Real Estate Analysis and Commentary in Peoria, Arizona

by Jason Clow
Opinion Piece

Step right up everybody!!!  Consumer's can now opt for desktop Fannie Mae & Freddie Mac eligible loans, what does this mean for all of us?

As all appraisers should know, FANNIE & FREDDIE are now allowing consumers to opt a desktop appraisal starting March 6th 2022 for Freddie Mac & March 19 2022 for Fannie Mae loans, if the following criteria is met:
 

• Includes a complete subject property address
• Is a purchase transaction
• The loan is secured by a one-unit principal residence
• The loan-to-value (LTV) ratio is less than or equal to 90%
• The loan casefile receives an Approve/Eligible recommendation

The following transactions are not eligible for the desktop appraisal option:

• Second homes and investment properties
• Limited cash-out and cash-out refinances
• Construction-to-permanent loans
• Two- to four-unit properties
• Community lending mortgages (HomeReady® and HFA Preferred™ mortgages)
• HomeStyle® Renovation and HomeStyle Energy loans
• Community Seconds® with a subsidized sales price, community land trusts, or other properties with resale restrictions (loan casefiles using the Affordable LTV feature)
• Condo and co-op units, and manufactured homes (including MH Advantage® properties)
• DU loan casefiles that receive an Ineligible recommendation

Desktop appraisals were temporarily allowed during the COVID-19 pandemic and in our experience were about as accurate as could be relying on data (square footage primarily) that is about 80% accurate, the other 20% of the time, the assessors square footage is substantially incorrect and we will discuss that a little further down in the blog.

The main difference is now is the lender / client is required to hire a third party  responsible for gathering measurements to calculate square footage and also include interior walls / doorways / stairwells / exterior ingress / egress along with labels for all rooms.  *INCLUDING THE INTERIOR WALLS IS A NEW REQUIREMENT*  

So the big question is, how is the appraiser sitting at his or her desk going to obtain this drawing / sketch /  meeting the new guidelines.  Well, the way I understand it, the lender / client will now be required to hire third parties to come on site and perform the measurements / photos / labeling / etc.  This third party can be Realtors, appraiser trainees, uber-drivers, home-owner, etc.  This sound great, RIGHT?   Yes if the house is a single level rectangle with no decorative pop-outs or false walls or arc's or non 45 / 90 degree angles, etc.  This is approximately 5% of homes.  

Now there are software developers chomping at the bit to get their teeth in the mortgage dollar.  I have watched many videos of drawing tools on a smart phone, or using the old measure wheel, they will not work for homes that are not perfect squares or rectangles in my opinion.

I started as an appraisal trainee in December of 1996 and was first licensed in May of 1998.  I have trained over 15 successful appraisers during my career and the most difficult part of the appraisal process over this time was the measuring process.  I take my trainees to about 2-4 homes a day and have them watch me measure then as they feel confident, have them measure behind me so we both have sketches, and finally after about 10 months or so, will let them measure easy to moderately easy floorplans that I already have measured either prior to them coming to the property or in the past.  Measuring a home to ANSI standards that is not a basic house takes skill and years of experience.  

Having Realtors or anybody else (other than experienced individuals, not just appraisers) measure the exterior dimentions of a house (especially in 120 degree heat, rain, or snow) will not only slow the process down, it will pollute the entire market with appraisals of incorrect square footage.  Sure, sometimes it will be only a 100 sf or so, but on large or complex floorplans, one wrong angle can make it almost impossible to reconcile the sketch and when that happens we could see 10 to 20% variations of livable square footage.

Now, lets get into the WHY are they offering this Desktop Appraisal.  From what I can gather, it is not a Cost issue, and that is good because I think this will increase the cost of an appraisal, not just a little bit, but a lot over time.  Speed as the mortgage industry wants to make more money faster, I suppose all of us do, but keep in mind, a mortgage brings the lender between 1-4% of the loan amount (on a $500k home, that is $5k to $20k), not including the interest being paid on the mortgage.  The average appraiser is compensated $500 an appraisal for a "typical" full appraisal, which can take between 3 to 12 hours to complete (including inspection, paper-work, research, analysis, inspecting comparable properties, etc.).  Having an appraiser now sit at their desk looking at 3rd party gathered data will lose the "rating / feel" the appraiser gathers while doing an interior inspection and reviewing / zooming into photos will actually take more time than the physical inspection.  Also, now a 3rd party has to gather that data, sounds easy, but it will be a logistical / scheduling nightmare.  Time will tell.  Discrimination is also a reason for the desktop appraisal, keep the appraiser separated from home-owner so there can be no discrimination.  I have no doubt there has been cases of this, I haven't personally seen one, but I feel this would be better weeded out (if thought to have happened) by having a second appraisal.  Sure there is some more associated cost, but if it stops discrimination, that is a good thing.

