Are no appraisal mortgages a wolf in sheep’s clothing?
I’ve seen a lot of celebration recently from various players in the home purchase and mortgage game regarding the decision by Freddie Mac to skip getting a traditional appraisal. While it may sound good up front because they promise to reduce the cost to the buyer and reduce turn times, will this really occur? Are no appraisal mortgages too good to be true?
There most likely will be some unintended consequences from the transactions where a traditional appraisal is not used because of an appraisal waiver. Today I thought I’d share my thoughts, however, I’d like to hear from you as well. What do you think about eliminating the traditional appraisal from a mortgage transaction? They say this option will not be used all the time but only for qualifying purchases. Will it eventually include all purchases? Tell me what you think in the comments section below.
Possible consequences from no appraisal mortgages
1. Independence is lost- The appraiser is the ONLY unbiased party to a home purchase transaction. Everyone else from the agent to the loan officer has a financial stake at risk if the loan does not close.
When you remove the appraiser from the picture you risk removing the voice of reason. Appraisers are trained to measure the market value of collateral to protect the interests of the lender.
The steps involved in the appraisal process include weighing and comparing sales to the subject property in order to properly reconcile value. When an automated valuation model is used it is possible to be overly optimistic when interpreting the data and the independent nature of the appraisal is lost.
2. Inaccuracies in the size of the house will grow- When a traditional appraisal is performed the appraiser
measures the home according to a generally accepted standard (ANSI). Using a set standard on every property helps the appraiser to compare apples to apples when it comes to the gross living area of a house.
Comparables are selected based on bracketing the gross living area of the home. If you use an inaccurate square footage figure from county records or from the owner and then bracket this amount it will prevent you from getting an accurate value indication from the sales.
Automated Valuation Models (AVM’s) look at the price per square foot of sales and then apply it to the subject. Whenever you have inaccurate square footage of the comps you arrive at a flawed price per square foot to apply to the subject. This inaccuracy is multiplied when you apply the wrong price per square foot to the subjects perceived living area.
3. Comparable selection- Choosing comparables is more than picking the 3 most recent sales that occurred within a one-mile radius. It takes human reasoning to pick comps that are the most similar to the subject property.
They say that choosing the right comps is 90% of the task in an appraisal assignment. If you choose the right comps the adjustments will be minimized and the value indication for the subject will be more accurate.
Appraisers have had a taste of the quality of comps that an AVM would provide with the Fannie Mae Collateral Underwriter (CU). The Collateral Underwriter is supposed to provide an automated risk assessment of an appraisal report. Part of this is looking at the comps the appraiser used and then possibly suggesting other comps that were not used.
The comparables that CU suggest are a joke at best. I have had lenders provide me with comps that the CU came up with that are not even in the same city as the subject. They include foreclosure sales when they are not even appropriate. We all know that school systems are a driving force in value, right? Many of the comps provided are from different school systems and would not provide an apples to apples comparison of properties.
4. Checks and balances for AVM’s will be lost- It is possible to compare a real appraisal with a Zestimate or other AVM to see how they vary but if the AVM is the only thing used then you don’t know how accurate it is.
Automated Valuation Models have been used for a long time, and in certain circumstances can be useful. They can be used to initially estimate a property value to make a preliminary loan decision, however using it exclusively is not prudent in my opinion.
Numerous appraisers have analyzed Zestimates and other AVM estimates by comparing them to appraisals they have done to see how closely they match up. The AVM’s are not consistent in their accuracy and can vary by a wide range. For lenders interested in having the most accurate value for their loan portfolios this is definitely not the way to go.
5. Consumers may not see the cost savings since the AMC or lender will keep charging a full appraisal fee- Will the consumer really see cost savings? Or will it be like it is now in areas where there are supposed shortages?
I have heard instances where the borrower was told that there was a shortage of appraisers and the lender had to charge upwards of $1,500 to get the appraisal done. The borrower was charged this amount but the appraiser was only paid $300-$400, if that much, and the Appraisal Management Company (AMC) pocketed the rest of the money. Sacramento appraiser Ryan Lundquist wrote of a similar situation about appraisal fees that you should check out.
Why would a lender or AMC pass on the savings to the consumer and give up money that the borrower is used to paying anyway? In my opinion, this is just a way to increase profits. There may be a savings in time, but at what cost to the consumer?
6. Owners will not know the true value of their assets- Sale price does not always equal market value. Some people think that if someone is willing to pay a certain price and someone is willing to sell for a certain price then that is market value, but that is not always the case.
