Imagine the following scenario: A couple are seeking a mortgage for a home in a rural neighborhood. Their credentials appear solid and they need a fast loan approval, but there is one problem. Their mortgage originator needs a valuation report within the week to proceed with the paperwork and close the transaction in a hot market, and there are very few appraisers within a 25-mile radius of the property.
The originator has one of two choices. He can pay an appraisal management company (AMC) and appraiser double the usual fee to spend half a day driving to and from the property to complete an appraisal inspection. Or he can engage an AMC to ask an appraiser to do an inspection from his desk in an hour’s time, then deliver the report in the next day or two, without any additional fees, for handling an underserved area.
This is not the future; it’s the present, and it’s just one example of how mortgage originators are able to capitalize on the digitization and modernization of appraisals to improve their service. Earlier this year, Freddie Mac and Fannie Mae further advanced this modernization when they approved desktop appraisals for many agency mortgages. Their permission builds on the preexisting use of remote appraisal inspections for other loans, such as nonqualified mortgages (non-QM), over the past year or so.
It’s a movement that’s accelerated since the start of the COVID-19 pandemic, when the industry stepped up its innovation to get around physical distancing requirements. Even so, there’s an adoption curve for appraisers. Now is the time for mortgage originators to ask if their appraisal management companies or individual appraiser partners are able to field the technology necessary to scale this for the next major business swing.
In the case of appraisals, the use of remote inspection and virtual technology solves some overriding challenges. As mortgage originators know, the wait for valuation reports is one of the biggest impediments to a quick closing.
The wait stems from today’s appraiser shortage, as many individual appraisers are being asked to handle three times the reporting volume that they formerly managed. The numbers tell the story: More than 70% of appraisers were over the age of 50 and 20% were over the age of 66, according to a 2019 report from the Appraisal Institute, an international trade group.
That’s leading to hundreds of retirements each year. The Appraisal Institute reported that the number of appraisers in the U.S. fell from 87,130 in 2014 to 78,015 in 2018. And the wave of impending retirements is likely to accelerate.
Mortgage originators will remember the past few years and the difficult issues they faced with appraisal costs and delays. This is the time to avoid repeating the experience in the future.
Remote desktop appraisals are among the digital advances that are providing remaining appraisers with some relief while enabling mortgage companies to rev up the pace of lending. Simply eliminating the need to drive to and from properties is making a difference. In many areas, this activity alone consumes up to 50% of an appraiser’s workday. Using new technologies, they’re able to spend their time on valuations rather than transportation, which is an added cost reduction given high gas prices.
These technologies allow appraisers to complete remote appraisal inspections from their desks. Some technologies let appraisers look through someone else’s smartphone camera — directing that person (most likely the Realtor or seller) around the property as they snap and upload images and videos while taking measurements using 3D scanning solutions. The technology also can create floor plans and illustrations of the home’s functional layout. Then they’re able to insert this data content into their reports to complete, publish and send their analyses.
Similar solutions utilizing non-appraiser property data collectors also are on the horizon. In these scenarios, individuals will show up to a home, collect the verified data and transmit it to an appraiser who can still complete a valuation from their desk.
These desktop appraisals are safe because the photos are time- and geo-stamped, giving the reviewer absolute veracity of the property’s condition as of the effective date. The home’s floor plan, including exterior dimensions, is highly accurate (and in some cases, more detailed) than a normal appraisal sketch. The main thing is that the appraiser is observing and verifying the data via virtual inspection, which gives lenders the added arms-length veracity they want from appraisers.
Applications for these technologies extend beyond simple purchases of primary residences. Other areas where they are making a difference to lenders, investors and borrowers include:
- Single-family rentals. These homes comprise about 33% of all rental housing, representing a lucrative opportunity for investors and lenders. By tapping appraisers who offer remote inspections to support non-QM and debt-service-coverage ratio lending, they are able to be more responsive to investors who need to be fast and agile.
- Disaster inspections. When intense storms and wildfires cause damage, neighborhoods can become inaccessible for a time. Remote desktop inspections are making it easier for lenders to obtain disaster area inspection reports, then get damaged properties reinspected after repairs for 1004D updates.
- New construction. The 1004D update inspections also are important for lenders that offer mortgages for newly constructed homes and have to verify earlier valuations once the project is done. Remote appraisal inspections are enabling these steps to be completed more efficiently.
- Default management. In the event of a loan default, a desktop appraisal can be useful for pushing loan modifications forward more quickly. This may help to keep a borrower in their home.
- Removing bias. The Mortgage Bankers Association, National Association of Minority Mortgage Bankers of America and others are working to advance the dream of homeownership for all. Digital appraisal solutions can support their members’ efforts in these areas.
As to the last point, lenders frequently find themselves with few appraisers to call in rural and underserved neighborhoods, including some communities of color. If they have to increase an appraiser fee to obtain a physical inspection, they often pass this cost on to the borrower. This, in effect, widens the disparities as buyers whose neighborhoods have more coverage or access to an appraiser incur lower appraisal costs. Remote appraisals can bring about a world that ensures cost parity for everyone.
When appraisers are conducting a remote inspection, they are viewing a property, not a person. And this means less chance for a negative interaction.
Not only are remote desktop appraisals being heralded for streamlining mortgage lending, so too is blockchain technology. Put them together and a new lending paradigm begins to emerge.
For those unfamiliar with it, blockchain is an immutable ledger of property and financial data that is shared with everyone involved in a transaction. (Think of it like a spreadsheet of the home’s aspects with “track changes” enabled.) Real estate companies and settlement providers can convert this data and the listing into a non-fungible token, better known as an NFT, to streamline the selling, lending and closing processes. This data can include measurements, a floor plan and the gross living area.
Blockchain and remote appraisals are a powerful combination. For example, recent developments are now allowing a listing agent to use remote inspection technology to scan the entire home and generate an appraiser-ready floor plan with measurements. The floor plan and measurements will be precise, giving the appraiser the functional layout along with time-stamped and geo-tagged photos of the home.
When a buyer applies for a mortgage, a lender can engage an appraiser to conduct a remote inspection, simplifying the verification of the measurements, layout and floor plan that the listing NFT contains — moving more seamlessly toward the close. This has the potential to enable a much faster overall appraisal process that still has built-in veracity and surety of data. The blockchain process assures the appraiser and other downstream stakeholders that the data’s accuracy is verified and has not been tampered with.
With so much potential to improve lending, how can mortgage originators take advantage of remote desktop appraisal technologies? They should start by asking their appraisal management companies, or the local appraisers they typically partner with, if they can provide them with the technology or help them get trained to use it.
They should plan to pay their appraisers the same amount for a report whether they complete an on-site or remote inspection. The level of analysis will be the same and this parity will speed adoption.
Lenders also should make the decision to use these new appraisal options and embrace them. It is not a secret that originations are down and appraisal turnaround times are improving, but this is simply due to less work being available.
During periods when they have additional bandwidth, lenders should consider prioritizing the technologies, vendors and processes that will drive this future state of appraisals. Failure to do so will only exacerbate the problem later when the next boom arrives and there are even fewer appraisers available to complete reports. Mortgage originators will remember the past few years and the difficult issues they faced with appraisal costs and delays. This is the time to avoid repeating the experience in the future.
Regardless of which technologies they use, appraisers’ training and judgment are most important in the reporting process. The appraisers who rely on digital tools can vastly improve their process flow, helping lenders speed their way to the closing table in a competitive purchase market. ●