The nation's biggest source of home loan money quietly has been moving to minimize the cost and eliminate the required use of one of the most traditional elements of the mortgage process -- the appraisal.

Employing its own databases of property valuations nationwide, Fannie Mae's online underwriting system now can approve 70 to 75 percent of purchase-money mortgage applications without a traditional, full appraisal, officials told Realty Times last week.

Fannie is also conducting a previously-unpublicized pilot program that totally eliminates the need for any form of appraisal in exchange for a $50 fee. The program also allows participating lenders the option of waiving their standard, legal "representations and warranties" to Fannie on the accuracy of property valuations. In some instances, the loan-to-value ratio (LTV) on the homes financed without appraisals can go as high as 90 percent (i.e., the borrower's equity is as low as 10 percent.)

Fannie charges pilot lenders the $50 "Property Inspection Waiver" fee in lieu of typical appraisal expenses. The lender can then pass the savings on to customers directly, or lower their fees or rate quotes.

The pilot program covers refinancings and new purchases, thereby departing dramatically from rival Freddie Mac's appraisal-waiver program. Under Freddie's approach, only purchase-money mortgages with loan-to-value ratios no higher than 80 percent are eligible for waivers, and customers must pay a $200 fee in lieu of an appraisal.

In an interview, Fannie Mae officials said the purposes of the appraisal reform efforts are to deliver time and cost savings for lenders and consumers alike. The waivers and reduced valuation requirements now available for the majority of loans processed online represent the cutting edge of automated underwriting innovation in 2002.

Essentially, Fannie believes that the valuation database built into its automated "Desktop Underwriter" system is now sophisticated enough to rank the level of risk faced by the company on the contract price or loan amount on every application it processes. If the valuation database indicates that a contract price or loan amount is high for the area, type of house or the credit-risk profile of the applicants, it may require a full or drive-by appraisal. Otherwise, the lender -- and potentially the borrower -- need not pay for or wait for completion of a traditional appraisal.

A mortgage company executive participating in the pilot told Realty Times that the new waiver program is attractive because it speeds up decision-making in the entire loan transaction.

"We don't have to wait for an appraiser" to physically visit a property, conduct research on comparable values, and submit a report. Fannie's new system allows complete loan decisions "in seconds, not days," he said.

"Ultimately this can turn into (a lower) rate to the borrower, he added, "since shorter locks (on rate quotes) mean lower rates."

The $50 fee -- passed onto the borrower and fully disclosed -- is also a big plus, in place of the traditional $300 or more. Finally, the lender said, there is real value in being relieved of the burden of warranties to Fannie. The giant investor "would be hard pressed to (send) back a loan to us (because of defects in the valuation) where they didn't require an appraisal in the first place."

Fannie Mae officials say they are still experimenting with the $50 waiver option with a limited number of lenders, but may expand it if the results are promising.

The bottom line: Look for lower appraisal fees nationwide in 2002. And shop for mortgage companies who offer the $50 no-appraisal option.

For more articles by Ken Harney, please press here.

Published: December 17, 2001

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.