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Desktop Appraisals: Interview with Fannie Mae

by Isaac Peck, Editor 

With Fannie Mae and Freddie Mac officially accepting desktop appraisals, it is clear that change has come to the appraisal industry. Working RE sat down with Lyle Radke, Senior Director of Collateral Policy at Fannie Mae, to better understand how Fannie Mae will be rolling out this product and what Fannie sees for the future of appraisal.

Question: What are some of the advantages Fannie Mae believes that desktop appraisals have over traditional appraisals?

Lyle Radke: The desktop product removes the fieldwork requirement. So, the primary advantages are that it has the potential to alleviate capacity concerns and lead to faster appraisal turn-times. While we don’t track appraisal turn-times and fees, we do hear feedback on what’s happening out there. We’ve heard in some parts of the country, it can take a long time to get an appraisal completed.

Question: How can desktops help alleviate appraiser capacity? What percent of traditional 1004 assignments will qualify for desktop appraisals?

Lyle Radke: We believe desktop appraisals may alleviate capacity constraints since they eliminate the field-work requirement, meaning that appraisers no longer have to spend hours driving from house to house or inspecting the subject property in the field. There is a case to be made that the highest and best use of appraisers is as market analysts, not performers of fieldwork. If appraisers are able to do this efficiently, it will save time.

To your second question, our eligibility requirements are very straight-forward. The desktop appraisal is an eligible option for purchase transactions where there is a single unit, single-family home, and the loan is for a primary residence at an LTV of 90% or lower. This is the criteria we are using to determine eligibility. We don’t have hidden rules that draw on urban versus rural, or tract home versus custom built, et cetera.

If a property meets these simple criteria, it is eligible for a desktop appraisal. Within the purchase bucket, this would mean that roughly half of conforming purchase transactions may be eligible for desktop appraisals.

We certainly hope that lenders and appraisal management companies (AMCs) will help the process. This doesn’t need to be entirely on the appraiser’s shoulders to determine whether or not it’s going to work. I could see a big lift for rural assignments. If you’re having to drive all over, this could be a real efficiency boost. When I was appraising, I did a lot of rural work. I did 100 miles every day, on average. If I could have cut that in half, I could have saved a lot of money and a lot of time.

Lenders and AMCs could do pre-work to see if necessary information and exhibits are available on a property. We know there is currently a lot of discussion amongst appraisers as well. We’re going to watch, see how this works, tweak and adjust it over time based on what we see.

Question: Why are you requiring floor plans? How does Fannie Mae anticipate appraisers will get access to the floor plans of the homes?

Lyle Radke: We want to make sure that appraisers have all the information they need to formulate a credible opinion of value. If they don’t understand the functional utility of the property, that may prevent them from accurately performing the assignment. Those around the appraiser, the lender, the listing agent, they are the ones who are going to have to step up and provide the floor plan. It’s intended to be something to help the appraiser to have enough information to do their job.

Functional utility refers to the flow of the floor plan. Is the function of the floor plan useful? Let’s say, for example, you’ve got a house where you come in the garage and as you enter the garage you’re stepping into the bathroom. That would have an effect on the value. Functional utility absolutely impacts value. People pay more for houses that flow well.

How do you get from the garage to the kitchen? What kind of privacy do you have in those situations? These questions are important to establishing a home’s value. Appraisers already adjust for functional obsolescence. It is a longstanding requirement for all Fannie Mae appraisals. In fact, we already require appraisers to provide a floor plan in cases where they identify functional obsolescence.

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Question: One of Fannie Mae’s requirements is that data “provided by parties with a financial interest in the sale or financing of the subject property must be verified by a disinterested source.” How will this work with MLS data and video walk-throughs? If the appraiser is looking at the camera on a livestream with the listing agent, does that count as verification?

Lyle Radke: When we talk about the source of the floor plan, there are a number of different companies with app-based phone technologies that will allow the user to generate a floor plan through photos taken and measurements taken in the home. In cases where the app is generating the floor plan and the data is coming from the app itself, the Certification 10 obligation to validate or verify interested party information wouldn’t apply.

We are also intending for the appraiser to rely on MLS data. Some of that may come from the assessor and it may come from a real estate agent. Verification should not be confused with recreation. We are not asking the appraiser to recreate the data from an independent source. The appraiser has broad discretion in how they verify the information. The appraiser should be asking: does this information make sense?

