Appraisal Waiver (Explosion)

[DWiley]

The collateral is what makes the attractive financing terms of the mortgage market possible - investors have collateral if a borrower defaults.

Well, the collateral is ONE of the things that makes the loan "attractive" (eligible). I assume you have heard of the three Cs

And, in the case of a waiver, there is still evaluation of the collateral, it just isn't done using a traditional appraisal.

I do find it interesting that there is all this focus on appraisal waivers right now, at a time when traditional appraisal volume is at record levels.

 

[alebrewer]

https://philadelphiafed.org/-/media/research-and-data/publications/working-papers/2018/wp18-28.pdf

[/QUOTE]
This is, by the way, a really great paper. Several takeaways, though, not the least of which is what I've already stated - that appraised values 'at the contract price' may not indicate bias, but rather just a random number within a range of value determined by the appraiser. Additional takeaways include: (a) maybe LTV should be a continuous scale instead of 'notched' (to use the paper's nomenclature); (b) if the system were geared toward one where loans were not automatically declined, but rather, terms re-negotiated, there might be less tendency for bias?; (c) if the lending community can still exert so much influence on appraisers - even though they (the appraisers) are bound to the Ethics Rule of USPAP, how best to eliminate that bias? Instead of decrying the bias of appraisals, what if the pressure to confirm the bias was eliminated at the lender level?; (d) instead of 'point estimates of value', if appraisers were allowed to reconcile to ranges of value (a more reasonable scope of work), would that reflect in more accurate appraisals? (e) how can an AVM be a good predictor of default? Default is related to the credit decision. The only correlation between default and value that I see is LTV which, if there is such bias in appraisals, is not even a good factor for determining creditworthiness, no? To use hyperbole, let's say a borrower is purchasing a home for $500,000, and is putting $100,000 down. That is an 80% LTV (CC's aside for now). Now, assume that the 'true' value of the home is only $400,000. Even though the borrower put $100k down, it's still a 100% LTV (i.e. the lender is still loaning $400k). Assuming a strong credit score, and adequate assets, what are the chances the borrower will default, and lose the $100k investment (not counting any monthly payments he/she may have made)? I'd guess - very low...

So, then, at the end of the day, what is the value of an appraisal? Or AVM for that matter (or any method for estimating the value of the collateral)? IOW - how important is the LTV component of the credit decision? At the transactional level, I'd say there are probably compelling arguments either way. One item not addressed in the paper, however, is the use of appraised values for estimating the overall value of the MBS, no? And are the purchasers of MBS willing to use AVM values in pricing those bonds? IOW, in reality, the appraisal has value well beyond the transaction - it goes to the perception of the market of purchasers of MBS - i.e. the agencies' clients. And my guess is that the 'good ole' appraisal' is still the gold standard...

 

[glenn walker]

The truth is F & F are sinking funds which are a depository for money center banks and lenders to off load their loans and A good Turf Accountant who has billions in lines of credit and the resources and much like a lay off waver for the lenders. The beauty is money is made by the amount of times you turn over your inventory and portfolio. The Appraisals in a 90% to 100% LTV environment and especially in High Cost Areas are upside down the day the loan is funded, so they are not necessary. The VA Loans can fund up to 102% LTV and only made because of the insurance or what I call the lenders Layoff Wager, much like a bookie in Las Vegas. The beauty is F & F have unlimited lines of credit and resources which have and are being used by both sides of the political isles to accomplish two goals. Provide cheap money and to keep loan portfolio velocity at maximum volume. As long as you keep the money moving there is always money to be made on the spreads and margins. If you lose a few billion, it's no big deal , because you are not designed to make profits your a sinking fund.

I don't know if it's true but one banker in Los Angeles who is in the department that sells the portfolios to F & F says and is involved in the banks diversity and ethnic loan policies says that proposals are being forwarded to and by politicians that since we are suffering from systemic racism one way to eliminate value disparity is to create Diversity "waivers" on all properties located in minority communities. This is also backed by a few of our current politicians running for office, and is a very saleable proposition, in today's environment The machine has and is already sending out dog whistles on how white appraisers are low balling values on homes owned by people of color, and its even been discussed on this forum. Personally in general I think it's non-sense but if I was on Capital Hill I could sell diversity appraisal waivers all day long.

