Computerized Property Appraisals Downplay Home Values

It may seem ideal to refinance a mortgage or obtain a home equity line of credit (HELOC) at a time while interest rates are at an all-time low, but some Americans are facing a serious obstacle when they reach one of the final stages of the refinancing process: the real estate appraisal.

In an effort to cut back on the costs of a personal appraisal and to save time, many lenders have been depending on the simplicity and unbiased use of a computerized property appraisal.

Problems With Automated Appraisals

These appraisals are calculated by a computer rather than completed in-person by a bank-appointed, licensed appraiser. The computer program identifies and analyzes sales records of homes in the area with similar property characteristics, such as number of bedrooms and bathrooms. It doesn’t take in consideration key elements, such as the fact that values can fluctuate between neighborhoods even if two properties are within a certain radius of each other.

Computerized appraisals are used for an array of real estate transactions, such as mortgage originations of less than $250,000, home equity loans, loan modifications and preapproval for mortgage refinancing. Possible inaccuracies could affect millions of people.

The automated-valuation model was originally developed in the early 1990s by Robert Shiller, a Yale University economist. While his appraisal process eliminated the human, more subjective factor from home valuation, he admitted that the model could estimate unrealistically low values.

The amount of available historical data, for example, affects the result of the automated-valuation appraisal. Chief economist David Stiff of Fiserv, a large provider of automated appraisals, said having fewer than two prices on record negatively affects the value given. This especially affects newer properties, such as those in housing developments built during the real estate boom. Lower property values can make a significant difference when applying to refinance a mortgage or for a HELOC.

Despite its problems, the computerized appraisal method is popular for its cost-effectiveness. Whereas an in-person appraisal usually costs several hundred dollars, a computerized appraisal typically costs around $20.

Some homeowners over the years have had their HELOCs reneged when new property valuations indicated a sudden drop in home values. Frustrated by having lines of credit suddenly revoked, homeowners have filed multiple lawsuits and class action suits against lenders, claiming the lenders grossly underestimated property values by utilizing only the automated method.

Banks Defend Computer Models

Federal banking regulators and state attorneys general say the automated-valuation is used mainly as a check on in-person appraisals, which are said to have been too generous over the years. Regulators have accused some banks as having some power over the appraisers, pressuring them to value a house at a certain price point with the promise of continued business. As the housing market took a major hit in the past five years, new rules were imposed which prohibited lenders from choosing individual appraisers for particular properties.

Professional, licensed appraisers, real estate agents and homeowners argue the validity of these appraisals as they agree the property values generated by the system are typically quite low. While it’s considered commendable by some economists not to overestimate the value of a property during an unpredictable housing market, underestimating the value can be equally destructive to market growth.