Starting next month, private mortgage insurance, which costs many borrowers hundreds of dollars a year, will become a little bit easier for homeowners to eliminate.
However, the method for determining how that will be done has sparked some outrage and suspicion among industry professionals.
Freddie Mac, the quasi-governmental organization that purchases mortgages from lenders and uses them to back new securities, announced last month that it would now accept a real estate broker's evaluation of a property in determining whether a borrower can cancel his private mortgage insurance.
Freddie Mac had hitherto accepted only the valuations of licensed appraisers.
Fannie Mae, which claims to be the nation's largest source of mortgage funds for lending institutions, will continue to rely on appraisers to determine property values.
"We have decided to stick with appraisals because we need to make sure that these values are right," said Robert J. Engelstad, senior vice president for credit policy at Fannie Mae.
The action by Freddie Mac nevertheless left the national trade organization for appraisers and at least one local appraiser dumbfounded.
"Brokers are not held accountable to any sort of appraisal or any real appraisal liability because they don't have an appraisal license," said Jan Ramsay, president of Ramsay, Williams & Associates in Canton.
"I'm not sure where the public protection is with regard to a broker's liability in rendering an opinion of value."
Borrowers are required to pay private mortgage insurance when their down payment is less than 20 percent of a home's value. The insurance is intended to protect lenders from possible default by borrowers with low down payments.
In many cases, the insurance can be eliminated from a monthly mortgage when the homeowner's equity reaches 20 percent, either by paying down the mortgage or by appreciation.
In the past, many lenders continued to collect for the insurance even when a homeowner's equity met or exceeded 20 percent.
But last year Congress enacted the Homeowner Protection Act, which requires lenders to remove the insurance requirement when a homeowner's equity reaches 22 percent.
The new law applies only to mortgages that are made after July 28.
Freddie Mac and Fannie Mae announced in May that they would go a step further.
Fannie Mae said it will require lenders to automatically cancel the insurance requirement on existing loans when those loans reach the midpoint of their term.
Freddie Mac will make the requirement optional.
Homeowners, however, still retain the right to request that their insurance be dropped when they feel their equity has reached 20 percent.
Freddie Mac -- in its new guidelines -- said it would accept "broker price opinions" instead of those of a professional appraiser, figuring that would be less expensive for the consumer.
But licensed appraisers and even the head of Long & Foster Real Estate Inc. said allowing real estate agents to set values could be detrimental.
"I think they are looking for trouble. I'm surprised. I think it would open up some abuse," said Wesley P. Foster, president of Long & Foster.
"In many ways we can do a better job than the appraiser, but I would think there would be some people out there who would move very quickly toward abusing the thing," he added.
"We strongly believe that real estate appraisals that comply with [industry guidelines] and that are performed by professional appraisers are far more reliable to establish market values leading to the cancellation of PMI than broker price opinions," said Bert Thornton, president of the Appraisal Institute, a 20,000-member national organization based in Chicago.
But Brad German, spokesman for Freddie Mac, defended the move, saying the organization has "confidence that the [broker's price opinion] will provide accurate valuations" and that they "tend to be less expensive. The expectation is that there would be significant [financial] difference that would be passed onto the borrower."
German didn't not know how much a consumer would save, but an appraisal done by a licensed and certified appraiser generally costs $250 to $400.
"They are doing it as a money-saving issue, because [brokers] don't have to go through appraisal training and appraisal licensure. They can afford to do it cheaper," Ramsay said.
"Why did Congress make us become licensed if quasi-federal agencies are now going to accept opinions of value from nonlicensed people?" asked Ramsay, the Canton appraiser.
"If a Realtor misses, where is the public protection? Why did we need to be licensed in the first place?
"The bottom line is that we are licensed and we are bound to be objective. A broker has no such requirements in either their code of ethics or a requirement of their licensure They are licensed sales people."