Tag: Freddie

AVM Regulation – Twists and Turns to Get Here

The Era of Full Steam Ahead!

Six months before the pandemic, we published an article on the outlook for regulation related to AVMs. At the time, we identified three trends.

  1. The administration was encouraging more use of AVMs (e.g., via hybrids), and tempering that with calls for close monitoring of AVMs.
  2. The de minimis threshold change foreshadowed an increase in reliance on AVMs in some lower value mortgages.
  3. The Appraisal Subcommittee summit was focused on standardization across agencies and alternative valuation products, namely, AVMs. Conversation focused on quality and risk as well as speed.

We saw those trends pointing to increased AVM use balanced by a focus on risk, quality and efficiency.

Sure enough, the following events unfolded:

  1. The de minimis threshold was indeed raised, right before the pandemic changed everything.
  2. The appraisal business was turned upside down for a period during the pandemic.
  3. Property Inspection Waivers (PIWs) took off in a big way as Fannie and Freddie skipped appraisals on a huge percentages of their originations (up to 40% at times).

Halt! About Face!

And then the new administration changed the focus entirely. No longer were the conversations about speed, efficiency, quality, risk and appraisers being focused on their highest and best use. Instead, conversations focused on bias.

Fannie produced a report on bias in appraisals. CFPB began moving on new AVM guidelines and proposed using the “fifth factor” to measure Fair Lending implications for AVMs. Congress held committee hearings on AVM bias.

New Direction

Then The Appraisal Foundation’s Industry Advisory Council produced an AVM Task Force Report. Two of AVMetrics’ staff participated on the task force and helped present its findings recently in Washington D.C.

The Task Force made specific recommendations, but first it helped educate regulators about the AVM industry.

One specific recommendation was to consider certification for AVMs. Another was to use the same USPAP framework for the oversight of AVMs as is used for the oversight of appraisals. It’s all laid out in the AVM Task Force Report.

Taking It All In

Our assessment three years ago was eerily accurate for the subsequent two years. Even the unexpected pandemic generally moved things in the direction that we were pointing to: increased use of AVMs through hybrids.

What we failed to anticipate back then was a complete change in direction with the new administration, and maybe that’s to be expected. It’s hard to see around the corner to a new administration, with new personnel, priorities and policy objectives.

The Task Force Report provides some very practical direction for regulations. But the recent emphasis on fair lending, which emerged after the Task Force began meeting and forming its recommendations, could influence the direction of things. The end result is a combination of more clarity and, at the same time, new uncertainty.

Property Inspection Waivers Took Off After the Pandemic Set In

Appraisals are the gold standard when it comes to valuing residential real estate, but they aren’t always necessary. They’re expensive and time-consuming, and in the era of COVID-19, they’re inconvenient. What’s the alternative?

Well, Fannie and Freddie implemented a “Property Inspection Waiver” (PIW) alternative more than a decade ago. However, it’s been slow to catch on.

But now, maybe the tipping point has arrived during the pandemic. Recently published data by Fannie and Freddie show approximately 33% of properties were valued without a traditional appraisal! (Most, if not all, would have used an AVM as part of the appraisal waiver process.) Ed Pinto at AEI’s Housing Center calls it a hockey stick.

https://www.aei.org/research-products/report/prevalence-of-appraisal-waivers-at-the-gses-including-cltv-statistics/

So, what changed? Here are some thoughts and hypotheses:

  1. Guidelines changed a little. We can see in the data that Freddie did almost zero PIWs on cash out loans, but in May that changed, and at lease for LTVS below 70%, they did almost 15,000 cash out loans with no appraisal.
  2. AVMs changed. Back when PIWs were introduced, AVMs operated in a +/- 10% paradigm. They were more concerned with hit rates than anything else, and they worked best on track homes. But, today they are operating in a +/- 4% world, hit rates are great, and cascades allow lenders to pick the AVM that’s most accurate for the application.
  3. Borrowers changed. These days, borrowers have grown up with online tools that give them answers. They are more likely to read about their symptoms on WebMD before going to the doctor, and they are more likely to look their home up on Zillow before calling their realtor. In the past, if home was purchased with a low LTV, who was it that required an appraisal? Typically, it was borrowers that wanted the appraisal – more as a safety blanket than anything else. They wanted reassurance that they were not getting ripped off. Today, for some people, Zillow can provide that reassurance without the $500 expense.
  4. Lenders changed. You would think that they are nimble and adaptable to new opportunities. But where the rubber meets the road, it’s still people talking to customers, and underwriters signing off on loans. If loan officers aren’t aware of the guidelines, they’ll just order an appraisal. Often ordering an appraisal, because it can take so long, is just about one of the first things done in the process, regardless of whether it’s necessary. After all, it’s usually necessary, and it takes SO long (relatively speaking, of course). I have known lenders who required their loan officers to collect money for an appraisal to demonstrate customer commitment. But, lenders are starting to incorporate PIWs into their processes and take advantage of those opportunities to present a loan option with $500 less in costs.

Accurate AVMs are a necessary but not sufficient criteria for PIWs, and now that AVMs are much more accurate, PIWs are much more practical, and we’re seeing much higher adoption.

So now what should we expect going forward? The trend will likely continue. There’s a lot of room left in some of those categories for PIWs to grab a larger share.

If agencies are doing it, everyone else will. If there are lenders not using PIWs to the extent possible, they are going to be at a disadvantage.