Appraisal waivers are fueling the refinance wave

The global pandemic has redefined Murphy’s law for the internet age: anything that can go digital, will go digital. But many aspects of real estate transactions still need to be completed in person. Often, this includes the appraisal, requisite for mortgage approval.

However, to keep up with demand for mortgage originations during the pandemic, appraisal waivers have become more acceptable and more common.

To qualify for an appraisal waiver consideration, Fannie Mae and Freddie Mac require the mortgage to be:

• a loan casefile with an Approve/Eligible recommendation;
• a one-unit property, including a condominium; and
• for a limited cash-out refinance:
  • a principal residence or second home with a loan-to-value (LTV) ratio up to 90%; or
  • an investment property with an LTV up to 75%;
• for a cash-out refinance:
  • a principal residence or second home with an LTV up to 80%; or
  • a second home or investment property with an LTV up to 60%;
• for a purchase transaction:
  • a principal residence or second home with an LTV up to 80%; or
  • a new construction with an existing appraisal. [Selling Guide B4-1.4-10]

Appraisals need to be conducted in person for other transactions, and for mortgages for which the lender has any reason to believe an appraisal is warranted.

More appraisal waivers as the pandemic continues

In August 2020, the share of transactions which received an appraisal waiver was 38%, up from 24% in March 2020 at the start of the pandemic. By transaction type, appraisal waivers were conducted in August 2020 for:

• 10% of purchase transactions, up from 5% in March;
• 63% of rate/term refinances, up from 49% in March; and
• 26% of cash-out refinances, up from 13% in March, according to the Urban Institute.

Appraisals are meant to reduce the risk to lenders and ultimately to the agencies that guarantee mortgages, like Fannie Mae and Freddie Mac. Without an appraisal, a homebuyer may be approved for a mortgage which exceeds the home’s fair market value (FMV), putting the mortgage holder at risk.

So, is the rapid increase in appraisal waivers a sign of danger in the market?

The Urban Institute correctly points out that the majority of the appraisal waivers being allowed in 2020 are for refinances, which are by and large already held by Fannie Mae and Freddie Mac. Further, these refinances offer lower payments or better mortgage terms for homeowners, which is only helpful in reducing the chance of future default.

However, the rising trend in appraisal waivers for purchase mortgages is something to watch.

Either way, expect 2021 to bring more delinquent mortgages and more foreclosures. Nationally, 6.4% of mortgages are delinquent as of October 2020, according to Black Knight. Of the nation’s delinquent mortgages, two-thirds of them are in some stage of serious delinquency. Servicers of these 90+ day delinquent mortgages will be able to pursue foreclosure once the foreclosure moratorium ends, currently set to happen on December 31, 2020.

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