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A Lender’s Guide to Navigating the Appraisal Modernization Path
Written by Chuck Mureddu
May 11, 2023
In Fannie Mae’s March Selling Guide Announcement, the government-sponsored enterprise introduced updated guidance to lenders and mortgage industry professionals aimed at modernizing the valuation process.
According to the announcement, “Valuation modernization helps lenders, appraisers, and risk investors manage collateral risk more effectively, while also benefiting consumers via greater appraisal accuracy, lower costs, and increased speed of loan decisions.”
In an effort to make the home appraisal process more accurate and efficient, Fannie Mae will transition to using a variety of traditional and alternative appraisal options to establish a property’s market value, “with the option matching the risk of the collateral and the loan transactions.”
These appraisal options include:
- Value acceptance
- Value acceptance + property data
- Appraisal Update and/or Form 1004D Completion Alternatives
- Hybrid appraisals
In this blog post, we’ll provide an overview of the updated options and discuss best practices for lenders who want to streamline the valuation process by leveraging desktop and hybrid appraisals.
Fannie Mae’s New “Valuation Modernization” Options
The lending giant’s new path to valuation modernization introduces the following:
Fannie Mae is adapting their messaging to replace the term “appraisal waiver” with “value acceptance.” This update is meant to better capture the true process of leveraging data and technology to validate the value provided by the lender.
“Appraisal waiver” will still be used for a short time while the industry adjusts to the new language, after which “value acceptance” will be considered appropriate nomenclature.
Value Acceptance + Property Data
This is a new option Fannie Mae introduced that enables lenders to leverage comprehensive interior and exterior data gathered by third parties in the property valuation process.
To maintain consumer safeguards, lenders must confirm and demonstrate that data collectors:
- Undergo yearly background checks
- Are professionally trained, and
- Are equipped with the necessary expertise to proficiently carry out property data collection tasks
Lenders can use the gathered property data to ascertain property eligibility, eliminating the need for a separate appraisal. To leverage this option, lenders are required to submit data to Fannie Mae's Property Data API, adhering to a new data standard and delivery of Special Feature Code 774.
Alternative Methods to the Appraisal Update and/or Completion Report (Form 1004D)
Fannie Mae’s new policy introduces alternative approaches to the Appraisal Update and/or Completion Report (Form 1004D). These alternatives encompass a borrower/builder attestation letter for verifying the completion of construction, as well as a borrower attestation letter for confirming the completion of repairs for existing construction, replacing the need for Form 1004D. The policy further elaborates on the mandatory exhibits and controls.
These completion substitutes are essential for lenders to validate the completion of repairs or modifications in conjunction with the value acceptance and property data option, as Form 1004D is inapplicable when an appraisal is absent. Moreover, this modification permits appraisers to employ virtual inspection technology to enhance the 1004D process, albeit within specific limitations.
A hybrid appraisal is a valuation of a property completed by a licensed or certified appraiser remotely using digital research and records. Appraisers using the hybrid approach can employ the assistance of a credible third-party, such as a real estate agent, property inspector, or real estate appraiser.
The hybrid appraisal process resembles that of a desktop appraisal, but the appraiser is equipped with supplementary information from a third party to aid in determining the property's value. These additional resources may include:
- Exterior and interior photographs of the house taken by a third party
- An interior inspection conducted by a property inspector or real estate appraiser
- A drive-by exterior assessment along with interior inspections from a trustworthy source
- A virtual tour of the interior facilitated through a video chat with the homeowner
Hybrid appraisals typically expedite the appraisal process, particularly in rural regions or markets experiencing an appraiser shortage. This approach also grants the appraiser enhanced flexibility.
Hybrid appraisals gained wider acceptance during the pandemic, and according to Fannie Mae’s new path to modernization, they are here to stay. The new ruling states that hybrid appraisals “are permitted for certain one-unit transactions where value acceptance + property data was initially started, but changes in loan characteristics results in the transaction not being eligible for that option.”
At SWBC Lending Solutions, we provide innovative and compliant alternative valuation products for originators, loan servicers, hedge funds, and portfolio managers. Built as a result of our vast experience in valuations, we have assembled a suite of effective, cost-efficient products designed and process-engineered to meet the turnaround time and compliance needs of the financial industry.
Chuck Mureddu has more than 30 years of combined mortgage lending experience, including appraisal management, institutional risk, loss mitigation, and whole loan exit and securitization strategies. As the Chief Valuation Officer for SWBC Lending Solutions, Chuck is responsible for all valuation policy and process, quality assurance, and regulatory compliance.
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