Newest homeowner headache? 'Robo-appraising'
Automated and computerized appraisals can be cheaper and faster. But critics say they're woefully inaccurate — and can cost homeowners their home-equity lines of credit.
© Gregor Schuster/Corbis
Home appraisals, blamed for being too generous during the housing boom, are now facing criticism from some homeowners for being too stingy and preventing them from refinancing or borrowing against their houses.
The criticism is leveled at computerized real-estate appraisals, which depend on models that use prices from home sales and other data to determine a house's value. Because of the housing market's volatility, these appraisals are underestimating prices, some homeowners, real-estate agents and fee appraisers say.
Lenders use computerized appraisals primarily for home-equity loans, preapprovals for mortgage refinancing, loan modifications and mortgage originations of less than $250,000. Automated appraisals are cheaper and faster than in-person appraisals. They run as little as $20, whereas appraisals done by people can cost hundreds of dollars. (Bing: What's a home-equity line of credit?)
The computerized models are used as a check on in-person appraisals, which often were too generous during the housing boom, according to federal banking regulators and state attorneys general. The regulators said banks often held sway over appraisers, encouraging them to value homes at certain prices in exchange for future business. In the wake of the housing bust, regulators imposed tough new rules, prohibiting banks from picking individual appraisers for individual properties.
"The selling point was that (computerized appraisals) were faster and not prone to bank pressure," says Steven Kane, a Colorado commercial and residential appraiser who is the author of two books on how to apply automated-valuation models.
Computerized appraisals calculate a home's value by using an index derived from historical repeat-sales data, or sales records of homes with similar property characteristics, such as square footage and the number of bedrooms and baths. In-person appraisals don't incorporate as much transactional data as a computer model.
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Lawsuits pop up
Gary Cohen, an advertising-sales manager in West Los Angeles, Calif., says Citibank suspended his $510,000 home-equity line of credit based on a drop in his home's estimated value.
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A computer model the bank used showed his home's value had dropped to just over $1 million in 2009 from its $1.65 million appraised value four years earlier.
So, Cohen, 65, paid $750 for an in-person appraisal from a bank-designated firm. It estimated his home was valued at $1.3 million, but Citibank still wouldn't reinstate his credit line.
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"The discrepancy is so great that you have to know whatever method they are using is not accurate," Cohen says.
Cohen sued Citibank, a unit of Citigroup Inc., over the appraisal. In court documents, Citibank said that even if his home is worth the higher figure, the bank has a legal right to suspend the credit line.
"Citibank continues to believe the suit has no merit and intends to defend its position vigorously," a spokesman says.
Borrowers also have sued JPMorgan Chase, Wells Fargo and other big lenders, claiming that banks are misusing automated-valuation models in order to cut home-equity lines of credit. JPMorgan Chase and Wells Fargo declined to comment.
How computerized appraisals started
Automated-valuation models were pioneered by Yale University economist Robert Shiller in the early 1990s. While arguing that these appraisals are more objective than human appraisers, Shiller and others say that sometimes, the models may provide unrealistically low values, prompting lenders to reject loan applications or lend less money on particular properties.
Some models weigh past sales of a particular property over time against a historical home-price index, and they are running into problems with properties that have only one sale or none. That is occurring in places such as Nevada and Southern California, where new subdivisions sprouted during the housing boom but many homes never sold or entered foreclosure before being sold.
"The main difficulty is that I need two or more sales prices for a property, and if I'm not able to find it, it doesn't fit into the sample used to calculate the index," says David Stiff, chief economist at Fiserv, one of the largest providers of automated appraisals using this method.
Shiller says there can be problems with these appraisals if the period of historical data programmed into the models is too short.
"In a slow market, it might suggest that prices are going to be falling for a while," he says.
Other computerized models break down property characteristics, such as the number of bedrooms and bathrooms, as well as sales of comparable homes, to estimate value estimate. A lack of accurate or comprehensive data in county and municipal records often hampers them, though. Improvements, for example, are recorded by building permits. If homeowners don't file permits, the records are inaccurate.
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These models can "change a lot, depending on which variables you include or exclude, so there can be a bias," Shiller says.