Examples of how appraisers can verify the information include: (1) third-party websites that provide aerial or street level photos; (2) floor plans or imagery generated by third-party applications; and (3) with the remote viewing tools available today where the appraiser can view the property with their own eyes. The appraiser is responsible for producing credible assignment results and we are leaving it up to the appraiser how to verify the various data points. The appraiser has broad discretion and can decide which points of information they are concerned about and which data points need further investigation and verification. Fannie Mae is not going to prescribe to them precisely how to verify everything. The intent is not to make this any harder than it has to be.

On a typical assignment where there is enough information in the MLS and public record, an appraiser might pull data from the MLS, pull data from public records, and gather that information at their desktop. If the information fits, they can complete the assignment. If there are points the appraiser is uncertain about, then they could take additional steps. They may contact the homeowner, real estate agent, or another party to the transaction. They can take additional steps to verify information and answer key questions on an as needed basis.

It will be up to the appraiser to decide whether or not the public record is sufficient. If the appraiser believes the public record is reliable, there is no need to go any further. Fannie Mae is not mandating or requiring a remote inspection. Appraisers do this all the time with comparable sales. The appraisal industry has a long history of reconciling disparate data sources, being detectives and figuring out where the gaps in the data are. We do this with comparables all day, every day.

Here is one more example: Imagine that the appraiser receives a floor plan from the MLS as an exhibit. Hopefully that floor plan gives an indication of where it came from, but the appraiser could research where it came from, what company did it, what quality controls they have, and so on. If the property is X sq. footage, the room count matches, and I’m scrolling through photos and I see three pictures of different bathrooms—I can get a comfort level around this information.

Question: Will interior pictures be required by Fannie Mae? Encouraged?

Lyle Radke: The desktop appraisal requirement is exactly the same for all our appraisals. The Fannie Mae Selling Guide Section B4-1.2-01 is a great resource for appraisers.

Here are the requirements:

Exterior Photographs: Clear, descriptive color photographs showing the front, back, and a street scene of the subject property and the front of each comparable. The subject and all comparables must be appropriately identified.

Interior Photographs: At a minimum, the report must include photographs of the following:

• the kitchen
• all bathroom
•  main living area
•  examples of physical deterioration, if present, and examples of recent updates, such as restoration, remodeling, and renovation if present.

These requirements are the same across all appraisal products, including the new desktop appraisals.

Question: Fannie Mae has decided not to offer desktop appraisals for second homes, investment properties, cash out refinances, and 2–4-unit properties. Why has Fannie Mae made this determination? In what cases is a traditional 1004 preferable to a desktop appraisal?

Lyle Radke: The first thing that drove our decision around the eligibility box is, if you go back to the pandemic, we had a temporary, non-technical solution. We asked appraisers to copy and paste an alternate set of certifications and Scope of Work. So, we have a desktop appraisal form, rolled out in 2020 and we only have a URAR version, meaning we never created another version for other property types. For simplicity’s sake, we’re best prepared to do the single-family residence.

Beyond that, there are some other issues. Regarding the question of purchase versus refinancing, if it is not a purchase transaction, you may not have current MLS data. For example, you may not have your primary data source available. Another aspect is with a purchase transaction, you generally have some market discipline around that contract price. That’s not to say the contract price is always supported, the market is comprised of the actions of the participants in that market, and that is reflected in the aggregate of the transactions. So, by definition, the typical purchase transaction will be at or near market value. You will have outliers and exceptions, of course. But all of that goes away in a refinance. There is no market exposure and the appraiser is working from a blank slate.

Now some of the other questions: Why not second homes or investment property? Part of Fannie Mae’s mission is to promote homeownership, so we’d rather start with desktop appraisals in a space where it best promotes the mission. The purchase of primary residences is also the cleanest transaction in terms of motivations. It’s less likely to be speculation or tied to a business venture, and has a more straightforward, simple risk calculus. So, a single family home that is a primary residence avoids higher risk influences such as non-owner occupied and business interests.

About the Author
Isaac Peck is the Editor of Working RE magazine and the President of OREP, a leading provider of E&O insurance for real estate professionals. OREP serves over 10,000 appraisers with comprehensive E&O coverage, competitive rates, and 14 hours of CE at no charge for OREP Members (CE not approved in IL, MN, GA). Visit OREP.org to learn more. Reach Isaac at isaac@orep.org or (888) 347-5273. Calif Lic. #4116465.

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