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Freddie Mac

An explosion of appraisal waivers. Is that good or bad?

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Appraisal waivers have really exploded in recent years – especially during the pandemic. But how many are there exactly? Let’s look at actual numbers to walk away with some perspective. These stats are from January 2021 from AEI.

QUICK SUMMARY:

  • 47.4% of all Freddie Mac loans had a waiver
  • 44.5% of all Fannie Mae loans had a waiver
  • Waivers are far more common during refinances
  • Only 10-12% of purchases had an appraisal waiver in January
  • Non cash-out refinances have the most waivers (67-69%)
  • The higher your loan-to-value, the lower your chance of a waiver
  • Waivers have seen a dramatic increase during the pandemic

NOTE: This post is not about buyers removing the appraisal contingency. That is in a sense a “waiver”, but the topic here is Fannie Mae and Freddie Mac not requiring an appraisal.

What else do you see?

CLOSING THOUGHTS:

1) Crazy growth: It’s astounding to see nearly half of all loans getting an appraisal waiver, though for now most of these are refinances instead of purchases. Honestly, I would have guessed the purchase numbers were a little higher than reported.

2) Seeing numbers: What real estate professionals experience with appraisal waivers with their clients can really vary. For instance, if you work with FHA borrowers putting very little down, you probably don’t see many waivers, but if you work with conventional buyers putting 30-40% down, you’re going to see more. This is why seeing actual stats is so important.

3) There is place & danger: I’ll be the first to admit there is a place for appraisal waivers in today’s market. That may not sit well with some colleagues, but I don’t have a problem seeing them occur with no cash-out refinances where owners have massive equity. That’s a no-brainer. The danger comes when we start seeing too many appraisal waivers happen in the purchase market especially. The concern is waivers can essentially artificially inflate prices by helping some properties close higher than they should.

4) Big data favoring people with more money: Appraisal waivers are being given to people bringing more money to the table. That’s what the stats show and I get it from a risk standpoint. But with so much conversation about equality in real estate, I guess I find it ironic to see a waiver system implemented that is clearly giving more advantage to people who already have more wealth.

Thanks for being here.

SPEAKING GIGS CLARITY: Lately I’ve been getting asked to give in-person presentations, but I’m not there yet. I’m not vaccinated, so my answer will be NO until that happens. But then I’ll have to see how comfortable I feel too. For now I’m glad to speak by Zoom. Just a heads-up.

Questions: What stands out to you above? What are the positives and negatives of appraisal waivers? I’d love to hear your take.

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It might not be an appraiser at the inspection due to new “hybrid” appraisals

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It’s happening. It might not be an appraiser who shows up for the appraisal inspection. I’ve been talking about the potential of “hybrid” valuations like this, and now they’re here.

The gist is somebody besides the appraiser inspects the property and then gives the inspection details to the appraiser to do the “value part” (without seeing the property). Last week Chris Little, a Realtor friend, was talking to me about his first experience with a non-appraiser inspecting one of his listings, so I asked him some questions.

Ryan: What gave it away that this person wasn’t an appraiser? 

Chris: When he called and asked for an appointment to access the property he identified himself as a property inspector working on the appraisal. I asked if he had a lockbox key (every appraiser I know has one) and he said he did not. We agreed to meet at the property. At the house he gave me his card which said he was a project manager for a company in upstate New York. There was no mention of appraiser on his card.

Ryan: What did the inspector do at the house? Did he measure it?

Chris: He came in and took a bunch of photographs which he said he would upload to their portal so the appraiser could look at them. He went outside and measured the home.

Ryan: What price was this house? 

Chris: The home was listed in the low $800,000’s. The buyers sold their former home and were renting on a short term basis. They were putting down 55% of the purchase price.

Ryan: Did the inspector say he would pass along information you gave?

Chris: Yes, he asked a few questions and said he would include that in his report.

Ryan: What are your concerns about this new process?

Chris: My overarching concern is the validity of the “appraisal.” The buyer was charged less than a traditional appraisal and in my view received less. The proper valuation of a property is essential for many reasons. Inaccurate or incomplete information can effect value and that can effect a transaction, both during the transaction and later on if there is ever a question about value resulting from loss bankruptcy, foreclosure.

Ryan: Anything else to add?

