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Faster and Cheaper:
Fannie Says Appraisals No Longer the Default
by Isaac Peck, Publisher
The appraiser profession has been abuzz with alarmed discussions since Fannie Mae’s now-historic update to its Selling Guide on March 1, 2023 (Announcement SEL-2023-02).
In it, Fannie boldly proclaims that they are “moving away from implying that an appraisal is a default requirement.” Fannie’s unique choice of words—which one assumes was no accident—has attracted special attention.
The policy update actually mirrors the existing practices of Freddie Mac. Indeed, nearly a year prior to Fannie’s announcement, Freddie introduced its Automated Collateral Evaluation and Property Data Report (ACE + PDR) structure wherein a segment of Freddie’s loans would receive an appraisal waiver, and another segment would receive an appraisal waiver subject to a Property Data Report—which would not be required to be collected by a licensed appraiser.
It is worth noting that both Government Sponsored Entities (GSEs) have been working to “rebrand” away from the simple-for-the-public-to-understand term “appraisal waiver.” Freddie has opted to call its appraisal waiver an “ACE” and, as part of its March 2023 update, Fannie has coined the term “Valuation Acceptance” to describe its appraisal waiver.
Semantics aside, an astute observer of GSE appraisal policy might be compelled to ask: Is Fannie’s update really a significant change?
After all, appraisal “alternatives” are nothing new. During the height of the COVID-19 market pandemonium in 2021, the total share of GSE appraisal waivers reached 49% of all GSE transactions. The GSEs have been moving towards appraisal waivers and property data collection options for several years now.
Nevertheless, Fannie’s word selection about dethroning appraisals as the “default” has sparked a broader discussion about the GSEs’ policies and alarmed active appraisers, national appraisal associations, and other stakeholders within the real estate community.
Fannie’s Appraisal Alternatives
The specifics about Fannie’s new valuation approach are fairly straightforward. Here are the valuation options in Fannie’s new framework:
- Valuation Acceptance (Appraisal Waivers): This option will be considered on principal and secondary residence purchase transactions with a Loan to Value (LTV) of 80% or less, primary and secondary residence limited cash-out refinances with an LTV of 90% or less, investment properties with an LTV of 75% or less, and principal residence cash-out refinances of 70% or less, among other criteria.
- Valuation Acceptance + Property Data: This is a new option Fannie is introducing and as its own version of Freddie’s ACE + PDR product. Under this option, Fannie will offer an appraisal waiver subject to “property data collection by a third party who conducts interior and exterior data collection on the subject property.”
- Hybrid Appraisal: This solution would only come into play where Value Acceptance + Property Data “was initially started, but changes in loan characteristics result in the transaction not being eligible for that option.” In other words, the “property data” would be forwarded to a licensed appraiser, who would perform the valuation analysis based on the information provided by the third-party data collector.
In a nod to appraisers, Fannie writes that for Value Acceptance to be offered: “generally a prior appraisal must be found for the subject property… in some cases, the prior appraisal may not be acceptable. For example, if a CU Overvaluation Flag was issued on the prior appraisal or the appraisal could not be scored, that prior appraisal will not be used.”
AI and ASA Speak Out
In response to Fannie’s update, both the Appraisal Institute (AI) and the American Society of Appraisers (ASA) spoke out—expressing serious concerns about the harmful consequences this will have on the appraiser profession and the consumer public.
In a letter to Sandra Thompson, Director of the Federal Housing Finance Agency (Fannie’s regulator), AI President Craig Steinley writes that of particular concern is “the encouraged development of an alternative workforce of property data collectors that may negatively impact aspiring appraisers’ ability to enter the appraisal profession.”
To combat this, AI proposes that appraiser trainees might be able to use hours spent doing property data collection to qualify for appraisal experience credit.
Addressing Fannie’s choice of words, Steinley writes that “many appraisers are concerned by the statement…when one considers the possibility of increased use of appraisal waivers in concert with allowance for ‘hybrid’ appraisals or desktop appraisal assignments, reasonable people can conclude that attempts may be made to minimize the scope of services of appraisers. This has profound potential impacts on safety and soundness of the mortgage market, particularly considering the significant market and economic headwinds of the day.”
