Desktop appraisal solutions have also played a key role in shaping the current homebuying process
Those who bought, sold or refinanced a house in 2022 are likely familiar with the term appraisal waiver. Those who did not likely haven’t thought much about the appraisal process, let alone how the elimination of an appraisal can change the entire homebuying experience. But those who have received an appraisal waiver from a lender or who have waived the appraisal contingency in a purchase know the pros — and the cons — that can result from this choice.
In red-hot markets, electing to accept a lender’s offer for an appraisal waiver may make the difference between closing on a loan and getting stuck in a repeat bidding cycle while prices slowly inch upward.
In 2022, the U.S. housing market began to regain balance, and as higher mortgage rates reduced affordability, that meant sellers no longer necessarily held the upper hand. Prior to this market adjustment, it was common for buyers to resort to all manner of negotiation tactics for sellers to accept their offer in a tight market, where for decades, construction hasn’t kept up with demand. One maneuver that became popular during this cycle was waiving the appraisal contingency requirement in a purchase agreement, which is normally considered a prudent buyer condition.
Another change in the status quo was seen in the increased prevalence of lenders waiving the requirement for an appraisal — a standard requirement in a mortgage. Waiving this requirement changes the game. Lenders that eliminate appraisals for mortgage underwriting provide an opportunity to significantly reduce the time required to close a loan — an appealing prospect for sellers who want to wrap up transactions in a timely manner.
A History of the Appraisal Waiver: Are Automated Digital Models More Accurate than Analogue Solutions?
Appraisals are and have been a cornerstone of the mortgage underwriting and closing process for generations. Closing costs for loans include fees that buyers must pay, including appraisal fees, which are required by lenders to be secure in the knowledge that their loans were indeed underwritten with a credible valuation.
“A mortgage loan is secured by real estate — the home, which allows lenders to offer low interest rates and long repayment terms. Appraisals are a confirmation to a lender that the loan is properly secured, so that’s how important an appraisal is in the process,” explained CoreLogic Chief Appraiser Shawn Telford. “The lender cannot make a loan unless they know what the home is worth. A key ratio lenders review is the ‘LTV’ (loan-to-value), and the appraisal is the ‘V’ for the ‘value’ part of that equation, which is at the core of how lenders make risk-based lending decisions.”
To be sure, appraisal waivers existed before the most recent housing boom, but when interest rates hit rock bottom in 2021, the floodgates opened to homeowners clamoring to refinance their homes or take out home equity lines of credit. As refinances have more eligibility for a waiver, this practice gained more traction.
Refinancing demand came in addition to buyers and sellers who sought to purchase mortgages. This resulted in an increased amount of requests on the desks of appraisers, an industry where the number of active residential appraisers has remained relatively flat for the last decade, according to Freddie Mac data.
The mortgage industry was already experiencing increased demand and a limited number of licensed appraisers before the pandemic, but social distancing caused traditional processes to further shift. Since the majority of appraisals are not eligible for waivers, according to documentation from Fannie Mae, desktop and other automated appraising solutions also ventured into the mainstream as alternative ways to expedite the process.
Are Appraisal Waivers and Desktop Appraising Solutions Here to Stay?
On paper, desktop appraising solutions look like a magic bullet. However, while evaluating properties from behind a desk increases speed, many experts have feared that making this practice commonplace would result in appraisers losing touch with the on-the-ground market conditions that they would typically encounter when visiting a property in person, or worse, they would miss important factors about the home that would have a negative impact on a home’s value.
But much of this fear has been quelled, especially for lenders who carefully select desktop solutions using their own credit policies or utilize the options offered by Fannie or Freddie, which rely on hybrid appraisal data to estimate current property values and collate the results with Automated Valuation Models (AVMs).
“Ultimately, what we saw over the past couple of years was that appraising can continue when based on data and information that’s in the public record, as well as data that was collected from homeowners through various sources,” Telford explained. “And because of that, the Federal Housing Finance Agency directed Fannie and Freddie to make desktop appraisals a permanent part of how they evaluate collateral risk.”
It didn’t take long for property valuation companies and appraisers to adapt, as many industry participants had already spent years developing streamlined valuation solutions and proposing policy changes to allow these solutions. Although this shift to touchless solutions was already in motion, it was the pandemic-related restrictions and increasing demand for appraisals seen during this period that accelerated the transition. As a result, desktop and exterior appraisals quickly became a handy tool for lenders and their contracted appraisers working to obtain credible home valuations and comply with GSE guidelines.
Despite the pandemic-driven pivot to more streamlined valuation solutions, meeting demand for appraisals remained an uphill battle the industry was fighting on multiple fronts. The tremendous demand for home refinancing that lower interest rates ignited left appraisers struggling to keep up with volumes that continued to climb, compounding lender demands for quicker turn times and expedited valuation options. These circumstances, in part, resulted in GSEs re-examining the already existing but not yet mainstream solution to accelerate turn times and lower the cost of originating mortgage appraisal waivers.
Are GSEs Courting Disaster With These Waivers?
Waiving an appraisal can speed up a transaction, but at what cost to both buyers and sellers?
Some lenders and other market participants are wary of appraisal waivers since they don’t want to lend a buyer money for a mortgage that is larger than a home’s value — a real risk in a volatile market where home prices have been declining month over month since the last quarter of 2022. Real estate agents can also be wary of waivers and desktop appraisals in purchase transactions, fearing that not all of the features of a home will be considered, resulting in increased friction if things don’t work out. From a buyer’s perspective, waiving an appraisal might mean an increased risk of paying too much for a property and potentially moving underwater on a mortgage.
To avoid these uncertainties, lenders can rely on reputable AVMs to power desktop appraisals rather than waiving an appraisal altogether.
However, not all AVMs are created equal, and it is important that the models lenders use draw from reliable data — such as comparable sales, property characteristics and price trends — to provide a current market value estimate on specific properties. Tapping into the convenience of these models, though, means that lenders have a duty to understand how AVMs work and to validate them regularly.
Beyond clean data, an AVM needs to provide that data in real time to keep up with the cyclical nature of the property market. Since price fluctuations regularly influence market values, it pays to keep pace with industry trends and harness all the available data on the property in question. Doing so is imperative to understanding the market and making it work for everyone.