Decoding the shift to UAD 3.6 appraisals

Transcript:  

Allie Barefoot:

I am Allie Barefoot with Cotality, and this is another conversation about Data in Context. Valuation modernization is bringing some of the biggest changes the appraisal industry has seen in decades, and Cotality experts are exploring how these shifts could transform appraisals for the better, making them fairer, faster, and more data-driven. That's why we're going to be talking with Cotality's Chief Valuation Officer Shawn Telford about why Fannie Mae and Freddie Mac are modernizing their approach and what this could mean for the homebuying process. So, to break down the changes and the data, let's go ahead and jump into today's conversation with Shawn. Shawn, thanks so much for joining me, talking about valuation modernization here today.

Shawn Telford:

Happy to be here. Thank you.

Allie Barefoot:

So really, we're just going to start this whole thing off with kind of explaining what valuation modernization is and why is everybody talking about it right now?

Shawn Telford:

There's really two distinct parts to valuation modernization. One is new ways for lenders to get the collateral valuation on a property. So the Fannie and Freddie have been offering new and different options such as inspection based waivers, appraisal waivers, desktop valuations, and similar. These have become available to lenders hybrid appraisals where it's a combination of a data collector, an appraiser. These new options are now in the marketplace and acceptable for originating loans that go to Fannie and Mae. So that's one part of it is producing these additional options. The second part of it is updating the uniform appraisal dataset. So more than a decade ago, Fannie and Freddie implemented a uniform appraisal dataset, which allowed the information for the most part in the appraisals to be communicated as data points, which allowed some automated workflows for lenders and efficiencies and some risk management components. Well, that original process was piggybacked onto the legacy form filling process.

What the GSCs have done now is they've created a new uniform appraisal data set, and they've eliminated appraisal forms as we know them, and will have a dynamic approach that will allow the appraiser to communicate their observations and all of the necessary information to help the lenders understand the collateral risk. That new dataset is much broader, allowing more of the appraisers appraiser's information and more of the appraiser's observations to be communicated as discreet data points, which help the automation eliminate some of the back and forth when pieces are buried in addendums and things of that nature. So again, it's really just a component of new options combined with new dataset

Allie Barefoot:

And the fact that appraisers have already had this older version of the dataset. Really, Fannie Mae and Freddie Mac are just updating that dataset into UAD 3.6. But how has the home appraisal process actually changed with all of these new tools and technology and what's different from the way that it used to be?

Shawn Telford:

Sure. So part of it, as I mentioned, is there's an opportunity for an appraisal waiver. So in certain circumstances, Fannie and Freddie, they know enough about the property and they know enough about the risk profile of that collateral that they waive the requirement for the lenders to have an appraisal done, and that significantly can speed the process up in these very low risk scenarios, right? Then the other thing that's different now is a homeowner may not. So the experience for the homeowner is they may not have someone come to their home in all cases because there's not a need to do that. In other cases, a property data collector, which is a vetted person who's trained to go to the home and collect the data, they're not an appraiser and they don't do an appraisal. They may come to the home and then that data may be used downstream by the appraiser to do a desktop type analysis. So there's different options. Now, the traditional appraisal where the appraiser comes out is still, the vast majority of loans will have that done, but these other options are starting to be more accepted in the low risk scenarios

Allie Barefoot:

And these other appraisal options, they've been available for quite some time now. So why now? What's driving the push for modernization at this moment, and when will appraisers adopt this change? What will it mean for lenders and really all stakeholders that appraises and appraisers have to do with?

Shawn Telford:

Yeah, so it's funny, these new options for appraisals that are from the exterior or using data from others, they're not really new per se. They've been acceptable. What's changed is that Fannie and Freddie are now allowing them. So for the past decade or so, there's been a one size fits all for appraisals that makes sense in certain scenarios, but there's a lot of low risk scenarios. The demand from lenders, there's a lot of desire to have the process of home buying be shorter, be quicker. There's a lot of desire to have the cost be smaller, and so Fannie and Freddie are pushing for some of those options to help manage that risk in a different way. And largely the COVID, believe it or not, COVID was a catalyst in some ways for these new appraisal tools to be tried in the marketplace where an appraiser uses data from another person or from a virtual inspection or from video. COVID proved out that those types of solutions can produce at least as good of a report as if the appraiser went out according to Fannie and Freddie. And so those things combined with just the demand for speed it up lower the cost is really what's driving part of it. It's been a lot of things just kind of culminating in an opportunity really change how we look at the appraisal process.