For ASA’s statement, John Russell, JD, Strategic Partnership Officer at ASA, did not mince words. Russell makes a series of strongly worded arguments against Fannie’s direction, which include:
- Models Fail: Models lag adverse changes to the market and Fannie’s reliance on data in place of “learned human interaction informing the process” exposes it to significant downside risk. “Remember that in the last housing crash, an 85% LTV loan became, generally, a 115% LTV loan virtually overnight,” Russell reminds us.
- Taxpayers Will Hold the Bag: Fannie is offering Representations and Warranty Relief for lenders on all Valuation Acceptance transactions, but there is no “rep and warranty” relief for Fannie itself. “Once again the taxpayer will be left holding the bag for Fannie’s injection of unnecessary risk into the housing finance market, all based on the hedge that models and poorly trained data collectors can replicate the longstanding work of appraisers,” Russell argues.
- Consumer Protection: Without appraisers involved in the homebuying process, Russell sees consumers being completely without protection. “Agents and brokers have a direct financial incentive on seeing deals consummated for the highest possible selling price thanks to percentage-based commissions. Home inspectors are inconsistent at best, and more buyers are waiving inspections… and mortgage originators want velocity. The only safeguard left to homebuyers was (and is) an appraiser looking at a property from an objective perspective and expressing a professional opinion as to the home’s value as collateral to the mortgage being underwritten. No other party has reason or incentive to provide objective information to the homebuyer,” Russell protests.
- Fannie is Capitalizing on Public Opinion: It feels almost too convenient, Russell writes, “to see this pivotal change from Fannie come at a moment where the public’s opinion of appraisers is near the low water mark. By obviating the appraisal from the mortgage process entirely, not only are home buyers left unprotected and mortgage markets injected with new and unknown risks, but the efforts to address inequalities in how homes are valued and to diversify the profession are cast aside before these labors bear fruit. It is disingenuous at best for federal agencies, such as Fannie’s conservator FHFA, to ask for change and then not allow change to happen.”
To read the full statements released by AI and ASA, visit WorkingRE.com/FannieStatements
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Fannie’s Perspective
Since Fannie’s announcement, Lyle Radke, Senior Director of Collateral Policy at Fannie Mae, has been on something of a press tour—taking questions from appraisers on webinars and attending appraiser conferences to help assuage appraisers’ concerns and communicate Fannie’s position.
On the Appraiser eLearning YouTube channel, host Bryan Reynolds invited both Lyle Radke and Hamp Thomas, an appraiser and educator, to discuss Fannie’s policy changes on a webinar. (Visit YouTube.com/@AppraisereLearning to subscribe!)
One of the big questions on the minds of appraisers is: how much business are appraisers going to lose to property data collections?
Addressing this, Radke reports that based on 2022 data the answer is somewhere between two and four percent. “We don’t target specific percentages. What we’re doing is saying here’s the eligibility box. If you’re within that box, then you’re eligible. If we back test this against 2022 data, we find the percentage that is switching from appraisal to property data collection is somewhere in the two, three or four percent range. It’s hard to know for sure because the economy and interest rate environment is always evolving and that impacts mortgage lending,” says Radke.
Throughout the webinar, Hamp Thomas repeatedly argued about the seriousness of the direction Fannie is taking, remarking that maybe Fannie is only cutting three or four percent of appraisals now, but further cuts are imminent. “Ultimately this will be the demise of the appraiser profession. We are giving the GSEs the power to eliminate an industry using our own data. It is just wrong and it is going to get worse soon,” Thomas says.
In response, Radke maintains that Fannie needs appraisers and reiterated that there is a future for appraisers in mortgage lending transactions. “We are not trying to get rid of appraisers. Hamp [Thomas] himself pointed out we are using appraisal data in our models. If we get rid of appraisers, where would we get the data for our models? We won’t have the data, our models won’t work, and we’ll have to go get appraisals. So, you have to have a steady input of appraisals in order to drive the whole process. The appraisal is the foundation of the process. We’re using appraisals to critique other appraisals. And appraisal data to critique others’ appraisal performance. We’re taking a scientific approach to analyze the results. In some cases, the appraisal is the best option. In other cases, the appraisal is not adding benefit. We’ve worked on this project for many years,” Radke reports.
