Appraisal Waiver (Explosion)

[DWiley]

here is no way to lend $ without some risk of repayment since humans take out loans ...whine whine whine...

Exactly. That is why there is evaluation to determine which risk management tools work best in which situation. No one is trying to obtain the impossible goal of zero risk - they are just trying to manage the risk in the best way possible.

 

[DWiley]

What is disturbing is blaming appraisals for a risk performance of a loan...

I have seen no one do that

 

[J Grant]

Yes, such an approach would be insanity. That is why when we compare, we compare things that are similar, controlling for all other variables and then examining the tool used to evaluate the collateral.

But, some have a preconceived notion that the appraisal will always be the best tool, and they cling to that (unsupported) view, no matter what the data shows.

Then show us the data ! ( show me the money lol )
What are the very similar loans - of loan types, loan amounts, value of properties, LTV% /type of properties that show different outcomes when an appraisal is used vs another form of valuation used ? You do usually credit appraisals as still the better choice for many situations so what are the situations when it is not?

While I can see a business argument for no appraisals needed in a low equity loan or refi existing mortgage situation, I still fail to see how the evaluation itself impacts outcome.

 

[J Grant]

Exactly. That is why there is evaluation to determine which risk management tools work best in which situation. No one is trying to obtain the impossible goal of zero risk - they are just trying to manage the risk in the best way possible.

They certainly are free to do that and it is their function to do that - but what I object to is blaming appraisals for risk management outcome when the appraisal itself is about the property-,

Below example : Appraisal is done on 32 State St, valued at 300k, a credible OMV -how would the loan more likely perform under these 3 scenarios:

Same 300k purchase price/OMV - A) borrower puts 3% down LTV 97%, B) Borrower puts 10% down LTV 90% C) Borrower puts 30% down LTV 70%

Most would predict the A) borrower loans has most risk, the B) second tier risk, the C) least risk. So why is the appraisal of 300k to blame if the A) loans perform more poorly ?

 

[J Grant]

I have seen no one do that

That is the implication when Fannie publishes articles ( which they have ) stating that loans with waivers perform better - without a headline or lead paragraph stating the reason (borrower strength ) - that truth is buried in a mouse statement lower down in the article. Many people skim articles and read mainly the headlines or first paragraph.

 

[DWiley]

That is the implication when Fannie publishes articles ( which they have ) stating that loans with waivers perform better -

Saying that a tool does a better/worse job of predicting/measuring something is in no way "blaming" the tool. If I say that an air pressure gauge does a good job of measuring air pressure, is that blaming the gauge for the low tire?

 

[J Grant]

Saying that a tool does a better/worse job of predicting/measuring something is in no way "blaming" the tool. If I say that an air pressure gauge does a good job of measuring air pressure, is that blaming the gauge for the low tire?

Your analogy above is good, however , (imo) fannie /agencies seem to be doing exactly that -"blaming" the tool. An air pressure gouge reading is for the tire pressure today (as eff date appraisal.) A tire pressure reading today can not predict if tomorrow the tire will blow out or hit a nail or leak air. And it certainly can not predict if the borrower stops paying if they put the tires on a credit card!

What if the tire store or manufacturer is responsible for a tire purchaser 's default on a credit card or in house financed purchase.? How is their decision to sell a tire at no $ down / to X credit borrower, tied in to the air pressure tire gauge reading ? Would it be crazy to make tire pressure readings a prediction of borrower performance on their payments?

Yet that kind of prediction /loan performance tie in is what the agencies are using appraisals for ....

 

[Mark K]

Saying that a tool does a better/worse job of predicting/measuring something is in no way "blaming" the tool. If I say that an air pressure gauge does a good job of measuring air pressure, is that blaming the gauge for the low tire?

And the air pressure gauge with an accuracy of+/- 1% has no inherent increased value over a gauge that has an accuracy of +/- 10% if the tire owner doesn't check the pressure.

My sense is that lenders have come to the realization that the best valuation tool available has little value if the borrower fails to make the payments. Conversely, the worst valuation tool doesn't cause any harm as long as the borrower makes the payments. The borrower is the common factor in either equation. Maybe they should vet them better or have lending standards that are higher than those currently used if they want an easy way to reduce risk.

 

[J Grant]

And the air pressure gauge with an accuracy of+/- 1% has no inherent increased value over a gauge that has an accuracy of +/- 10% if the tire owner doesn't check the pressure.

My sense is that lenders have come to the realization that the best valuation tool available has little value if the borrower fails to make the payments. Conversely, the worst valuation tool doesn't cause any harm as long as the borrower makes the payments. The borrower is the common factor in either equation. Maybe they should vet them better or have lending standards that are higher than those currently used if they want an easy way to reduce risk.

I agree. Would like to add that the collateral valuation has a key function aside from risk - the function at front end of providing information for a lending decision, ( including a decision not to lend ) Why is the front end critical function ignored- the collateral and its condition/value anchors a loan and investor confidence and is what allows mtge loan interest rates and terms to borrowers.

The collateral is the safe harbor for investor and tax payer backing. The agencies should shore up this aspect,- the risk of aging, neglected houses. Perhaps with mortgage payments, escrow payments into a repair fund /adhere to a schedule of maintenance /repair to keep the collateral in decent condition - a PMI fee which borrower in FHA can never get rid of, put that $ into a monthly repair escrow fund. Stop shoving loans off to PMI companies are they charging usury rates? Wrt to onus put on borrowers instead of the money going to savings or repair funds.

 

[DWiley]

And the air pressure gauge with an accuracy of+/- 1% has no inherent increased value over a gauge that has an accuracy of +/- 10% if the tire owner doesn't check the pressure.

100% true. But in the case of an appraisal waiver "the pressure is still checked," it is just checked using a different tool (something other than an appraisal report). And, in all cases, the goal is to use the tool that works best under the circumstances.