13 Years Later, They Do the Thing They Said They Wouldn't

Last week when I wrote about the period from 1989 to 1994 and how the impact of the 1994 interagency appraisal regulations took decades to fully understand, I did not expect FHFA and the GSEs to underscore that point so quickly. Yet here we are, digesting the expansion of appraisal waivers, both outright and supported by property data collections.

You can read the FHFA press release here, but the gist is simple: Loans up to 90 percent LTV will be eligible for outright waivers, and up to 97 percent LTV when accompanied by a property data collection. Given the policy change covers most lending activity connected with the GSEs, it’s not hard to read between the lines and see this for what it is: The logical terminus of Fannie Mae and Freddie Mac’s long-term effort to move away from appraisals.

I know the GSEs have said, publicly and repeatedly, that they still need appraisals and their underlying data. But actions speak louder than words, and this latest action is really a culmination of efforts that started with the original Uniform Appraisal Dataset back in 2011.

I remember attending a meeting at the old Fannie Mae campus in Washington, DC, around the launch of the UAD, and at the time thinking how odd it was that appraisers weren’t being compensated for the secondary uses of their reports in the construction of the GSEs own in-house QC tools. (As an aside, the genius of UAD is not its ability to support Collateral Underwriter and Automated Collateral Evaluation – it was controlling the expression of the appraisal report, removing any claim the appraiser could make regarding intellectual property and the GSEs secondary use. Hard to seek damages when someone else provides the means of expression!) But even then, those in charge were adamant that appraisals would always be necessary to keep the QC models working properly, so appraisers had nothing to fear.

Appraisers, and those who support them, were read as either too naïve or too fractured to push back against this change and its longer-term potential to erode reliance on appraisals, and unfortunately the GSEs read right. Not only on the introduction and expansion of appraisal waivers and property data collection, but on related issues like the federal de minimus threshold. Even where the appraisal profession had sound arguments about why moves to alternative valuation methods or outright waivers was bad policy, the might of the GSEs was too much to overcome.

Another memory I have is of a pre-pandemic joint session of the Appraisal Foundation Advisory Council and the Industry Advisory Council where representatives from Fannie and Freddie shared some insights regarding appraisal waivers. (I’d proffer a year, but it would be wrong.) Even then, some years beyond the original assertions around UAD’s introduction, appraisers were told how waivers would be limited in scope and scale, and appraisals would continue to be the preeminent valuation method for the GSEs.

At an even more recent joint meeting, an FHFA representative was discussing the GSEs Duty to Serve plans, both of which conveniently left until the final bullet point their desire to expand the use of alternative valuations methods. I guess we can’t get upset if they told us it would happen, right? Even then, at a moment where diversification of the appraisal profession was a priority, there were assurances that the use of appraisals wouldn’t be seriously eroded, and that anyone new coming into the field could look forward to a long and successful career.

Guess that last bullet point was the one that really mattered.

Maybe it’s because I lived this evolution since 2011, but each time the GSEs expanded the use of waivers and alternative valuation products such as bifurcated appraisals, it always came with language about how appraisals would still be important going forward. As I said at the outset, judge them by their actions – on actions, the GSEs are more than ready to abandon appraisals, and this latest policy shift is as close as they’ve gotten to that reality.

So, what now? For appraisers, it’s not complicated – Fannie and Freddie are signaling it’s time to pivot from mortgage lending related appraisal work, because it simply won’t have the volume or demand it once possessed. I’d love to sell you on some deep-seated hope that an 11th hour reversal is coming but given the 13-year runway that preceded this latest step, the GSEs are wagering no one will stop them now since they haven’t before.

(Selfishly, I should be thanking Fannie and Freddie. As someone just launching a business tailored to helping appraisers of all kinds find their “next,” this is almost too timely to be true. But as someone who’s given my professional career to advancing the profession and the value of appraisals, I’m just sad.)

For borrowers, this is a new and dangerous world when buying or refinancing a home. Everyone around the process has an interest in seeing the loan close, and the only safety valve to date keeping borrowers from harm was an independent, impartial, and disinterested opinion of value from an appraiser. Unless borrowers are savvy enough to obtain their own appraisal, it’s more likely than ever that they’ll be walked into transactions where more collateral risk exists than they’ll ever know – until it’s too late.