Fannie has also offered appraisal waivers for over 20 years, Radke points out. “A little-known fact is that loans with appraisal waivers outperformed loans with appraisals on loss severity in the great recession. How can that be? We didn’t even know what the property looked like. Even normalizing for credit risk, they still outperformed. One hypothesis is that people who qualify for waivers have conservative, or low expectations, around their credit and appraisal and home value. They’re not pushing the boundaries. Because of that, they’re really safe risk cases. On the other hand, people who don’t qualify for the waiver, their value expectations are higher than what we think are reasonable. They might be more aggressive in their personal behavior and less qualified as a credit risk. This doesn’t always show up in your FICO. It’s a really interesting finding. We find waivers identify a really low risk segment of borrowers who have modest expectations,” says Radke.
Reynolds asked both Thomas and Radke if they had a child who was interested in becoming an appraiser, what advice would they offer. Thomas said he would highly encourage a family member to become an appraiser, but would have them “do other things and not focus solely on mortgage finance transactions.”
Radke disagreed, arguing that appraisers are still needed on mortgage finance transactions. “From where I sit mortgage finance transactions is a great business. There is a huge volume there. You don’t necessarily find that volume in other lines of business. [To appraisers who say “this is the end”], I don’t believe that to be true,” Radke says.
With respect to property data collections, Radke acknowledged that they generally cost less than a full appraisal, but added: “The appraisal skillset is very transferable to performing property data collection, which also provides opportunities for appraisers to expand their array of services. And our test-and-learn activities included appraisers among the workforces performing property data collection. In addition, appraiser trainees are eligible to conduct property data collection, providing them with a professional growth opportunity.”
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Realtor® Takes a Stand
Appraisers aren’t the only ones concerned about Fannie’s new policy. In April 2023, Leigh Brown, President of the North Carolina Association of Realtors (NCAR), published a video to her YouTube channel outlining her serious concerns about Fannie’s program. (Visit WorkingRE.com/RealtorSpeaksOut to watch the complete video.)
In her video, Brown argues that professional service providers that are going into people’s homes should have some regulatory oversight. “For the princely sum of $50, these [property data collectors] will do an inspection without a license. No license means there’s not a regulatory body that’s going to oversee them and look out for consumer protection. They are going into somebody’s house—their sanctuary—where their babies lay their heads down to sleep at night. There should be some protection over who is coming in. As a consumer, I don’t want somebody like that in my house,” Brown says.
Outside of safety concerns, Brown questions why the GSEs are seeking to supplant appraisers. “These data collectors don’t have the expertise. What we do in real estate is so big—the volume of the financial investment and what it means to people. This is, for most people, their financial stability. Do we want an unlicensed, unregulated, probably poorly trained data collector going into [our clients’] houses? As Realtors® and professionals, we have to ask all these questions. Why in the world are our institutions trying to get rid of our Certified Appraisers?” asks Brown.
As the President of NCAR, Brown warns her fellow Realtors® to not allow unlicensed property data collectors on their transactions. “My pocket card that I have from the NC Real Estate Commission has granted me the public trust. I want the people that I represent to have the best possible outcome which means an independent, Certified appraiser verifying their numbers. Even if my clients are paying cash, I still recommend a Certified appraiser. It is my job as a fiduciary. My clients sign an agency agreement, meaning that I’m advocating for them every step along the way. I have an obligation to not take a shortcut of an unlicensed, unregulated data collector making $50 looking at a house with no knowledge, no expertise, and not bound by a Code of Ethics,” argues Brown.
Lastly, Brown urges her Realtor® peers to not engage in property data collection. “If you are a Realtor®, do not do this data collector stuff. We’re still waiting on guidance, but it looks like you could possibly be outside your expertise operating like this, and that is a violation of your Code of Ethics. My recommendation is to do your Realtor® job and let Certified appraisers do Certified appraiser jobs. If you are a member of the consumer public and buying a house, ask for an appraiser. These are highly trained, skilled individuals,” Brown says.
Felon Data Collector?
To Brown’s point about allowing un-licensed people into one’s home, James Heaslet, Chief Appraiser at the Department of Veteran Affairs, presented a slide deck at VA’s Loan Guarantee Conference in early May 2023 that reported on the engagement of a property data collector who was a felon.
Heaslet’s slides explain that an individual was recently engaged by one of the largest AMCs in the country (one of six approved by Fannie) as a videographer and “data collection specialist.” The problem? The individual was facing felony charges and was shortly convicted of staging an armed robbery of a van carrying more than 1.2 million dollars.
