Appraisal-Free Mortgages Could Be Become a Thing

As of late June, Freddie Mac began phasing out the appraisal step from its lenders’ approval process for certain refinancings. However, the agency expects to remove the requirement for mortgages on some home purchases as well in the near future.

Fannie Mae, for its part, has quietly offered no-appraisal refinancings for several months. It, too, is expected to eliminate the requirement for some home purchases. Instead of having lenders send an appraiser out to look at each property, Fannie Mae confirmed it plans to rely on its database of more than 23 million appraisal reports, along with proprietary analytics, to value many of the homes it is refinancing.

Good News, Right?

The move to appraisal-free mortgages, at least in some transactions, addresses a major friction point in the settlement process. It eliminates the need for an appointment to see the property and the wait for the report. For Loan Officers, it will remove the liability of being held responsible for the accuracy of these valuations.

Homebuyers will see an immediate savings of a few hundred dollars at closing, if an appraisal is not needed. However, it also means they no longer have an objective third party physically viewing the property and confirming that they are getting what they thought they were paying for. Instead, your buy-side clients may need to count even more heavily on the inspection phase of the purchase for reassurance that no adjustments to the purchase contract are needed.

For clients who are selling, it's unclear whether the elimination of appraisals will help close the gap between what a homeowner thinks their property is worth and its appraised value. In fact, the gap could widen further in cases where a homeowner has addressed some of the issues that tempered its value at its last appraisal. In older neighborhoods, for instance, this could be an issue. While each home may offer the same square footage, there can be drastic differences regarding maintenance and improvements when you step inside. These could include custom closets, efficient lighting, and climate control, as well as updates to bathrooms, kitchens, basements, and backyards. These enhancements could throw off the algorithms. It’s unclear whether clients will be able to appeal decisions.

When There Is a Difference

What will not change is the nature of your role when there is a pricing mismatch that delays the mortgage approval. When that happens, you may still need to explain possible options and work toward a renegotiation. While the shift to appraisal-free mortgages may disrupt the industry, it’s likely your role as a mediator may intensify.