Written By: Joel Palmer, Op-Ed Writer
Fannie Mae and Freddie Mac have recently been criticized for using outdated methods of assessing credit scores. It’s time to enter the 21st century, they’ve been told by many sources.
The two entities seem to have taken this advice to heart, though not in the area of credit scores.
Instead, the GSEs, within a week of each other, announced they will allow automatic appraisals on new home purchases. This move effectively eliminating the need for human appraisers during the mortgage origination process for qualified transactions.
Fannie Mae has made the automated alternative available right away, while Freddie’s system takes effect on new home purchases on September 1.
Fannie has allowed automated appraisers on refinances since last year, while Freddie started accepting them in June of this year.
Freddie Mac’s automated collateral evaluation (ACE) assesses the need for a traditional appraisal by leveraging proprietary models and using data from multiple listing services and public records as well as historical home values to determine collateral risks.
Lenders must submit loan data through Loan Product Advisor to determine if a property is eligible for ACE. Freddie said that lenders receive real-time risk assessment feedback and information about the loans.
Fannie Mae’s property inspection waiver (PIW) is an offer to waive the appraisal for eligible transactions. PIW offers are issued through Desktop Underwriter using Fannie Mae’s database of more than 26 million appraisal reports in combination with proprietary analytics from its Collateral Underwriter program.
Fannie lists the following transactions that are ineligible for PIW:
• Properties located in disaster-impacted areas
• Construction and construction-to-permanent loans
• Two- to four-unit properties
• Properties valued at more than $1 million
• HomeStyle mortgage products
• DU Refi Plus loans
• Texas 50(a)(6) loans
• Leasehold properties, community land trust homes, or other properties with resale restrictions
• Cooperative units and manufactured homes
• DU loan casefiles that receive an ineligible recommendation
• Loans for which the mortgage insurance provider requires appraisal
• Loans for which rental income from the subject property is used to qualify
Freddie officials touted the ability of borrowers to save $500 on closing costs while reducing closing time by seven to 10 days.
"By leveraging big data and advanced analytics, as well as 40+ years of historical data, we're cutting costs and speeding up the closing process for borrowers," said David Lowman, executive vice president of Freddie Mac's Single-Family Business. "At the same time, we're providing immediate collateral representation and warranty relief to lenders.”
Several articles have been published in the last few months predicting the demise of the appraisal industry as technology and algorithms replace human judgement, a trend occurring in a number of industries. As one industry observer was quoted as saying: “The future for appraisers specializing in residential mortgage work is coming to an end.”
Not surprisingly, the appraisal industry is warning about the ramifications of these moves.
“Since 1994, the government sponsored enterprises have been exempted from appraisal requirements established by Congress on the basis that they would make responsible decisions,” said Appraisal Institute President Jim Amorin, MAI, SRA, AI-GRS. “Last week’s announcement to waive appraisals in blind loan purchase decisions calls this privilege into question, as it will undoubtedly result in a race to the bottom and create more risk for taxpayers.”
A recent article in the Chicago Tribune included dire warnings from professional appraisers. One noted that property data used by Fannie and Freddie will age without being refreshed if new appraisals are not being conducted. Another warned that eliminating professional appraisals is akin to subprime mortgages that make it too easy to obtain financing
"I've walked into 5-year-old houses that are in such bad shape that they look like they haven't been maintained for 25 years," said one appraiser to the Chicago Tribune.
On the other hand, it’s also become widely publicized that the industry has been hindered by a shortage of incoming professionals to replace those who are retiring. Therefore, the use of automation may be a way to combat the potential backlog that occurs when there are not enough appraisers to efficiently assess the volume of properties being bought and sold.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.