The final reason that I personally believe the Desktop appraisals are here for good is corporate greed.  AMC's are appraisal management companies and are one of the biggest components to hurt consumers in the mortgage process.  I will give you an example.  Lender Y uses an AMC (AMC X for this example) to handle their mortgage appraisals.  Lender Y charges the consumer $600 for their appraisal, then orders the appraisal from AMC X.  AMC X collects $250 of the $600 fee and hires an appraiser from their pool of appraisers.  The appraiser gets the assignment, completes the appraisal, and is paid $350.  Well this seems okay, except, what appraisers would work for AMC X when they could work for Lender Z, which uses a portal to control the appraiser panel and collects a $25 fee to keep the separation between Loan Officer and appraiser (which is needed by the way), so an appraiser working for Lender Z, gets an appraisal fee of $575 for the same work.  Good appraisers work for Lender Z and perform more detailed appraisals than for Lender Y, because the best and most experienced appraisers don't need to work for Lender Y.  AMC's have created some software on mobile phones to use on these desktops and appraisers who are not on their panel, can't use or buy this software.  

Direct lender's who use appraisal portals like the Mercury Network, Appraisal Shield, Lender X, Appraisal Port, etc. will now have to order another job from another vendor and manage the timing of everything.  AMC's know this will bog down the direct lender appraisal departments, and force them to join AMC's and again reduce the quality of overall appraisals, making the profit margins even greater for the AMC's.

The hypocrisy now is Fannie Mae will require all appraisers to measure homes using the ANSI Standard Z765-2021 starting April 1st 2022.  This is actually a great thing, my firm and the previous firm I worked for and trained many appraisers have always used ANSI Standards to measure a home, so this is not a change that really effects our firm.  There are appraisers however, that use the assessors dimensions when providing the lender a sketch and again, as I have discussed in previous blogs can often times be off greater than 10-20% or just incorrect floorplans all together.  So on one hand, Fannie Mae is cracking down on appraisers to ensure all appraisers are using the same standard and on the other hand, they are allowing Uber drivers to measure homes and have consumers rely on that square footage for one of the biggest purchases of their lives.  

In summary, the Desktop appraisal will not make the appraisal process any faster or any less expensive, but will more than likely increase the overall time and cost more to provide this service.  An excellent example is the Judicial system, there are only so many judges and there is time required to perform the judicial system analyze the facts, and make a decision.  Should the courts go out and hire grocery store clerks to hear cases to speed up the process?  No of course not.  This is an extreme example, but if Fannie Mae and Freddie Mac want to speed up the appraisal time, the following steps could be done that are not currently being done:

• Require lender's to order purchase appraisals immediately once they received the loan approval.  This is not being done, they are waiting until after the inspection period of 10 - 20 days, to order the appraisal in fear of absorbing an appraisal cost if the buyer's back out of the loan.  Well this becomes a bottle neck because the majority of purchase loans close at the end of the month, so waiting until the end of the month to order an appraisal that needs to be completed by the end of the month doesn't work.  

• Allow desktops for special situations, similar to the temporary COVID-19 desktops, require surveys from realtors (almost all software developer's have apps for this already).  I requires home-owners and / or realtors to take photos on an app that geo-codes the photos and write down features, etc.  Use assessors records square footages, as at least this is what the market assumes the property to be.  This will stop the databases from being polluted with more incorrect square footage data that will harm consumers when John and Jane sell the home they purchased that was measured by a third party measuring app and now use that square footage to market their home for a new sale (that is 400 sf larger than reality or vise versa).

• Create a better form that incorporates USPAP requirements and Fannie / Freddie requirements in the form to eliminate the ticky tack revision rates.  This is primarily caused by a form that is basically made for Fannie or Freddie and doesn't have space for narrative for major USPAP requirements, so the appraisers have to find places and add text addendum pages, which make the under-writing / review process time consuming as there is no standard place to put all the information (including FHA/HUD required information on FHA insured loans).  I AM AWARE THAT A NEW FORM IS IN THE DEVELOPMENT STAGES AND I BELIEVE THIS FORM FOR RESIDENTIAL APPRAISAL REPORTING WILL MAKE THE REVIEW PROCESS MUCH FASTER AS IT IS A FORM THAT ALLOWS FOR TEXT ADDENDUMS RIGHT AT EACH SOURCE.  MY SOURCES TELL ME THIS WILL ROLL OUT HOPEFULLY IN 2023.

These three things should get the speed from ordering an appraisal to delivering an appraisal down by 50% and keep the UAD data base accurate as can be.

If you are now reading this, you have read a lot of opinions by me and my take on this.  As a firm we have and are willing to adapt to technology and provide the best possible appraisal valuations and the most accurate measurements of homes (as this is not an OPINION).  Remember, an opinion of value is an opinion.  The measurements of the home are facts, we can't rely on a phone app and an Uber driver for the fact.  By the way, Uber driver references are just to make a point and refer to anybody that will be measuring a home that is not properly trained to ANSI standards.

Here are some links for more information:

Desktop Appraisal Fact Sheet

Fannie Mae Article