The Federal Housing Finance Agency (FHFA) recently issued a request for information (RFI) seeking input on appraisal-related policies, practices and processes in connection with home mortgage loans. Comments will be due 60 days after the RFI is published in the Federal Register.
FHFA is seeking input on four main topics:
- Aspects of Fannie Mae and Freddie Mac (the Enterprises) appraisal policies, practices, and processes, especially as they relate to modernizing the appraisal process and balancing the mortgage industry's need for process efficiencies with the Enterprises' need for quality valuations that foster prudent risk management.
- How to ensure that the Enterprises' respective appraisal policies and deployment of valuation tools, such as appraisal waivers and automated valuation models, do not lead to competitive practices that erode and endanger Enterprise safety and soundness.
- How the policies and tools can be enhanced to ensure that mortgage industry participants do not engage in activities that manipulate the assessments made by the Enterprises' automated underwriting systems and/or result in the adverse selection of the Enterprise with the more generous appraisal policies and practices in a particular situation.
- The extent of disparities in value determinations for racial and ethnic minority borrowers, as well as properties located in neighborhoods with a large proportion of racial and ethnic minority residents.
FHFA advises that it previously sought input on appraisal policies, practices and processes, and that industry stakeholders noted issues with appraiser shortages in rural and high-volume areas, the impact of licensing requirements on new entrants, sources of meaningful training for trainees and new appraisers, and how to use technology to help trainees gain practical experience. As a result, the Enterprises are focusing on appraisal moderation, which for purposes of the RFI means "exploring the respective risks and benefits of the entire range of property valuation alternatives."
One potential approach being proposed by the Enterprises is appraisal bifurcation, which is also referred to as a "hybrid appraisal." With a hybrid appraisal approach, one party, such as an appraiser trainee, home inspector, or real estate agent, inspects the subject property, collects key data points, and reports the information to the lender for submission to an Enterprise's automated underwriting system (AUS) and corresponding collateral tool (Freddie Mac's Loan Collateral Advisor and Fannie Mae's Collateral Underwriter). If the AUS determines that further collateral analysis is warranted, the data collected at inspection would be provided to a licensed or certified appraiser for a desktop appraisal.
The FHFA notes that the potential benefits to a hybrid appraisal approach are a reduction in appraiser shortages in rural and high-volume areas, and training opportunities for individuals seeking to become an appraiser. However, the FHFA notes that potential risks to the approach include (1) the potential for complexity and risk based on third-party inspections of homes being performed by non-appraisers, as a result of the lack of a uniform regulatory framework at both the state and federal levels that holds non-appraisers accountable for their work on appraisals, and (2) the potential for risk to the Enterprises, such as (a) if an appraiser receives inaccurate data from a non-appraiser that results in a poor understanding of the property's condition and an incorrect value determination, or (b) if splitting the data collection and valuation components of property valuations between two parties negatively impacts the quality of those valuations.
The FHFA seeks input on the advisability of a hybrid appraisal approach. The FHFA also seeks input on the following specific issues: (1) the types of technology that could be used to facilitate appraisal process efficiencies to reduce strain on the appraisal supply chain when needed, (2) the types of qualified labor forces that could be employed in such an approach, including any impact their use may have on enforcement of appraisal standards and consumer protections, and (3) the need to provide valuation solutions that bridge the gap between appraisal waivers and traditional appraisals, and the associated policies and controls that could balance the benefits with the risks and promote Enterprise safety and soundness.
Two other topics addressed by the FHFA in the RFI are the temporary appraisal flexibilities provided by the Enterprises, and the use of automated valuation models (AVMs) and appraisal waivers by the Enterprises. The temporary appraisal flexibilities provided by Fannie Mae and Freddie Mac in response to the COVID-19 national emergency provide for alternatives to a traditional appraisal that is based on an inspection of a home's interior. FHFA states that the flexibilities demonstrate "how a more flexible appraisal process can assist the flow of liquidity to the housing market."
With regard to the use of AVMs and appraisal waivers by the Enterprises, the FHFA advises that the Enterprises use AVMs for various purposes, including to assist with offering appraisal waivers on eligible loans. The FHFA also advises that the Enterprises make an appraisal waiver offer when they determine they have enough information on the current value of the property and do not require an appraisal from a licensed or certified appraiser. The FHFA notes that each Enterprise approaches the waiver decision differently depending on individual risk tolerance, collateral tools, and aggregated data. Based on the differences in the approaches to appraisal waivers, the FHA notes that risks include (1) industry participants "inappropriately gaming the appraisal waiver process" and (2) adverse selection risk when one Enterprise will offer an appraisal waiver and the other will not. The FHFA seeks input on the need for the Enterprises to offer appraisal waivers and how to ensure safety and soundness should waivers be offered. The FHFA also seeks input on policies and controls to minimize the occurrence of "gaming and data manipulation."
The FHFA states "[s]tudies . . . show that there may remain significant disparities in valuations for properties in minority neighborhoods, despite substantial efforts by the appraisal community to improve appraisal and valuation methodologies." The FHFA seeks input on the extent of disparities in value determinations for minority borrowers and for minority neighborhoods.
In the RFI the FHFA also summarizes the work of the Enterprises to update the Uniform Appraisal Dataset (UAD) and to redesign appraisal forms.
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