Charting a More Effective Course

Appraisal Modernization Can Help Credit Unions Better Serve Members

By Jake Williamson Fannie Mae

In response to a recent Fannie Mae survey of mortgage lenders, including credit unions, 94% of those surveyed agreed that appraisal modernization efforts are valuable to the industry. Lenders cited shortening loan origination cycle times and lowering borrower costs as key benefits, along with enhancing data quality, increasing confidence, reducing errors, and lowering repurchase risk. (The Mortgage Lender Sentiment Survey was conducted in the first quarter of 2022. Forty credit unions were among the 1,888 total respondents.)

BENEFITS OF APPRAISAL MODERNIZATION

How will appraisal modernization provide the benefits cited by survey respondents? Let’s start by reviewing the current challenges. The method of establishing residential property values for mortgage lending hasn’t evolved much for several decades. Obtaining a traditional appraisal is still, typically, one of the most time-consuming aspects of the mortgage lending process.

As an alternative to traditional appraisals, Fannie Mae offers value acceptance (appraisal waivers) on some loan applications when we have enough information to feel confident in the property value estimate. Over the years, we’ve enhanced waiver offerings based on improvements in data digitization, analytical techniques, and data sources. But so far it has been “all or nothing” — the full traditional appraisal approach or no appraisal — with no in-between options.

This binary approach is not consistent with how other mortgage risks are managed. Using a spectrum of options to establish a property’s market value is a far better approach, with the option matching the risk of the collateral and loan transaction. The spectrum balances traditional appraisals with appraisal alternatives. Options range from use of automated valuation models to validate the estimated property value, to collection of updated property data to confirm the model value, to alternative-scope approaches like desktop appraisals and hybrids, to a traditional appraisal. This valuation spectrum mitigates appraisal pain points, including long wait times and rising fees due in part to appraiser scarcity and risks of human bias.

VALUE ACCEPTANCE SAVED MORTGAGE BORROWERS MORE THAN $2 BILLION SINCE 2020

Fannie Mae estimates that value acceptance (appraisal waivers) on loans sold to us saved mortgage borrowers $2.1 billion in 2020-2022. More than $87 million of that cost savings can be attributed to credit union loans delivered with value acceptance. When we offer to accept the property value entered in Desktop Underwriter® (and waive an appraisal), it is because we are confident that the estimated property value submitted by the lender is consistent with expectations in the current market. Value acceptance is most often appropriate for home refinances, eliminating contact between an appraiser and the homeowner, and speeding up the refinance process. We also offer value acceptance for some purchases, especially with a large down payment or a recent previous sale of the home. Continuous fine-tuning of our methodology allows us to maintain and expand value acceptance offers in a safe and sound manner, reserving the finite appraiser capacity for where it is needed most.

MODERN APPRAISAL METHODS SAVE TIME

Fannie Mae has been working with mortgage lenders, appraisers, and industry technology providers for several years to test digital innovation and alternative ways of conducting appraisals. In our test-and-learn activities, we have found that technologyassisted property data collection combined with analysis and valuation by professional appraisers to complete hybrid appraisals is saving an average of five days versus the traditional appraisal process.

In March 2022, Fannie Mae began allowing desktop appraisals as an option for some loans. Leveraging the power of advanced analytics, the speed of technology, and the abundance of data available today, appraisers can perform desktop appraisals without physically inspecting the property or having a face-to-face interaction with the homeowner/homebuyer.

MODERN APPRAISAL METHODS AND RECRUITING PROGRAMS ARE HELPING FILL THE APPRAISER GAP

There is a shortage of appraisers in many places — especially rural areas — and fewer people are entering the profession, all of which increases wait times and costs for an appraisal. But appraisers can be more productive with desktop appraisals and hybrids because they don’t have to schedule appointments or visit properties but can still access comprehensive property information to confidently determine a credible opinion of value.

Since 2018, Fannie Mae has worked through the Appraiser Diversity Initiative (ADI) to bring awareness of the real estate appraisal profession to potential new entrants and assist those entrants in overcoming various barriers to entry. New entrants to the profession can bring in new technology expertise and techniques to help further improve the methods.

THE JOURNEY TO A MORE EFFICIENT AND EFFECTIVE HOME VALUATION PROCESS

We know that credit unions are dedicated to serving their members’ financing needs with excellence. There is tremendous opportunity for credit unions to benefit their members through adoption of the latest enhancements to the appraisal process and technology improvements that can better support mortgage lending. We invite credit unions to join Fannie Mae on this journey to chart a path forward to a more efficient, effective, and impartial home valuation process.

1 Fannie Mae analysis based on loan delivery data from January 2020 through October 2022 using $500 as the average appraisal cost savings.

Jake Williamson is Fannie Mae’s Senior Vice President, SingleFamily Collateral Risk Management. He is responsible for oversight and management of all end-to-end collateral capabilities, including front-end collateral policy design, loan quality control activities for both credit and collateral, property valuations, valuation modernization, and real estate liquidation options.