No Praise for Automated Appraisals

Fannie, Freddie programs raise risk concerns.

April 1, 2002

Any time you can save buyers a few hundred dollars in closing costs, it’s a good thing—except when it puts them at risk of higher financial losses. That’s what appraisers are saying could result as Fannie Mae and Freddie Mac implement programs for testing automated valuation programs.

There’s no question that with some low loan-to-value loans, appraisals could be reasonably replaced with broker price opinions or tax assessments, says Frank Gregoire, RAA, chair of NAR’s Appraisal Committee and chair of the Florida Real Estate Appraisal Board.

But the same can’t necessarily be said of automated valuation programs that Fannie Mae and Freddie Mac have been implementing in the past year.

The Fannie Mae appraisal waiver pilot program allows approved lenders to forgo appraisals for purchase-money and refinance loans when electronic evaluation data on the property is available. Freddie Mac offers a similar program, which applies to first-lien purchase-money loans of up to 80 percent LTV for borrowers with excellent credit histories.

Fannie and Freddie say the attraction is in the cost and time savings. Automated valuations are a fraction of the $250 to $400 cost of a standard appraisal and can be completed in seconds.

By eliminating the independent valuation, though, the programs put lenders at risk of making loans on houses with insufficient value to support the debt. To borrowers, that could be devastating. “Borrowers might be better off parting with an extra fee at the time of the purchase to make sure their initial equity is, in fact, equal to their downpayment,” says Gregoire.

There’s no accountability in the automated valuations, says Gregoire, because they’re based on the proprietary products of the secondary market companies, and so “aren’t subject to any scrutiny by borrowers or their representative.”

Fannie and Freddie defend automated appraisals as innovations that are being used only when it makes sense, not in all cases. But with many appraisers still sensitive to the 1980s, when loans were written on the basis of faulty valuations, such assurances may not be enough. “Automated appraisals haven’t been tested by a full-scale recession,” says Gregoire. “Real estate practitioners, consumers, borrowers, and taxpayers will be very interested if the program goes bad and will wonder where the oversight was of the country’s largest source of home mortgage money.”

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.

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