990=100.
Ann O’Rourke, MAI, SRA, MBA
We want to know what you think!! Please leave a comment.