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Fannie Mae Permits Some Lenders to Waive Appraisals

January 06, 2002|KENNETH R. HARNEY | SPECIAL TO THE TIMES

WASHINGTON -- Could 2002 be the year when you buy a home or refinance a mortgage, and your lender surprises you with the news: Oh, by the way, we're not going to need an appraisal on your property? Just give us $50 at closing and we'll eliminate the $300 to $350 you'd normally have to pay.

Could the most traditional and long-standing piece of the home buying and financing puzzle--the professional property appraisal--be headed for oblivion?

Probably not--and certainly not in 2002. But the biggest player in the American housing finance market, mega-investor Fannie Mae, quietly has been moving in that direction. With no public fanfare or announcement, Fannie has been permitting some lenders to dispense with appraisals on home purchases and refinancings, in exchange for a $50 fee.

Known as the "property inspection waiver," the pilot program is being offered around the country by a select group of mortgage companies who sell loans to Fannie. The lenders welcome the plan because it allows them to close mortgages faster, attract price-conscious loan shoppers and sometimes even lower their rate quotes. It also allows them to dispense with their customary contractual warranties to Fannie regarding the mortgaged property's condition and value. Those warranties open lenders to financial penalties should a home's stated value later turn out to be bogus.

Fannie Mae declines to identify the mortgage lenders taking part in the $50 appraisal-waiver program.

Word of Fannie's no-appraisal-needed experiment has professional appraisers understandably upset. Frank K. Gregoire, chairman of the Appraisal Committee of the National Assn. of Realtors, calls the idea "radical" and worrisome.

"People seem to have forgotten the lessons of the savings and loan crisis of the 1980s," said Gregoire. He was referring to the multibillion-dollar losses racked up by thrift institutions that lent money in recessionary markets on the basis of inaccurate or fraudulent property appraisals. Many of them subsequently had to be closed down or bailed out by the federal government, which seized and then resold thousands of overvalued properties.

Patrick Turner, a professional real estate appraiser in Richmond, Va., called Fannie's new program "ridiculous" and "dangerous."

"Common sense will tell you," said Turner, "that you can't know what a house is worth" without some form of appraisal. He cited the example of a home he recently examined that appeared normal from the outside, but was a mess inside--with multiple building-code violations, including no enclosed bathroom in the entire house. "[Fannie Mae is] trying to pull rabbits out of hats" by eliminating appraisals, said Turner, but "they're going to hurt the consumer and hurt themselves."

Home buyers need professional appraisals, said Turner, "so that they've got an independent judgment that what they're paying [for the property] is the correct price."

Fannie Mae, for its part, said it is not eliminating appraisals by any means, but instead is allowing some lenders to dispense with them when there is sufficient electronic valuation data available on a given house. A Fannie Mae official said that about three-quarters of the home-purchase mortgage applications it now receives through its automated underwriting system--Desktop Underwriter--do not require full, traditional appraisals.

Some applications qualify for a total waiver. Others require appraisals with exterior-only examinations by the appraiser. Only a minority of applications need interior and exterior examinations as part of the appraisal.

Fannie's competitor, Freddie Mac, has a more restrictive appraisal-waiver program. Freddie requires no appraisal on home purchase transactions where the down payment is 20% or more, and the borrower's credit profile is strong. In such cases, Freddie charges the lender a $200 fee, which most lenders then pass on to borrowers in lieu of a full-cost appraisal.

Fannie's $50 pilot program fee, by contrast, costs much less, and can be used on home purchases and refinancings where the borrower's equity is as low as 10%.

Fannie's and Freddie's waivers or reduced appraisal requirements are available only on loans up to their $300,700 purchase maximum.

The upshot of Fannie's new moves on appraisals? For most consumers, $50 certainly sounds better than $300 or $350. After all, it's the lending institution--not the borrower--that traditionally has demanded a professional valuation of the real estate securing a loan.

But Turner has a point, too: An independent appraisal could steer you away from paying too much for a house. If you spend $200,000 on a house that a professional appraiser would have valued at $180,000, you've saved $350 on the appraisal, but you've spent $20,000 too much.

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Distributed by the Washington Post Writers Group.

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