A Word About “Appraisal-Free” Valuations

The GSEs recently announced a new policy that has stirred more than a little interest.  Some have referred to it as a gateway to “appraisal-free” mortgages.  Housing Wire has a great write up on the details here.

Some are up in arms about the potential for the demise of the appraiser. They point to the need for qualified appraisers, the complexity of property valuation and even the inflated values of so many toxic assets involved in the subprime meltdown of the late 2000s.  And while we certainly agree that qualified human appraisal should ALWAYS be a part of the overall mortgage lending process, we disagree that this announcement is the beginning of the end for appraisers.

Here’s why.

Let’s have a look at where the industry currents are flowing at the moment:

  1. Rising compliance costs and increasing borrower demand for a faster process (led by the coveted Millennial market) have driven the entire industry to seek more efficient and less expensive ways to produce a mortgage. It’s also looking to the GSEs to assist with this.
  2. This movement has led to a mini “tech boom” in the mortgage industry. A combination of automation, system integration and other ways to embed technology into the process has been a natural solution to the cost conundrum.
  3. Over the course of this transformation, data has become more trustworthy, more widespread and more available. Our industry increasingly leverages it instead of “reinventing the wheel” for every single task.
  4. With the return of a competitive purchase market, mortgage businesses are working harder than ever for any little advantage they can get. That includes simplifying the borrowing process for the consumer.

While complex transactions or challenging properties absolutely call for expert human appraisals, this policy change covers only the simplest of valuations.

Fannie Mae itself points out that any “appraisal-free” mortgages must meet at least the following criteria: “the purchase loan having 80% or lower loan-to-value ratio, being single-family and condo properties, primary occupancy and second homes and only when Fannie already has a prior appraisal in electronic format that has been analyzed by Collateral Underwriter.” Fannie expects less than 5% of its purchase loans to qualify.  5%.

The bottom line is that our industry is just starting to catch up with the technology revolution that has propelled our society in the past 15 years or so. Consumer expectations are driving lender expectations which, in turn, are driving the GSEs to serve their market.  Considering we are talking about less than 5% of the transactions out there, we can safely assume two things.  First, this is by no means a call for, or the beginning of, the end of the appraisal industry.  Second, considering the months of discussion we have had across all facets of the mortgage industry on the real or perceived shortage of appraisers and the consequences, this isn’t necessarily an imprudent move on the part of the GSEs.