When real estate broker Hank Miller explains the mortgage process to buyers, he gives it to them straight.
“It’s going to be the biggest pain in the ass that you’ve been through,” he says.
Freddie Mac and Fannie Mae, government-owned entities that buy a large share of U.S. mortgages from lenders, are taking a big step toward alleviating this pain by eliminating the need for lenders to use a traditional appraisal when underwriting certain purchase mortgages.
This could slash closing timelines, but not without potentially putting many appraisers out of work and midwifing some ill-advised loans, some observers say,
“If you remove this big hurdle, you’re going to streamline everything, and it probably would make it less cumbersome and sales less intimidating for a buyer,” said Miller, who is a broker at Atlanta, Georgia-based Harry Norman Realtors, as well as a licensed appraiser.
But, he adds, “we’ve eliminated another hurdle for people who probably shouldn’t be buying homes.”
Starting September 1, Freddie Mac’s automated collateral evaluation (ACE) will determine whether an estimated value provided by a lender can substitute for a traditional appraisal.
If ACE gives the green light, the lender can sell the appraisal-free mortgage to Freddie Mac without promising to buy the loan back due to a flawed home valuation if the mortgage later defaults.
The initiative could save eligible borrowers around $500 and reduce closing times by as many as seven to 10 days, according to Freddie Mac.
Fannie Mae also recently announced that it would allow lenders to forego an appraisal on some purchase mortgages with lower loan-to-value ratios, though it will continue to require traditional appraisals on the “vast majority of purchase money mortgages.”
Freddie Mac’s ACE assesses the need for a traditional appraisal by leveraging proprietary automated home valuation models (AVMs) that use multiple listing service (MLS) data, public records and historical home value data.
To find out if a property is eligible for ACE, lenders must submit loan data though software provided by Freddie Mac that helps lenders validate loan quality. The software assesses “credit, capacity and collateral” and provides “real-time risk assessment feedback and information about the loans.”
“[W]e’re cutting costs and speeding up the closing process for borrowers,” said David Lowman, executive vice president of Freddie Mac’s single-family business, in a statement. “This is just one example of how we are reimagining the mortgage process to create a better experience for consumers and lenders.”
The National Association of Realtors (NAR) is working with industry leaders and the government agency that oversees Freddie Mac and Fannie Mae “to assess the effect” of their move towards automation, and will keep Realtors “well-informed of the issue,” said NAR President Bill Brown.
“Appraisals are an important part of the homebuying and selling process,” Brown added. “They give consumers an expert opinion on the value of what they’re purchasing and a level of certainty that they’re making a sound financial decision.”
A growing number of lenders and mortgage startups claim to provide lightning-fast approvals, but closing on their mortgages often still takes weeks.
One big reason is that the appraisal process is out of their hands. Obtaining an appraisal often takes at least 10 days and can drag on for 25 in some cases, according to Miller.
This is why Freddie Mac’s use of AVMs is so significant. It marks a “natural step in the evolution to moving toward a near-fully digital solution,” said Andy Taylor, the founder of mortgage software startup Approved.
“It is a big deal, since appraisals are the single longest pole in the chain at the moment,” he said. “It could literally take a week and a half off the time to fund.”
The technology is especially welcome in today’s red-hot housing market, where many buyers often must waive appraisal contingencies to compete with all-cash buyers, said Nela Richardson, chief economist of high-tech brokerage Redfin, which recently debuted a lending arm.
“It’s especially important that Freddie Mac, a steward of the mortgage industry, is making this move and setting a new standard for the rest of the industry,” Richardson said.
But not everyone comes out on top.
“I’d be looking over my shoulder if I were an appraiser now,” Taylor said.
While it’s futile to resist technological change, Miller agrees the Freddie Mac initiative could have a devastating impact on appraisers.
Because Freddie Mac is a government-controlled entity, it’s also a case of the government picking winners and losers.
“Freddie doing this — that’s a bit of a head scratcher because if they do push it, it will eliminate a certain number of appraisers absolutely,” he said.
Miller also worries that ACE raises the odds that lenders will originate some shaky mortgages.
That’s because AVMs don’t take into account whether a home sits under a power line or on a steep hill, has a creek or river in the back, or is located near a busy street, among other many variables, Miller said. (Some real estate technologists might disagree.)
And the data that AVMs do rely on can be faulty. Public records and real estate agents frequently misstate property characteristics, including square footage, according to Miller.
“The nuances that are involved when you look at a property simply can’t be caught by an AVM,” he said.