I bought a home in 2001 and put a down payment of $50,000. When the appraisal from the lender came in it was for the amount I needed to borrow. I had done my homework and knew my offer was low but reasonable, the husband had died and the widow had already moved. I wondered at the time, had I missed the mark by that much?
Jump forward to the housing mess, when I found lenders had told appraisers what amounts the wanted to see. The honest appraisers who didn't play ball weren't called to do any. Now nobody is sent to jail, all those rich cheaters scott free. Except Martha Steward for such a small amount, her mistake was was being involved with too small of amount of corruption.
As an appraiser of over 35 yrs, I can attest to the fact that AVM appraisals are frequently inaccurate and often wildly so. In the vast majority of cases, they do not reflect the interior quality or condition of a home. How could they? No one went inside and looked. They often have the square footage of the house wrong. They will ALWAYS fail to catch structural or equipment problems. They typically have serious database dependency issues in that they rely on tax assessor records (which are notoriously inaccurate in many counties) or dubious databases where inputs are unreliable and non-comprehensive.
The great AVM challenge: pick a two story upscale house with a partially finished basement situated on an atypical lot. The house sold recently but that fact has been obscured. Five live appraisers versus the top AVM models. Which group would you bet on to get it right? I thought so.
Not only the banks are reposible for this meltdown. A lot of people out and out lied on those loan applications stating income they didn't have. Just because the banks didn't check or knew it didn't exist doesn't mean the borrowers weren't just as guilty. When a single mother of two borrows hundreds of thousands of dollars with no down and purchases a five bedroom house and hasn't got a dime in the bank, there is more wrong there than just the bank. Later the borrowers claim that nobody told them about the adjustable rates, but everybody knows what goes on when the loan documents are signed. Those people knew the interest rates were going to change. Lying on loan applications is a crime, and yet they are saying they were duped. Nobody was duped except those of us who are now paying the bill for this mess and don't have a house. Don't blame the banks. There's a lot of blame to go around.
As an appraiser I have prepared appraisals that required only an exterior inspection of a property with little information on the interior features then later been asked to actually go inside and there are times the value result is dramatically different once I've been able to see the interior due to unknown upgrades or horrible condition issues. Using them in condo projects and even some townhouse projects where value ranges from top to bottom are very small isn't so unreasonable. But if a borrower is willing to incur the cost of a full appraisal that option should be available to them.
Does this article REALLY need a random link to something else literally after every 1 or 2 sentences toward the end!?! Don't we think that's a little excessive. Its hard enough to read online articles with all the crap links within the text itself. Can the editors please go back to providing solid content? This got to be very difficult just to read.
Automated valuation models (AVM's) are woefully inaccurate in "typical home sale conditions". They will work when the subdivision or neighborhood is homogenous (alike) and the public records are accurate. Most public records are not accurate, so garbage in - garbage out, and most subdivisions and neighborhoods (especially the older ones) are not homogenous (similar in construction). I have reviewed many AVM's that used non waterfront property to value waterfront property, or 500 sf homes to estimate value for 5,000 sf homes. Never mind all the other nuances of differences in home construction and ownership (read granite countertops, upgraded appliances, metal roofs, effective age, etc.) That's why they only charge $50 for them, and also the reason lenders use them...bottom line. Lenders don't mind paying $50 for a junk estimate of value, it is the consumer that takes it on the chin. AVM's are the reason so much "toxic" debt is in Fannie Mae and Freddie Mac, and the reason those GSE's have been declared terminal or DOA. Lenders are mostly to blame for this housing meltdown because of their shortcuts, cheapness, and fraudulently subverting the regulation governing their lending practices. There is plenty of regulation protecting consumers, if the lenders follow the policies instead of KNOWINGLY subverting it. The big problem with AVM's is that it cannot make subjective adjustments, like for condition of home, curb appeal, effective age, etc., because it doesn't see the current state of condition. It is usually based on aerials or photos that are over a year old. If you want a "good" appraisal, get a "good' appraiser, they are like doctors and lawyers, good ones and a whole lot of bad ones. Or just use the "cheapest and fastest" appraiser that the lenders' AMC (Appraisal Management Company) uses (groan, roll eyes). The difference can be thousands of dollars in value estimate. There is no substitute for experience.