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FHFA announced expanded eligibility of appraisal alternatives for purchase loans at the Mortgage Bankers Association (MBA) Annual Convention & Expo in Denver, Colorado this week. For the first time on purchase loans an appraisal alternative is available up-to 97% CLTV.
For purchase loans of primary residences and second homes, the maximum loan-to-value (LTV) eligibility for appraisal waivers will increase from 80% to 90%. For the same loan and occupancy types, the maximum loan-to-value (LTV) eligibility for inspection-based appraisal waivers will increase from 80% to 97%; essentially to the program limits. Appraisal waivers and inspection-based waivers, collectively ‘appraisal alternatives’ are eligible for single unit properties, including condos, on purchase loans.
Fannie Mae issued a press release stating these eligibility changes for appraisal alternatives would go into effect, starting in Q1 2025. Freddie Mac also issued a press release regarding these same changes and highlighting the benefits to lower-income and first-time home buyers.
This article takes a first look at how these changes may affect purchase volume, and what benefits lenders and borrowers can expect as these programs roll-out.
The information presented is based on the published GSE selling guide eligibility and the number of loans delivered using appraisal waivers and inspection-based waivers. The number of appraisal waivers and inspection-based waivers offered vs. accepted is not available publicly, but lenders can see this data in the LOS and underwriting systems. In addition to published criteria, offers of appraisal alternatives rely on borrower credit information to determine waiver eligibility
How many more purchase loans would be appraisal waiver eligible?
Since the start of 2024, originations of purchase loans for single unit primary residences and second properties, including condos, has averaged 121,000 loans per month, peaking in August at 157,000 loans.
Loans up-to a combined loan-to-value (CLTV) of 80%, averaged 64,000 loans per month, or 53% of total. Appraisal waivers were used to deliver an average of 15,000 loans per month, or 12.3% of the total.
From the 2024 data through Q3, increasing eligibility to 90% CLTV would have added a further 19,000 eligible purchase loans per month, representing 16% of total purchase loans. This would have been a 30% increase in the number of new purchase loans eligible for appraisal waivers.
Assuming there is 100% acceptance of appraisal waivers offered – which industry feedback largely confirms – and loans are delivered at the same rate (12.3%) this will add an average 2,400 appraisal waivers per month. This would be an 16% increase in monthly appraisal waiver usage, pushing average monthly utilization to 14.4%.
How many more purchase loans would be inspection based waiver eligible?
There are two parts to answering this question: First, what would 100% acceptance of inspection based waivers look like today (they are only partially adopted)? Second, assuming 100% acceptance, how many loans could be delivered with the new eligibility.
Taking the 2024 year-to-date, increasing eligibility to 97% CLTV, or full program limits, adds a further 57,000 purchase loans per month – representing the remaining 47% of total loans. This is a 90% increase in the number of new purchase loans now eligible for inspection-based waivers.
Lenders will note that inspection based waivers are the first appraisal alternative to be offered on (essentially) all eligible GSE primary residence and second home purchase loans
Using the average of 121,000 total purchase loans per month and 64,000 (53%) loans per month up-to 80% CLTV, inspection-based waivers were used to deliver an average of 1,600 loans per month in this cohort, or 1.33%. This is estimated to be a third or less of the total number of loans that could be delivered using inspection based waivers.
Assuming 100% acceptance of inspection based waivers offered and that loans are delivered at a rate of 7%** across all LTV buckets, this will add an average 6,900 inspection based waivers per month – a +500% increase in monthly inspection appraisal waiver usage.
**Early adopters of inspection based waivers have automated acceptance of appraisal waivers and inspection-based waivers in their mortgage pipeline. Analysis of these specific lenders 2024 ‘optimized adoption’ provides an acceptance rate of 7% that is used above and applied across all agency lenders. It is noteworthy that there are material differences in the relative acceptance rates for appraisal waivers and inspection based waivers for loans delivered to Fannie Mae and Freddie Mac, including by production channel. For simplicity these are not considered in this article.
Conclusions on appraisal alternatives
Appraisal alternatives, in the words of FHFA Deputy Director Naa Awaa Tagoe at MBA this week, “have lowered costs; reduced loan cycle times during periods of high transaction volume; addressed constraints with appraiser capacity; and supported fair, equitable, and accurate valuations.”
Inspection based waivers have become the first of the appraisal alternatives (for purchase loans) to be eligible for all CLTVs up to the GSE program limits. If lenders plan to take advantage of appraisal waivers on purchase loans above 90% CLTV, the only solution today is inspection-based waivers.
Inspection based waivers rely on the Universal Property Data (UPD), a GSE standard for an interior & exterior property inspection by a trained & certified professional. This includes recording ~120 standardized property attributes, ~50 photographs, and generation of an ANSI-compliant floor plan, and optionally a 3D virtual tour. The next phase of appraisal modernization is the GSE hybrid appraisal – projected for release in Q2 2025 – that combines a UPD with an appraiser’s professional valuation.
More information at ‘Inspection based waivers and the top 10 reasons to adopt now‘ and ‘Correspondents make the most of inspection based waivers in September‘.