Ensure balance between innovation, transparent standards and protection from undue risk in the housing finance system.
The private MI industry recognizes there are opportunities to modernize appraisal processes and improve the quality of residential property valuation practices. However, it is critical that there be appropriate transparency, monitoring, and governance. If done properly, collateral valuation and risk assessment can benefit from the significant advancements in technology, data aggregation, and analytics. Accurate valuations are of utmost importance for buyers and sellers, and have a material impact on risk within the housing finance system as the underlying valuations affect loan-to-value (LTV) ratios and the appropriateness of pricing and risk assessments. As the government-sponsored enterprises (GSEs) seek to modernize their valuation policies and technologies, it is critical there be a balance between innovation and the need for transparent standards and appropriate protections from undue risk in the housing finance system.
USMI urges FHFA to implement measures to better tailor the use of appraisal alternatives that support the following principles:
- Employ a risk-based framework to determine the appropriateness of alternatives to full appraisals, such as appraisal waivers and desktop appraisals, which includes transparent compensating factors.
- To the greatest extent possible, FHFA should promote policies that prioritize an inspection of properties collateralizing mortgage loans for the purposes of value estimation and property eligibility.
- Greater transparency and sharing of data around the GSEs automated valuation models (AVMs) and how they leverage data in collateral valuation and underwriting.
Our additional observations and recommendations for elements of appraisal modernization and alternatives are listed below.
- FHFA should require that a property receiving an appraisal waiver have a prior full appraisal on file that was completed within the past five years for transactions with LTV ratios above 70%. The appraisal on file must not predate a natural disaster event in the geographic area where the property is located.
- There should be prudent LTV maximums for appraisal waiver decisioning to protect against the mispricing of mortgage credit risk and increased risk to the American taxpayer. Specifically, appraisal waivers should be limited to mortgage transactions that meet certain eligibility criteria and with the following LTV maximums:
- 90% for rate/term refinance of a one-unit primary residence or second home
- 80% for purchase of a one-unit primary residence or second home
- 70% for all other transactions
- Implement a risk-based framework to determine the appropriateness of appraisal waivers on a loan-by-loan basis and prevent inappropriate competition between the GSEs, especially as it relates to the 80% LTV threshold that triggers MI requirements and LTV eligibility/pricing thresholds (e.g., 85% or 90%). The framework should include a transparent and uniform set of compensating factors to be considered during the waiver decisioning process and specific risk factors that trigger an upgrade to a desktop review or full appraisal during the underwriting process. Please see Appendix A (on the PDF below) for possible considerations for appraisal alternative decisioning.
- FHFA should implement policies to address the potential for “gaming” to test and shop appraisal waiver programs to reduce LTVs and/or reduce or eliminate MI coverage requirements. “Automated underwriting system (AUS) switching” has the potential to incorrectly value collateral and negatively affect long-term credit risk management.
- FHFA and GSE policies should promote standardization, accountability, and oversight of AVMs and automated valuation providers. There should be greater transparency for market participants regarding which AVM is used and the rigor of the AVM approval process.
- Rather than relying on the extensive use of appraisal waivers during underwriting, FHFA should promote policies and processes that utilize desktop appraisals and retain an inspection of properties collateralizing mortgage loans for the purpose of the value estimation and property eligibility.
- FHFA should implement explicit requirements for the GSEs and lenders to develop effective processes for ensuring that appraisers being considered for desktop appraisal assignments are sufficiently proximate and experienced in the local market in which a property is located to credibly assert local market knowledge.
- The vast majority of COVID-19 appraisal flexibilities should remain part of the GSEs’ appraisal modernization efforts and are beneficial in disaster situations to lessen market impacts. However, the one flexibility that should be reexamined is the use of unvalidated property information. The use of unvalidated/uncorroborated property information by a borrower or seller poses a risk to the reliability of such information when used by an AVM, exterior-only appraisal, or desktop appraisal in collateral valuation. Property condition, quality, and features are prominent components of property value and should be obtained from sources who are reasonably considered to be objective and impartial rather than from parties with a vested interest in the transaction.
- As FHFA and the GSEs contemplate the expanded use of appraisal flexibilities and technology, it is important that there be a true balance between accurate property valuation and transactional efficiency. FHFA should establish a transparent piloting mechanism for appraisal flexibilities before broad application, and stakeholders should have the opportunity to provide comments and analyze data to help FHFA determine whether adjustments are warranted.