After the Mortgage Bankers Association (MBA) sent a letter in support of raising the threshold dollar amount for requiring manual appraisals from $250,000 to $400,000, Collateral Analytics examined how raising this threshold would impact the mortgage industry as a whole. The MBA originally wrote a letter to the Comptroller of the Currency, the chairman of the Federal Reserve and the chairman of the Federal Deposit Insurance Corp. (FDIC), requesting the elimination of manual appraisals from the mortgage underwriting process when mortgages are $400,000 or less, according to a report in DSNews.
The letter stated: “MBA supports the agencies’ desire to raise the threshold for appraisal exemptions as a means of leveraging technology to better serve consumers, while also preserving crucial safety and soundness standards.”
According to Collateral Analytics, the new proposed guideline will impact around 19.4 percent sale transactions, based on MLS (multiple listing service), and about 14.6 percent of sale transactions, based on public records. Collateral’s study suggests this move to eliminate traditional appraisals, from even a modest subset of residential mortgages, is a baby step in modernizing the regulation and underwriting process for home buyers.
Without traditional appraisals, automated valuation models (AVM) would still be necessary during the underwriting process, performing the same tasks as humans but can process more data. However, AVMs may not reach the target price lenders may be pressured to achieve, DSNews reported.
According to a study from Calem, Lambie-Hanson and Nakamura (July, 2017) from the Federal Reserve Bank of Philadelphia, the current system of price disclosure (to appraisers) creates a flaw in the risk management system.
“When appraisals exactly hit the purchase prices, or refinance target price, no real information is gained by lenders, and that we find appraisals are less predictive of default than automated valuation model estimates,” the study said.
Most lenders still use traditional evaluation processes, even though 68 percent of all homes are under $312, 500 the typical threshold for a $250,000 mortgage and eligible for automated appraisal methods combined with inspections on property condition. Eliminating the traditional evaluation will require a fresh look at this issue.