With all of the inaccuracies that AVM’s provide how will the homeowner know the true market value of their largest asset? It reminds me of several situations I have seen in the past when buyers were paying cash and did not get an appraisal to make sure that the price they were paying was too much.
Life situations necessitated the owners sell shortly after they purchased the home, but they could not resell the home for what they bought it for because it was overpriced. If no appraisal mortgages result in a similar situation it can lead to short sales, which is discussed in #7.
7. Short sales could increase- If a home sells for more than its true market value, and the AVM does not provide 
an accurate value indication, the buyer could immediately be underwater in their mortgage. This could result in a short sale situation because the lender will need to accept less than the amount owed on the property.
We all know how short sales affected overall property values during the recession, right? If you have enough short sales, overall price trends could take a dip downward.
8. No brakes put on bidding war situation- The word on the street is that inventory levels are down across most of the country. This has resulted in a seller’s market with buyers becoming frantic that they will not get the house they want.
One tactic that real estate agents have used for their buyer clients is to create a bidding war situation where they offer a price over the list price in order to have the winning contract. If the contract is accepted by the seller and the transaction qualifies for a nontraditional appraisal mortgage this could create a problem that was outlined in #6 and #7 above.
In situations like this where a traditional appraisal is performed the high contract price would probably be questioned based on recent sales and active listings. The boots on the ground appraiser would be able to let the lender know that their collateral is worth less than what they are lending on it, which would help them make a better-informed loan decision.
9. Lawsuits against agents could increase- Many of the above-noted situations could result in consumers becoming frustrated when they find out that they bought a house for more than it was worth. This could increase liability to real estate agents since buyers may choose to sue agents.
Since an appraisal was not done, the true market value of the home was not determined. As I noted previously, some believe that if a buyer is willing to pay a certain price and a seller is willing to sell at a certain price then that should constitute market value, but in reality, it may not. A traditional appraisal determines the most likely price after looking at numerous transactions, including closed sales and active listings. It goes beyond the agreed-upon price, although it also is taken into consideration.
As you can see, there may be some unintended consequences from Fannie Mae’s decision to provide no appraisal mortgages. Appraisers provided valuable input into the last housing recession before it began to happen, although many did not listen. Will eliminating appraisers from future mortgage transactions be worth the risk to the housing market? Only time will tell.
Question
So what are your thoughts on no appraisal mortgages? Please share your opinion in the comments section below and as always thanks for reading.
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If lenders require more and more stuff in an appraisal, scope creep, then how is it that we are less and less valuable to the transaction and should be eliminated? If we didn’t have AMCs adding significant fee on top of what we get, Borrowers wouldn’t be paying NEARLY as much for an appraisal; no cap on their fee beyond what they can get somebody to pay. Often on refi situations, I find condition or upgrades significantly better or worse than the ‘median’; so how can lender tell from this blindfolded arms length approach what the current value of the collateral is? Views, noise levels & condition vary broadly, but are not fully addressed in AVM values, and those items can have big Buyer impact. These are just the first 2 minutes of my thoughts on this matter.
I agree, Sandra. You bring up some very good points and what they are doing does not make sense. They will certainly get less detailed information from an AVM. You are spot on with the cost comment. The only reason costs are through the roof is because of what AMC’s are charging because appraisers are certainly not getting higher fees except in those very rare areas of the country where there are some shortages, such as in the northwest.
Aain, appraisers are the only ones who get paid same amount regardless of value of the property. I believe this will result in false values. But it will save Loan Offiers and Agents time in sending RECONSIDERATION letters when we don’t HIT their value.
Agreed Billie. Like I said, we are the only voice of reason due to our impartiality. It will indeed save real estate agents and loan officers time but at what cost?
Appraisers always determine the proper value. It is the sellers and agents who don’t always hit the “value”. Keep that in mind.
I agree, Will. That is why I always recommend a pre-listing appraisal.
Another problem of an AVM is that it is based on the Sale Price only, without regards to the terms of the sale. i.e.: the Sale Price is $250,000, but the seller has to provide $10,000 towards the buyer’s closing costs. That $10,000 is not calculated in the AVM, but it certainly is in the appraisal, at least in my appraisals it is.
Additionally, the AVM does not consider the differences in Quality or Condition.
Are far as shortages in appraisers go, there does not appear to be a shortage at this time. However, I do not see many young people becoming residential appraisers. It seems that young people with a decent head on their shoulders are becoming either commercial or farm/ranch appraisers, because there is significantly more money to made. Residential appraisers have been getting the short end of the appraisal stick for quite some time. So, the only ones doing residential appraisals are us old folks, and we are retiring (I am retired) soon. Therefore, it is my opinion that there will be a time when lenders, especially the bigs ones, will be screaming to Congress, “We cannot find appraisers”. Then Congress will bend over and change the rules so that only AVM’s will be used. At that time, the housing industry will be up the proverbial creek.
