Are home appraisals always necessary?

Are home appraisals always necessary?

Kenneth R. Harney on Jun 23, 2017

WASHINGTON – Do we always need an appraiser to tell us what a house is worth? The two biggest sources of mortgage financing in the country – Freddie Mac and Fannie Mae – think not.

With no formal public announcement, on June 19 Freddie Mac began phasing in its plan to transition to appraisal-free mortgage for certain loan applications. Though limited initially to some refinancings, Freddie expects to expand the concept to home purchases in the coming months. Under the program, borrowers no longer will have to pay hundreds of dollars for a professional appraisal – a reversal of long-standing mortgage industry practice. There will be no traditional appraisal charges at closing and lenders no longer will be required to assume responsibility for the accuracy of home valuations. The program currently is limited to refi applicants who have at least 20 percent equity in their homes and are not pulling out cash.

Fannie Mae, the other giant, government-supervised financing company, has been quietly offering no-appraisal refinancings for months. Both companies emphasize that they only permit waivers of appraisals when they have substantial data on the property involved and the local real estate market. Fannie says it has a database containing more than 23 million previously completed appraisal reports and uses “proprietary analytics” to come up with value estimates. Unlike Freddie Mac, Fannie Mae has not indicated whether it plans to expand its “property inspection waiver” concept to loans for home purchases, though industry sources say they expect it.

Mortgage lenders generally are enthusiastic about the two companies’ moves. Dave Norris, chief revenue officer of loanDepot, one of the highest volume retail lenders in the country, says “leveraging technology” to arrive at property valuations “gives consumers certainty” about the status of their application upfront, sharply reduces the time needed to get to closing, plus saves money. Roughly 12 percent of loanDepot’s refinancings through Fannie Mae already are proceeding appraisal-free, Norris told me.

“Consumers definitely appreciate it,” he added. There’s “more cash in their pockets” and the total experience is better.

Pete Mills, a senior vice president at the Mortgage Bankers Association, also welcomed the appraisal-free concept. “If there is a way to use technology to streamline or automate the process while ensuring the same standards of accuracy are met,” he said, “it would benefit both lenders and consumers and should be pursued.” Nonetheless, loan applicants should retain the right to request a full, walk-through appraisal if they want one, added Mills.

Not surprisingly, appraisers view the whole trend as an impending nightmare – potentially sending them to the fate of buggy whip manufacturers, travel agents and others whose industries have been decimated by new technologies. Unlike buggy whip makers in an age of automobiles, however, appraisers argue that they have a legitimate, continuing role. There is simply no technological substitute for what they bring to the table- Eyes, ears, noses and the ability to independently analyze a home, its interior, the neighborhood environment and market conditions, and arrive at an accurate opinion of its current worth. Computer programs may be jam-packed with data and algorithms but they have no clue about what damage – or improvements – may be present inside a house.ds by

“I’ve walked into five-year-old houses that are in such bad shape that they look like they haven’t been maintained for 25 years,” says Pat Turner, a Richmond, Virginia, appraiser. Eliminating appraisals is a “a throwback” to the disastrous practices of subprime lenders during the housing boom and bust, he said. “This is a return to no doc and low doc on steroids.”

Carl S. Schneider, an appraiser in Tulsa, Oklahoma, says the path Fannie and Freddie are on is “fraught with danger,” not only for banks but for the taxpayers who may have to bail them out. The databases Fannie and Freddie are using may contain voluminous appraisal information previously submitted as part of mortgage files. But that “property data will age and change without being refreshed” if large numbers of new appraisals are not being done, he said. Without new professional appraisals that include updated information on the interior conditions of homes – plus observations on the presence of value-depressing environmental features in the area that aren’t likely to be picked up by computers – “where will it all lead?” asks Schneider.

Where indeed? Fannie and Freddie are confident that they are introducing appraisal-free mortgages carefully and responsibly. Appraisers have serious doubts. The jury is out.

