Federal regulators require banks to prepare documentation that fully explores their response to potential market forces that could put stress on their institutions or the broader economic system. Rarely do sub-processes of mortgage loan origination have the opportunity to undergo similar stress tests. That changed in March 2020 when the COVID-19 virus struck.
It quickly became apparent that the health risk would prevent professional fee appraisers from entering properties in order to inspect them for their appraisal reports. The industry was on the cusp of a serious crisis. Without accurate collateral valuation, lenders could not properly underwrite new loans.
Fortunately, Fannie Mae and Freddie Mac were very transparent about their analysis of the situation and the flexibility they were willing to extend to the industry. The GSEs responded with a two-pronged approach, the first was by expanding the appraisal waiver program, and second, allowing for a change in the scope of work and interior inspection relief for traditional appraisals. The second approach allowed appraisers to make use of other available technologies to complete their reports.
Appraisers, to their credit, were back up to speed in less than two weeks. The impact on the appraisal business lasted all year. In December, Fannie Mae issued Lender Letter LL-2020-04, in which it extended its temporary flexibility into the new year.
In October, the Federal Housing Finance Agency that oversees Fannie and Freddie expanded appraisal flexibilities again, this time making desktop appraisals acceptable for new purchase money loans in 2022 as part of the government’s efforts to better serve low- to moderate-income borrowers. This was made possible because the COVID-19 Appraisal Stress Test of 2020 proved that appraisers were up to the task.
It’s important to remember that nothing in the flexibilities offered during the COVID crisis did anything to reduce or remove the appraiser’s responsibility to produce the same kind of reports they have been providing to lenders for the past 40 years. The appraiser is still required to provide a scope of work that is sufficient to ensure that their results are credible.
The appraiser’s standard is still a valuation that is believable, regardless of whether they get access to the interior of the property or not. Doing exterior viewing or desktop analysis does not relieve the appraiser from doing the due diligence required to make sure that their presumptions are accurate.
That’s exactly what appraisers did during the COVID crisis and continue to do today. From an appraiser’s perspective, the scope of work required by the FHFA flexibilities was nothing new. They’ve dealt with that before.
Mortgage servicing is a good example. When foreclosure is imminent, the appraisers are asked for an exterior only appraisal. But that doesn’t mean they are only looking at the outside of the structure. They are doing whatever due diligence is required — whether that be looking at town records for building permits or checking the internet for any record of the property — to make certain that their assumptions are reasonable.
Home Equity lending is another case in point.
The lessons we learned during the pandemic were not about appraisers and their abilities. Rather, the nation’s largest investors learned that when the borrower’s credit supports the transaction, we can pull back on some of the inspection requirements for the appraisal. The tolerance for margin or error is stronger when the borrower’s credit score is high or the LTV on the deal is low. When that happens, you can be more flexible on the appraisal.