Would you welcome the option to buy a house without having to pay hundreds of dollars for an appraisal?
Are you kidding? Sign me up, you might say. Who doesn’t want to save $500 or $700 for someone to confirm that the price you and the seller agreed to makes sense? Appraisals are mainly for lenders, right?
If an appraisal-free home purchase sounds intriguing, you might be interested in groundbreaking new policy changes by the two largest sources of home financing — Fannie Mae and Freddie Mac. Both government-chartered companies are now willing to waive their decades-old appraisal mandates for certain home purchases, provided their automated valuation models — loaded with previous appraisal and current market data — flash a green light.
[For Fannie and Freddie, appraisals are not always necessary]
You as a buyer won’t have to do a thing; the entire process will be handled between your mortgage lender and either Fannie or Freddie. Your lender will submit your loan file for underwriting analysis by the companies’ proprietary online systems with a property value estimate but no appraisal. If an underwriting model determines that there is sufficient information available on the house, you’ll get a choice: Do you want to do a traditional appraisal, at your cost, or go with Fannie’s or Freddie’s in-house valuation, which will cost you nothing?
Simple as that. If you opt for no appraisal, you’ll know immediately whether your contract price is acceptable for the mortgage amount you’re seeking. That’s impossible with the traditional approach, where you have to wait for the appraiser to bless the deal, which sometimes doesn’t happen because the appraisal comes in lower than the contract price.
[What to do when the home appraisal is lower than the sale price]
Properties eligible for Fannie Mae’s version of the program include single-family homes, second homes and condos. Cooperatives, multiunit and manufactured homes aren’t allowed. You’ll need to have at least 20 percent equity going in, so this is not an option for people buying with skimpy down payments.
Freddie’s program is slightly more restrictive. It is limited to single-family, single-unit houses that are used as the borrower’s principal residence — no second homes. Houses valued at more than $1 million are not eligible. It requires a 20 percent equity stake. Freddie won’t go appraisal-free if the lender knows of “adverse physical property conditions,” whether noted in the sales contract, an inspection or the seller’s disclosures. Foreclosed homes are barred as well.
Not surprisingly, opinions on the two giant companies’ departure from strict dependence on traditional appraisals vary widely. Appraisers think the idea stinks. In a statement for this column, the country’s largest appraisal group, the Chicago-based Appraisal Institute, predicted that eliminating humans from the process — even a little to start — will be dangerous for lenders, Fannie and Freddie, and the public. The group warned that the changes could “result in a race to the bottom” in terms of loan quality, “and create more risk for taxpayers.”
Carl S. Schneider, an appraiser in Tulsa, said appraisers function as the lender’s and consumer’s essential “eyes and ears,” and no computer program “can replace” them. They inspect interiors, which computers cannot do. “Buyers may want to avoid the cost of an appraisal,” he added, “and that is their prerogative.” But he foresees trouble ahead when investors in Fannie’s and Freddie’s mortgage bonds discover “loans were made to unscrupulous borrowers and the collateral is crap.”
Real estate brokers generally see the companies’ limited moves as worthwhile, particularly given recent frequent delays in delivery of appraisals, higher fees to buyers because of surcharges by appraisal management companies and few appraisers available — or willing — to perform home valuations in some markets. A new survey of members by the National Association of Realtors found that appraisal issues were involved in 17 percent of all delayed home sale closings, second only to problems in obtaining mortgages.
Anthony Lamacchia, broker-owner of Lamacchia Realty in Waltham, Mass., told me he thinks appraisal-free loans are “a good thing,” provided buyers have made significant down payments. But he worries that if Fannie and Freddie waive appraisals at lower equity levels, “it will lead to what happened in the bust.”
One of the mortgage industry’s most prominent leaders supports the companies’ new tech-driven initiatives but has some words of caution for buyers. David Stevens, president and chief executive of the Mortgage Bankers Association, says automated valuations might satisfy a lender’s purposes, but they “may not necessarily be the best assessment” of “the right price to pay for a property.”
Good point to remember.
Ken Harney’s email address is firstname.lastname@example.org.
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