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Hard data increasingly preferred, versus narratives
After the Great Recession’s influence on the mortgage industry by way of reduced product availability and new underwriting and loan quality-related rules, lenders have responded by taking a more assembly-line approach to loan origination. This has made the mortgage process increasingly standardized.
Today’s loan origination and accessory systems help make this assembly-line approach run smoother along with e-signature and e-document technology, which aims to eliminate manual paper-based processes. This is for good reason: today’s lenders employing the standardized approach are increasingly using the data, rather than the actual documents; and with mortgages moving to an all-digital process, the documents are becoming less important.
During the past eight years, there’s been a big push for the mortgage industry to move beyond paper-based processes and only use the data. In some cases, this means using structured data, which works with today’s systems instead of the unstructured data used in the paper-based processes. Structured data allows for simpler automation of the mortgage process, improving loan quality, and better and faster analysis of the main trends that are happening internally and across the mortgage industry.
A major part of the mortgage application process where unstructured data continue to play a big role is the home appraisal. Although appraisal reports contain a considerable amount of data which can be plugged into the new process, the meat of any appraisal report is the appraiser’s narrative. Some data can be extracted from the narrative by using optical character recognition. With the push for more structured data, the big question is how appraisal reports in the future will be affected. With regulators, GSEs, FHA and investors increasingly calling for the appraisal reports to include more data and transparency, this raises more questions of how appraisal reports might change. The GSEs and the FHA have been at the forefront in emphasizing structured data and standardizing the process by launching new appraisal submission and review portals and quality control tools.
Paul Prentice, Senior Managing Appraiser at PEMCO Limited said, “To answer the underlying questions, we need to go back to some of the changes made to the appraisal reporting process over the past few years. Eight or ten years ago, the narrative provided by the appraiser was considered to offer a significant amount of support. An appraiser’s area knowledge and expertise were in many ways, the factor that trumped all other factors. With the amount of data available through various technologies such as UCPD and the Collateral Underwriter and the hundreds of AVM products available, the narrative and data provided within the appraisal is highly scrutinized and more support is required from the appraiser.”
Prentice adds, “For example, while the appraiser can provide comparables that appear to be relevant, similar, and recent, the selected comparables will be scrutinized against the Collateral Underwriter or an AVM document. Therefore technology is making data available to the lender that has not previously been present and this will now be analyzed in hopes that the appraisers’ data and lenders’ data closely aligns. This has put some pressure on the appraiser to take a more proactive approach to completing the appraisal report and addressing potential concerns and available sales prior to submission of the completed product.”
Does this portend a push to fully automate the appraisal profession by removing more of the appraiser’s valuation opinion and replacing it with more structured data?
Prentice doesn’t see total automation of the profession, “I do not currently see a replacement for the appraiser. While various data points and technology can quantify a considerable amount, there is no replacement for “rubbing noses” with a house as I call it. It is still necessary to get up close to really understand the functionality, layout, and condition. Additionally, technology does not usually consider neighborhood differences. This is generally the most impactful factor in determining a reasonable conclusion and still requires an individual to quantify. So while various portions of the report may change to allow the software to scrub the information and produce results, there are aspects that a software program will not be able to capture. It will be the responsibility of the appraiser to support statements made and provide execution that is consistent with provided data.”
Prentice goes on to say that the dwindling number of appraisers may have the effect of increasing their value, “We must keep in mind that the field of real estate appraisal is a craft that young people are not jumping into. For this reason I do not foresee the appraiser going away but I see them becoming more valuable as their numbers dwindle and lenders find appraisers’ expertise to be in high demand and short supply.”