All mortgages require an appraisal- at least in the traditional sense. Today, advancements in automation may be able to eliminate that entire step – at least for some.
A week ago, government service enterprises Freddie Mac and Fannie Maeannounced the rolling out of new appraisal-free productsfor the purchase mortgage market. These products called Automated Collateral Evaluation and Property Inspection Waiver respectively, will automatically waive off appraisal for some loans that are determined eligible for the program.
To be eligible for the Fannie Mae Property Inspection Waiverprogram, the following criteria must be met:
- Single-unit properties inclusive of condominiums
- For limited cash-out refi transactions:
- Principal residences and second homes up to 90 percent LTV/CLTV
- Investment properties up to 75 percent LTV/CLTV
- For cash-out refi transactions:
- Primary residences up to 70 percent LTV/CLTV
- For purchases:
- Primary and secondary homes up to 80 percent LTV/CLTV
- Loan casefiles that receive an approve/eligible recommendation
[see full eligibility requirements here]
Meanwhile, to be able to qualify for the Freddie Mac Automated Collateral Evaluation, the borrower and his or her property must be able to satisfy the following standards:
- Having the loan product advisor accept the risk class
- Single-family, one-unit property
- Must be the primary residence or second home
- No cash-out for properties with LTVs/TLTVs less than or equal to 80 percent
[see full eligibility requirements here]
In place of the manual appraisal method is an algorithm-driven automated system that will use millions of sales records from comparables to generate a market valueon a property.
These systems, also called Automated Valuation Models or AVMs, are changing the way mortgage is done by slashing off appraisal time and saving the borrower around $300 to $600 paid for the process.
Will this make the old method obsolete?
Experts say it may not totally do so for now. Precision for properties with a small number of comparables is problematic and has a high standard deviation, but could be highly useful for markets where a high number of sales provide valuable data for crunching estimations. Many also argue that the meticulous input of a seasoned appraiser cannot compare to the limited, often broadly general data required by a software service.
Experts in the industry are divided as to whether the move to automation will be good for the mortgage process.
“Republicans might slap them down for increasing the risk profile of the two GSEs and possibly the exposure to the American taxpayer,” Grady & Associates attorney Francis Grady expresses his skepticism in an interview.
“I don’t know enough to say what they’re doing is wrong, but it strikes to me that there’s no debate about the safety and soundness of going in this direction,” he adds.
Some, however, see the move to be a positive approach to the changes in the industry such as Consolidated Analytics COO Rudy Zabran.
“We as an appraisal industry need to embrace those changes and explore ways in which we can leverage technology to make us smarter and more efficient in the job that we do,” Zabran says.
Not a first
AVMs are the not the first tech to be integrated into the mortgage acquisition process. Many lenders and mortgage companies are now utilizing computational analytics to speed up the mortgage process. These already affect underwriting, not just appraisal. And in fact, just recently, the first eClosing was facilitated by Notarize.
But while the irreversible benefits of tech are undeniable in the process, total automation may still be far off. Fannie Mae estimated that only a mere 5 percent of the purchase market will be affected by the new programs’ rollout.
This is supported by Freddie Mac’s VP for strategic delivery and operations of single-family business Andy Higginbotham when she said, “I think we’ll constantly be looking at ways to improve the model and to drive that percentage up as much as we can, but I don’t think ever we’ll see anything but the vast majority of the loans still needing that traditional appraisal.”