Thursday, March 28, 2024 | The Latest Buzz for the Appraisal Industry

Transparency vs. Privacy

There are some interesting currents in the financial transaction ocean. On one hand, there is the demand for greater transparency. I am a huge fan of radical transparency. And as I have learned with the launch of my own company that manages appraisers’ credentials, not everyone is a fan.

Transparency is certainly something new to the entire mortgage transaction and especially so for the appraiser. Before the mortgage crisis, appraisals were sent mostly in a “flat file”, a PDF or other locked document. Fannie Mae and Freddie Mac never looked at an appraisal unless and until a loan went into default. That seems astounding today. What may be even more astounding is that while the demand by the GSEs for access to more and more data has accelerated, the investor community has access to less data.

Huh? Yes, you heard that right. The credit risk transfers that the GSEs package up and sell have very little loan level data. So. while the GSEs are enjoying access to better data, their customers do not benefit by the same openness and transparency. During the next crisis, everyone will be talking about this. I am not clairvoyant. This is just common sense which seems rarely to apply to our industry.

If I hear one more expert say that Artificial Intelligence is going to replace the appraiser I am going to throw open my window and yell “I am as mad as hell and I am not going to take it anymore”. Some of you will recognize this quote by Howard Beale from the movie “Network” filmed in 1976, one of the best films ever. They sure don’t make movies like they used to. But I digress.

While the demand for greater transparency is at play you have an opposing force of privacy. Virtually everyone was negatively impacted by the Equifax data breach. Everyone is concerned, as they should be, about data breaches. Most appraisers are “more mature” and are less comfortable with social media, online transactions, and living in an online virtual reality world. Millennials, however, think nothing of it and have their whole life digitized.

Look at what is going on with Bitcoin. Some say it is the wave of the future. Others say it is a crock. Tulipmania. Few will disagree though that it encourages criminal behavior due to the lack of transparency. For a great read, check out “Silk Road” in Wired magazine. Here is a link to Part I and Part II. I am learning all I can about the underlying technology. From what I gather “blockchain” has real applications to the mortgage system. But cryptocurrencies in the absence of any governance and regulation would be an insane concept to introduce into financial services.

Artificial intelligence will have tremendous applications in collateral risk. But rest assured it cannot replace the appraiser. There are many tasks that an appraiser does that cannot be replicated by a machine. From my perch, I see a union of man and machine. There are lots of exciting new things that will make your appraisal better. Warren Buffett believes in the qualitative and the quantitative analysis of a company. You cannot recognize the integrity of a CEO by reading a spreadsheet. There is a great book I just finished by Ray Dalio, Principles. He talks about how his company for years has applied artificial intelligence to their portfolio analysis. Yet he says he doesn’t trust a purely quantitative approach to investing. Anyone who knows anything about appraising knows that it is part art and part science. The sooner those risk managers learn that the better.

Brent Bowen

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