How AI is changing the valuation process | ET REALITY


HousingWire recently spoke with Chris McLain, president of the Appraisals division for Consolidated analysisabout the current appraisal market, AI innovation in appraisals and valuation products for HELOCs and second lien mortgages.

HousingWire: How Will the Appraisal Market Change in 2024?

Chris McLain: We all thought radical change was coming… a decade ago. Then we did more of the same. But since the pandemic, the pace of change has really accelerated.

On the demand side, the order volume pendulum swung sharply towards the lower zone, but is about to recede strongly. Demand for housing is increasing, so as the market finds equilibrium, demand will once again increase in volume. Additionally, low rates don’t last forever, so the perceived “interest rate lock-in” will resolve itself. As more homeowners are forced to sell due to necessity (job changes, home moves, etc.), those low rates will return to the market. Then the incentive to “stay and play” will disappear and that house will become liquid again.

The product environment is changing rapidly. Data, artificial intelligence and analytics are far beyond what we had in 2016 or even 2019. The technology is growing at a rapid pace. This means that where ratings used to be a fundamental menu of options, we are now on the way to a dictionary-sized menu, something specialized for each situation. Appraisers have to adapt to this new environment and AMCs have to adapt to the changes for appraisers. We expect that in 2024 there will be strong demand for valuation services, but it will no longer be just 1,004: it will be a spectrum.

HW: Are you seeing a lot of buyback activity and how are you responding to it?

CM: We have seen an increase: a couple of years ago they were very rare, whereas in the last six to 12 months we are seeing significant increases. When it comes to an assignment we work on, we have a team of specialists who evaluate the complaint and advise our client on their response.

We also assist clients with loan repurchase claims that we do not service. This can be done proactively by taking a representative sample of the portfolio and assessing it for buyback risk. Or it can be a reactive form, responding to a buyback demand. We have solutions that will thoroughly investigate the details of the claim, assess the likelihood of success, and form a defense and response. For investors, we can help find problematic valuations and evaluate them for possible return using the same process.

HW: How is artificial intelligence being integrated into the property valuation and appraisal process?

CM: Artificial intelligence (AI) is increasingly integrated into the valuation process, leading to significant advances in efficiency, accuracy and data-driven decision making.

Beyond AVMs, AI is used in property valuations for predictive analytics, natural language processing, workflow optimization, quality assurance and risk assessment, regulatory compliance, and more, leading to better quality and faster delivery times. AI is reshaping the real estate valuation and appraisal process by improving the speed, accuracy and efficiency of appraisals.

While AI brings valuable insights and automation, it is crucial to emphasize that human expertise remains vital in interpreting data, considering unique property characteristics, and making informed judgments. AI is a valuable tool to assist appraisers and appraisal management companies, allowing them to deliver more reliable, data-driven property valuations.

HW: With higher rates, the home equity loan market continues to grow. What are the most common valuation products for HELOCs and second lien mortgages?

CM: For home equity loans, several common valuation products can be used to determine the value of a property, helping lenders assess the risk and capital available to borrow. It is important to note that the choice of valuation product can be influenced by regulatory requirements, loan-to-value ratios, investor overlays, and lender risk tolerance.

Lenders should work closely with their AMCs to understand which appraisal product is most appropriate for your home equity loan needs. A cascade of disparate products is often an effective valuation strategy.

For example, due to its low cost and quick results, an automated valuation model (AVM) with a property condition report could be an ideal solution for borrowers with high credit scores and low loan-to-value (LTV) ratios. As risk grows, other deeper, human-driven solutions, such as a broker price opinion (BPO) or hybrid appraisal, would better suit the risk. For higher LTV transactions and borrowers with adverse credit, more traditional solutions may be needed, such as a full 1004 appraisal. The key to an effective strategy is matching the appropriate valuation method to the risk of the transaction, and a good valuation partner can help advise on this strategy.

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