Chris: In my view, this “hybrid” appraisal is meant to streamline the lending process yet puts homeowners and lenders at risk. I don’t think there is a lender out there who would use a discount Cardiologist or Oncologist if they had heart problems or cancer. Why would you underwrite a loan based on an unlicensed individual snapping pictures and taking measurements? One thing that particularly concerned me about the house in question was at almost 4,900 square feet it was more than twice as large as any other home so developing comps would take someone with real knowledge of the market to develop the appropriate value. This unusual Sacramento home doesn’t seem like a good fit for a watered-down process like this.

Ryan: Thanks so much for your time Chris. 

Now a few quick things.

MY CLOSING THOUGHTS:

1) This is a move that diminishes the role appraisers play in the housing market for the sake of so-called convenience. Banks are saying, “Don’t worry. Trust us. It’s all good…” While there is a place for big data in real estate, let’s not forget the crucial role appraisers play as a systems of checks and balances. Do we really trust banks to do the right thing?

2) Value isn’t just about size or bedroom and bathroom count. There is so much more an appraiser observes while walking through a house and talking with the agent. To be fair it seems like this would less of an issue on a cookie cutter house, but on something unique it could be a disaster waiting to happen.

3) If the inspector does not have adequate training, there could be a legitimate issue measuring the house accurately (and we know how important that is).

4) Could this become risky for the rest of the market if inflated appraisal waiver or “hybrid” sales become the new comps? 

Communication advice for Realtors: It’s going to be key to ask for a business card and be sure you know who you are talking to. My advice? Show up with my appraiser info sheet filled out so an “inspector” can hopefully pass along relevant details to the appraiser. Remember though, the appraiser is getting paid very little do this type of report (I hear $100 to $150), so the “hybrid” system is not designed to encourage appraisers to spend lots of time on the appraisal… 

I hope that was helpful or interesting.

Questions: What do you think of “hybrid” valuations? What are the positives and negatives? Any stories to share?

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Get rid of appraisers while nobody’s looking

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Did you hear the news? There’s a proposal from the FDIC, Federal Reserve, and others to not require appraisals for some mortgages under $400,000. This is a big deal and I have some thoughts. Actually, Ken Harney in the Chicago Tribune penned a fantastic piece about this today (I was quoted too).

Dude, this will save us money: The idea is to do away with traditional appraisals so consumers can save money and the loan process can speed up. Here’s the thing though. Regarding cost, the appraisal is one of the least expensive elements in a transaction. Of course to be fair the Borrower might pay a much higher fee for the appraisal because of what Appraisal Management Companies (AMCs) charge the consumer. Regarding turn-times, if an appraisal was ordered right away that would speed things up. It also doesn’t help if an AMC offers an absurdly low fee and shops around for an appraiser willing to work for that amount.

A 60% change in a slowing market: It’s troubling to hear a proposal to increase the appraisal threshold from $250,000 to $400,000. This 60% change hurts appraisers, but let’s be real about who it is helping. This is a ploy for banks and big corporations to make money by controlling the valuation process. This rule of course doesn’t necessarily mean appraisals won’t be required in all situations, but the danger is it paves the way. More than anything though this looks like a move in the agenda to usher in an era of “evaluations” (see below).

Systems of checks and balances: Consumers are certainly not being protected here. Why are we diminishing the role of the appraiser, one of the systems of checks and balances for our financial markets? What could possibly go wrong? This seems like very convenient timing for banks too because it helps position them to operate with looser standards as the market is softening.

The people behind the rules: We have nearly 95,000 appraiser credentials across the country, so changing the rules can put lots of people out of business.

Evaluations instead of appraisals: There’s been a big push to introduce “evaluations” in lieu of appraisals. As Ken Harney writes, “Instead of a formal appraisal, these homes would receive an “evaluation” by individuals who have no appraisal licenses or certification and would not be subject to current state regulatory oversight requirements that govern appraisers. The evaluators could be an “independent bank employee” or unnamed “third part(ies).” They would, however, have to be “competent” and possess “knowledge of the market, location and type of real property being valued.”” I’m guessing these “evaluators” will be real estate agents who do BPOs, employees at banks and data firms, and probably some appraisers who need the work at $75-$100 a pop.

