Agencies Issue Final Rule on AI Appraisal Usage
Written By: Joel Palmer, Op-Ed Writer
The final step toward the passing of a new rule regulating artificial intelligence models for real estate valuations and appraisals was completed earlier this month, coinciding with a report that home appraisals are higher than sales prices in half of home sales.
Corporate Settlement Solutions (CSS), which provides commercial and real estate settlement solutions, recently released a report that shows home appraisals were higher than sale prices 51 percent of the time in the first half of 2024.
The report was based on data analysis of home sales in 10 states. The analysis provides the percent of homes that were over-appraised, under-appraised and appraised at the same value as the sale price (within $2,500.00).
The report stated that the gap between appraisals and sale prices is the highest that it has been since the start of the pandemic in 2020. As of June 2024, the average over-appraisal was 9 percent among all markets analyzed.
Just over 8 percent of analyzed homes were appraised below the final sales price, while the remaining 40.5 percent were appraised at or near the final sales price.
“The growing gap between home appraisals and actual sale prices underscores the challenges of providing accurate valuations in a rapidly appreciating market with limited inventory,” said Ashley Jelinek, CEO of Corporate Settlement Solutions. “The big question is, how long will this continue given that many housing economists are suggesting that home appreciation is normalizing and, in some markets, even decreasing. It is inflection points like the one we may be approaching that emphasize the importance of accurate, market-centric valuations.”
Also last week, the final rule to implement quality control standards for automated valuation models (AVMs) was issued by six regulatory agencies.
The agencies involved include the Consumer Financial Protection Bureau (CFPB), Federal Housing Finance Agency (FHFA), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board of Governors, the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC).
Under the final rule, the agencies will require institutions that engage in certain transactions secured by a consumer’s principal dwelling to adopt policies, practices, procedures, and control systems designed to:
ensure a high level of confidence in estimates;
protect against data manipulation;
seek to avoid conflicts of interest;
require random sample testing and reviews; and
comply with nondiscrimination laws.
“While advances in AVM technology and data availability have the potential to reduce costs and turnaround times of the property valuation process, it is important that institutions using AVMs take appropriate steps to ensure the credibility and integrity of the valuations produced. It is also important that the AVMs institutions use adhere to quality control standards designed to comply with applicable nondiscrimination laws,” FHFA said in a statement.
The guidance offers examples of reconsiderations of value (ROV) policies and procedures that a financial institution may implement to help institutions identify, address, and mitigate discrimination risk. It also describes the risks of deficient residential real estate valuations, and explains how financial institutions may incorporate ROV processes into risk management functions.
The agencies finalized the guidance largely as it was proposed in June 2023.
The final rule will become effective on the first day of the calendar quarter following 12 months after publication in the Federal Register.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
