Will new regulations modernize AVMs? Will they equalize the large administrative regulatory cost burden of real appraisals?
And who is subject to the “new rule”? Is it the AVM vendors and developers, or others (like banks) who use the output to make loans?
This Modernizing Appraisal series is about the analysis process, not FannieMae and FreddieMac reporting requirements. The process is identical: 1) The problem; 2) The data; 3) Predict or adjust; 4) Communicate. We continue here on #1 – defining the problem to be solved. Read the earlier parts of this series here.
The goals of the rule, now in effect, are worthy:
- High estimate “confidence”;
- Inhibit “data manipulation”;
- Restrain “conflicts of interest”;
- Require random testing & review;
- Comply with nondiscrimination laws.
The official descriptions connect the need for new regulation on “advances in database and modeling technology.” It requires the “appropriate steps to ensure the credibility and integrity of the valuations produced.”
Credibility for AVMs may or may not mean the same as for appraisers per USPAP – “worthy of belief.” Integrity is also more a human trait word, not a measure of accuracy or precision of algorithmic result.
These goals are to be insured through the use of “quality control standards.”
In the rule definitions of terms – An AVM is a “computerized model” which can “determine the value” of a principle dwelling. (Appraisers are taught differently: that it is the market — buyers and sellers — who determine value through the price-negotiated mechanism.)
Can appraisers use AVMs as part of the “development of opinion” of a value? This is vague in the rule. On the other hand, the Appraisal Foundation’s “USPAP Guidance and Reference Manual” clearly addresses “how an appraiser may use an AVM.” (Advisory Opinion 18) This AO-18 assures us that appraiser use of an AVM is ok, but only if: “the appraiser believes the output to be credible.”
Note: evaluations, as defined, are subject to this new rule!
Appraisals are not.
This Advisory Opinion comprises six pages in the manual. Appraisal Standard 1, (which covers the complete appraisal development process) comprises just four pages!
Hmmm.
It appears that for the first time, appraisers may have a small equalizer of regulatory burden and cost – as compared to AVMs, evaluations, “waivers,” and all other ways to “determine” value.
There is also now a need for AVM reviews (alongside the “random testing” required by the rule).
Once again the question: Will the appraisal organizations and schools step up to the opportunity? Or will the large users, such as the GSEs (FannieMae and FreddieMac), set the map?