Appraisals waived on some loans
Fannie Mae and Freddie Mac each have announced that they will begin waiving appraisal requirements on a limited number of home-purchase loans they back, which will save hundreds of dollars and speed closings for qualified buyers but strike a blow to appraisers.
Fannie started waiving the need for what it calls “property inspections” on certain refinance loans in December. At the time, Fannie said up to 10 percent of refinance loans could qualify for the waiver. Freddie quietly followed suit on some refis on June 19. Instead of using human appraisers on these loans, the government agencies are relying on automated valuation models.
Waiving them on purchase loans is a much bigger threat to taxpayers and appraisers, said Ken Chitester, a spokesman for the Appraisal Institute. “The previous owner could have made changes — good or ill — to the property” that would not show up on an automated valuation, he said. Also, when borrowers refinance an existing loan, lenders can see their track record. That’s not always true on purchase loans, which is why “it’s important to have an appraisal as part of good risk management.”
For buyers, there’s little downside. They can still get an appraisal if they want peace of mind, but won’t have to if they qualify for a waiver.
“Borrowers may be able to realize savings in some instances of approximately $500, and closing times may be reduced by as many as seven to 10 days in cases where Freddie Mac’s innovative new capability determines a traditional appraisal isn’t needed,” Freddie Mac said in a press release.
Fannie and Freddie guarantee home loans up to certain limits. The limit for a one-unit dwelling is $424,100 in most parts of the coun-
try but $636,150 in most Bay Area counties. In June, about 37 percent of the loans used to purchase homes in the Bay Area exceeded those limits, according to CoreLogic.
Fannie and Freddie both said they will continue to require full appraisals on the “vast majority” of purchase loans, but it’s not entirely clear which loans will qualify for the waiver.
Fannie Mae has posted a question-and-answer sheet for lenders on its waiver program. For purchase loans, it started Saturday and is available on one-unit properties, including condominiums, used as the borrower’s primary residence or second home, with loan-to-value ratios up to 80 percent.
However, most transactions will not receive a waiver offer, including those in disaster areas, cooperative units and manufactured homes, homes valued at $1 million or more and loans if the borrower is using rental income to qualify for the loan. In addition, “a prior appraisal must be found for the subject property in Fannie Mae’s Collateral underwriter data.” Fannie Mae estimates that fewer than 5 percent of purchase loans will qualify.
In Freddie Mac’s case, waivers will be available starting Sept. 1 for some “single-family, one-unit dwellings that are used as the borrower’s primary residence,” with loan-tovalue ratios up to 80 percent, Freddie spokeswoman Lisa Tibbits said in an email. However, “there isn’t a simple checklist of items that determine whether a specific loan will be eligible (for automated valuations). Eligibility depends on a mix of factors, including the loan-to-value ratio and the borrower’s FICO score and general credit worthiness.”
When Fannie announced it was waiving appraisals on some refis in December, the Appraisal Institute said it was more concerned about Freddie’s apparent plans to waive them on purchase mortgages this year. (At that time, Fannie was not openly planning to waive them on purchases.)
In a May 30 letter to the Federal Housing Finance Agency, which regulates Fannie and Freddie, the institute said it remains “deeply concerned about the structure and scope of these initiatives from a taxpayer protection standpoint, particularly given recent housing price increases. If anything, such market activity begs for heightened due diligence, not less.”
Fannie and Freddie are not required by law to obtain appraisals, “on the basis they would make responsible decisions. 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,” the institute’s president, Jim Amorin, said in a statement.
“As Congress weighs how to roll up or roll out the conserved enterprises, it must ensure that taxpayers are not exposed to irresponsible decision making and unnecessary risk taking,” he said.
Kathleen Pender is a San Francisco Chronicle columnist. Email: kpender@sfchronicle.com Twitter: @kathpender