How Less Risk, More Flexibility and a Better Borrower Experience Are Driving the Future of Valuation
Collateral valuation has come a long way in a short time. As COVID-19 restrictions prevented in-person property valuations, non-traditional solutions including desktop and hybrid appraisals and appraisal waivers have gained more mainstream adoption.
The pandemic, in fact, spurred the housing ecosystem to take a more proactive approach towards implementing widespread changes, serving as a catalyst to nudge initiatives over the line that had long been sitting on the margin. It provided validation that, thanks to tools, technology and data, the industry can conduct confident, sound business practices—even remotely. That was a breakthrough.
As we head into a new year and the effects of the pandemic abate while market uncertainties intensify, collateral valuation faces longstanding challenges as well as exciting innovations and advancements. While we navigate the ever-changing landscape, Freddie Mac remains focused on developing valuation methods that provide the best risk mitigation while promoting consistent outcomes, simplifying the loan manufacturing process and reducing costs.
Necessity Paves the Way for Modernization
Since Freddie Mac purchases loans in different kinds of market conditions, it’s crucial that we remain constantly aware of varying collateral valuation risk factors. Market value—the most probable price for a property in a competitive and open market—is undoubtedly a major consideration and one that also tends to get the most focus. But condition, quality and marketability challenges are also crucial, necessitating policy thresholds to mitigate headwinds.
Advancements in collateral valuation are increasingly addressing risk factors. However, obstacles including inertia and the status quo have stunted the adoption of existing alternatives and prevented wider changes.
For years, the only viable choices for property valuation were either a traditional appraisal with an interior inspection or a total waiver, with nothing in between; now we are starting to fill in some of that middle space.
During COVID-19, exterior-only inspections and desktop appraisals have allowed us to collect data without the need for the appraiser to enter a property or even physically visit the site at all. In 2020, through a joint effort with Fannie Mae, we developed standardized desktop and hybrid appraisal forms to facilitate the process and provide consistency. Additionally, automated collateral evaluation (ACE) appraisal waivers use models and algorithms to forgo an appraisal altogether.
Use of ACE+ PDR Allots More Time for Complex Assignments
This past summer, we introduced inspection-based waivers, or ACE+ PDR (automated collateral evaluation plus property data report) for refinance loans where there might be a lack of available information about the property condition. A trained professional conducts a brief visit to the property and subsequently reports their findings; if the PDR meets our requirements, the loan may be originated without an appraisal. This is just another way technology and bifurcation can help alleviate capacity concerns when loan volume is high and allow appraisers to focus on assignments that require their knowledge and expertise.
Expanding with an Eye on Risk and Added Value
Solutions like these successfully addressed the painfully long wait times for traditional appraisals during the peak of the pandemic when volumes quickly escalated and put stress on appraisers across the country. However, as the market levels off and short-term memory fades, companies may find themselves less motivated to modernize. Yet without necessary widescale implementations, the industry could be ill-prepared to face another market upheaval when—not if—it happens.
As Freddie Mac continues to implement modernizations in collateral valuation, we remain mindful to steadfastly focus on risk mitigation, consistency and quality. Risk decisions for nontraditional appraisal methods must be at least as good, if not better, than those for traditional appraisals.
Our policy and our offerings for alternative collateral evaluations can only expand and evolve when they don’t increase our risk and when they provide value to both our lenders and their borrowers.
On lower-risk loans that qualify, options other than a traditional full appraisal may be sufficient to help inform our risk decision, offering immediate efficiencies in overall turn time. Allowing the use of third-party data collection in certain circumstances, for example, alleviates the need for an appraiser to physically visit and inspect every property and appropriately limits the scope of work on these assignments.
Additionally, alternatives can help us achieve our goal of addressing housing inequality and potential bias—like ACE, which leverages proprietary models, historical data and public records to provide current market value. Hybrid and desktop appraisals may also mitigate the risk of unconscious bias as they remove the face-to-face interaction with an agent, buyer or seller, which could lead to unfounded assumptions.
A Look Ahead
So what does the future hold? We are exploring ways to enhance Home Value Explorer® (HVE®), our automated valuation model (AVM) that generates an estimate of property value, to incorporate more data and respond more quickly to the market.
Also on the horizon are:
- Natural language processing (NLP), a branch of artificial intelligence (AI) that interprets human communication similar to the way people process language. NLP will be used in the next version of Collateral Condition Evaluator (CCE), a condition model used in ACE, to identify key words from free form text comments in multiple listing service (MLS) listings that measure sentiment and mitigate undervaluation and bias.
- Computer vision, which uses AI to identify property features and characteristics, confirm photo compliance and conduct damage analysis, ultimately boosting quality control and the accuracy of property reports.
- Scanning technology and 3D laser imaging, which provide a condition score and digital representation of the property that’s fungible with other market solutions. This allows downstream users to do a virtual walk-through of the property, avoiding poor quality imagery or obscured damages and deficiencies, while it calculates measurements automatically and avoids human error.
Technologies like these could also prevent undervaluation of a home with renovations whose comparable properties lack similar improvements, or overvaluation if comparable sales have newer updates.
Freddie Mac is fully committed to the important ongoing work in the valuation space. Innovating in collateral valuation is about managing risk, nimbly responding to demand and providing reliable consistency—at a lower cost to the homeowner. Learn more about how we’re accomplishing this and get insights on other relevant and timely topics.