You bring up some very good points Thomas. I think the big thing about the AMV’s, in my opinion, is the lack of reliability of data. Fannie Mae must have calculated in the margin of error and estimated losses possible with a number of potential problems possible when you don’t have all the information about the property. As far as new people getting into the profession I also agree with your assessment. I think AVM’s can be used by lenders but not exclusively or else there will be a whole lot more problems as you noted. Thanks for sharing your thoughts.
Great points Tom! In fact, I have one this week in which the house is 448 sf smaller than the county reported. I pointed out the difference during the inspection to the listing realtor, and she just shrugged her shoulders. The other argument I hear about the shortage of appraisers that I don’t agree with is the education requirement. It does play somewhat of a role in bringing on new appraisers. Yet, the unrealistic expectations we deal with on each assignment with turn times play a larger role in driving people out of the profession and keeping people from getting in. Lenders get 45 days issue a loan. Appraisers get 3 days to pull comps, inspect, and write a report. This while working other assignments in order to make a living puts appraisers working well beyond business hours and into weekends. A big impact to ones quality of life.
I think most appraisers would agree with your observations, Leo. Seems like they would rather just get rid of the appraiser and use AVM’s than work with the appraiser.
I get comments from lenders all the time who question values and comparable selection citing Zillow, and ‘suggested sales’ from underwriters, interestingly enough the paragraph below is part of Zillow’s ULA statement.
“lending professionals and institutions are prohibited from using information provided by Zillow Group through the Services in making any loan-related decisions.” Please see section 1 “Permissible Use” of our Terms of Use for more details: https://www.zillow.com/corp/Terms.htm
The paragraph below is a direct quote from FNMA protocols
‘Fannie Mae does not instruct or suggest to lenders that they ask the appraiser to address all or any of the 20 comparables that are provided by CU for most appraisals. It is also not Fannie Mae’s expectation that appraisals should contain only CU’s top-ranked comparable sales. In the majority of cases, there may be no material difference between comparable sales utilized by the appraiser and those identified by CU. Before asking the appraiser to consider any alternative sales, it is imperative that the lender analyze the relevance of the sale and determine if the use of such sale would result in any material change to the appraisal report. If the lender determines that there would be no material change, then they should not ask the appraiser to make revisions. Fannie Mae expects CU to enable lenders to accept appraisals “as is” with greater confidence.’
I see that part of the problem is as was stated that the change is driven primarily by those who do have a stake in the outcome and see the unbiased nature of appraisal writing as an impediment rather than what it is, a fact based opinion of value.
How many lenders do you think analyze the sales provided by CU before giving them to the appraiser? I would guess zero. I totally agree that the lender sees the appraiser as an impediment to closing more loans, however that does not mean we should be eliminated as we are put in place prevent the real estate market and banking system from falling apart.
I know of three right off the top of my list, JPM Chase, Citizens and BOA
Are you saying those 3 lenders do analyze the CU comps before passing them along to the appraiser?
No, I think they generate and pass along the results to the appraiser to accept or reject.
Okay, gotcha. They need to see if they are truly comparable before they waste the appraisers time.
I think it is irresponsible of Fannie Mae and shows just how much opposition they have with the appraiser by doing this. Has Fannie Mae worked with appraisers to streamline their process….NO. There first action to cut mortgage turnaround times is to cut the appraiser out? Hey, Fannie Mae, how about you work with all of these diligent appraisers in the field and actually find out which of your guidelines have us spinning our wheels out in the field? You know, the ones that were specifically set up to cause delay in the appraisal process. You know those 25 certification statements in the report that haven’t been updated since the early 1990’s. Maybe address why appraisers cannot seam to streamline their processes and maybe address the non essential fields on the forms that could be removed before you just cut us out of the process costing good people their incomes and livelihoods. I can think of 2 or 3 of these guidelines that if were changed, would cut our turnaround times and writing the reports in half. Maybe the appraisers out there and the rest of the industry will start to see that Fannie Mae has set up the appraiser to actually fail at streamlining the appraisal report, just so they could blame us and remove us from the process. I can show a few ways they have done this by not making the reports living documents. They are outdated and lack any observance of the new technologies out there that are at our fingertips today. They give us archaic forms and processes that are written in concrete and seem unchanging over the years , but yet can re-arrange the mortgage part at any point in record time, then make it look like we are responsible for the big delays in the process. I hope soon, more industry professionals will start to see this and catch onto their schemes and make Fannie Mae stop pushing unfair business practices at the appraiser.
