By Hudson Holder – SRA AI-RR
Soon Fannie Mae will roll out its latest appraisal experiment. Effective March 2022, eligible mortgage transactions can utilize the new 1004 Desktop Appraisal product. Over the past several years, the lending industry has been calling for a faster and cheaper method to evaluate collateral value. This demand is related to advances in valuation technology, advances in data collection, decline in number of licensed appraisal professionals, and general expectations in our modern society – quicker, faster, and instant gratification. It is no coincidence that Fannie Mae is rolling out the Desktop Appraisal option at the same time real estate prices are appreciating at a historical pace. It should also be mentioned that this is after 10 years of steady upward momentum since the market bottom of 2012. This is reminiscent 2005 drive-by appraisals – used heavily during the No-Doc/Low-Doc mortgage days of 2005-2008, when rapidly accelerating real estate prices relaxed underwriting standards.
Fannie Mae and Freddie Mac experimented with the Desktop product during the COVID-19 pandemic, allowing desktop and exterior appraisal products to keep the secondary mortgage market liquid and functional during the health crisis, while keeping borrowers and appraisers safe. The agencies reported no adverse impact in quality or reliability of these alternative COVID appraisals versus the standard interior appraisal product, a conclusion based heavily on rates of mortgage default. This assessment of appraisal reliability and default rates comes during the highest rates of value appreciation and fiscal inflation in recent history. Desktop appraisals will initially focus on lower LTV deals backed by primary residences – transactions with the lowest potential for default.
According to the Fannie Mae seller guide, regarding the Desktop Appraisal:
“Subject property information may be obtained from one or more data sources. The appraiser can accept data, photos, floor plans, and other information from a party who has a financial interest in the sale or financing of the property if the appraiser verifies such data is from a disinterested source. The appraiser must determine if the information is accurate and reliable to produce a credible report, which includes the features, quality, and condition of the subject property.
Virtual inspection methods (including digital photos or videos) or other technological solutions (such as a machine-generated floor plan) can augment the data and imagery used for a desktop appraisal. Information provided by the homeowner, potential borrower, or a third party can be used to develop the description of the interior and exterior of the improvements. Extraordinary assumption(s) or appraisals made “subject to” verification of the subject property’s condition, quality, or physical characteristics are not permitted.
The lender remains responsible for the description of the property, and the accuracy and completeness of all data on the appraisal that pertains to the property. This includes the property’s condition and quality ratings. The lender is also responsible for ensuring the property meets the property eligibility requirements in this Selling Guide. Lastly, the lender remains responsible for any life-of-loan representations and warranties that may apply to the property or the appraisal.
A footprint sketch or floor plan must be software-generated (not hand drawn) and indicate dimensions and calculations that demonstrate how the estimate for gross living area was derived. The sketch must include the subject’s exterior footprint with dimensions. All levels of the dwelling unit(s) must be part of the exhibit. In addition, a separate footprint sketch including dimensions must be provided for each additional structure with room labels, when applicable.
If the interior layout of the dwelling unit(s) is atypical or functionally obsolete, thus limiting the market appeal for the property in comparison to competitive properties in the neighborhood, Fannie Mae also requires a floor plan. The floor plan must include the following:
- interior walls,
- doorways,
- staircases,
- exterior ingress/egress,
- labels for each room, and
- provide the dimensions of all exterior walls.”
As outlined, desktop appraisal products will require the same disclosures and information as a standard interior appraisal with no additional Extraordinary Assumptions. Data must be verified by a disinterested source. The burden is placed on the appraiser and lender to obtain measurements, square footage, condition, facts about functional obsolescence, and adverse external factors that is reliable and to include photo evidence of such from a disinterested third party. Historically, the appraiser has been the only party in a typical real estate transaction to be a disinterested party. Every other party – buyer, seller, buyer agent, seller agent, and loan officer are compensated directly based on the closure of a sale and compensation is based on the amount of the sale/loan amount.
Are these viable sources an appraiser can trust? Would a borrower or agent take photographs of deferred maintenance? Has a borrower been trained to measure houses?
Another option for an appraiser or lender is to hire another party to produce floor plans and photos that can be used to conduct a desktop appraisal. That is, to bring another party to the appraisal transaction – with fees, overhead, and turn time – into the transaction. Some transactions would have three parties – licensed appraiser, third party company to verify physical information, and appraisal management company. Logically, this scenario means the cost of an appraisal increases and likely the time to conduct an appraisal increases because there are more parties involved and more parties to be paid.
The second issue regarding data reliability remains – who is the third-party conducting site inspections, do they have experience/training or a license at risk that encourages some level of accuracy and professionalism? Can the appraiser trust the third party? The appraiser cannot make assumptions regarding accuracy of data provided. At the inception of Dodd-Frank, appraisal turn times increased significantly with the inclusion of AMC’s in the appraisal equation. Logically the inclusion of another third party would impact turnaround again.
Ultimately, the risk for the appraiser and the lender are increased through the desktop appraisal scenario. Some appraisers do not yet understand that the new desktop appraisal does not allow any additional assumptions that were ordinary in a desktop or drive-by scenario in the past. The new Desktop Appraisal requires the same certainty in data collection obtained through a personal inspection of a property – only without the trust in one’s experience and process. The desktop also requires the appraiser to evaluate reliability of sources conveying data – is the data from a reliable source that is disinterested, trained to produce reliable data, etc.? Lenders must offer the same warrantees on every loan with risk of buyback. Appraiser E&O companies have taken note of the changes in desktop appraisal agency policies – some not insuring these types of appraisals. It will undoubtedly be more difficult for an appraiser to obtain good, reliable data on a subject property in a desktop scenario than through a personal inspection of the property. Reliance on a third party for such information adds another layer to questions about data reliability – and will certainly impact cost and time for an appraisal. Questions regarding data reliability ultimately add risk to the collateral profile, an increased risk to the direct lender.
For the borrower perspective, desktop appraisals will be portrayed as a benefit – a quicker, cheaper way for mortgage loan approval. Is it to the borrower benefit to NOT have a licensed professional inspect the property to understand condition, functionality, true square footage? Does a borrower care if the house is worth $300,000 or $350,000? Fannie Mae is in the risk assessment business. If the borrower takes a loan for $75,000 on a $350,000 purchase deal, a valuation of $300k or $350k means little in the eyes of Fannie Mae. Does the borrower care if they pay $300k or $350k? On the flip side, it may benefit the borrower that is refinancing to not have a physical inspection, especially if they have been living in the property for the past 25 years with 12 kids, 8 dogs, and 21 cats.
We are in a constantly and rapidly changing world. As an agent, appraiser, or borrower, it is important to understand what an appraisal waiver or desktop appraisal means and how that impacts your situation, your duty to your client, your disclosures, your transactions. Appraisers should educate themselves on the requirements of the new Desktop alternatives to make a business decision that reflects the scope of work requirements and its risks. Lenders should understand different appraisal products to make a business decision that adequately impacts their buyback risk tolerance. Agents should educate their borrowers on the differences in appraisal alternatives and benefits/detriments of each as it relates to their fiduciary duties. This industry has a responsibility to make educated, sound and trustworthy decisions, rooted in good business practices. It is yet to be seen how this experiment will play out.