Here Comes the Appraisal Waiver for Purchase Loans!
This will be an interesting process to see how it's implemented. I think it will save many buyers money but I remain skeptical about the way financial institutions implement such practices:
Here Comes the Appraisal Waiver for Purchase Loans
This past week, Fannie Mae announced they'd be joining Freddie Mac in allowing for appraisal waivers on purchase loans. For a while now, it has been possible to do refinance loans for people without an appraisal, and it's actually pretty typical for "clean" loans - those with low risk borrowers and plenty of equity. Now the news comes that this loan feature will be allowed on conventional purchase loans, too.
The Good
The good news about being able to perform a mortgage for a purchase money loan with no appraisal is that the loan process will be shortened significantly. With the documentation process getting easier for most borrowers in recent years, the appraisal process is still largely at the mercy of AMCs and individual appraisers. When they're busy, or in markets with limited appraisal licensees, the loan process can be stretched out by weeks, resulting in higher costs to consumers (longer rate locks, or rush fees to get an appraisal done quickly). Not needing an appraiser on a purchase transaction eliminates a large portion of the process that is out of a lender's control.
The good news for sellers and agents is that there won't be a worry that an appraiser thinks a home is worth $200K when your buyer and seller have agreed they want to exchange the property for $205K. This avoids the opinion of an appraiser completely overshadowing the opinion of the listing agent, buyer's agent, buyer, and seller, and therefore avoids annoying renegotiations that can cause hostility over a very slight difference of an opinion.
The Bad
The perhaps unintended consequence of allowing appraisal waivers on purchases will come at the expense of low and moderate income buyers. Fannie Mae's Desktop Underwriter (DU) is a system based 100% on data and algorithms when determining things like whether a buyer should be approved, and whether a property needs an appraisal. For loan files with huge down payments (or in the case of refinances, a great deal of equity), the likelihood of an appraisal waiver will probably be greater than a 5% or 10% down loan. These borrowers could have more difficulty in getting offers accepted in multiple offer scenarios if going up against buyers with more money in the bank for a down payment (typically, the benefit of accepting a buyers offer with 30% down VS a buyer with 5% down was truly just a misconception amongst sellers and their agents, but the possibility of an appraisal waiver brings in a very real perk to the buyer with a large down payment, aka the one that likely doesn't fall into the low-moderate income class).
As if FHA buyers already didn't have enough trouble in competitive markets, the fact that FHA loans don't have the possibility of an appraisal waiver will put another arrow in the quiver of buyers with a conventional loan preapproval. This again could harm the odds of home ownership for low-moderate income buyers, whom the FHA program is intended to help.
While there could be some unintended consequences for buyers, another concern is for appraisers themselves. In a rising rate environment with refinance applications down, appraisers are relying on non-mortgage related business and purchase transactions to make a living. The industry is already starved for new licensees, and taking away a source of their business isn't going to help in this area. Whereas it takes years to train and become a licensed appraiser, market shifts can happen very quickly - what happens when there's a huge demand for appraisal work, and no supply of those able to do it? The answer is always higher costs for buyers, and lower quality work.
The Takeaway
Overall, removing the appraisal from the purchase process should speed up the process, lighten the stress for buyers and sellers, and avoid rounds of unwarranted and unpleasant negotiations after a contract is in place. If Fannie Mae and their Collateral Underwriter system have their numbers right (I'd argue that in most cases, they do), this should be a low risk benefit to the marketplace, resulting in lower costs for buyersand a faster process.
To ignore the downsides, though, would be foolish. We haven't even talked about the rare case when a house has something materially wrong with it. If a naive buyer really wants a house, waives their right to an inspection, and doesn't have an appraisal done, what protection do they have when inevitably things go wrong? For those of us working on individual transactions, appraisal waivers on purchase business will be a nice perk, but whether the perks outweight the potential negatives is something we'll only see in time.
Questions about purchase mortgages with no appraisal, the appraisal process, or anything else mortgage related? Give us a call at 484.680.4852 or ask an expert here.
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