For decades, it was treated as an absolute certainty in the home buying process: if you need a home loan, you had to get an appraisal. It was just something you had to do. And it didn’t seem likely to change, considering the housing market is only a few years removed from the worst foreclosure crisis in 70 years.
So when Fannie Mae and Freddie Mac decided last year they would waive appraisal requirements for some purchase mortgages, the news was met with some shock. The GSEs have already been accepting automated appraisals for certain home refinances. But this was the first time they had granted waivers for purchase loans since before the housing crisis began. In fact, many industry observers argue the prior waivers, which started in 1994 and ran right up to the start of the financial crisis, contributed to the GSEs’ financial failures and eventual conservatorship.
So here are three things to understand about the GSEs’ waivers.
Most loans still require appraisals. To qualify for a waiver on a purchase loan under either Fannie Mae or Freddie Mac, a borrower must make a down payment of 20 percent or more of the purchase price of the home. Loans for certain types of property including two- to four-unit homes or homes in areas hit by disasters are not eligible. Fannie Mae and Freddie Mac have other limitations on the types of loans that are eligible for waivers, such as cases in which appraisals are required by state law.
Big data and automation. Appraisal technology was non-existent when the first residential appraisals were performed. But over the past decade, the adoption of automation, big data and other innovations in the appraisal industry has soared. Both agencies will be relying on these technologies to determine which properties are eligible for waivers and to confirm property values.
Fannie Mae and Freddie Mac are using slightly different tools, but both will leverage multiple listing service data, public records and historical appraisal data in their waiver programs. Fannie Mae, for example, will leverage its database of more than 26 million appraisal reports.
The waivers have differences. Both GSEs have the same 20 percent down payment requirement for purchase loans. But for home refinances, Fannie Mae requires a borrower to have at least 10 percent equity on their primary or second home and 25 percent equity for an investment property. For cash-out refinances, borrowers need 30 percent equity for a primary home and 40 percent for a second home or investment property. Freddie Mac simply requires 20 percent equity for all refinances.
The GSEs also have different names for the waivers themselves. Fannie Mae calls it a property inspection waiver. Freddie Mac’s exemption is an automated collateral evaluation.
Certainly, the waiver programs will make lending easier for borrowers who qualify. Fannie Mae says its property inspection waivers will also shorten the loan origination process, lower costs, and will relieve lenders from reps and warrants “on the value, condition and marketability” of exempted properties. But the waivers are not without opponents.
The Appraisal Foundation, which sets standards for appraisers, and the Appraisal Institute, which represents appraisers, have criticized the GSEs’ waivers and argue that professional appraisers are critical for determining accurate home values. Both groups have expressed concern that the GSEs are courting disaster.
It remains to be seen what the long-term impact of the GSEs’ waivers will have on the housing industry. But considering the fact the GSEs finance half of the nation’s mortgages, it’s a safe bet we’ll all be paying close attention.