President’s message: Chapter educational offerings in 2016

John Mello, Appraisal Institute

Within the past two weeks Government Sponsored Enterprises (GSE) that are pivotal to residential real estate financing have announced changes in their regulations. The changes are likely to have significant and broad effects on certain aspects of residential real property appraisal practice. Among the GSE’s that are involved in residential real estate financing are the Federal Home Loan Mortgage Corp. (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Bank System (FHLBank System) which includes 12 Federal Home Loan Banks (FHLBanks).

On October 24, Freddie Mac announced that it will waive appraisals and accept the use of “appraisal alternatives” in a number of financing situations. Among the financing situations reportedly affected by Freddie Mac’s Loan Advisor Suite revisions is first-purchase, origination mortgage loans.

On November 1, the Appraisal Institute addressed a letter in response to Freddie Mac’s announced policy changes to Melvin Watt, director of the Federal Housing Finance Agency. The letter expresses the Appraisal Institute’s “serious concern” about the policy changes and requests the reconsideration of the GSE’s Loan Advisor Suite. The letter emphasized, “The policy change by Freddie Mac appears to be oriented to purchase-mortgage transactions or transactions with the highest risk to the agency.” The Appraisal Institute stated further, “It has become standard practice to obtain a complete interior inspection appraisal to understand things such as property condition.” In a November 1 Appraisal Institute News Release that announced the organization’s communique to Freddie Mac, the Institute noted that Freddie Mac’s policy changes “appear to harken back to the loan production-driven days in the years leading up to the 2007-2008 financial crisis.” The letter noted further, “… it has taken many years for the mortgage finance sector to recover, but that progress has been made partly because fundamental risk management activities like appraisal have been reinforced by mortgage lenders. Today, there is little doubt that markets are more secure because of most first-purchase mortgages utilizing real estate appraisals as a fundamental tenet of residential mortgage risk management. Reducing appraisal requirements sends the wrong signal to mortgage loan sellers about the importance of risk management practices.”

The Institute’s letter also states on behalf of the largest professional association of real estate appraisers in the world, “unlike a refinance transaction, where a previous appraisal is likely to be on file, loan purchases generally have less information available to the agency, which is where appraisal data provides added input to risk management. … Similar actions were taken by government-sponsored enterprises in the early to mid-2000’s and the resulting decline in risk management by mortgage lenders turned out to be disastrous for the entire economy. In fact, the Government Accountability Office confirmed that such appraisal waivers were in widespread use leading up to the point when the government-sponsored enterprises were taken into conservatorship, with as many as 30% of mortgage loans receiving such waivers. … Competition between Freddie Mac and Fannie Mae should not result in a race to the bottom from a risk management stand-point, especially while the agencies remain in conservatorship.”

Separately, Fannie Mae announced changes in appraisal options that may be utilized by lenders. But unlike the Freddie Mac’s Loan Advisor Suite policy changes, the Property Inspection Waiver (PIW) policy changes that have been announced by Fannie Mae appear to be targeted toward lower-risk refinance transactions. PIW policies nonetheless enable lenders to sell loans to Fannie Mae without having first obtained an appraisal of the collateral residential real property. Documentation made available by Fannie Mae communicates that PIW may include waivers of appraisals for specified categories of residential real property refinancing contracts. PIW operates through “Desktop Underwriter (DU)” which incorporates Fannie Mae’s existing and expanding database of appraisal reports. It also incorporates what are described as “proprietary analytics from Collateral Underwriter (CU™)” which measures a “minimum level of property valuation” that is required for a loan that is transacted with Fannie Mae. According to Fannie Mae information, PIW may be applied to the following transaction categories:

• “Principal residence, second home, and investment property transactions;

• One-unit properties, including condominiums

• Limited cash-out refinance transactions up to a 90% LTV/CLTV for principal residences and second homes; up to 75% LTV/CLTV for investment properties;

• Cash-out refinance transactions up to a 70% LTV/CLTV for principal residences; up to a 60% LTV/CLTV for second homes and investment properties; and

• Loan casefiles that receive an Approve/Eligible recommendation.”

PIW reportedly will not apply to purchase transactions and the majority of refinance transactions which will continue to require an appraisal to establish the market value. According to further Fannie Mae information, PIW will not apply to the following:

• “Properties located in a disaster-impacted area;

• Purchase, construction, and construction-to-permanent loans;

• Two- to four-unit properties;

• Loan casefiles where the value of the subject property provided to DU is $1,000,000 or greater;

• HomeStyle mortgage products (Renovation and Energy);

•DU Refi Plus™ loan casefiles;

• Leasehold properties;

• Community land trusts, or other properties with resale restrictions;

• Cooperative units and manufactured homes; and

• DU loan casefiles that receive an ineligible recommendation.”

The Appraisal Institute emphasizes that its Office of Government and External Relations is closely monitoring these GSE policy changes and proposes to meet with leading GSE officials to review in detail the policies and their effects.

The Massachusetts and Rhode Island Chapter of the Appraisal Institute expresses its continued appreciation for the support that has been made possible by the following sponsor organizations: Joseph J. Blake & Associates, Inc. and CB Richard Ellis/ New England (platinum sponsors) and Cushman & Wakefield and Vision Government Solutions (silver sponsors).

John Mello, SRA, is the 2016 president of the MA/RI chapter of the Appraisal Institute.