Appraisers hate the idea. But major lenders this summer have begun offering the fastest-growing alternative to traditional, full-cost appraisals: insured site-inspected electronic appraisals at deeply-discounted prices.

The fifth largest mortgage lender in the country, ABN-Amro Mortgage Group, says it now uses electronic appraisals extensively and passes along the lower costs directly to its borrowers. Ameriquest Mortgage Co. began using them for certain home purchase transactions in July, and several of the top 10 largest national loan originators reportedly are about to do the same.

The principal developer of the concept, Fidelity National Information Services, a subsidiary of title industry giant Fidelity National Financial, calls its appraisal alternative “Collateral Valuation Insurance” or CVI for short. CVIs typically cost around $175 to $250, according to CEO Patrick Stone, compared with $350 to $450 for traditional appraisals.

At its core, CVI is a form of electronic valuation--tapping into online property databases to obtain comparables and an estimated market value for a loan applicant’s property. But electronic valuations traditionally have had several shortcomings: They may be unable to come up with a final valuation number in parts of the country where online real estate data is scarce or unreliable. They also are “blind” in that no human visits the house being valued to observe its condition and surroundings. And finally, electronic valuations carry no warranty of the valuation itself. If the computer program somehow gets the numbers wrong, the lender may be at risk of loss in the event of foreclosure.

CVI purports to deal with all three drawbacks. It provides access to multiple proprietary databases and guarantees a “hit”--an accurate valuation--on houses anywhere in the U.S. CVI also dispatches a realty agent or appraiser to the property for an exterior assessment of the house and the surrounding neighborhood conditions. A checklist must be filled out onsite answering questions about traffic, quality of maintenance of the property, and the existence of any conditions that could depress--or raise-- the market value of the house.

Finally, CVI insures the lender against loss in the event of a foreclosure where the valuation was too high.

The rapid-paced adoption of CVI by major lenders has traditional appraisers in a tizzy. Patrick Turner, an appraiser based in Richmond, VA., says the concept is inherently flawed and is motivated by “greed.”

“Computers can’t see, they can’t hear, they can’t smell,” said Turner in an interview. “There is no substitute for getting a valuation by an independent, trained and objective appraiser. Anything else is just blowing smoke.”

A spokesman for the Appraisal Institute, the largest trade organization representing appraisers, called the insurance aspect of the CVI concept “a gimmick.” Donald Kelly, the Institute’s vice president for public affairs, said the lack of any interior inspection greatly limits the utility of a CVI-derived valuation to a lender.

But Patrick Stone argues that traditional, full-priced appraisals in many cases represent overkill. “They are more than what is needed to establish value,” he says.

Stone believes “it is idiotic” to spend $450 for a full appraisal on a house that was refinanced using a traditional appraisal a year or two earlier. Similarly, subdivision houses, townhouses and condominium units tend to have relatively predictable market values because comparables are so plentifully available nearby.

Lenders, in turn, say insured electronic valuations beat traditional appraisals by cutting the time required for delivery from two to three weeks on average to just two days.

Adam Bass, senior executive vice president of Ameriquest Mortgage says that in addition to speed, his firm uses the new insured electronic alternative to “replace the subjective aspects” of traditional appraisals.

Giant investors Fannie Mae and Freddie Mac also now encourage use of electronic valuations in certain situations, particularly refinancings of borrowers with high credit scores and equity stakes, as well as certain new home purchases where property data is readily available online.

What’s the bottom line here for you as a home buyer or a prospective refinancer? Ask your lender whether a lower-cost electronic valuation may be sufficient for your transaction. If you are refinancing your house or buying a condo or townhouse and your lender is comfortable with an electronic valuation, why pay more than necessary?

Published: August 4, 2003

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.