Do we always need an appraiser to tell us what a house is worth? The two biggest sources of mortgage financing in the country — Freddie Mac and Fannie Mae — think not.
With no formal public announcement, on June 19 Freddie Mac began phasing in its plan to transition to appraisal-free mortgage for certain loan applications. Though limited initially to some refinancings, Freddie expects to expand the concept to home purchases in the coming months. Under the program, borrowers no longer will have to pay hundreds of dollars for a professional appraisal — a reversal of long-standing mortgage industry practice. There will be no traditional appraisal charges at closing and lenders no longer will be required to assume responsibility for the accuracy of home valuations. The program currently is limited to refi applicants who have at least 20 percent equity in their homes and are not pulling out cash.
Fannie Mae, the other giant, government-supervised financing company, has been quietly offering no-appraisal refinancings for months. Both companies emphasize that they only permit waivers of appraisals when they have substantial data on the property involved and the local real estate market. Fannie says it has a database containing more than 23 million previously completed appraisal reports and uses “proprietary analytics” to come up with value estimates. Unlike Freddie Mac, Fannie Mae has not indicated whether it plans to expand its “property inspection waiver” concept to loans for home purchases, though industry sources say they expect it.
Mortgage lenders generally are enthusiastic about the two companies’ moves. Dave Norris, chief revenue officer of loanDepot, one of the highest volume retail lenders in the country, says “leveraging technology” to arrive at property valuations “gives consumers certainty” about the status of their application upfront, sharply reduces the time needed to get to closing, plus saves money. Roughly 12 percent of loanDepot’s refinancings through Fannie Mae already are proceeding appraisal-free, Norris told me.
“Consumers definitely appreciate it,” he added. There’s “more cash in their pockets” and the total experience is better.
Pete Mills, a senior vice president at the Mortgage Bankers Association, also welcomed the appraisal-free concept. “If there is a way to use technology to streamline or automate the process while ensuring the same standards of accuracy are met,” he said, “it would benefit both lenders and consumers and should be pursued.” Nonetheless, loan applicants should retain the right to request a full, walk-through appraisal if they want one, added Mills.
Not surprisingly, appraisers view the whole trend as an impending nightmare — potentially sending them to the fate of buggy whip manufacturers, travel agents and others whose industries have been decimated by new technologies. Unlike buggy whip makers in an age of automobiles, however, appraisers argue that they have a legitimate, continuing role. There is simply no technological substitute for what they bring to the table: Eyes, ears, noses and the ability to independently analyze a home, its interior, the neighborhood environment and market conditions, and arrive at an accurate opinion of its current worth. Computer programs may be jam-packed with data and algorithms but they have no clue about what damage — or improvements — may be present inside a house.
“I’ve walked into five-year-old houses that are in such bad shape that they look like they haven’t been maintained for 25 years,” says Pat Turner, a Richmond, Virginia, appraiser. Eliminating appraisals is a “a throwback” to the disastrous practices of subprime lenders during the housing boom and bust, he said. “This is a return to no doc and low doc on steroids.”
Carl S. Schneider, an appraiser in Tulsa, Oklahoma, says the path Fannie and Freddie are on is “fraught with danger,” not only for banks but for the taxpayers who may have to bail them out. The databases Fannie and Freddie are using may contain voluminous appraisal information previously submitted as part of mortgage files. But that “property data will age and change without being refreshed” if large numbers of new appraisals are not being done, he said. Without new professional appraisals that include updated information on the interior conditions of homes — plus observations on the presence of value-depressing environmental features in the area that aren’t likely to be picked up by computers — “where will it all lead?” asks Schneider.
Where indeed? Fannie and Freddie are confident that they are introducing appraisal-free mortgages carefully and responsibly. Appraisers have serious doubts. The jury is out.