The novel coronavirus pandemic already has had a profound impact on the U.S. economy and society. With the ebb and flow of the virus apparently set to last for some time, it’s impossible to predict the long-term implications on home valuations or overall mortgage lending volumes, with respect to both new- and existing-home sales as well as refinancing.
These may be unprecedented times with never-seen-before circumstances. Still, mortgage industry professionals have the experience and skills needed to handle these challenges in an orderly, positive manner. Since this past spring, when the chilling impact of the virus became clear, all parties involved in mortgage lending have played a strong part in restoring order and a sense of calm. Freddie Mac and Fannie Mae provided an important foundation and boost when they introduced flexibilities for the loan origination process.
For mortgage originators, it is important to understand the nature and impact of these procedural adjustments. Appraisal management companies are working with lenders and appraisers, in their consultory and supervisory capacities, to help implement these new procedures. Doing so will help all sides adapt while maintaining respectable closing times.
In response to social distancing and other realities of life during the coronavirus outbreak, Fannie Mae and Freddie Mac changed their loan origination requirements. This includes alternate methods for verifying employment before loan closing; flexibility for borrowers to provide documentation rather than requiring an inspection prior to renovation loan disbursements; and alternate appraisals for purchase loans and rate-and-term refinances.
The government-sponsored enterprises (GSEs) understood that, due to the COVID-19 pandemic, there will be instances in which a lender is unable to obtain an interior inspection of a subject property. This could be due to homeowners not wanting to allow visitors inside, an appraiser who does not want to enter someone’s home, or a local stay-at-home order or travel restrictions.
Although the full 1004 Uniform Residential Appraisal Report is the gold standard in the loan origination process, the GSEs published temporary flexibilities to property eligibility and appraisal requirements. This temporary guidance, which has the potential to be extended or reinstated as market conditions warrant, allows appraisal companies to authorize and process desktop and exterior-only appraisals for certain mortgage transactions.
These appraisal flexibilities appear to have had their intended effect. Appraisal management companies are able to assign and process completed appraisals with turn times close to normal. As a result, these companies are learning to work within the constraints brought about by COVID-19.
Although not ideal, desktop appraisals rely on the appraiser reaching out to the homeowner and verifying needed information — including basics such as square footage, construction type, conditions of the roof and heating and cooling systems, and any recent remodeling. Similar to drive-by appraisals, where the appraiser can only observe the outside of a home, the appraisal management company or lender will assign an appraiser familiar with the given neighborhood and typical housing stock whenever possible.
Across many markets, the industry is starting to see normalization of the appraisal process. Fewer appraisers are declining to do interior inspections. They are wearing masks and asking owners to make their homes accessible. This includes leaving lights on, having interior doors open and either not being home at the time of appraisal, reducing the number of people in the house or not following along as the appraisal is done.
Anecdotally, a very small number of appraisers currently are unwilling to do home inspections. Lenders that aren’t selling GSE-sponsored loans may still ask for a traditional 1004 appraisal, which appraisal companies must be prepared for.
Lenders also are taking advantage of allowing for an appraisal inspection waiver when the lending risk justifies it. Historically, these waivers have accounted for 5% to 7% of transactions. In the early days of working in the COVID-19 world, that spiked to an all-time high of about 30% but it is quickly returning to normal percentages.
There is an additional appraisal flexibility of note. The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corp. have adopted an interim final rule for appraisals. It defers the requirement to obtain an appraisal or evaluation for up to 120 days after the closing of certain residential and commercial real estate transactions.
This provision excludes transactions for acquisition, development and construction of real estate, and it applies through the end of 2020.
During the pandemic, nationwide appraisal management companies have worked to fulfill their obligations to lenders, appraisers that they supervise and all regulatory requirements. Communication is key. Appraisal management companies are helping lenders and appraisers stay current on regulatory developments, their practical impact on procedures, and turn times or audit functions.
This process includes constant monitoring of developments with the Federal Housing Administration, the GSEs and the Centers for Disease Control and Prevention, accompanied by real-time updates for both lenders and appraisers that belong to appraisal management company panels.
Although the current appraisal environment is stabilizing, it is important to not relax. The events of the 2007-2009 financial crisis are not far behind in the rearview mirror. The industry cannot forget the lessons learned in those days. Fortunately, today’s appraisal product goes through a comprehensive quality and regulatory audit. Residential appraisers are pledged to a professional code of conduct that helps protect lenders and consumers, as well as communities.
Going forward, it is important for each professional discipline — Realtors, underwriters, appraisers, lenders and originators — to follow best practices. Many lessons will continue to be learned. No one can predict where markets are ultimately headed. Industry professionals have the past decade of solid appraisal, underwriting and lending practices as a guide. ●