What is the Future of the Appraisal Industry

Monday, June 26, 2017

In June, Freddie Mac joined Fannie Mae (known as the GSEs) and began offering appraisal-free mortgages, initially for refinancing applications for those applicants with 20 percent or more equity in their homes. Freddie Mac is expected to expand this waiver to home purchase applicants over the coming months, something Fannie Mae has not indicated it would do. This new program will allow borrowers to save hundreds of dollars on a professional appraisal – a long-standing practice within the mortgage industry. 

For both financing giants, the waiver of an appraisal report is only granted when there is sufficient data on the specific property and the corresponding real estate market. How this is defined remains to be seen but one would expect that atypical properties would not be excused from traditional appraisals. Will these changes greatly impact the future of the appraisal industry? This also remains to be seen. Many in the appraisal industry feel there is no substitute for a current appraisal of a property. Relying on older property data which may not provide up-to-date information on a given property (including conditions of a home and current value of the surrounding neighborhood), may present a whirlwind of issues.

According to data from Fannie and Freddie some 93% of all appraisals come in at or above the purchase price on all mortgage applications and those appraisers who come in below contract prices find themselves not hired on the next mortgage application. So, there is an incentive to hit the mark on purchase contracts and even on refinancing.

 "The GSEs have been developing their own Automated Valuation Models (AVMs) for years and apparently have more faith in their own AVMs than in the appraisal industry to protect mortgage investors and buyers from over paying on a home or borrowing more than 80% of the true value," says Norm Miller, Hahn Chair of Real Estate Finance at the University of San Diego School of Business and the Burnham-Moores Center for Real Estate. "It seems that the appraisal industry should wake up to the need to modernize and streamline residential valuation by adopting interactive user driven AVMs along with property inspections, At the same time, lenders should not be allowed to select their own appraisers on the basis of hitting the mark. An appraisal management system where third party contractors select appraisers based on competency would be far superior to the current system."