Both Fannie Mae and Freddie Mac have begun waiving on-site appraisals on a relatively small number of qualifying mortgages this summer, and instead are now relying on data they already have, along with publicly available data, to determine the market value of a property. Critics call the move a baby-step down the slippery slope that led to the collapse of the housing market a decade ago.

Freddie Mac’s Automated Collateral Evaluation (ACE) program is limited to single-family homes and condominiums that are primary or secondary homes, up to 80 percent loan-to-value for purchases, and some limited cash-out refinance transactions as well.

Instead of requiring applicants to pay for an appraisal, Freddie Mac instead mines data it already has, in addition to publicly available data, to ascertain the market value of the home. If the numbers meet the criteria, the on-site appraisal is waived, saving homebuyers several hundred dollars and shaving a week or more off the length of time it takes to close the deal. Fannie Mae’s program is similar.

The most criticism of the plan comes, unsurprisingly, from the appraiser community. The Massachusetts Board of Real Estate Appraisers (MBREA) has several concerns about the program that go beyond just a potential loss of business for its members, said MBREA executive vice president Stephen Sousa.

“Both agencies are under conservatorship and are competing for loans,” Sousa said. “What will loan performance look like? How aggressively will they issue appraisal waivers to compete against each other?”

Freddie Mac spokesman Lisa Tibbitts said the GSE is not waiving appraisals, it’s offering a faster, cheaper electronic alternative for qualifying properties.

“We expect the vast majority of loans will still need a traditional appraisal,” Tibbitts said. “We’ve just started to roll this out. It will certainly be a minority of the loans we purchase. By allowing ACE to be used on easy-to-value properties, appraisers will be able to allocate more time to unique properties.”

Tightened Up Lending

In response to the housing crash, Dodd-Frank tightened up lending criteria – some might say it’s too tight. Others, like appraiser J. Paul Morgan Jr. of J P Morgan Appraisals in Wakefield see the rise of low down payment programs and the ACE program and baby steps down the primrose path back to the days when it seemed that almost anyone could get a mortgage on almost any property.

“We’re heading down the exact same garden path as we were in 2003 and 2004,” Morgan said. “Freddie and Fannie were loosening up underwriting standards. It became credit-based lending instead of equity based lending and the standards became less stringent. If it proceeds along this progression as it did previously, it could get really exciting in five or six years.”

Tibbitts said given the widespread pain the last crash caused, she understands those concerns, but the current lending market is much healthier than it was a decade ago.

“I think those are valid concerns,” Tibbitts said. “But today, delinquencies are under one percent and at a 10-year low. Foreclosures are way down. The mortgage market as a whole is very different than it was in 2008.”

Maybe so, but there’s no substitute for an appraisal from a local appraiser who understands the nuances of a given area, said Attorney Elizabeth K. Cotter, of Cape Cod Title and Escrow. Cotter, who is a member of REBA’s Conveyancing Section, said if a buyer is putting a 30 percent down payment on a $250,000 purchase and the ACE is off by a few thousand dollars, then maybe it wouldn’t have a big impact, especially as home values are on the rise.

“But what if they rely on a desktop appraisal that inflates the value and the buyer has a low down payment?” Cotter said. “If the buyer runs into financial hardships, we could be right back where we were back when we were doing short sales. I don’t think it ever helps to rely on desktop appraisals.”

In a position paper, the MBREA criticized the GSEs reliance on public records to form accurate opinions of value in a fast-changing market. “Public record data is yesterday’s data,” the paper said.

Morgan said if GSEs rely on an appraisal that’s a few years old, they’re taking a risk because a lot can change in just a few years.

“The house could have burned in the meantime,” Morgan said. “Or someone moved in there with 20 cats. The GSE algorithms are probably very good, but two or three years down the road, who knows? Values are going up now but what happens if 2008 hits again and you have massive decreases?”

Tibbitts said the benefits outweigh the risks and the process will be monitored internally.

“We can leverage 40 years’ worth of big data and analytics,” Tibbitts said. “We’re cutting costs and speeding up the process at the same time we’re reimagining the mortgage experience for lenders and borrowers. In part, this helps lenders and consumers contend with the high cost of originating a loan and gives full rep[resentation] and warrant relief to lenders.”

That last point is crucial for lenders, like Jay Tuli executive vice president of retail banking and residential lending at Leader Bank. He said his bank has only seen a handful of these loans, but he thinks ACE is fantastic. And full representation and warrant relief means that if there’s a problem with the loan that can be traced back to ACE, his bank won’t be forced to buy the loan back.

“It speeds up the process,” Tuli said. “Fannie has been working on this for years. For all our conforming loans – which will be sold into the secondary market – this becomes extremely valuable. The borrower can shave off two weeks off the closing date and the GSEs are giving rep and warrant relief. They’re basically saying we financed this before, we’ll waive the on-site appraisal requirement.”

Tuli said there nothing to stop a lender who feel an on-site appraisal is necessary to require one.

Attorney Cotter said the cost savings to the borrower isn’t worth the protection lenders and borrowers give up by not requiring an on-site appraisal.

“Look, you know you’re going to go out and buy a flat screen for your new house,” Cotter said. “You might as well spend half that amount on an appraisal to make sure what you’re paying is in line with market value.”