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Saying it needs to modernize the way it values properties, Fannie Mae announced significant changes Wednesday to the appraisal process for single-family mortgages it buys on the secondary market.

The changes, which took effect immediately, generally echo similar shifts fellow mortgage-buyer Freddie Mac announced months earlier.

“Valuation modernization helps lenders, appraisers, and risk investors manage collateral risk more effectively, while also benefiting consumers via greater appraisal accuracy, lower costs, and increased speed of loan decisioning,” the government-owned company said in its announcement.

“We are moving away from implying that an appraisal is a default requirement” towards a world where it relies much more heavily on data and valuation technology, it added.

Going forward, mortgage companies, credit unions and banks will have three options to demonstrate the value of a property that’s being mortgaged for a loan they plan to sell on to Fannie Mae:

Value acceptance: “Value acceptance” replicates the company’s current appraisal waiver process, where Fannie Mae takes the lender’s claim about how much the property is worth at face value, based largely on Fannie Mae’s own, proprietary automatic valuation model.

Value acceptance + property data: This approach uses a “professionally trained” third party to examines a home’s interior and exterior to collect data on the property for the lender “to confirm property eligibility,” even when Fannie Mae accepts the value the lender has assigned to the property without requiring an appraisal. The lender will still have to submit the data gathered to Fannie Mae’s Property Data API.

Hybrid appraisals: “Hybrid appraisals” will be based on data about a property’s interior and exterior, supplied by a trained third party who’s been vetted by the bank. This third party will then turn the data gathered in the course of its inspection over to an appraiser who will then analyze it similar to a desktop appraisal. Fannie Mae says it will only require this option if a lender has begun the second type of valuation process, “but changes in loan characteristics results in the transaction not being eligible for that option.“

The changes will mean disruption for the local appraisal industry, said Steve Sousa, executive vice president of the Massachusetts Board of Real Estate Appraisers trade group, particularly because both of the major players in the secondary mortgage market are now trying to move away from in-person appraisals to underwrite loans they buy.

“There are still roles [for apraisers] here, but they’re not the traditional roles,” he said “For appraisers who have been in the profession for quite a few years, making this transition is going to be difficult – what is my new role going to be? – on the other hand, if I’m not going to have to leave my home office to do most of this work, maybe that’s the way I want to go with my career. For the younger ones with an entrepreneurial mindset, they could make a career out of inspections and hybrids.”

The changes could also mean it becomes more difficult for people – particularly people of color – to enter the profession, Sousa suggested, thanks to the length and cost of training and the software needed and the new appraisal requirements eliminating demand for the kinds of jobs newly-minted appraisers could pick up to help build their client bases. The appraisal industry already struggles with recruitment and workforce diversity.

A Fannie Mae spokesperson declined a request to comment, but pointed Banker & Tradesman to several commentaries written by Fannie Mae executives over the course of 2022 that claimed the changes had broad support within the mortgage industry. The new approach, the pieces argued, would shorten the time it takes to originate a loan, save borrowers money on fees and would help fight concerns of racial bias in appraisals.

Sousa questioned whether the shift to relying on automatic valuation models instead of an appraiser’s judgement could create risks when the mortgage-backed securities Fannie Mae and Freddie Mac create from the loans they buy are an important part of the financial system.

“Valuation acceptance works on the basis that Fannie or Freddie have an existing appraisal on that property in their database, but it could be a few years old. They may not know what has gone on inside that property. That’s really troublesome,” he said. “A lot of this is predicated on the housing market being stable.”