Fannie Mae experiment waives home appraisal

Nation's housing

January 06, 2002|By KENNETH HARNEY

COULD 2002 be the year when you buy a home or refinance a mortgage, and your lender surprises you with the news: Oh, by the way, we're not going to need an appraisal on your property. Just give us $50 at closing and we'll eliminate the $300-$350 you'd normally have to pay.

Could the most traditional and long-standing piece of the homebuying and financing puzzle - the professional property appraisal - be headed for oblivion?

Probably not - and certainly not in 2002. But the biggest player in the American housing finance market, mega-investor Fannie Mae, quietly has been moving in that direction.

With no public fanfare or announcement, Fannie has been permitting some lenders to dispense with appraisals on home purchases and refinancing, in exchange for a $50 fee.

Known as the "Property Inspection Waiver," the pilot program is being offered around the country by a select group of mortgage companies who sell loans to Fannie.

The lenders welcome the plan because it allows them to close mortgages faster, attract price-conscious loan shoppers and sometimes even lower their rate quotes. It also allows them to dispense with their customary contractual warranties to Fannie regarding the mortgaged property's condition and value. Those warranties open lenders to financial penalties should a home's stated value later turn out to be bogus.

Lenders not identified

Fannie Mae declines to identify the mortgage lenders taking part in the $50 appraisal-waiver program. But an executive of one participating firm, who requested anonymity, calls it "a great way to do business. Why do full appraisals if Fannie doesn't require them?"

Word of Fannie's no-appraisal-needed experiment has professional appraisers understandably upset. Frank K. Gregoire, 2002 chairman of the Appraisal Committee of the National Association of Realtors, calls the idea "radical" and worrisome.

"People seem to have forgotten the lessons of the savings and loan crisis of the 1980s," said Gregoire, who is also incoming chairman of the Florida Real Estate Appraisal Board. He was referring to the multibillion-dollar losses suffered by thrift institutions that lent money in recessionary markets on the basis of inaccurate or fraudulent property appraisals. Many of them subsequently had to be closed down or bailed out by the federal government, which seized and then resold thousands of overvalued properties.

A professional real estate appraiser in Richmond, Va., Patrick Turner, called Fannie's new program "ridiculous" and "dangerous."

"Common sense will tell you," said Turner, "that you can't know what a house is worth" without some form of appraisal. He gave the example of a home he recently examined that appeared normal from the outside, but was a mess inside, with no enclosed bathroom in the entire house.

"They [Fannie Mae] are trying to pull rabbits out of hats" by eliminating appraisals, said Turner, but "they're going to hurt the consumer and hurt themselves."

`Independent judgment'

Homebuyers need professional appraisals, said Turner, "so that they've got an independent judgment that what they're paying [for the property] is the correct price."

Fannie Mae, for its part, says it is not eliminating appraisals by any means, but instead is allowing some lenders to dispense with them when there is sufficient electronic valuation data available on a given house.

Some applications qualify for a total waiver. Others require appraisals with exterior-only examinations by the appraiser. Only a minority of applications need interior and exterior examinations as part of the appraisal.

Fannie Mae's competitor, Freddie Mac, has a more restrictive appraisal-waiver program.

Freddie Mac requires no appraisal on home purchase transactions where the down payment is 20 percent or more and the borrower's credit profile is strong. In such cases, Freddie charges the lender a $200 fee, which most lenders then pass on to borrowers in lieu of a full-cost appraisal.

Both Fannie's and Freddie's waivers or reduced appraisal requirements are available only on loans up to their $300,700 purchase maximum.

But Patrick Turner has a point, too: An independent appraisal could steer you away from overpaying for a house. If you spend $200,000 on a house that a professional appraiser would have valued at $180,000, you've saved $350 on the appraisal, but you've spent $20,000 too much.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071. Or e-mail him at

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