In The News: The Property Inspection Waiver
Just in case you haven’t been in the market for a home mortgage recently there’s something new these days that you should be aware of. The current buzzwords recently have been Property Inspection Waiver or PIW.
A Property Inspection Waiver consists of the option to forgo a traditional appraisal when getting a mortgage for certain refinance and purchase transactions. The motivations behind this are that it will save the consumer both time in processing the loan and lower the cost of obtaining a mortgage.
While this sounds good, we must ask the question “will this actually happen”? Today we’ll take a look at whether it is a good idea for those refinancing or purchasing a home to do this.
What is a Property Inspection Waiver?
As I just stated, a Property Inspection Waiver (PIW) gives the lender the option to pass on getting a traditional appraisal that would establish the current market value of the home. By forgoing a traditional appraisal they claim that consumers will save money and time when getting a loan.
If a property qualifies for this program the lender is absolved from “future enforcement of representations and warranties on the value, condition, and marketability of the property” according to Fannie Mae, and this is known as “Day 1 Certainty”.
What this means is that if the value of your home is less than what the lender determines it to be then your lender will not be held responsible for the error. Part of the decision that determines whether a property qualifies for a Property Inspection Waiver (PIW) includes determining what the estimated market value of the home is.
Since this program is sponsored by Fannie Mae, which developed the Uniform Appraisal Dataset (UAD) program, they determine the value by using the AVM they developed from collecting millions of records over the years when appraisers would submit their reports using the UAD protocol.
By absolving the lender from inaccurate property value estimates Fannie Mae has in effect absolved themselves since they are the ones providing the value estimates. Don’t forget this is the same Fannie Mae that required a $100 billion dollar bailout from the federal government in 2008 after the last real estate crash.
What a Property Inspection Waiver Means for Homeowners
From a consumer perspective, you may be wondering what could possibly be wrong with saving money and time during a refinance or purchase transaction. Being a homeowner and consumer myself I get it, but we have to look beyond the time and questionable savings in closing fees.
I mention the questionable savings in fees because of a recent appraisal assignment I had. My client, who was purchasing the home, was given the option by their lender to forgo the appraisal, however, they were still charged the full appraisal fee.
I’m not sure what the policies of all other lenders are in this situation, but in this case, the buyer was being charged the same fee as if they were getting a full appraisal. My client chose to hire me to do the appraisal because they wanted the true market value of the home.
It’s important to know what your most expensive asset is really worth so that you can base your decisions on good information. Not knowing the true market value of your home can put you in a bad situation. A scenario that came to mind for me involves the need to resell the home shortly after you buy it.
There are various reasons for needing to sell but let’s just say that there is some family or financial reason that requires you to sell shortly after you buy it. If you price the home for resale based on your recent purchase price, but cannot sell it because it is priced too high, then you will not be able to come back on the lender for incompetence in valuing your home during your purchase transaction.
What happens if you have to sell a home for $125,000 that you bought 6 months ago for $150,000? That is called being underwater, and you must make up the difference, not your lender or Fannie Mae, who told you what the house was worth. We’re not talking about economic changes in the market that caused your home to decrease in value but rather an inaccurate market value estimate of your home developed by an AVM similar to Zillow’s Zestimate program.
Another scenario that Phil Crawford of the “Voice of Appraisal” podcast mentions (at the 13 min. marker-click text link or the image below) is just as alarming. If a home qualifies for a Property Inspection Waiver (PIW) and it sells for more than it is worth due to an inaccuracy in the AVM it can now become a comp.
Everyone in the neighborhood will now hold that sale up as being the true measure of value for other homes. If that comp results in another home selling for more than true market value, because there was no proper verification done at the time of the Property Inspection Waiver (PIW), then a trend will begin where every home in the neighborhood begins to sell for above market.
The bottom line is that these two scenarios result in an inaccurate valuation that can affect property values in the area. The question you need to ask yourself is “do I want to take a chance at getting an inaccurate value of my most expensive asset?”
Even though you may qualify for a Property Inspection Waiver (PIW) it may not be the best financial decision to make. It would be best to know the value of your home so that you can make better-informed decisions. You can do this by requesting that a full appraisal is done so that a qualified appraiser is doing the appraisal and not an AVM with potentially inaccurate algorithms.
Question
Did you listen to Phil Crawfords scenario that he outlines in his podcast? Does it make sense? I’d like to hear your take on this new and emerging trend in the valuation of real estate for mortgage lending so leave a comment below. As always, thanks for reading.
