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FHFA Seeks Comments on Overhauling Appraisal Process

January 11, 2021

Could the appraisal process be headed for an update? The Federal Housing Finance Agency, the regulator to mortgage financing giants Fannie Mae and Freddie Mac, is requesting public input on policies and practices regarding the home appraisal process. FHFA is weighing a series of proposals, including one on increasing the valuation options for loans that are backed by Fannie and Freddie.

“Modernizing the appraisal process has the potential to create a more streamlined and accurate collateral valuation process,” FHFA Director Mark Calabria said in a statement announcing the request for public input. “But if modernization is not properly adopted, it could have negative unintended consequences. … The comments we receive will inform how we will modernize appraisals to improve both loan quality and the origination process.”

FHFA is exploring numerous proposals, such as increasing the use of appraisal waivers, where instead of a traditional appraisal an automated valuation method is employed that uses existing data to determine value. FHFA is considering allowing “hybrid appraisals,” in which a third-party goes to the home to collect necessary information and then provides the information to an appraiser offsite who then completes the valuation. FHFA is also exploring the use of desktop and exterior-only appraisals. The agency did this during the pandemic to protect the health and safety of appraisers.

Critics have expressed concerns over these different valuation products. Policies that allow for appraisers to do exterior-only or desktop valuations may not catch issues with the condition of the property. There’s also concern among some in the industry that waiving appraisals for certain priced homes puts unnecessary risk into the secondary market. Automated valuations use previous appraisal data and some critics are concerned that without new data being brought in there could be problems with valuations further down the line.

“If those appraisals are replaced with waivers it would be logical to assume there will be less data to drive” the models in the future, Tom O’Grady, CEO of Pro Teck Valuation Intelligence, a property data and valuation firm, told MarketWatch. If a property isn’t appraised in-person, changes over time also could go unnoticed. “That could have a dramatic effect on the overall market value of the home,” O’Grady noted.

Proponents of changes to re-evaluating the appraisal process say it could offer time and cost savings to consumers. Some proponents point to a shortage of appraisals in the industry and an uptick in mortgage demand from home purchases and refinances over the past year that has prompted, at times, delays in the appraisal process to close a loan. The Appraisal Institute reports that between 2014 and 2018, the number of appraisers has dropped by more than 10% nationwide.

FHFA is collecting public feedback on the appraisal process at FHFA.gov.