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FHFA’s Massive Expansion of Appraisal Waivers: What It Really Means

by Isaac Peck, Publisher

“Not to be melodramatic, but I don’t see how our profession survives this onslaught.” This is what one appraiser wrote on Facebook in response to the latest news from the Federal Housing Finance Agency (FHFA) regarding appraisal waivers. Another commenter wrote that they were glad to be retiring in a year, while a third declared “Everybody hates us.”

On October 28, 2024, the FHFA proudly announced at the MBA Annual Convention in Colorado that it was significantly expanding the eligibility criteria for both appraisal waivers and waivers + property data collections deployed by Fannie Mae and Freddie Mac (the Government-Sponsored Enterprises, or GSEs)—in lieu of traditional appraisals.

Prior to the announcement, appraisal waivers and waiver + property data collections could only be used by the GSEs on purchase transactions where the mortgage had a loan-to-value (LTV) ratio of 80 percent or less. However, the FHFA announced that now all purchase loans with LTVs up to 90 percent will be eligible for appraisal waivers, and purchase loans with LTVs up to 97 percent will be eligible for a waiver + property data collection.

This is a significant change in policy for the GSEs, who currently control an estimated 65 to 70 percent of the United States’ mortgage market. On its face, this sounds like a tremendous expansion of both waivers and property data collections.

Appraisers are, quite understandably, alarmed. The appraiser profession has been struggling with historically low volume and tremendous fee pressure from appraisal management companies (AMCs), so an expansion of waivers in today’s current climate is a move that seemingly adds insult to injury.

So just what kind of impact will this change have on the appraiser profession? And what’s at risk for appraisers and other stakeholders in real estate transactions?

Here’s an inside look at what this announcement really means for appraisers and the mortgage industry as a whole, with interviews from those opposed to the changes, and from those who are making them happen.

Risks to the System
Mark Calabria, former Director of the FHFA and currently a senior advisor at the Cato Institute, finds this move by current FHFA leadership irresponsible. It’s not that he is opposed to all waivers; as FHFA Director during the COVID-19 pandemic, he approved expanding them for public health reasons, a decision not everyone agreed with, but which he takes ownership of now. “I will take ownership of what we did during the pandemic. In 2020, there were significant concerns about appraisers going into homes and the expansion of waivers was meant for public health purposes. The waivers were meant to be temporary and we made sure there were mechanisms in place to study the performance of loans that were granted waivers,” Calabria says.

But things are different now. There is no public health emergency, and the guardrails that accompanied the COVID-19 waivers are being abandoned, according to Calabria. He believes this is because GSEs see the appraisal process as adversarial to home sales rather than a vital part of the process. “When I was FHFA Director, Fannie and Freddie were very upfront about their view that the appraisal process was just friction to be smoothed out. They compete with each other for originator business, and they want to squeeze friction out of the process. They don’t see a lot of value to the appraisal process. Notwithstanding the problems that Zillow found itself in, they have a view that appraisals can be replaced by big data and see themselves as the curators and holders of that data,” Calabria argues.

The FHFA worked to slow that process when Calabria was Director, he says, but is now doing a 180-degree turn. “FHFA is supposed to be a safety and soundness regulator. What we’re seeing today is a real abandonment of that. Pressure on appraisals was a factor going into the 2008 real estate crash, so it’s very disappointing to see this regulator, which was specifically created to deal with these very issues, take a different direction. This is a reflection of current leadership that doesn’t see FHFA as a safety and soundness regulator, but instead sees them as a junior version of HUD, laser focused on housing access issues and obsessed with making it easier and easier to get into a mortgage. They are throwing away longstanding safeguards,” observes Calabria.

The result will be that families will get in over their heads and pay the price for these shortcuts, Calabria predicts. “With the historic decline in housing affordability, the Biden administration is looking for scapegoats and appraisers are getting kicked while they are down,” he says.

So, what is to be done? Calabria says the appraisal profession needs to better argue its case to the government. He believes there is a real onus on appraisers to “be able to communicate with policymakers in Washington about the value of the appraisal. The general view is that the appraisal is just a compliance exercise and if you can get rid of it, all the better. Appraisers need to educate policymakers on why appraisals are important,” he says.

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Gaming the System
Ed Pinto, Senior Fellow and Codirector of the American Enterprise Institute (AEI), agrees with Calabria that expanding the use of waivers is risky. While Pinto says it will be hard to predict exactly how many additional waivers will result from this expansion, it is easy to see how the FHFA’s move allows players in the real estate market to game the system, which he argues will ultimately hurt the buyers, sellers, and appraisers.