Heaslet’s slide deck indicated that the bifurcated appraisal process has risks that Veterans should not take on. In lieu of property data collectors, the VA envisions a process “where the VA appraiser can utilize another appraiser or trainee to inspect and appraise the property, write the report, the appraiser/trainee and supervisory appraiser must sign the report.” This will ultimately “reduce overall appraisal turn times while also encouraging more individuals to join the appraisal profession,” Heaslet argues.
Conclusion
Fannie has been upfront about its interest in developing appraisal “alternatives.” However, the timing of Fannie’s update could not have come at a worse time. Appraisers are currently in the midst of historically low transaction volume, with February 2023 clocking in as the slowest transactional month on record—less than 95,000 appraisals being ordered between both GSEs according to the American Enterprise Institute.
However, Fannie insists that it is looking to the future. With respect to volume, executives at both Fannie and Freddie have pointed out that during the crazy-volume times of 2020 and 2021, appraisers were not actually able to keep up with the transactions that were taking place in the market. It is rumored that FHFA approached both GSEs and asked them to “find solutions” to the “appraisal bottleneck.”
Both Fannie and Freddie insist that appraisers remain an integral part of the valuation landscape and demand for appraisal services will continue into the future. But there definitely appears to be truth in Fannie’s unpopular choice of words. When it comes to low-risk, low-LTV, cookie-cutter property mortgage transactions, appraisals are no longer the only game in town—or the default—according to Fannie.
About the Author
Isaac Peck is the Publisher of Working RE magazine and the President of OREP, a leading provider of E&O insurance for real estate professionals. OREP serves over 10,000 appraisers with comprehensive E&O coverage, competitive rates, and 14 hours of free CE for OREP Members (CE not approved in IL, MN, GA). Visit www.OREP.org to learn more. Reach Isaac at isaac@orep.org or (888) 347-5273. CA License #4116465.
OREP Insurance Services, LLC. Calif. License #0K99465
by John A MacLeod
The future is AVM/ for the easy value estimates while the complex ones will be done by appraisers. But be careful what you wish for Fannie you might get it.
-by Vince Slupski
This result has been inevitable for almost a decade since Collateral Underwriter came into use. If the GSE’s can critique appraisals using statistical data, they can perform appraisals, and they are. The 1980s S & L crisis and the 2008 financial crisis weren’t caused by appraisals, but they weren’t prevented by them either. At best, appraisals are like the stock tables in newspapers (when there were newspapers and stock tables). They report values in the recent past. They don’t predict values in the future. When that 90% loan becomes a 115% loan a year later, it’s really not the appraiser’s fault, if the appraisal was completed according to competent practice and theory. But then, what was the value-add of the appraisal? Appraisals may catch out uninformed buyers, mortgage fraud, or property defects, but they are designed to NOT predict the future. As an example, values can’t rise 7% a year forever when incomes are flat; but who can predict when the music will stop? Where does that fit into our current standards and theories of appraisal (“effective date”)? Appraisals will continue to play a role for waterfront and other unusual properties, and for estates, divorces, etc. But the number of appraisers will decline to half or less what it is now.
-by Jim
The reason appraisers couldn’t keep up with demand was because for the last 10+ years the GSE’s have been driving good appraisers out of the profession. These institutions have not done anything to alleviate the longer turn times for appraisals, rather they have done all they can to exasperate the problems we see today, including adding layers to the process (AMC’s), unlicensed and inexperienced property data collectors, and literally stealing appraisal data without appropriate compensation to the appraiser, and so many other edicts made that leave appraisers with no choice but to leave the profession or move away from mortgage appraisal work and into the private sector. I for one will not do hybrids or property data collection, or sign any appraisal I have not personally done inspected and have worked on from start to finish, and I hope all certified and licensed appraisers will do the same, for the good of our profession and more importantly for the good of the public. The people in charge at these institutions are simply fools and the public will pay dearly in the end.
-by Jim Scholl
Since we have already seen waivers as high as 49% it is hard to fathom Lyle’s statement about 2-4%.
-by A. GILE
IS THERE A WAY TO FORM A NATIONAL APPRAISERS GROUP THAT CAN HAVE AN IMPACT ON ANY OF THIS? I WONDER WHAT WOULD HAPPEN IF WE QUIT FOR A WEEK, 2 WEEKS OR A MONTH.
-by Cassandra
We doomed and groomed until ir finally is coming to pass
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