Remember the old rule for value that most of us were taught when we first got into the real estate business: "The value of any item is what a willing and qualified buyer will pay." That mantra has certainly changed as we have seen real estate values skyrocket and then crash. Now the value of a piece of real estate can vary widely depending on who appraises it and what the underwriter thinks of the report when it comes to her desk. I have personally seen two appraisals that differ by more than $100,000 on the opinion of value of a piece of property, and both were done by competent appraisers.
Of course, the appraisers and the mortgage brokers have taken most of the blame for the economic distress this country is in and the problems with the real estate industry. To hear the media tell the story, everything bad that has happened for the last two years has been the fault of evil appraisers who artificially inflated values and evil mortgage brokers who pressured them to do so. And because of those evils, mandates which separated the loan originator from the appraiser were necessary, according to the government, so that there could be no collusion between these two wicked, self-serving entities.
And that makes Fannie Mae's new announcement especially interesting. On Friday, September 3, Fannie Mae sent out an email stating that its new version 8.1 which will be released October 16 is being updated to increase the number of property that might be eligible for a property fieldwork waiver in DU refi plus. Put simply, the computer program will determine that more property owners do not need an appraisal in order to refinance--even up to 125% of the property's value.
Just before the market crashed, Fannie Mae had programmed their systems to allow quite a few homes to get property inspection waivers. That meant that the system looked at the address of the home and determined whether it agreed with the value that had been entered by the loan officer. If the computer program agreed that the value was acceptable, no appraisal was necessary. As the market began to crash, however, I began to see property inspection waivers go away, and rightly so since values were generally declining.
Last week I had findings for a property inspection waiver--the first one I have seen for a long time. I thought they were gone forever, but last week, I got authorization to waive the appraisal. Granted that the house currently has a mortgage for less than half of what it is worth, and I took the estimated value off the tax rolls in order to have a figure for the underwriting system. But still--a property inspection waiver based on tax rolls is really a return to the old way of doing loans.
I sell to one lender who does not allow property inspection waivers, but they do allow exterior only property inspections with no appraised value. To me, that is more reasonable. The appraiser does not value the house, but he does go by, photograph it, and fill out a form with a general statement of the neighborhood. This saves the borrower a lot of money and it protects the lender from outright mortgage fraud--for instance submitting a loan for a house that is partially burned down or in such horrible condition that the lender would never knowingly make a loan on such a property if he had seen a photograph of it. An exterior inspection appears to be a reasonable compromise if there is really no doubt about the property's value.
The problem with rigging the underwriting system to accept the stated value for a property up to 125% of the home's value is that it is a basic denial of the fact that home values are declining in many areas. This is just a way of refinancing people who would not qualify if they had to stand up to the scrutiny of an actual property valuation. A real appraisal might show that they owe twice as much as the house is worth; so let's avoid doing a real appraisal and pretend instead that the value is higher than it really is. This approach seems to be based on the theory that what we don't know won't hurt us. I thought that was what got this industry into trouble in the first place.
When I wrote last month that the real estate industry is not going to improve until credit restrictions relax, I was talking about not putting unduly burdensome underwriting guidelines for credit, income, and assets on otherwise qualified borrowers. I was not talking about rewriting the mortgage underwriting systems to play with property values so that people can refinance homes that could not qualify using reasonable standards. It would make much more sense to go back to the old system of brokers hiring a local appraiser who knows the market than to use a computer model which has been skewed to produce the desired answer. At least a real person has a license and some accountability. The only good news is that when the next round of decreasing property values begins to get attention, Fannie Mae and the government will have no one to blame but themselves.
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