Allie Barefoot:

And I'm sure convenience has a huge part of it. You and I, we really enjoy more convenient options with technology and just pretty much in everything that we do in life nowadays. So when can homebuyers notice a change and really will they with this new valuation modernization?

Shawn Telford:

Yeah, it's happening now and it's been happening for many years. As I said, the majority are still a traditional appraisal process. During COVID, when there was a large refinance scenario, a lot of low rates and high degree of refinancing, a lot of those refinances because they're low risk appraisal waivers were issued. And so in many of those cases, the homeowners may have been told, Hey, we don't need to do an appraisal. We're going to go with what we already know about the property. So they may have already seen it. It's certainly something that's discussed by real estate agents, mortgage lenders. It's certainly an option today for many home buyers. So they may already have noticed or they may begin to notice, but it's not something that's going to happen overnight. There's reasons for the way the appraisal process and risk management process is set up. And so as we, as societies, we learn more data becomes ubiquitous and we can learn more and more about property from databases, it becomes less and less needful to consult other people or bring in external data in some cases. And so I think it's just a natural trend that we'll see over the next five to 10 years for sure.

Allie Barefoot:

And for home buyers specifically, does this modernization make things faster or more accurate when they're trying to get a mortgage?

Shawn Telford:

It certainly can. There's a lot of moving parts in the origination of a mortgage, and the appraisal can be a longer piece of that puzzle. It's not always in the cases where an appraisal waiver is offered and accepted, certainly that could speed up the process if the appraisal was taking a certain amount of time. And in some of the other cases where you have a desktop appraisal scenario, sure, it certainly could reduce the amount of time that the appraisal process takes. And so there's also a lot of innovation that we work here at Cotality as well to provide efficiency tools for our appraisers to do the traditional process even faster and bringing data together, bringing tools to them. And so we're certainly committed to helping all of our clients from lenders to appraisers.

Allie Barefoot:

And like you said, valuation modernization. It really touches on all stakeholders of the home buying process. So what about for sellers? Will these new methods or UAD 3.6, would this make their home value the same way as the old school approach?

Shawn Telford:

Nothing about how an appraiser is expected to estimate the value has changed. What's changing is how the appraisers report and communicate their observations and information. And so from that perspective, it should be the same. Appraisers are still licensed to do the analysis and form an opinion of value from a seller's perspective. If an appraisal waiver is offered, that very well may be a simplification of the process. There's, there's also scenarios now where if an appraisal waiver is offered and there's a contingency for an appraisal as part of the purchase agreement, there may be things that need to be worked out there with the real estate agent. A home buyer can always order an appraisal on their own if they desire. It's just historically been part of the origination process. So there are some considerations there, but from the most part, a seller is not directly involved in the mortgage origination process. So aside from a waiver or something like that, it likely would be, they wouldn't see it. It would be transparent to them.

Allie Barefoot:

Right. And my last question here for you, Shawn, from your viewpoint, where do you think valuation modernization is headed over the next few years? And I think a really big question with this new dataset is, will human appraisers still be a part of this process?

Shawn Telford:

Absolutely, they will. There's no question that the appraisal process will change, and at the same time, there's no question that the value of an appraiser in analyzing data and information, our view, our feeling is that the role the appraiser plays will move more towards analyst than data collector. There's other ways that lenders can collect data, and there's other data sources that are becoming reliable and very usable to someone that's remote and using those types of situations. And so the role of the appraiser will become, in my opinion, more of an analyst and looking at the output of these processes. We're also seeing the introduction of artificial intelligence in multiple ways as to how the appraisal process is done, whether it's the gathering of data to the analysis of the data, and I see a very important role for appraisers to be part of that process going forward as we kind of iron out what that might look like. It's also new, and there's so much there, but appraisers are an important part of the risk management process, and they will remain. So

Allie Barefoot:

It just sounds like a really big learning curve for pretty much everybody in the mortgage ecosystem. But learning new things can always be beneficial for everybody involved. So thank you so much, Shawn. This has been super, super insightful here on data and context.

Shawn Telford:

My pleasure. Thank you.

Allie Barefoot:

Thank you again to Shawn Telford for joining me on Data in Context. And thank you guys for listening. If you haven't already, go on ahead, drop a comment down below, hit that like button for me, and be sure to hit that subscribe button on Cotality YouTube page or check us out at Cotality.com

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