AI threat to home appraisal industry

The battle between man and machine has a new front: your mortgage.

House valuations could be done by computers.

The battle between man and machine has a new front: your mortgage.

Federal regulators have proposed loosening real estate appraisal requirements to enable a majority of US homes to be bought and sold without being evaluated by a licensed human appraiser. That potentially opens the door for cheaper, faster, but largely untested property valuations based on computer algorithms.

The proposal was made earlier this month by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Federal Reserve. It would increase to $US400,000 ($547,000), from $US250,000, the value of homes that can be bought and sold without a tape-measure-toting valuer visiting a property.

More than two-thirds of US homes sell for $US400,000 or less, according to US Census data and the National Association of Realtors. If the regulators’ proposal had been in force last year, about 214,000 additional home sales, or some $US68 billion worth, could have been made without an appraisal, regulators said.

WEB WSJ Home value graph

Some worry that dropping appraisal requirements would introduce new risks into the $US10.7 trillion market for home loans. Lima Ekram, a mortgage-backed securities analyst at Moody’s Investors Service, said: “We still would prefer a human being doing the appraisal.”

One issue: automated valuations done by computers are largely unregulated. The 2010 Dodd-Frank financial overhaul required regulators to propose quality control standards for automated valuation models, but they have yet to do so.

Ritesh Bansal, chief executive of Appraisal, a New York-based provider of automated valuations, said: “There are a lot of problems with appraisals, but there are voluminous standards. On the AVM side, it’s a wild, wild West. And that just invites abuse of all kind.”

Appraisers’ latest turf battle comes months after a defeat at the hands of politicians rolling back some financial-crisis-era banking rules. That change eliminated a chunk of appraisers’ business by exempting many rural properties from appraisals.

Joan Trice, chief executive of industry tracker Allterra Group, says: “The appraisal profession is suffering a death by a thousand cuts.”