Great points, Adam. It seems ironic that all of the time intensive guidelines they have heaped upon us are now going to be replaced by a “Wham bam, thank you ma’am” AMV model. The two seem totally opposite, on one hand, you have all of the regulations appraisers have to abide by and then, on the other hand, you have the AVM, which I guarantee you will not be subject to as much scrutiny.
You nailed it Adam!!!
Time will tell. When interest rates increase, people will in slot if areas see price deflation based on artificially low interest rates. Hot markets will once again fall and repeat the cycle every 7 years. I think once interest rates increase to a point, more buyers will elect to build homes versus investing money into an older home. I think more appraisers will leave the industry and fees will double in the next 7 years and a lot of amcs will go out of business.
Interesting take James. I hope you are right about fees doubling and AMC’s going out of business!
There is the claim that the elimination of the appraiser will speed up processing of the loan by 7-10 days. This would only be a valid argument if the lender policy was to complete all of the other necessary protocol and then orders the appraisal. In fact, in most cases, the appraisal is processed along with all the other necessary tasks. There would be little of no savings in processing times.
In my opinion, the push to eliminate the appraiser is simply an attempt to provide another “profit center” for the lenders.
As to the difficulty in finding appraisers, this is a myth in my area. (South Florida). I don’t know any appraisers that have to turn down orders because they are too busy. Certainly I don’t. There may be a problem finding appraisers that accept low fees.
I agree with your assessment Earl. I doubt if they will start charging less for the appraisal part of the deal either. Why charge less when the customer is used to paying what they are now.
It’s a sad state of affairs when the same folks who nitpick every tiny little item to death on an appraisal, question every comp, every adjustment…are now the folks cheering no appraisal loans based on AVM’s as “good enough.” If they’d applied this “good enough” standard to appraisals instead of drowning appraisers with constantly changing rules and regulations and trying to drive prices into the basement, perhaps there wouldn’t be an appraiser shortage. I’ve been appraising over 25 years and I’m honestly fed up and considering leaving the profession entirely.
I agree, Kathy. Keep in mind that there is NOT an appraiser shortage, but there is a shortage of appraisers willing to work for half a typical fee but still get call backs on appraisals for the nit picking items you mention. It always confused me as to how they want the appraiser to have the best training and provide the best service yet they not willing to pay us for the work we do. I know there are some good clients out there but it seems there are a lot of bad players as well.
This is a prime example of what can go wrong without an appraisal. Borrower goes under contract on a home that the Realtor states has 1471 sf living area under air. Appraiser does appraisal. The home has 1130 sf living area under air and it does not appraise near contract price. Borrower and seller haggle and agree to terms of appraised value. Later, seller backs out because she WANTS more money. Realtor changes sf living area under air in the listing and it’s back on the market. NO APPRAISAL TRANSACTIONS? What do you think?
You prove my point, Helen. Since square footage is so important something has to give if they are going to start using AVM’s. We all know that public records falls way short in their reporting accuracy, yet it is these figures that many AVM’s go by. It’s like the saying goes, garbage in, garbage out. Thanks for sharing your real life example of what can happen when a full appraisal is not done.
Since I had my home refinanced in 2012, the value of my home has increased in value. It is possible to get my home appraised to lower my mortgage payments without having to refinance?
I like the rate I have, I just don’t like the appraised value.
I don’t think you can lower your payment without refinancing but that is something you might want to ask your lender.
In some cases, the lender will allow removal of PMI based on a new appraisal. Check with your lender to find out their requirements.
Thanks, Sandra.
1. If not required, I would recommend they place a contegency on the offer to have that as part of the offer. If the buyer does not elect to do so. Have them sign a waiver indicating they did so against my advice.
That would be good way to keep the agent from being sued but we all know if someone wants to sue you a lawyer is going to find a way.
100% agree on all points. Plan to share with local Realtors around here. Thanks Tom
Thanks, Mary.
A systems of checks and balances is a good thing. In politics I’m very thankful for three branches of government and in real estate I’m grateful for appraisers and underwriters who should be acting more like umpires than cheerleaders. I understand where appraisals waivers in some cases would make sense, but it’s a dangerous path to dismantle a system too….
As I stated in the post, it is dangerous to put the responsibility of a loan decision in the hands of a person who has a vested interest in the closing of the loan. AVM’s have their place but I don’t think it is a good idea to make a loan decision based on something that can be very unreliable.