Appraisal-free loans save millions for buyers
WASHINGTON — For homeowners and buyers, it’s been an unexpected windfall: relief from having to pay for a traditional mortgage appraisal that usually costs between $400 and $600.
The savings nationwide to consumers in just the past year alone may total tens of millions of dollars.
Sounds great. But to some key players in the home financing arena, the savings look ominous.
Last year, the two largest sources of American mortgage financing, federally backed Fannie Mae and Freddie Mac, began accepting home-purchase loans that carried no formal property appraisal. Instead, the valuations supporting the mortgages were performed by Fannie and Freddie in-house, using proprietary analytics and deep stores of property data.
Only highly select loans were eligible for appraisal waivers, primarily those with sizable down payments (20 percent and up) plus previous appraisals on file. Buyers, refinancers and lenders were not permitted to request waivers; Fannie and Freddie were the ones that identified eligible properties and offered waivers at the application stage.
Both companies had introduced the no-appraisal concept earlier for refinancings. The expansion to homepurchase loans was a big deal, though, because they’re considered riskier than refinancings, where borrowers’ credit and equity are well established and known to lenders.
Fannie and Freddie haven’t publicly released data or the results of their shifts to noappraisal mortgages, but last week both companies allowed a peek for this column.
During 2017, Fannie Mae acquired roughly 60,000 noappraisal mortgages, 5 percent of its total 1.2 million home-loan acquisitions. Assuming an average appraisal costs about $500, then the combined savings to buyers and refinancers totaled somewhere near $30 million.
Freddie Mac declined to estimate specific savings but said through a spokesman that by accepting appraisal waivers, “borrowers may have saved millions.”
Fannie’s and Freddie’s no-appraisal option has been popular with lenders. Mat Ishbia, president and CEO of United Wholesale Mortgage, the country’s largest wholesale lender, said, “We think it’s great for borrowers.”
Not only does it “save time and money,” he said, it leads to shorter interest-rate locks and quicker closings.
Not surprisingly, all this gushing enthusiasm for appraisal-free mortgages isn’t shared by the segment of the housing industry most directly affected: appraisers.
Real estate brokers also have expressed concerns. Appraisers see the waivers not only as sucking money out of their pockets but as a potential threat to taxpayers, who had to bail out Fannie and Freddie because of ill-advised investments during the housing bust.
Individual appraisers are scathing in their criticism, arguing that professionals trained to perform interior and exterior inspections, identify recent sales comparables and render independent analyses are essential to accurate valuations.
What’s all this mean for buyers? No. 1: Be aware that even if you are offered an appraisal waiver, the choice is yours. Fannie and Freddie require lenders to allow borrowers to opt for a traditional full appraisal.
Also, careful as the two companies may be in offering waivers, the contract price you’re paying for the house may be inflated. Lundquist cited a local realty broker who recently had clients who declined the no-appraisal option and saved thousands of dollars as a result. A full appraisal found the property to be overvalued — which the waiver apparently missed — and allowed them to renegotiate the final price lower.