Written By: Joel Palmer, Op-Ed Writer
The ongoing debate about the use of alternative valuation products (AVPs) gathered steam last week with a report that Fannie Mae will be testing hybrid appraisals.
The report, which Fannie Mae officials have not commented on, claimed the GSE will be asking appraisers during this pilot to use a combination of local market data and a home inspection report to determine a property’s value during mortgage underwriting and processing.
The move is said to be geared toward saving time and money during the mortgage process.
It’s yet another sign that mortgage lending is transitioning away from traditional onsite appraisals. While some in the industry say alternative valuations are necessary to deal with the growing number of mortgage originations, others warn that the industry may be sacrificing quality for speed and cost savings.
Proponents of hybrid appraisals and other AVPs point to the dearth of qualified professionals due to the aging of the profession and the lack of newcomers entering the field. If more appraisals can be done without the appraiser traveling to and from a property and spending an hour or more in it, the industry can better meet demand without worrying about recruiting more professionals.
Even some in the profession are saying it’s time to accept this trend and embrace what many in the industry call “desktop appraisals.” In fact, some are even pushing for independent appraisers to develop their own hybrid model to compete with appraisal management companies (AMCs).
A number of AMCs already conduct hybrid appraisals. Nationwide Appraisal Network has a hybrid valuation product that enables an appraisal to be created using an inspection report from a licensed home inspector, who will also provide photos to the appraiser. The assigned appraiser reviews the inspection notes and photos to create a final value of the property.
Clear Capital is one of several companies that uses real estate agents or brokers to conduct onsite inspection. The appraiser then evaluates comparative market analysis and other data. Clear Capita said its hybrid appraisal report “undergoes four levels of quality assurance, including automated and human reviews.”
It isn’t just hybrid appraisals that are changing the face of mortgage lending. Some transactions can even be done without an appraisal at all.
Last fall, Fannie and Freddie both announced automatic appraisals on certain new home purchases, effectively eliminating human appraisers during the mortgage origination process for qualified transactions.
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.
While mortgage processors likely appreciate the efficiency of AVPs, mortgage underwriters may have a different take. Those who caution against AVPs say the only way to get the most accurate valuation of a property is for the person conducting the valuation to see it in person and investigate its every nuance.
There is concern that the potential for valuation errors will increase considerably. Also, using a home inspector to gather intel on a property means getting a much different perspective. Inspectors are not focused on attributes of a home that impact it’s market value. Their only concern is the property’s condition.
Moody’s Investor Services has also weighed in on the trend. The firm released a report in February warning that the continued use of property appraisal alternatives could “weaken the credit quality of new residential mortgage-backed securities (RMBS) unless certain risks are mitigated.”
Another frequently debated issue about hybrids and other AVPs is whether they comply with Uniform Standards of Professional Appraisal Practice (USPAP).
One school of thought is that there is no violation of USPAP in using hybrid as long as proper disclosure occurs about how the valuation was created.
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.