Desktop appraisals arrived in March of 2020, allowing the housing market to keep humming while many stayed indoors to prevent the spread of COVID-19.
Allowing appraisals without a walk-through was one of several flexibilities the Federal Housing Finance Agency allowed in light of the pandemic. Use of desktop or exterior-only appraisals peaked in April 2020, reaching a share as high as 17% in some places. By the end of 2020, FHFA signaled publicly it was considering hybrid appraisals on a permanent basis, following proposals from both Fannie Mae and Freddie Mac.
In a December 2020 request for information, FHFA highlighted potential benefits of desktop appraisals, including assisting training of new appraiser trainees, and alleviating appraiser shortages in rural and high-volume areas. It also pointed out potential pitfalls of a non-traditional approach.
There were risks, FHFA wrote, because a ”uniform regulatory framework does not exist at both the state and federal levels that holds non-appraisers accountable for their work on appraisals.” A recent federally commissioned report further detailed the appraisal industry’s dysfunctional regulatory regime.
But any risks appear to have been resolved. In October 2021, FHFA Acting Director Sandra Thompson announced to a crowd of mortgage industry professionals that desktop appraisals would become permanent, starting early in 2022. In January, Fannie Mae said it would start accepting desktop appraisals, where an appraiser need not perform a walk-through, for some agency-backed loans after March 19.
The option is limited to purchase transactions, secured by a one-unit principal residence with a loan-to-value ratio of no more than 90%. Loans for second homes, investment properties, cash-out refinances, construction loans, multi-unit properties, renovation loans, condos, co-ops or manufactured homes are not eligible. Any loan application flagged as ineligible by Fannie Mae’s automated underwriting system will have to use a traditional appraisal.
A Fannie Mae spokesperson said that appraisal modernization and digitization, and specifically the launch of desktop appraisals, can offer different career opportunities for a new generation of appraisers. Appraisers could earn more by doing more appraisal reports, the spokesperson said, spend less time and money traveling to appointments, and could more easily work from home, assisted by remote data collection.
The new policy is welcomed by lenders, who often view appraisals as a “pain point” and have sought to reduce turn-times. But there is at least some skepticism of desktop appraisals from appraisers themselves.
D. Scott Murphy, CEO of D.S. Murphy and Associates Real Estate Appraisers and Consultants, raised concerns about bearing the liability for an appraisal, but relying on second-hand information. Desktop appraisals, he said, still hold the appraiser responsible for getting the correct information.
“The only difference is that the appraiser is not required to visit the property,” Murphy said. “That is completely different from doing a traditional desktop appraisal which is done on an abbreviated form with all kinds of exceptions and clauses to protect the appraiser when he has to make certain assumptions.”
Although appraisers can do desktop appraisals from a remote location, they must have accurate floor plan data. Where they get a reliable floor plan sketch is somewhat of a gray area, however. Few listings — only about one in 10, according to Ken Dicks, director of appraisal compliance and initiatives at Reggora — include that data.
The need for accurate floor plan data could indirectly spur the appraisal industry to replenish its dwindling ranks, by giving something for appraiser trainees to do. Trainees could collect the data, and be paid for providing a useful service. Since trainees are not allowed to do appraisals without the supervision of a licensed appraiser, appraisers have little incentive to take them on.
But relying on other sources for the data needed to conduct a desktop appraisal, the listing agent, for example, could be risky. Listing agents have a clear motivation to provide information that might pad an appraisal.
“If the Realtor says there are hardwood floors throughout, and the appraiser puts that in the appraisal report and it’s not the case, that’s a problem,” Dicks said.
Some have also touted he cost benefits that desktop appraisals could bring.
A Fannie Mae spokesperson said desktop appraisals “could help make the appraisal process more efficient in a safe and sound manner and have the potential to reduce costs and time for homebuyers, homeowners, and appraisers.”
Lenders, the spokesperson added, are keen to “understand how to operationalize desktop appraisals because they appreciate the process efficiencies and potential cost savings for borrowers.”
But Sean Pyle, president of appraisal management company Valutrust Solutions, says he’s already dealing with pressure from lenders who are expecting desktop appraisals to reduce their costs, too.
“My counsel to clients I speak with is, ‘Don’t think about this in any other terms than potential time savings,’” Pyle said. “Don’t try to wrap cost savings into this.”
There’s an assumption, he said, that because appraisers could produce an appraisal more quickly, it should be cheaper. But appraisers, not lenders, assume the liability for producing a complete report.
“There’s still some battle scars from 2006 to 2009 where appraisers were made to be the scapegoats,” Pyle said. “But it wasn’t an appraiser deciding to loan 125% of a home’s value for a 3/1 adjustable rate mortgage. The lenders may not like the appraisal process, but they aren’t the ones taking on the risk.”
Appraisers are also likely to balk at another pay cut. In the years after the great recession, appraisal management companies proliferated, which ate into appraisers’ compensation.
Lisa Rice, CEO of the National Fair Housing Alliance, has observed in many sectors of the mortgage industry that cutting costs can also come at the expense of quality. Oversight, in those cases, becomes extremely important.
“Every time you’re paying someone on the ground less, what does that mean about the quality? That lets you know that you really have to be on your p’s and q’s to make sure the quality is there,” said Rice.
For now, however, industry observers are taking a wait-and-see approach with desktop appraisals. Kroll Bond Ratings Agency, in a January 2022 pre-sale report, said they gave a “broad valuation haircut” to all loan pools with appraisal waivers.
Jack Kahan, senior managing director for residential mortgage-backed securities at Kroll, explained they performed the haircut because “there is no third-party value provided to KBRA to substantiate the lender value.”
For loans with desktop appraisals, however, Kahan explained there is no discount, although he said that for loans with desktop appraisals or appraisal waivers, it’s possible that could change “in either direction for either product” as they evaluate performance over time and gather more data.
“For loans with desktop appraisals, since they are performed by licensed appraisers, follow appraiser independence requirements, among other reasons, we generally do not haircut values.”