Lucky you! That’s the elation borrowers and their realty agents feel when the mortgage loan originator crows that Fannie Mae or Freddie Mac issued the almighty appraisal waiver.
After all, that saves about $600, speeds up the purchase (or refinance) transaction and avoids other potential red flags that a responsible appraiser may note (termite damage, foundation cracks, leaky roof, etc.).
But what does it mean when Fannie and Freddie grant such a waiver?
There are both advantages and disadvantages.
On the one hand, you save money on appraisal fees.
On the other, you could be paying too much to refinance your loan without confirmation of your home’s value. If your home is worth more – meaning you have more equity in your property – your rate and costs can be lower.
For example, let’s say a borrower has a 699 middle FICO score, owes $480,000 on his condo and thinks he has 20% equity (or a value of $600,000).
But the property is really worth $640,000 or 25% equity. The pricing difference can be either .375% better in rate or 1.25 points lower in loan origination points.
Fan and Fred’s system requires your lender to plug in a property value (either purchase price or estimated value for a refinance).
Do Fan and Fred communicate that your property is worth more when a waiver is provided? Definitely not.
Do their systems have the intelligence to force an appraisal to correct a low-balled value? Or, do the borrowers receive the waiver anyway but unknowingly get stuck with worse pricing? I don’t know.
Over the years, I’ve asked both mortgage giants countless times about the inner workings of their automated appraisals. I have never been offered any enlightening answers.
A California appraisal regulator doesn’t think much of the appraisal waiver practice.
“Fannie and Freddie are about making loans and selling loans. Otherwise, they don’t really care,” said Jim Martin, chief appraiser of the California Bureau of Real Estate Appraisers.
One prominent lender actually charges borrowers one-quarter point more when a Fannie or Freddie appraisal waiver is granted. If that borrower elects to have a full appraisal done (and not use the waiver) then the lender removes the .25% pricing hit.
Attorney Roger Fendelman of Garris Horn explained that Fannie and Freddie have long had their own appraisal independence requirements in addition to the Truth-in-Lending-Act. The act bars lenders and loan originators from attempting to influence the property valuation process.
Think back to the mortgage meltdown days.
When property values decline and borrowers are at risk of losing their homes, questions certainly will come up about these invisible appraisal decisions.
“In general, a borrower can basically challenge just about anything the lender does,” said Fendelman.
Jeff Lazerson - Mortgage Columnist since 2011