“When the market finds something like this, they’ll figure out how to game it,” Pinto says, explaining that the industry learned this in the late 1990s with the development of automated underwriting. Loan officers could submit loans multiple times to Fannie Mae, putting higher income numbers in each time, until the system granted a “No Doc” status, meaning the loan was approved with no documentation required. Pinto sees the same logic at work with waiver expansion. In both the past and present cases, what drives the loosening of requirements is FHFA’s goal of increasing affordable housing, he says. “That’s what FHFA said, and it’s the same driver of the stuff that happened in the 1990s and the early 2000s. It was the same reason. The same goal that got them into trouble last time.”

Financially motivated individuals in the mortgage business, enabled by FHFA’s affordability goals, have incentives to find a loophole with these types of automated processes. “We know gaming happened in the early 2000s. Not everybody in the industry, but certainly a portion of the industry is going to be very creative. Last time, it took a long time, but by the time the gaming of the system was figured out, the GSEs were already in conservatorship. If I were at FHFA, I wouldn’t be doing this. I think it’s too risky,” Pinto says.

How It Works
It may come as no great shock that Lyle Radke offers a different viewpoint to Pinto’s and Calabria’s assessments. As principal of collateral risk at Fannie Mae, Radke says this change in policy around waivers and LTV is not as substantial as many stakeholders are making it out to be.

It’s interesting to note that based on data published by the AEI, based strictly on LTV, half of the mortgages that Fannie and Freddie acquired in the last 12 months had an LTV or 80 percent or less and technically qualified for a waiver, and yet, only around 14% of all purchases actually received a waiver. This suggests that LTV is not the driving factor behind the decision to issue waivers. In other words, it is as if Fannie and Freddie (and FHFA, by proxy) is saying that they don’t want their hands to be tied by the LTV of a given property. If there is a tract home in a cookie-cutter subdivision with 4 comps right next to the subject property, and a prior appraisal on file from 18 months ago, why not issue a waiver at a 90 percent LTV? (Or so the argument goes.)

This leads to a question: If LTV is being rejected as a useful barometer of when an appraisal waiver, or a waiver + property data collection is offered, then what will the GSEs be looking at? Radke begins to answer this question by explaining that a waiver is only offered on properties where Fannie Mae has a prior appraisal, which he says demonstrates how much Fannie values appraisers and needs them for their models. “We appreciate our partnership with appraisers, and we consider them the backbone of our collateral risk management program. The obvious evidence of this is that we need a UCDP-compliant appraisal on file in order to offer a waiver,” says Radke.

The UCDP, which stands for Uniform Collateral Data Portal, is a dataset that is compiled and shared by both Fannie Mae and Freddie Mac. Launched in Sept. 2011, UCDP became mandatory for lenders to use in March 2012. An estimated 70 million appraisals have passed through it. How recent does an appraisal need to be for Fannie to rely on it for waiver purposes? “We offer Value Acceptance based on available data and a proprietary modeling framework and the age of an existing appraisal is taken into consideration,” Radke says.

Fannie Mae will also take into account things like significant weather events and natural disasters that may have taken place since the past appraisal. Such events might mean that no waiver would be offered, or they might trigger further collection of data on the property. The goal is to ensure Fannie has a clear idea about the current condition of the property, Radke explains.

Finally, Fannie Mae will also look at property type and value validation, as Radke describes. “We look at property quality and condition. Because we have a prior appraisal on file, we’ve seen this property before, and we have a full Uniform Appraisal Dataset- (UAD) compliant appraisal to reference. We can check the property condition and if the property was in poor condition last time we saw it, we will not offer a Value Acceptance,” says Radke.

Value validation will be the biggest reason a waiver will not be offered, according to Radke. “If a property is somewhat unique or there is a lot of complexity in the market data, that would typically result in a lower model confidence which would then require an appraisal. In terms of when we’re going to offer waivers, we’re looking for cases where data is easily validated and we feel the probability that the value is there is reasonable,” Radke explains.

In response to arguments that lenders and loan officers may be able to game the system, Radke points out that the incentive, if it does exist, would be for lenders to lower their value estimates, i.e. producing a safer loan. “In most types of mortgage fraud that relate to value, one of the facilitators is to get an inflated appraisal. In our system, the higher you put the value, the more likely you are to fail the value validation test and not get a waiver. We do take this seriously, we do have a robust control environment to ensure we’re making prudent decisions in how we validate the collateral. We do model performance testing and we have robust audit procedures. We also do regular post-acquisition loan and ‘value’ reviews. We’re very proud of the robust model control environment we’ve built,” Radke says.

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Property Data Collection
Addressing property data collections specifically, Radke says that appraisers are well positioned to do property data collections. “Some appraisers really enjoy this aspect of field work and this change allows appraisers to diversify into this. There is a lot of opportunity for appraisers to get involved as property data collectors,” says Radke.

But will that involvement come at the cost of professional standards? When asked directly if Fannie Mae had a position on whether property data collectors should be licensed, Radke says that’s not his decision to make, or even to weigh in on. “We are completely neutral on the question of whether or not PDCs should be licensed. Per our Selling Guide, we do have guidelines for who can collect property data. Property data collectors need training and vetting. They need to be independent, i.e. a neutral party who has no relationship with the transaction. They need to pass a background check annually. And they need to use technology to collect property data,” says Radke.

