By: E. Grant Murphy – SRA and VP of Training
In 2016, Fannie Mae introduced a new offering to its lenders called an Appraisal Waiver. The Appraisal Waiver was designed to reduce the time and expense involved in conducting an appraisal as a part of the loan process for certain qualifying properties/loans. The AW was originally designed for certain properties with prior appraisal data on file with Fannie Mae, properties located in condo buildings where all the units are the same/similar size and age, and tract-built communities with hundreds of similar homes with reliable data.
Most people do not realize that the primary goal for Fannie Mae when taking on a loan is to minimize risk. All decisions made regarding a loan are made with this at the core. For Fannie Mae to waive a formal appraisal, they need to be comfortable with the borrower and the collateral. Waivers are generally only given when Fannie Mae has a prior appraisal on the property, the loan to value ratio is low, and the borrower’s credit score is high.
The benefits of obtaining an appraisal waiver include a quicker underwriting process (since no appraisal needs to be scheduled), lower cost for the borrower (no appraisal fee), and a lower chance of appraisal-related issues such as a low value, required repairs, time delays, etc. All of these benefits are great for the lender and agent who may be depending on the closing of the deal to earn their paycheck. However, an AW does NOT protect the borrower.
Appraisal Waivers, by nature, waive the need for a lender to order an appraisal in order to underwrite the loan. This waiver does not mean that the value of the property is equal to or greater than the purchase price. However, having an appraisal performed serves the borrower and lender by protecting a borrower/lender from overpaying for a property and by identifying potential health and safety issues that may not be visible through online data sources. Foregoing this protection opens the borrower up to more risk down the road when they attempt to resell the house and find out they vastly overpaid and are now upside down on the mortgage or have required repairs necessary to sell the home for the next borrower’s appraisal. Remember: obtaining an Appraisal Waiver does not serve to protect the borrower – it just means the risk profile of the loan is low enough for Fannie Mae that a new appraisal is not necessary to meet their risk tolerance guidelines.
Eligible loan types to receive AW’s include single family residences, condominium units, some cash-out refinances, and purchase transactions of primary residences up to an 80% loan-to-value ratio. These guidelines are somewhat broad but are narrowed by the ineligible loan types. Some of these ineligible loan types include construction loans, 2-4 unit properties, manufactured homes, purchases over $1m, and loans that rely on rental income to qualify for the mortgage.
You might be asking yourself, “What about properties in areas that have very high property values where the average home could be $1m or more?” Fannie Mae almost always requires an appraisal on these types of homes due to the large amount of capital at play. In the case of an appraisal waiver, the lender is left to determine the market value of the home using their own in-house valuations team and software. As a result, there have been recent reports of loan officers at Wells Fargo artificially manipulating the value of a home reported to Fannie Mae to be below the threshold of $1m so an appraisal waiver could be obtained (Business Insider). In some loans, this meant a reduction in value of over $1m – a flagrant deception!
This begs the bigger question: How many loans in lower markets have also been manipulated to meet Fannie Mae’s risk profile to trigger an appraisal waiver? We may never know the answer and Fannie Mae appears to be somewhat unprotected in these cases. Per the Fannie Mae Selling Guide (FNMA), “The lender is required to represent and warrant that the data submitted (other than the value estimate) to DU is complete and accurate.” You have to wonder how/where the lender is obtaining the information about the size, views, condition, etc without an appraisal.
There may be another way Fannie Mae intends to protect itself: If Fannie Mae audits the data from a lender and finds the lender-submitted information incorrect, they may trigger a buy-back of the loan on the grounds that the lender submitted invalid information about the property. This is further reason for lenders to also get on board with hiring an appraisal professional instead of pushing for an appraisal waiver. Providing information from an appraisal report creates a much more sound backing for the underwriting of the loan based on information gathered first-hand from a professional in the field.
Fannie Mae intends to further grow the eligible property types for an Appraisal Waiver using its database of property information along with the guidance from their lender partners. But, this database may contain dated information about a property that is constantly changing such as condition or view/site elements. Also remember that the same lender submitting the information to Fannie Mae (in the case of a waiver) is the one relying on the loan to close to get paid. The door is wide open for potential cases of mortgage fraud and it’s paramount for everyone (lenders, borrowers, appraisers, Fannie Mae) to understand the risks involved in obtaining an appraisal waiver. At the end of the day, the lender and Fannie Mae are primarily in the risk business, not in the business of protecting a borrower’s best interests. While $500 for an appraisal may sound like a lot in the short term, hiring an appraisal professional to evaluate the purchase price paid when making the single biggest investment decision of most people’s lives is a no-brainer!