On March 1, 2023, Fannie Mae issued Announcement SEL-2023-02, which addressed several different lending-related topics. Most important and relevant to appraisers was the first topic, titled “Valuation modernization,” which is an update to the Selling Guide that allows more options for valuation, including alternatives to traditional appraisals.
Predictably, the appraisal online community reacted to this announcement in much the same way that a vampire in a low-budget horror movie reacts when shown a crucifix. But, despite the dire predictions from some, the world isn’t ending, the sun will come out tomorrow, the sky isn’t falling, ___________ (insert your favorite metaphor here). Appraisers have been fending off predictions of professional obsolescence for decades, and will likely continue to do so until flying cars become a reality.
Announcement SEL-2023-02: What’s new and what’s not?
Fannie Mae is rebranding their Appraisal Waiver process and calling it Value Acceptance. There is nothing new there, other than the name. The Announcement does introduce a “new” alternative called Value Acceptance + Property Data which allows for a loan to be made with no appraisal, based on a third-party property data collector making an interior and exterior inspection of the property to verify its physical characteristics and condition. For all value acceptance offers that are exercised, the lender remains responsible for the accuracy and completeness of all data that pertains to the property and project (if applicable) and must warrant that the property is adequately insured. This includes warranty that the property is safe, sound, and structurally secure.
This program is expected to be modest in scale, as only certain types of low-risk transactions will be eligible for this process. Announcement SEL-2023-02 also sets forth requirements for these third-party inspectors, e.g., they must be professionally trained and undergo a background check.
The Announcement also addresses hybrid appraisals, which are certainly not new. Like value acceptance, hybrid appraisals are only permissible for certain types of low-risk transactions. The good news is that these types of assignments require the expertise of a geographically competent appraiser.
How will this update affect the appraisal profession?
To determine the effect this might have on the appraisal profession, there are a number of factors to consider. For example, it is widely expected that the U.S. economy will experience a recession within the next several months. The employment outlook is not as rosy as it was last year at this time. Foreclosure numbers are trending upward. There is even an article by Lauren Black and Enrique Martinez-Garcia of the Federal Reserve Bank of Dallas warning of an impending “global housing slide,” i.e., a market correction that could bring housing prices down by as much as 19.5%.
During the economic uncertainty of the last few years, originating lenders have been reluctant to take advantage of the appraisal waiver process. With the specter of declining housing values looming on the horizon, lenders can be expected to continue their reticence, at least for the time being.
In an online article titled “How New Appraisal Policies Affect Old Homebuying Practices,” CoreLogic states, “Some lenders and other market participants are wary of appraisal waivers since they don’t want to lend a buyer money for a mortgage that is larger than a home’s value — a real risk in a volatile market where home prices have been declining month over month since the last quarter of 2022.” In other words, just because Fannie Mae says a transaction is eligible for an appraisal waiver, that does not mean the lender is willing to proceed down that path. A lender who is concerned about risk reduction — and one who isn’t — is likely to order an appraisal regardless of what Fannie Mae permits.
The bottom line: Even though Fannie Mae and Freddie Mac are revising the lending process to allow for certain loans to be made without an appraisal, the appraisal is part of the “traditional” process, and many lenders are slow to adopt the so-called “modernization,” particularly if they believe it adversely affects their risk.
It is certain that the value acceptance process will eventually find more widespread acceptance, but for right now, we should not expect lenders to embrace this program in large numbers.
