I am haunted by the mortgage crisis. It is estimated that 10 million people lost their homes during this period. I wouldn’t fret so much if I didn’t hear tone deaf folks at high levels within the mortgage system proclaim with gusto that “this time is different.” I willfully accept that no, we don’t have exploding ARM products. You don’t hear about Vegas cocktail waitresses buying dozens of homes to flip. So why all the worry?
We do have “no doc appraisals.” Maybe it’s just me, but that is predatory lending. Consumers have a right to know that the home they are about to buy is worth what they are paying. Overleveraging the borrower is never a good plan. Removing the appraisal requirement will prove to be the dumbest mistake of this decade.
The first sign of willful ignorance comes from the overhype of big data and algorithms. While the prospects for machine learning in the valuation space are truly exciting, the reality is that we are at least a decade away from realizing any meaningful lift. The foundations must be built first. We don’t even have basic standards around the data in order for artificial intelligence to have any real application. What is the most outstanding characteristic of big data? It’s big. So what? I’ll take three similar sales over thousands of unverified, unfiltered data any day of the week.
Just to torture myself, I recently rewatched a few documentaries on the Mortgage Crisis. When the Treasury Secretary says, “we really didn’t see this coming,” you are left scratching your head. Ask any “boots on the ground appraiser” during that timeframe and they surely knew. Which leads me to today. Any appraisal modernization effort must first begin with asking the appraiser the right set of questions. Most importantly, have a system that rewards a competent, ethical appraiser to report the unbiased truth.
The current pilots appear to have failed epically, at least in the court of public opinion. The proclamation that, “Change is here. You appraisers are going to love it and get rich doing God’s work of the analysis,” is so offensive that appraisers have orchestrated a revolt, and successfully, I might add. There have reportedly been numerous complaints filed with state appraisal agencies. The disciplinary action that I reviewed in the State of Georgia was a case involving an out of state appraiser performing the desktop analysis. While some may come to the conclusion that this is an indictment of a bifurcated process, I think it reflects more on the fundamental quest for fast and cheap over better. This appraiser doesn’t appear to be competent under any circumstances. Full stop.
We’ve all had failures in our lives. Failures are actually a good thing when you learn from them. It is always important to fail quickly and move on. Going forward, let’s identify collateral risk factors that should become a part of the appraisal process. Perhaps a range of value with confidence scores; sustainable lending value definitions, creating standards, democratization of the data, better education, and a system to weed out bad actors and reward good behavior.
It doesn’t sound that hard to me. Let’s do it.
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