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Well stated Tom and oh so true. Just cannot take Fannies short term memory. Buyers Agents should be crying FOUL! It is not good for their buyer and their buyers will appreciate them looking out for their best interests. One very important point you made… chances are GREAT most Lenders will see this as an opportunity to make more money off buyers by charging them for a full appraisal when they waived one! Totally agree with Lori that PIW should be in MLS listing so we as Appraisers can scrutinize this sale more closely to see if it was an over market sale. I have to say whenever I see a sale that I think right off the buyer overpaid, they paid CASH. Seems cash buyers don’t care if they over pay. Realtors love cash deals as no appraisal is involved unless the buyers order their own! Buyers Agents should look out for their clients more in cash deals and PIW deals. In the long run they will be respected for their actions! Thanks Tom.
Yes, Mary, I agree that agents need to be looking out for their clients best interest. If the buyer purchases a home that is overpriced they may not want to refer anyone to the agent that did not take care of them. I have done some appraisals for cash buyers because the buyers realized that it was in their best interest. Thanks for sharing your thoughts.
Maybe buyers (their agents, really) extend inspection period in purchase offer so if lender says it’s PIW, buyer has time to select their own appraiser, pay appraiser directly without any AMC fees and get, on average, a better appraisal than the lender’s appraisal.
Great suggestions, John. I don’t think I would want to chance my largest purchase on a Zestimate type valuation.
Great job. Thank you for this article.
Thanks.
The PIW will be great for the appraisal business…..in about 5 years but for all the wrong reasons. It along with other bad lending practices that have once again surfaced such as the 1% down loans that are actually 110% loans and the bogus seller concessions being pushed by real estate agents as “customary’ are already causing many markets to be overvalued. Throw in shortages that has resulted in an “irrationally exuberant” market causing buyers to make offers on homes that they don’t even want but just want to buy something NOW and the result will be a repeat of 2008. After 2008 80% of my appraisal business were managed assets and the nice thing about appraising managed assets is the bank actually cares about the value and not about making a deal and getting their “fees”. Plus I wasn’t getting the annoying and highly illegal phone calls and emails from real estate agents upset about a deal going bad because of my “low appraisal”. The PIW will be good for the appraisal business eventually and bad for the consumers and the lenders. Rinse and repeat. When the housing/financial markets crashed just about everyone was saying nobody saw it coming. Many appraisers saw it coming! We were talking about a market that lacked fundamentals as early as 2005 in CE classes and seminars. Problem was no one was listening because appraisers have no voice. In the 90’s and early 2000’s I was predominately appraising residential subdivision developments. There was a huge oversupply of specs homes on the market. This was resulting in lower values due to longer absorption projections. The banks and the developers did not want to hear that and essentially “fired” me and went and bought an out of town appraiser that was favorable to their agenda. They ended up owning a few of those subdivisions. Stupid is as stupid does or something like that. My 2 cents worth out of 32 years of banging my head against a financial wall built on greed, corruption and passing the buck all in the name of “its good for the consumer”.
Thanks for sharing some of your war stories Michael. I agree that appraisers saw these issues coming but nobody would listen to us. I think it is important for appraisers to take ownership of our profession by contributing to the narrative rather than letting the narrative be set for us. I notice you have a blog and I think it is important for appraisers to make their voices heard by either writing blogs or creating podcasts like Phil Crawford does with his “Voice of Appraisal”. If we share our market expertise then that information will be out there whether its listened to or read or not. At least appraisers will be able to take advantage of the work provided by foreclosed properties if and when the market crashes again. Look forward to hearing more from you.
To me it’s simple, Fannie is covering their own risk, not the homeowner’s risk.
I’m afraid you are probably right, Wayne.
Great information for home buyers Tom. There comes a point where we can’t always protect consumers from themselves and the PiW is that potential because it just sounds too good. But, what does it mean to waive an appraisal on a purchase? The ripple effects are profound and you tapped into how destructive one sale can be to a neighborhood economy.
My recommendation is that all MLS boards add the PiW to the finance category so the market place knows the sale was not properly vetted. To raise a red flag if you will to research and verify further.
If I were a home buyer exempt from an appraisal, I would want an appraisal to know my net worth without any conflicts of interest from banks. So, an independent analysis where the home buyer is the client is truly the best advice I can give in this new era of the #banappraisal concept.
Best to All!
Thanks for the insightful comments Lori, I agree 100%. Tagging these sales in order to track how they compare to other sales is a great idea. It will be interesting to see if there are any undue influences on other sales in the neighborhood as well.
Yes!
How about PIW being an acronym for “Put In Writing” all of the disclosures of the risks involved in the property inspection waiver program?
I think that would be an excellent suggestion, Steven.
I’m concerned about the dynamic of new “comps” that really didn’t go through the entire process (which includes an appraisal and more scrutiny from the underwriter). I get the waivers in some regards of course, but there is room for exploitation. It could end very badly if this becomes too liberal in its application. We certainly don’t need more “steroids” so to speak in the housing market.
I agree, Ryan. As Phil mentioned, this could lead to a runaway market if exploited, like you said. Someone even mentioned having these sales flagged so that they could be monitored to see if they are affecting the market. I think this would be a good idea.