Last year, the two largest sources of American mortgage financing — federally backed Fannie Mae and Freddie Mac — began accepting home-purchase loans that carried no formal property appraisal. Instead, the valuations supporting the mortgages were performed by Fannie and Freddie in-house, using proprietary analytics and deep stores of property data. Only highly select loans were eligible for appraisal waivers, primarily those with sizable down payments (20 percent and up) plus previous appraisals on file. Buyers, refinancers and lenders were not permitted to request waivers: Fannie and Freddie were the ones that identified eligible properties and offered waivers at the application stage.
Both companies had introduced the no-appraisal concept earlier for refinancings. The expansion to home-purchase loans was a big deal, though, because they’re considered riskier than refinancings, where borrowers’ credit and equity are well established and known to lenders.
Fannie and Freddie haven’t publicly released data or the results of their shifts to no-appraisal mortgages, but last week both companies allowed a peek for this column. During 2017, Fannie Mae acquired roughly 60,000 no-appraisal mortgages — 5 percent of its total 1.2 million home-loan acquisitions. Assuming an average appraisal costs about $500, the combined savings to buyers and refinancers totaled somewhere near $30 million. Freddie Mac declined to estimate specific savings but said through a spokesman that by accepting appraisal waivers, “borrowers may have saved millions.”
Fannie’s and Freddie’s no-appraisal option has been popular with lenders. Mat Ishbia, president and CEO of United Wholesale Mortgage, the country’s largest wholesale lender, says, “We think it’s great for borrowers.” Not only does it “save time and money,” it leads to shorter interest-rate locks and quicker closings. The company is now doing more than 10 percent of its home-purchase loans appraisal-free.
Not surprisingly, all this gushing enthusiasm for appraisal-free mortgages isn’t shared by the segment of the housing industry most directly affected: appraisers. Real estate brokers also have expressed concerns. Appraisers see the waivers not only as sucking money out of their pockets but as a potential threat to taxpayers — who had to bail out Fannie and Freddie because of ill-advised investments during the housing bust.
In a letter to Congress last fall, the Appraisal Institute, the largest professional group representing appraisers, warned of “a race to the bottom” between the two companies in pushing for more appraisal-free loans, which require no physical visit or inspection of homes being financed. The National Association of Realtors said Fannie and Freddie “must demonstrate” that their reliance on “data-based” valuations does not “put undue risk into the housing market.”
Individual appraisers are scathing in their criticism, arguing that professionals trained to perform interior and exterior inspections, identify recent sales comparables and render independent analyses are essential to accurate valuations. Ryan Lundquist, an appraiser in Sacramento, noted that computer programs “cannot smell 20 cats living at the property.” Nor can they spot other value-depressing interior conditions or severe deferred maintenance.
Pat Turner, a Richmond appraiser, says that, worse yet, the “savings” from Fannie and Freddie may not always flow to buyers. He cited a recent case in his area where a major online lender allegedly charged a buyer $600 on a loan with an appraisal-fee waiver. “The guy went ballistic,” says Turner, and “demanded to see the detailed appraisal report,” which did not exist. His money has yet to be refunded.
What does all this mean for buyers? First, be aware that even if you are offered an appraisal waiver, the choice is yours. Fannie and Freddie require lenders to allow borrowers to opt for a traditional full appraisal.
Also, as careful as the two companies may be about waivers, the contract price you’re paying for the house may be inflated. Lundquist cited a local realty broker with clients who declined the no-appraisal option and saved thousands of dollars as a result. A full appraisal found the property to be overvalued — which the waiver apparently missed — and allowed the buyers to renegotiate the final price lower.