The problem is Appraisers have always been focused on values and what effect an-inflated value would have on lenders risk ? None that ship sailed many years ago but about every 10 years we have A-Crisis of some kind, it was stated income, NINJA loans, and then back to so called conservative underwriting and now we are full circle to looser underwriting and revised appraisal guidelines. Also Covid-19 was a great time to go full steam ahead on transitioning the entire process to Waivers and Desktop type products, and to get appraisers used to it, in 5 years from now loan production appraisers will long be over trying to fight a losing battle. The reasons don't really matter because, appraisers have still not come to grips with the fact that-the "Turf-Accountants" have now collected enough data to be able to establish what and how to deal with what %-Percentage of defaults can they handle and how to adjust their portfolios by raising, and lowering the odds. I often don't agree with Bert but he is correct that these portfolios can be managed like any other and all done using computers and hedging themselves.

SO NOW if we can quit looking at real estate as the collateral for the loans F & F purchase and then use a baseline of 100% LTV- no matter what an-appraised value is. We can have the F & F "wonks" focus on the management of the Trillion Dollar Portfolios and not get brain fogged by defaults. As far as the MBS "mortgage backed security" crow over on Wall Street they will sell anything as long as Standard & Poor's and the other two agencies give it a A- which is no problem because we have seen them due this over and over during the years and hell as we speak our Federal Reserve and Treasury is buying Junk Rated Bonds paid for by the tax payer .

 

[Dublin ohio]

I do find it interesting that there is all this focus on appraisal waivers right now, at a time when traditional appraisal volume is at record levels.

 

[J Grant]

This is, by the way, a really great paper. Several takeaways, though, not the least of which is what I've already stated - that appraised values 'at the contract price' may not indicate bias, but rather just a random number within a range of value determined by the appraiser. A

My take away - the MVO within the range is not the problem in an inflated value appraisal. Number hitting aka inflating value does not describe meeting or exceeding a CS price, including a high SC price - fine as long as it is supported. Number hitting is used to describe those appraisals/appraisals which ignore the best market indicators of comps , or who massage adjustments, cherry pick superior sales etc. I've reviewed (field reviews ) hundreds of appraisals post crash and some now and the same number hitter tactics are used on refinance appraisals as on purchase appraisals

As far as " the number" falling within the range of value - the range of value is determined by comp selection, and if a number hitter ignores, or minimizes reliance on more similar sales and includes/weights more heavily superior sales as the "comps" then the number is within the range. So what - all those lousy, pushed appraisals their number wa within the range. A review or second appraisal or both can reveal if the range was developed credibly or not...

 

[J Grant]

And what does that (FHA ) track record look like?

Ha ha after the RR panel disbanded, FHA loans became the new flip and fix and sell for highest toy - to extent that to prohibit lender shopping for appraisal value, the first appraisal has to stay with the FHA loan for min of X # of days or months ( but they still can get around it ), and in a flip or resale within X days a second appraisal is required

When the FHA panel assigned, lenders /mtge brokers used to grumble that FHA appraisals were "Conservative", which is mortgage broker speak for will not hit the number we need.

 

[DWiley]

And my guess is that the 'good ole' appraisal' is still the gold standard...

Yes, that is generally true. Perhaps that is the reason that despite all the wailing an gnashing of teeth over waivers right now, the traditional appraisal is still the tool most widely used for collateral analysis by the GSEs. And, while generally true, it is not always true. There are certain segments of property types where "the machine" does a demonstrably better job. Optimizing risk management means optimizing the choice made for collateral analysis and using the tool most effective in each case. Despite the fears that some have, I see no move to eliminate appraisers. What i do see is a move to identify when appraisers are the most effective option. And, I see a move to upgrade appraisers' use of technology to make the analysis more transparent and better supported.

 

[DWiley]

For how many years were waivers used for origination mortgage/purchase loan purposes ?

That data goes back about 20 years

 

[alebrewer]

Ha ha after the RR panel disbanded, FHA loans became the new flip and fix and sell for highest toy - to extent that to prohibit lender shopping for appraisal value, the first appraisal has to stay with the FHA loan for min of X # of days or months ( but they still can get around it ), and in a flip or resale within X days a second appraisal is required

When the FHA panel assigned, lenders /mtge brokers used to grumble that FHA appraisals were "Conservative", which is mortgage broker speak for will not hit the number we need.

That is your opinion of what happened... you've offered absolutely no documentation to support your opinion.

 

[alebrewer]

Perhaps that is the reason that despite all the wailing an gnashing of teeth over waivers right now, the traditional appraisal is still the tool most widely used for collateral analysis by the GSEs.

It is, I'm sure, one of the reasons. Another reason is that the agencies' AI doesn't work if they don't have appraisals feeding the machine... once they figure that out, I'm sure there will be even more liberal use of PIW's...