Hybrid appraisals: Speaking of changing the appraisal process, it’s worth mentioning there is a hybrid evaluation product where someone else does the inspection part while the appraiser does the value part. I’m not certain if all evaluations would work this way, but here’s the gist. An individual would measure the property, take photos, make notes, and then send everything to the appraiser to do the value part. I really don’t like this idea because it treats value like it’s only crunching numbers at a desk instead of seeing the fuller picture of a property. I want to see the home, walk the parcel, smell the property, observe the street, understand the layout, etc…. instead of relying on someone else’s photos and notes – especially if that person is inexperienced.

But less appraisers is good news: I realize some might be excited to have less appraisers. I get it. But here’s some honest questions. If you work in real estate or you’re purchasing or refinancing a home, what’s going to happen when less experience is infused into the valuation space? Do you think that’s going to help protect consumers? If you’re frustrated now, what are you going to be feeling in the future? Does it bother you the banks are changing the rules to their benefit?

ACTION STEP: If it’s within your power to say something, please speak up right away. Maybe ask your local and state associations to make a statement and put pressure on the FDIC, Federal Reserve, and Trump administration. Thank you for your consideration.

SIGN THE PETITION: There is now a petition, so please sign here to make your voice heard.

I hope that was interesting or helpful.

Questions: What do think of this? Is this a good move? What are any positives and negatives you see? I’d love to hear your take.

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Machines, humans, & appraisal waivers

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No appraisal needed. In case you haven’t heard, last year Fannie Mae introduced Property Inspection Waivers, which means an appraisal is not required in certain situations. Is this a good thing? Well, here are some thoughts swirling through my mind. Anything to add?

1) The automation trend: Automation is happening all around us. Right or wrong, machines are taking human jobs, and the world is changing. Elon Musk actually warns that machines will eventually be able to do everything better than humans, which is a scary thought (way too much like The Terminator). Anyway, machines are starting to be appraisers as property inspection waivers are a growing phenomenon in the marketplace. Some loan officers I’ve spoken to have said they’ve only seen a few while others are reporting about 15%+ of their deals are having waivers. How will this trend unfold? That is the question.

2) Systems of checks and balances: Appraisal waivers are going to make sense in some cases with very low-risk Borrowers, but I find myself concerned about the narrative that we need to use alternative valuation products for the sake of a more efficient mortgage. Let’s not forget the profound greed in the banking world and the important role human appraisers play in being the voice of reason in a transaction. Please forgive me if I’m not optimistic when I hear things like, “Trust us, we have big data. We want to save consumers money. We don’t need appraisers.”

3) Cat urine & big data: We put so much weight on big data, but it’s not always right. It’s like we think something intelligent must be happening since math and computers are involved. Google Flu Trends is a perfect example because Google tried to predict flu patterns, but the project ended after being very inaccurate compared to CDC data (Center for Disease Control). Anyway, there is a place for big data in real estate, but let’s remember valuing properties doesn’t always fit into a neat little equation. Algorithms cannot smell cat urine, know about condition or quality of upgrades, understand layout, analyze the impact of non-permitted additions, etc…

4) Uh oh, hybrid valuations: There is a hybrid appraisal product being pushed right now, and here’s how it works. Someone else does the inspection for the appraiser and then the appraiser will do the value part. Will this inspector have adequate training, report deferred maintenance, understand what appraisers look for, know how to measure square footage, or be paid enough to even care? My struggle in thinking this is a good idea is that assessing the layout of a house, location, quality of upgrades, deferred maintenance, etc… is such an important part of value. It sounds easy to split the inspection with the research, but the inspection actually is research. Relying on someone else to do the “inspection part” seems like a step back when it comes to credible valuations.

5) Next in line for automation: I’m not trying to add stress, but I have to ask an important question. Who in real estate is next in line for automation? Real estate agents? Loan officers? Title professionals? Right now we are at the beginning of talking about how digitizing valuations is good for us because it’ll make the mortgage more efficient. Here’s the question. If this happens to appraisers in mass and we’re okay with it, will it be easier to see happen in other niches of real estate? In short, if you belong to an organization and it is within your power to advocate for appraisers, it may be a good time to speak up.

I hope that was helpful or interesting.

Questions: What do you think of appraisal waivers? Is this a good thing or bad thing? Anything I missed? I’d love to hear your take.

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