Appraisal pre-approvals can level the home-buying playing field

Fannie Mae and Freddie Mac have data that could help low-income and minority buyers compete with all-cash bids in a seller’s housing market.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | January 15, 2022

Today, more than ever, low-down payment buyers can barely compete against the all-cash crowd or the large-down payment pool of people to get on that life-changing road to homeownership.

During the past three years, my experience shows, buyers with less than 20% down must make about five times the number of offers to get into escrow — if they don’t throw in the towel first.

What else can we do as a nation to increase the number of low-down payment, minority and first-time buyers?

My answer is appraisal pre-approvals, similar to the mortgage pre-approvals lenders now provide. Buyers then could submit their lender’s guarantee the property will appraise for a set amount upfront along with their purchase offer.

By bullying America’s appraisers into providing uniform appraisal datasets immediately after each appraisal, taxpayer-owned mortgage giants Fannie Mae and Freddie Mac have compiled a Fort Knox full of current, accurate property valuations for a large swath of the roughly 111 million U.S. residential properties.

Indirectly, Fan and Fred dictate the loan and appraisal approvals of close to 65% of America’s mortgage transactions. Fat chance residential appraisals can survive without taking Fan and Fred type business.

So, why do buyers have to make an expensive guess at what that starter home is worth when Fannie and Freddie may already have a high confidence level of its real-time value?

“It makes all the sense in the world for Fannie and Freddie to open up their systems,” said Ted Tozer, former President and CEO of Ginnie Mae under President Obama.

“It’s a really interesting idea,” said Laurie Goodman, an Urban Institute fellow.

Yes, Fan and Fred may already provide for property inspection waivers. But that’s only if you are putting at least 20% down and you can guess at what the appraisal minimally needs to come in at.

All other things being relatively equal, it's easier for sellers to accept all-cash offers. No fuss. No muss. No waiting for the appraisal completion. And no worries about the sale falling apart because the appraisal fell short.

Scary stuff for buyers. They are scraping money together. Maybe begging and borrowing from their families for a better ante. They are desperate to buy at a fair price.

Bidding too low likely means coughing up more cash to cover the shortfall. If you bid too high, you get the pad, but you overpaid.

“I think we need to start exploring alternatives for lower-income and borrowers with small down payments in respect to the ability to compete on houses,” said Guy Cecala, publisher and CEO of Inside Mortgage Finance.

How can it be fair lending when Fan and Fred have prior knowledge, but nevertheless stay silent? Every mortgage originator in America must kill two trees with the amount of fair lending paperwork disclosures he or she must issue to mortgage applicants. Can you say classic hypocrisy?

One highly respected industry attorney I spoke to said there’s nothing in Fan or Fred’s charters requiring them to hide the pickle from the public.

Especially after the Federal Housing Finance Agency (Fannie and Freddie’s regulator and conservator) expressed concern in its own Dec. 4 appraiser hit piece about reducing “valuation bias” in the appraisal process. It cited anecdotal evidence of appraisal bias against minorities.

The last sentence of the commentary stated that the 78,000-member appraisal workforce is overwhelmingly white and male.

So, the FHFA — through Fan and Fred — make appraisers hand over their reports. Bosses appraisers around to change report flaws. Then issues a self-righteous “we’re on this” commentary.

Fannie, Freddie and the FHFA declined to comment.

Freddie Mac rate news: The 30-year fixed rate averaged 3.45%, its highest rate since March 2020 and up a gut-busting 23 basis points from last week. The 15-year fixed rate averaged 2.62%, up 19 basis points from last week.

The Mortgage Bankers Association reported a 1.4% increase in mortgage application volume from the previous two weeks.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $232 less than this week’s payment of $2,888.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 2.99%, a 15-year conventional at 2.75%, a 30-year conventional at 3.375%, a 15-year conventional high-balance ($647,201 to $970,800) at 2.99%, a 30-year conventional high-balance at 3.625% and a 30-year fixed jumbo at 3.625%.

Eye catcher loan of the week: A 15-year fixed at 2.75% without cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.