Freddie Mac plan will save money on home appraisals

Nation's Housing

April 01, 2001|By KENNETH HARNEY

THE COUNTRY'S second-largest source of home mortgage money has a money-saving new proposition for homebuyers across the country: Don't bother paying $350 to $450 for a traditional real estate appraisal. Skip it and avoid all but $50 or $200 of what you'd normally pay for a valuation of the property you're buying.

Sound intriguing? Beginning April 8, Freddie Mac, the giant home-loan investor, plans to change one of the oldest rules of the real estate game. On certain "low-risk" mortgages it finances, Freddie Mac no longer will require a formal appraisal. Low risk means loans of up to $275,000 to homebuyers with good to excellent credit histories who are purchasing a house with a down payment of 20 percent or more.

In place of the mandatory appraisal, Freddie Mac will perform an electronic "collateral assessment" on the home to determine its approximate market value.

This estimate, in turn, will be computed by accessing online databases that the company already taps into for prices, appreciation rates, resale value changes and local market trends. Some of the data are publicly available, pulled from county courthouse records. Other information derives from actual appraisals.

The new program, which Freddie Mac estimates will save American homebuyers half a billion dollars in appraisal fees per year, is expected to work like this:

Say you're moving up to a larger home and you apply to one of the thousands of mortgage companies that regularly sell loans to Freddie Mac. If you qualify on credit and down payment, your lender may offer you this choice: You can pay either $50 or $200 to cover the costs of Freddie Mac's electronic valuation, or an appraiser can be hired to do a full-blown valuation at a higher cost.

The $50 fees will be charged when Freddie Mac's sophisticated electronic systems indicate that the valuation data on a particular house is deep, and likely to be highly accurate. The $200 fees will be charged whenever there is at least some uncertainty about the degree of accuracy of the automated valuation.

The choice won't be difficult.

Going the "no-appraisal" route not only will save you money, but also will speed up the loan approval process. Patricia McClung, Freddie Mac's vice president for loan origination, says electronic valuations allow the corporation to give online applications approvals within seconds.

A loan officer sitting at a computer terminal, in other words, may now be able to give you a full mortgage commitment on the spot - not just a commitment that's conditional on completion of a traditional appraisal days or weeks down the road.

Directed at lenders

Technically, the no-appraisal option is directed at lenders, rather than the consumer. In exchange for what Freddie Mac calls "delivery fees" of $50 or $200, it will relieve the lender of the legal burdens of responsibility for the accuracy of the appraisal in the event the loan goes into default or foreclosure.

Freddie Mac will not require lenders to pass along the $50 or $200 fees dollar-for-dollar to loan applicants. Highly price-competitive lenders could choose to absorb some or all of the fees. But generally Freddie Mac assumes lenders will ask customers to pay the $50 or $200, just as they now require borrowers to pay the full appraisal cost.

Freddie Mac says it is moving to the new plan because nearly all traditional appraisals it receives on home purchase transactions simply ratify the price on the sales contract. The cost to the consumer is high, the company argues, compared with the valuation information Freddie Mac can obtain online for far less.

The new no-appraisal option will not be available for all types of home purchases. Condominiums and cooperatives will not be eligible, nor will homes that have changed hands during the six months preceding the new application. Refinancings will not be eligible, either.

Not surprisingly, Freddie Mac's plan has upset the appraisal industry. A spokesman for the largest professional group in the field, the Appraisal Institute, called the impending new program "irresponsible" and a "sleight of hand."

Plan called `misleading'

Don Kelly, the institute's vice president for public affairs, said the new concept "adds significantly" to Freddie Mac's potential risk of financial loss in the event of an economic downturn.

He also characterized it as "misleading" since "[Freddie Mac] seems to be telling people, `You don't really need an appraisal,'" while at the same time making heavy use of appraisal and public property data in its electronic valuation models.

Kelly pointed out that as one option for lenders, many appraisers already offer "streamlined" valuations for "half the usual cost." Streamlined appraisals typically cost $200 or less.

Fannie Mae, the other giant American purchaser of home loans, says it is doing "pilot" tests of the all-electronic appraisal concept. But, said a spokesman, "we have not made any final decisions" on whether to compete with Freddie Mac on what will almost certainly be a cost-cutting innovation heavily in demand by homebuyers.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. NW, Washington D.C. 20071.

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