To many real estate industry veterans, relying upon computer programs to calculate home values seems like a deplorable idea. But in an increasingly automated world, appraisals via software are now popular with many lenders. Unfortunately, it may adversely affect your mortgage or refinance.

Are you planning to refinance and keeping your fingers crossed that the appraiser will warm up to you and give you maximum kudos for being a conscientious homeowner? Don't be surprised if the appraiser isn't a keenly aware and detail-oriented licensed professional, but a computer, instead. Fannie Mae, Freddie Mac, Wells Fargo, Countrywide, and Washington Mutual are among those gigantic mortgage lending institutions that use computer generated appraisals-better known as AVMs-instead of real life human appraisers.

The problem with AVMs

The debate that the practice has inspired is, in some respects, a modern version of the battle between John Henry-the folksong hero and hammer swinging steel-driving railroad worker-and steam-powered machinery. The analogy goes further-many experts argue that consumers may be getting railroaded and steamrolled.

If an appraiser doesn't actually come inside your home, for example, he or she may not have any idea that you've put in an expensive new kitchen. This kind of "drive-by" appraisal might fail to detect serious structural problems, termite damage, or hazardous wiring. Local governments generally rely on drive-by evaluations for budgetary reasons. If they passed along the cost of face-to-face on-site appraisals to us, our taxes would go through the roof. But tax appraised values invariably either lag the market, or get ahead of it, so realtors rely on more precise methods of valuation instead. But computer generated AVM evaluation databases are populated with unreliable tax appraisal data-some of it 15 years out of date-yet major lenders accept those numbers as true. Go figure.

It's ironic that the same lenders who suffered the sloppy oversights and loose practices that led to the mortgage meltdown continue to accept such generalized and nonspecific appraisals. An AVM may have no bearing on real estate reality, yet can generate grossly misleading conclusions. Fitch Ratings, for example, a major bond market risk-assessment firm, believes that only on-site, exterior and interior professional appraisals can be trusted.

Helpful or hurtful manipulation?

With professional appraisers, ratings agencies, realtors, and homeowners objecting to the AVM methodology, why do mortgage institutions still use them? The short answer is that lenders can influence software easier than they can manipulate human appraisers. If the numbers need to be bumped up or trimmed down, it's easy, because of the wide margin of error built into mechanized AVM appraisals.

But pushing the numbers could generate a dramatic swing in the wrong direction when you apply to refinance your home, resulting in a much lower value. That may be good for mortgage lenders trying to minimize risk during a financial crisis, but it does little to help homeowners trying to refinance away from foreclosure-prone adjustable-rate mortgages.