In terms of passing an annual background check and being trained specifically for property data collection and inspections, Radke points out that these requirements are higher than what most appraisers have to meet. Few appraisers have to get annual background checks and many appraisers spend their training on market analysis, rather than learning to collect data on the property, Radke suggests.

Radke also believes that the new technology being developed to assist in the property data collections and to scan properties will help increase data accuracy and cut down on fraud. “We’re excited about the capabilities of technology. We’ve seen enough cases where appraisals, which have been the backbone of the mortgage industry for decades, have mischaracterized the characteristics of properties. Sometimes it’s a simple mistake, sometimes it’s fraud, which thankfully is a low rate. With technology, you can take human discretion out of the process with things like data validation and geolocation, so those aspects of the tools are really interesting,” remarks Radke.

While the GSEs do not take official positions on government policy or questions like licensing, some industry insiders have been quietly suggesting that licensing of property data collectors is not necessary because the technology will soon be available for homeowners to scan their own homes, a prediction that would naturally alarm the profession. In response to that concern, Radke says, “The practical reality of today is that the technology is not quite there yet. Today’s applications require human data input from a trained professional human. That’s why we need property data collectors.”

Future of Appraisers and Appraisal Volume
Strictly looking at the LTV and waiver criteria, FHFA and the GSEs have basically expanded the conditions where they can use appraisal waivers and waivers + property data collections on most of their loans.

But according to Radke’s comments, as well as the historical way that the GSEs have used waivers over the last few years on purchase loans with LTVs of 80 percent or less, there are many other factors that the GSEs will evaluate when deciding whether to offer a waiver or waiver + property data collection.

FHFA estimates that since 2020, the appraisal waivers that the GSEs have offered have saved consumers roughly $2.5 billion dollars on appraisal fees. When asked if Fannie Mae has an estimate for how much money he thinks this latest change will “save” consumers, Radke answered that there is no specific offer rate target. “We’re not targeting a specific offer rate. We set what we consider to be the safe parameters for these products. For those properties that fall outside that, we’ll require the lender to get an appraisal. The raw volume of waivers is going to be dependent on economic conditions. If we go into a recession, you’ll see fewer purchases. If the economy starts expanding really fast, we’ll see more purchases [and more properties that qualify for a waiver, as a result]. That will drive it. Overall, it will only be a fraction of all loans we get. The offer rate will be relatively low,” says Radke.

Radke addresses the climate of fear and uncertainty that is present in the appraiser profession by making two key points: (1) Appraisers remain a very important, integral part of the GSEs’ collateral risk management strategy, and (2) this latest change will have only a small impact on appraisal volume.

“Based on the announcements that have been made so far, I can understand that appraisers might be concerned. I want to emphasize that this will have only a small impact on appraisal volume. This is an incremental change. Appraisers play a vital role in housing finance, and they will continue to play an important role in the foreseeable future. There are so many things appraisers do well and there are so many loans where we are not comfortable offering a waiver. As we look to the future, it is true that the way appraisers work may be a little different. It’s already evolved and it’s going to continue to evolve,” says Radke.

In order to demonstrate the centrality of the appraiser’s role in the GSEs’ future plans, Radke points to the “millions and millions of dollars” he says have been spent designing the new Uniform Appraisal Dataset that is expected to be rolled out in 2026 and 2027. The new UAD will streamline the rules, guidelines, and terminology used in appraisals, eliminating the delays in current data management (so the argument goes).

The GSEs are also partners on the Appraiser Diversity Initiative, where significant investments are being made to support new entrants into the profession. “We’re very serious about supporting ADI. It’s a relatively new program that has grown a lot. We’re very proud of these results. We need people to continue to enter the appraiser profession—people who are analytically minded, able to learn good appraisal and risk management techniques, and who can raise the bar for appraisal quality. We wouldn’t be making these kinds of investments if we didn’t anticipate a large role for appraisers in the future,” Radke points out.

With appraisal waivers sure to increase on some level, and with housing markets as unpredictable as ever, time will tell how negatively FHFA’s latest waiver expansion will hurt the appraisal profession.

About the Author
Isaac Peck is the Publisher of Working RE magazine and the President of OREP Insurance, a leading provider of Appraiser E&O insurance that includes additional Discrimination Claim Coverage for appraisers (many programs exclude this important coverage). OREP serves over 10,000 appraisers with comprehensive E&O coverage, competitive rates, and 14 hours of free CE for OREP Members (CE not approved in IL, MN, GA). Visit www.OREP.org to learn more. Reach Isaac at isaac@orep.org or (888) 347-5273. CA License #4116465.

OREP Insurance Services, LLC. Calif. License #0K99465