Appraisal modernization is a hot topic right now, but updating the appraisal process is easier said than done. The process today is limited by a number of structural constraints, according to Scott Reuter, Single-Family chief appraiser at Freddie Mac.
While the industry as a whole has been adopting new technology, the appraisal process has remained relatively unchanged — right down to the forms used to complete them.
Another difficulty with appraisals historically has been appraiser capacity. Over the past decade, the number of active appraisers has remained static. In the current market, where volume has decreased, this is less of a concern. In markets with higher volume, such as 2020-2021, it can be difficult for appraisers to keep up with demand — which slows loan processing times and drives up costs for borrowers.
Reuter also noted that appraiser capacity in future high-volume markets may also be strained by appraisers aging out of the profession and retiring.
“Depending on which study you look at, 70-75% of appraisers are older than 55,” he said. “10 years out, the industry may be losing some appraisers to retirement in an already strained industry and there’s a lack of inflow of new appraisers.”
Freddie Mac’s appraisal modernization strategy
With these challenges in mind, Freddie Mac continues to work on modernizing the appraisal process for lenders that deliver loans to Freddie Mac. “The approach is twofold,” said Kevin Skowronski, Collateral Risk Policy Senior at Freddie Mac.
“First, we’re looking to modernize the traditional appraisal process and the forms that have been required into something that is more data-driven, flexible and dynamic,” he said. “The second part of the strategy is to offer a wider variety of valuation options.”
“From a modernization perspective, we want to promote consistent and fair valuation outcomes, simplify the loan manufacturing process, reduce borrower costs and effectively manage risk. If we can check those boxes, we succeed. We apply this approach across a spectrum of valuation options from traditional appraisal to our automated collateral evaluation (ACE) appraisal waiver, and we’re focused on what we can do between the ends of the spectrum.”
“Risk mitigation heavily informs Freddie Mac’s strategy,” Reuter added. “All of the valuation options and enhancements we’re thinking about testing have to pass that first bar of not introducing any additional risk to Freddie Mac,” he said.
ACE+ PDR: An enhanced option
One of Freddie Mac’s newer valuation options, which has been in effect since July 2022, is ACE+ PDR, or automated collateral evaluation plus property data report. With a PDR, property information is physically collected on-site by a trained property data collector, who prepares the PDR identifying property characteristics and capturing photographs. The PDR provides property data information, which can help mitigate risk.
ACE+ PDR was originally a temporary offering. However, effective August 2, 2023, this offering has been added to the Single-Family Seller/Servicer Guide (Guide). While ACE+ PDR was previously available only for refinances, the eligibility has been expanded to include eligible purchase transactions. That means more opportunities for lenders — and their borrowers — to benefit from loans originated without an appraisal.
“ACE+ PDR fits right in line with our approach to collateral valuation and appraisal modernization. We’re always looking for new ways to deliver value to the housing ecosystem,” Reuter said. “Whether that’s to allow appraisers to focus on the more difficult assignments, help lenders efficiently originate loans or achieve potential cost savings for borrowers.”
“On lower-risk loans during busy times, lenders may not necessarily have to get a full appraisal — there are other options,” Reuter said. “We’re trying to responsibly leverage data and technology to save time and reduce costs in the origination process through different valuation options.”
The PDR can be completed by a trained property data collector, as long as lenders meet the requirements outlined in Freddie Mac’s Guide.
“Freddie Mac has certain property data points in its dataset,” Skowronski said. “We require property data collectors to be trained on the dataset so they can understand the data points, the allowable enumerations and the expected responses.”
Property data collectors are also trained on how to identify observed issues about a property that could require repairs or an outside inspection, as well as how to measure a property and accurately produce a floor plan with measurements and calculations.
“The property data collector may be a non-appraiser, appraiser or appraiser trainee, but must meet certain requirements and be appropriately trained,” Skowronski said. “Individuals already in the housing industry, such as real estate agents or home inspectors, may become property data collectors too.”
Reuter and Skowronski said that Freddie Mac will continue to evaluate the PDR process to see how it evolves in the marketplace.
“It won’t be applicable for every economic cycle, but there will be instances where having alternative approaches benefit the industry and reduce time and cost while ensuring the same level of risk mitigation,” Skowronski said.
“Freddie Mac will continue to modernize the valuation process,” Reuter added, “leveraging emerging tools and technology while maintaining a risk-informed approach.”
“Appraisals, at the end of the day, are and will remain an important part of our risk management process while we continue to monitor and modernize the valuation process,” he said.
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