Lenders See Considerable Value in Appraisal Modernization

Appraisal modernization involves leveraging technologies, data, and analytics to enhance the management of collateral risk, making the process more efficient for lenders, borrowers, appraisers, and secondary-market investors – and it's gaining traction in the mortgage lending industry.

The journey toward modernization began more than a decade ago with the digitization of appraisal data through the Uniform Appraisal Dataset (UAD) and the Uniform Collateral Data Portal® (UCDP®). This changed the way we think about collateral risk management, enabling new risk-based, data-centric approaches. While appraisal modernization efforts were well underway prior to the pandemic, the emergence of COVID-19 forced an unexpected test of certain "appraisal flexibilities," further stimulating the modernization dialogue. This topic also gained attention from the Federal Housing Finance Agency (FHFA), which issued a Request for Input in late December 2020 for comment-gathering on appraisal policies, practices, and processes. ¹

To better understand lenders' views on appraisal modernization, including benefits, implementation challenges, and possible applications, Fannie Mae's Economic & Strategic Research (ESR) Group surveyed senior mortgage executives in February 2022 using its quarterly Mortgage Lender Sentiment Survey®.

Among others, the study revealed the following key findings:

• 94% of the surveyed lenders agreed that appraisal modernization efforts are valuable to the industry.
• Similarly, nearly all lenders agreed that current tools, such as Collateral Underwriter® (CU®), are helpful in managing collateral risk (94%). They noted that the tools provide an extra layer of due diligence and boost lenders' confidence in appraisals.
• "Shortening loan origination cycle time" was overwhelmingly cited as the most important potential benefit of appraisal modernization, followed by "enhancing appraiser capacity" and "lowering consumer/borrower costs." The benefits associated with appraisal quality and risk management were also considered important by many lenders, including enhancing data quality, increasing confidence, reducing errors, and lowering repurchase risk.
• Lenders cited "the speed of industry-wide adoption" as the biggest implementation challenge, followed by "integration with loan origination systems" and "integration with GSE automated underwriting systems." 
• "Inspection-based appraisal waivers" and "nontraditional appraisals (e.g., desktop appraisals or hybrid appraisals)" were cited as the areas most likely to benefit from adoption. Additionally, one-third of lenders think it would be helpful to "incorporate tools such as image recognition or GIS (geographic information systems) into the scoring logic of underwriting or quality-control tools (e.g., CU)."

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Our survey results reveal a near-consensus opinion that appraisal modernization will help lenders, appraisers, and risk investors assess and manage collateral risk more effectively, while also benefiting consumers via greater appraisal accuracy, lower costs, and increased velocity of loan decisioning. To achieve this vision, industry participants will need to work together to resolve implementation challenges through training and investment in the infrastructure needed to operationalize new solutions.

To learn more, access the associated research deck or check out the high-level infographic.

May 11, 2022

The authors thank Rachel Beam-Jares, Carol Bell, Matt Classick, Li-Ning Huang, Briana Jackson, Mary Miller, JamieDale Monday, and Keisha Wilkinson (in alphabetical order) for valuable contributions in the creation of this commentary and the design of the research. Of course, all errors and omissions remain the responsibility of the authors.

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) Group or survey respondents included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR Group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR Group or survey respondents represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

¹ "FHFA Issues RFI on Appraisal-Related Policies, Practices, and Processes" news released on Dec. 28, 2020,
https://www.fhfa.gov/news/news-release/fhfa-issues-rfi-on-appraisal-related-policies-practices-and-processes
The RFI covers four areas related to appraisals: (1) appraisal modernization; (2) the Uniform Appraisal Dataset (UAD) and the design of appraisal forms; (3) Automated Valuation Models (AVMs) and appraisal waivers; and (4) valuation differences by borrower and neighborhood ethnic makeup.

Since then, the FHFA has received a total of 181 submissions. https://www.fhfa.gov/AboutUs/Contact/Pages/input-submissions.aspx