While Fannie Mae is talking about relieving lenders from some reps and warranties surrounding appraisals, Freddie is announced that it is doing away with the current traditional appraisal report. This is a bold move that leaves many up in arms. Not surprisingly, the biggest protesters are appraisers.
Freddie says they may accept the use of automated valuation reports, supplemented by the vast trove of appraisal data they have been collecting from lenders. This would cut the time it takes for lenders to approve and close their loans while reducing the cost to consumers to get a loan by anywhere from $300 to $600, or more. The old win, win.
Critics say this would expose Freddie, and the taxpayers, to potential major losses on loans that default. But would it?
Traditionally lenders do not grant a mortgage without a complete comprehensive report of the property’s value. However, in the event of default, that value is very rarely the current value of the home.
Sometimes it’s more, sometimes it’s less. The original appraisal is basically a snapshot in time of the property value from when the loan was originated. That value is usually very close, if not exact, to home’s sale price. A value established by Realtors who are extremely familiar with the market in which the property is located. The appraisal confirms that value.
So, why the need for a complete inspection with all the detail that goes into a current appraisal? Maybe this is needed for some refinances and exceptional properties, properties in rural areas, or those with excessive land or special characteristics. Think about it, how often does an appraisal not come in at a value equal to the sale price?
Automated Valuation Models (AVMs) take into account the same property characteristics and comparable sales data as traditional reports. If anything, these are reports are sometimes a little more conservative. They also remove the “human element”. They deal strictly with the data. Plus, they cannot be manipulated by a lender. If there is a question of value, a lender can always obtain a more comprehensive traditional report.
The other concern is with property condition, as the AVM does not include an on-site property inspection. Think about it, what consumer would buy a home at the full value that has major defects? Many buyers today obtain their own home inspection report. If defects exist, they will be brought to light by the Realtor, the home inspector and/or the buyer.
So, maybe the time has come to streamline the valuation process, reduce time and expense and get loans to closing more quickly. Understandably, this will not work for all lending and properties, but initially, it may cover the low hanging fruit; low LTV, low DTI, well-qualified applicants buying a traditional property is an established area. For now, there is still definitely a place for the appraiser and their comprehensive reports.
The real question is what, or who may be next?