Freddie Mac Oks Appraisal Alternative For Some Mortgages

[timd354]

(my bold)

This is the real danger and, IMO, where appraisers should make their stand.

Correct. Appraisers are not going to make any progress trying to trash the entire programs of both Fannie and Freddie appraisal waivers...as these programs have already been approved by their regulator and are a done deal. Plus, let's face it, an appraisal waiver does not subject the GSE's to much additional risk for transactions like an arm's length purchase transaction with 20+% down from the borrower's own funds with 720+ credit score and a DTI <35%, especially given that 90% of appraisals hit the contract price or higher anyhow.

Where appraisers could possibly make a winning argument is by arguing with higher LTV's (BTW Fannie will do appraisal waivers up to 90% LTV on, but Freddie will not go over an 80% LTV), and/or loans that do not have a very strong credit profile should always require an appraisal.

 

[J Grant]

What are appraisal management companies going to do with their business if waivers expand and appraisal volume decreases?

It would be ironic, if the AMC's turn out to be the ones who take a stand for appraisals -for their own self interest no doubt but still, they have a greater access to and influence regarding decision makers greater than appraisers do.

 

[nicholz12]

What are appraisal management companies going to do with their business if waivers expand and appraisal volume decreases?

It would be ironic, if the AMC's turn out to be the ones who take a stand for appraisals -for their own self interest no doubt but still, they have a greater access to and influence regarding decision makers greater than appraisers do.

Doubtful AMC's will take a stand, I would be surprised. But I agree with you on that they will lose business for sure.

 

[J Grant]

Isn't the purpose of an appraisal more about the point of loan origination decision, then long term risk?

Neither a proprietary estimate from Fannie or Freddie, or an appraisal can prevent a future default . The benefit of an appraisal, and risk decision about loaning on a property comes at the front end, hen the loan is originated , purchase or refinance- should this property be loaned on ? And if yes, t what LTV% of value.

I presume with a 20% or greater down payment, there is enough equity in the property that even if buyer over paid or over borrowed for a refinance, or the Fannie/freddie value estimate was "off", in a default the loan wont' be underwater unless market dives sharply declines. And of course borrowers with more $ down/high income credit scores are less likely to default as well.

I suppose some of the measure of success of trial run of this program might come if Fannie or Freddie estimates start "killing deals", ( if they use estimates,), and or appraisal contingencies written into contracts, .

 

[J Grant]

Doubtful AMC's will take a stand, I would be surprised. But I agree with you on that they will lose business for sure.

Wouldn't they take a stand for that very reason ( losing business)?. IF their primary business is managing appraisals, if appraisals are waived, what do they have to sell ?

 

[timd354]

Isn't the purpose of an appraisal more about the point of loan origination decision, then long term risk?

What exactly do you think the point of origination decision is about?

Very, very, very few loans default before the first payment (FYI, loan defaults peak in years 3-6 after origination for 30 year loans), so the underwriting decision is all about trying to assess the long term risk of future default and the potential severity of a possible future default.

 

[nicholz12]

Wouldn't they take a stand for that very reason ( losing business)?. IF their primary business is managing appraisals, if appraisals are waived, what do they have to sell ?

I view AMC's as a fly by night type of business, here one day gone the next. They'll find something else. You might be right - they might fight it, but I don't think so, just my opinion. We'll see.

 

[J Grant]

What exactly do you think the point of origination decision is about?
Very, very, very few loans default before the first payment (FYI, loan defaults peak in years 3-6 after origination for 30 year loans), so the underwriting decision is all about trying to assess the risk of future default and the potential severity of a possible future default.

Obviously it is rare for a loan to default immediately! That was not what I meant (we seem to communicate poorly, at least on this board )

I agree that yes the UW would consider long term risk, however a default is about a borrower - but the collateral to cushion against a default is the info in the appraisal. Some loans perhaps should not be made, or not made be at such a high LTV % of a certain price...a poor decision at time of loan origin has repercussions later, not immediately.

Should the bank approve the property is first question answered in appraisal (such as a defect or adverse or site or condo financials, # of rentals etc- ) and if yes, then how much should the LTV be based on the value opinion. If a property is over valued aka inflated value, it puts the bank in a vulnerable position on the loan,

With 20% or more down from borrower, the questions about issues concerning the property are less critical, but still present. Defaults or underwater loans leading to short sales/property issues typically will not show up for years, making a short term trial run of mere months to see if the waiver system works seems reckless (imo)

 

[DWiley]

Correct. Appraisers are not going to make any progress trying to trash the entire programs of both Fannie and Freddie appraisal waivers...as these programs have already been approved by their regulator and are a done deal. Plus, let's face it, an appraisal waiver does not subject the GSE's to much additional risk for transactions like an arm's length purchase transaction with 20+% down from the borrower's own funds with 720+ credit score and a DTI <35%, especially given that 90% of appraisals hit the contract price or higher anyhow.

Where appraisers could possibly make a winning argument is by arguing with higher LTV's (BTW Fannie will do appraisal waivers up to 90% LTV on, but Freddie will not go over an 80% LTV), and/or loans that do not have a very strong credit profile should always require an appraisal.

From any objective analysis, the waiver of appraisals in certain circumstances does make sense. However, it is important for the GSE to keep this in mind - all of the historic data related to risk is based on an environment where appraisals are required in most cases. The PIW program changes that basic environmental variable, and that change is significant enough to affect the analysis. It seems to me that having market participants aware of the PIW increases the fraud risk. To what degree, I do not know.

 

[J Grant]

Today's strong credit buyer is tomorrow's deadbeat. Though history of credit and income is often a good predictor of continuing, job disruptions and other factors can change that. Whatever happens with the borrower, the collateral remains.