Sure, you can hedge on the idea that CU and ACE still provide a sort of “V” in the LTV equation, but as I recall these tools don’t assign a specific point-in-time value to a property. If anything, models will center on probabilistic consensus, so if the loan amount aligns with reasonable expectations everything will move ahead. But what about those situations where a loan amount is just too far beyond what’s expected?

I anticipate a wave of lenders, especially nonbank, seeing the opportunity to buy down the loan amount so that more mortgages will fall into the appraisal waiver/waiver and inspection eligibility bucket. They won’t be the ones retaining the risk on the loan, will have no warrant and representation issues hanging over them, and can still pencil out the loan to make enough money. Essentially, they’ll loan the full requested amount but provide their own form of concessions to get the loan to proceed without the perceived friction of an appraisal. In a business built on volume and velocity, it makes too much sense not to happen.

What about agents and appraisal contingencies, then? Surely a prudent agent would make sure if they wrote an appraisal contingency into the contract, they’d exercise that right for the protection of their client. If it doesn’t already happen, what makes you think this will suddenly change? At the end of the day, agents want to see deals close and waivers with or without inspections get to the finish line faster. This is especially the case in dual agency arrangements, whose specter feels larger since the NAR/buyer broker agreement changes went into effect.

Sure, there’s a risk down the road that a borrower who loses a home to foreclosure and had an appraisal contingency that was not executed comes after their agent, but they would have to connect the absence of that appraisal to the harm incurred from losing their home – not the easiest fact pattern. Plus, most people going through foreclosure have bigger things to address than whether their agent fully protected them in the transaction.

Ultimately, the risk coming from an exponential expansion of appraisals waivers falls on precisely two parties: The borrower, who could wind up severely underwater without having a clue where they started from in terms of value, and the taxpayer who – when we go through a true downturn in the housing market – will once again be asked to bail out the GSEs who remain in conservatorship.

A few final points to make, starting with the GSEs regulator – the Federal Housing Finance Agency. It’s fair to level the critique that FHFA has fallen victim to regulatory capture by the GSEs, much in the same way the GSEs have captured the mortgage lending appraisal process. That the GSEs are allowed to continue unabated towards an appraisal-free future without some pushback feels like an abdication of FHFAs mission, block quoted here for your reference:

“Ensure the regulated entities fulfill their mission by operating in a safe and sound manner to serve as a

reliable source of liquidity and funding for the housing finance market throughout the economic cycle.”

Those last words, “throughout the economic cycle,” are critically important when you parse through the FHFA’s release. They specifically call out the “long-running success of appraisal waivers” but fail to recognize that waivers have not weathered a true downturn in housing finance. Sure, the pandemic was a bolt of uncertainty, but it was relatively short-lived and resulted in the housing market having a boom period. The idea that waivers have been tested through all points in a cycle doesn’t align with reality, at least not yet.

Another aspect of this policy change I find troubling is how it ignored Congress’s clear intent that borrowers benefit from appraisals as a consumer protection tool. The Dodd-Frank Act accelerated delivery of the appraisal report to the borrower to no less than three days prior to closing, out of a recognition that the report contains vital information that borrowers would benefit from knowing prior to consummating a homebuying transaction.

There is no such consumer protection in the outright waiver of appraisals, and property data collections can give the wrong impression to borrowers that an appraisal was in fact completed. Unless this is accompanied by clear and adequate notice, there will be little opportunity for borrowers to seek their own appraisal and receive the clear consumer protection Congress envisioned when it authored Dodd-Frank.

The last issue is with how this affects the diverse populations that, since the beginning of the conversation around appraisal bias, have been recruited to join the appraisal profession’s ranks. All throughout the bias and discrimination conversation, one key concept has been the need for more appraisers from diverse backgrounds – something the appraisal profession embraced and fully supported through various initiatives.

To now act in a way that will, likely, result in a substantial reduction in demand for appraisal services yet again takes advantage of individuals and communities who have been failed by the housing finance system for decades. This was a foreseeable outcome of expanding appraisal waiver usage, and one the FHFA and the GSES have not yet accounted for.

As I was talking with a friend the other day, they pointed out you just have to laugh through it all because, for as long as I can remember, we’ve been asking the right questions and getting the same canned answers about whether and how Fannie and Freddie will do away with appraisals once and for good. Not because it’s funny, of course – it’s deeply troubling and on some level an abdication of the responsibility we should all feel to ensuring that homeownership does not become an albatross – but because, for 13 years, we’ve seen it coming all along. Only this time, the words and the actions finally aligned.