Why is Freddie Mac throwing out automated appraisals for certain refinances that have seemingly worked well for five years?

In June 2017, Freddie introduced refinance appraisal waivers on eligible properties, expanding the program to purchase loans by September of that year.

On Wednesday, March 16, the same day the Federal Reserve raised its benchmark interest rate, mortgage giant Freddie Mac announced it will no longer allow these appraisal waivers, called an automated collateral evaluation (ACE), on cash-out refinances and certain “no-cash-out” refinances, effective July 17.

In its place, Freddie may instead offer borrowers “ACE plus PDR” (property data report). That’s Freddie’s internal “automated valuation model” or AVM and something of a physical inspection. The PDR is generated by a data collector who must answer some 200 questions after an onsite inspection. Eligible properties include single-family homes or condos as well as second homes.

It should be noted that properties worth more than $1 million did not receive these appraisal waivers. Even under Freddie’s new model using ACE plus PDR, it still won’t work for properties worth more than $1 million.

The alternative or option for the lender is to order an appraisal by a licensed appraiser. Refinance properties with two to four units and investment properties also are not eligible for this nuanced AVM and PDR process. You’ll need a complete appraisal for those.

And you might be waiting a long, long time for that appraisal appointment, which I’ll circle back to in a bit.

According to its FAQs, Freddie’s goal is to purchase loans (mortgage lenders fund loans and sell the funded or closed loans to Freddie) supported by the most reliable and appropriate valuation models available, helping to mitigate risk associated with loan default.

Why were automated valuation appraisal waivers reliable for nearly five years for so many refinances — but now not so much? Freddie representatives declined to comment.

Think of this pivot as a canary in the housing coalmine.

Housing costs have been rising for a decade. The pandemic in two years pushed prices to consecutive, record highs. As interest rates shift upward after years of record lows, will Freddie’s predictive model struggle to adjust in a downward market?

There are good reasons to put the brakes on this automation.

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The automated waiver fails to answer several key questions: Was the property ever updated? Is there deferred maintenance? Did someone rip out the fixtures and fail to replace them?

“Nothing compares to (an appraiser doing) a physical inspection,” said Lance Siegel, president of HVCC Appraisal Ordering Inc.  “You can’t see cracked foundation, dry rot, termites and ceiling stains (water leaks).

Waivers also aren’t as reliable when you’re worried about prices potentially sinking. If I had to guess, Freddie likely wants to slow down lofty equity tapping.

When home prices flatten or decline, there is a synergistic effect as distressed sales and foreclosures cannot be ignored when considering comparable sales or comps. The loftier the home price point and its accompanying loftier loan, the more potential hit taxpayers will take on a defaulted Freddie loan.

So, why isn’t a trained data collector who’s answering 215 questions combined with Freddie’s five-year running AVM good enough for pricier properties, those at $1 million or more, investment properties and units, for example?

Let’s just call it risk management.

If a mistake is made, it’s more likely going to be made by the combination of ACE and the PDR as opposed to an appraiser. So, appraisers get the assignments that likely have more complexity and more financial risk. More valuable properties, for example.

Adding to the complexities of loan approvals is the dwindling number of licensed appraisers.

During the Great Recession, Congress in 2009 rolled up the Home Valuation Code of Conduct into the 2010 Dodd–Frank Act. The idea, in part, was to put a firewall between appraisers and mortgage originators so that originators could no longer pressure an appraiser to hit a number to receive the appraisal work.

That led to appraisal management companies, which came into play in 2010. These companies get appraisal orders from the originators, adding a step to the process and slowing down what was once a more direct order. The work was then distributed to appraisers, with the management company taking a chunk of what was previously all appraiser income.

For the 2020-2021 fiscal year, California had 9,442 licensed appraisers, according to Monica Vargas, deputy director, communications at the California Department of Consumer Affairs. As the market crashed, the state had 20,032 appraisers in the 2008-2009 fiscal year.

You need a bachelor’s degree and 1,500 hours of apprenticeship to get an appraiser’s license, according to Siegel at HVCC Appraisal Ordering. And, you have about one-third more work to do on each appraisal compared with 2010, thanks to hinky mortgage tactics before the recession.

Freddie’s new move away from AVM’s will have another consequence — much longer turn-around times to get appraisals done.

Prices are over the moon. Southern California median home prices hit a new record of $706,000 in February, up 15.4% from February 2021, according to CoreLogic. That’s 19 consecutive months of double-digit gains.

Orange County’s median home price is almost a million bucks, hovering at $985,000. That’s half of the OC homes above and half below that mark.

Freddie’s maximum high balance loan limit for Los Angeles County and Orange County is $970,800.

This week Freddie Mac’s mortgage rate survey indicates the 30-year conforming fixed-rate rose to 4.16%, its highest level since May 2019.

And the prime rate moved to 3.5% from 3.25% as the Fed raised short-term interest rates. Prime rate largely impacts home equity lines-of-credit as HELOCs are often tied to the prime rate.

If you want to refinance, do it now. If you want to sell, sell now. If you are going to buy, plan on holding for at least five years.

Freddie Mac rate news

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The 30-year fixed-rate averaged 4.16%, 31 basis points higher than last week. The 15-year fixed-rate averaged 3.39%, 20 basis points higher than last week.

The Mortgage Bankers Association reported a 1.2% decrease in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $390 less than this week’s payment of $3,034.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 3.75%, a 15-year conventional at 3.625%, a 30-year conventional at 4.25%, a 15-year conventional high balance ($647,201 to $970,800) at 4.375%, a 30-year high balance conventional at 4.75% and a jumbo 30-year purchase, fixed at 3.75 %.

Note: The 30-year FHA conforming loan is limited to loans of $562,350 in the Inland Empire and $647,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year purchase, adjustable jumbo mortgage, locked for the first 10-years with an interest-only payment at 3.625% without points.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected].