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Fannie Mae's decision to use real estate agents as appraisers is risky

By Jeff Lazerson

4/4/19

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

Rate news summary 

From Freddie Mac’s weekly survey: The 30-year fixed rate averaged 4.06%, up 2 basis points from last week. The 15-year fixed rate averaged 3.56%, down 1 basis points from last week.

The Mortgage Bankers Association reported a crushing 18.6% increase in loan application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $484,350 loan, last year’s payment was $90 higher than this week’s payment of $2,335.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages at zero point cost: A 15-year FHA (up to $431,250 in the Inland Empire, up to $484,350 in Los Angeles and Orange counties) at 3.250%, a 30-year FHA at 3.50%, a 15-year conventional at 3.375%, a 30-year conventional at 3.875%, a 30-year FHA high-balance (from $484,351 to $726,525 in L.A. and Orange counties) at 3.75%, a 15-year conventional high-balance (also $484,351 to $726,525) at 3.75%, a 30-year conventional high-balance at 4.125%, a 15-year jumbo (over $726,525) at 4.0% and a 30-year jumbo at 4.625%.

What I think: Mind you, for most Americans, our homes act as shelter and our most significant family wealth-building apparatus. Yet, Fannie Mae is now relying on real estate agents (not licensed appraisers) to measure and take photographs to determine property values for some mortgage refinances.

The ramifications are ominous. But first I will explain the potential real estate agent involvement.

The loan officer or loan processor runs your loan file through Fannie Mae’s Desktop Underwriter for a credit decision and an appraisal decision via Fannie’s Collateral Underwriter engine. You could receive a PIW (property inspection waiver), which means Fannie is confident in the property value and you are good to go without having to pay for a property inspection.

Or Fannie Mae may choose to have an appraisal management company get measurements and photos by sending a real estate agent to inspect the property. That costs $185.

Fannie might conclude the value based on the real estate agent’s report. Or it could call for a $250 appraiser desk review for a total cost to you of $435.

Or, you may have none of these choices, in which case you will pay around $650 for an appraisal inspection and report by a licensed appraiser.

It’s hard to understand why Fannie is engaging in such risky business by using agents.

“Unfortunately, we don’t have any data or information to provide at this time,” said Fannie Mae spokesman Matthew Classic.

Mortgage giants Fannie Mae and Freddie Mac represent about 66% of the nation’s 6.6 million residential loans, totaling $1.68 trillion in 2017, federal data show.

Fannie’s Collateral Underwriter and Freddie’s Loan Collateral Advisor are closely guarded secrets. The opaque processes and conclusions are troubling — especially since their market share and decisions can easily raise or stifle your neighborhood property values.

Is Freddie going to do the same thing? Who knows? Freddie did not respond to several requests for comment.

Appraisal standards and its licensing process are there for many reasons — most importantly to protect buyers and property owners, mortgage investors and most of all taxpayers.

“It’s horrible,” said Lance Siegel, president of HVCC Appraisal Ordering, an appraisal management company. “It sounds easier than it is. If you don’t know how to measure a house, it will be a debacle.”

How will Fannie be able to detect flawed information? Will Fannie expand this real estate agent inspection service to purchase loans? Do flawed data and information get embedded into Fannie’s collateral library, creating an eventual house of cards?

Most worrisome to me is the inherent conflict of interest that occurs when real estate agents participate in what is supposed to be an independent property valuation process. The higher the prices, the bigger the agent commissions when properties sell.

May 1 will mark the 10-year anniversary of the Home Valuation Code of Conduct law, which largely prevented crooked loan officers, crooked mortgage companies and their crooked real estate agent buddies from steering appraisal business to appraisers who agree to hit an inflated appraisal value.

Housing stakeholders cannot afford to go back to those shenanigan days. Congress, are you reading this?