Zero-down payment mortgages are back

Zero-down payment mortgages are back

Kenneth R. Harney on Jun 16, 2017

WASHINGTON They were all the rage then the scourge of the housing boom and bust. Now they’re back, big time Home mortgages that require tiny or zero-down payments from buyers.

Several major lenders are offering 1 percent down payment loans, and now a large national mortgage company has gone all the way, requiring absolutely nothing down. Movement Mortgage, a top 10 retail home lender, has just introduced a financing option that provides eligible first-time buyers with a non-repayable grant of up to 3 percent. This allows applicants to qualify for a 97 percent loan-to-value ratio conventional mortgage essentially zero from the buyers, 3 percent from Movement.

To illustrate On a $300,000 home purchase, a borrower could invest nothing from her or his personal funds, while Movement contributes $9,000 from its resources. The loan terms also permit seller contributions toward the buyers’ closing costs to help swing the deal. Duke Walker, branch manager for Movement for the Washington D.C. area, told me that although the program is brand new, it’s already “going great guns.”

Movement is hardly the only player in this arena. Navy Federal, the country’s biggest credit union, has offered members zero-down mortgages for years in amounts up to $1 million. NASA Federal Credit Union also markets nothing-down mortgages. Quicken Loans, the third highest volume lender according to Mortgage Daily, a trade publication, offers a 1 percent down option, as does United Wholesale Mortgage, another large national lender. The U.S. Department of Veterans Affairs also has been doing federally guaranteed zero-down loans for years.

In the case of Movement’s new plan, the mortgages are being originated for sale to giant investor Fannie Mae, which operates under federal conservatorship. Sensitive to the possibility that critics might perceive it as providing support and ultimately a federal guarantee on seemingly high-risk loans, Fannie provided me with this statement The company “is committed to working with our customers to increase affordable, sustainable lending to creditworthy borrowers,” Fannie said. … “We continue to work with a number of lenders to launch test-and-learn pilots [pilot programs] that require a 97 percent loan-to-value ratio for all loans we acquire.” There “is no commitment beyond the pilots,” the statement went on, and all of them are “focused on reaching more low-to-moderate income borrowers through responsible yet creative solutions.”

Nothing-down loans were among the biggest losers for lenders, investors and borrowers during the disastrous housing bust years, often extended to people whose incomes and debts went undocumented. The latest versions are starkly different. Under federal rules, applicants must demonstrate an ability to repay what’s owed, must have solid if not excellent credit histories and scores, and must document everything.

So how well are these mortgages performing? Quicken says its 1 percent down loans have less than a one-quarter of 1 percent delinquency rate. United Wholesale Mortgage says its version has experienced no delinquencies since its debut last summer. Records like this are possible, the lenders involved say, because 1 percent and zero-down offerings are conservatively underwritten. United’s minimum FICO credit score is 720. Quicken’s posted minimum is a 680 FICO, but the young, mainly first-time buyers who use the program have an average score around 750. Movement’s zero-down loan is an exception Minimum FICO is just 640 in most parts of the country. (FICO scores run from 300 to 850, with higher scores denoting higher creditworthiness.) Maximum debt-to-income ratio for the Quicken program is just 37 percent, well below the 45 percent ceiling for most conventional loans that carry much larger down payments.

Most of the programs also charge higher interest rates. Movement’s rate for the zero-down option in mid-June was 4.5 percent to 4.625 percent, compared with 4 percent for its regular fixed rate mortgages. Navy Federal charges 4.625 percent for its 30-year zero downs.

In fact, the credit standards and higher rates on these loans are attracting some criticism from within the mortgage industry. Paul Skeens, president of Colonial Mortgage Corp. in Waldorf, Maryland, says many of the cash-strapped, moderate-income first-time buyers who really need these programs can’t meet the required standards. “It seems like people without excellent credit scores and three months of [bank] reserves don’t qualify,” he told me.

The takeaway here If you’re interested in pursuing one of these new low or zero-down payment plans, be aware that unlike the bad old days, these come with real qualification requirements and costs expressly designed to minimize defaults and foreclosures.