By the Numbers
Freddie Mac pulls back on property inspection waivers
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A growing number of mortgage borrowers in recent years could skip property appraisals when refinancing or purchasing a home. Fannie Mae and Freddie Mac each use proprietary models to decide if an appraisal is necessary, and, if it is not, the GSEs will often offer a property inspection waiver. The lower cost and simpler closing process has been credited with making MBS prepayment speeds faster than expected during the pandemic. However, Freddie Mac plans to alter its waiver program, suggesting there may be concern about the credit performance of these loans. These changes may slow MBS prepayment speeds, an unwelcome prospect for MBS investors now that roughly 80% of MBS are trading below par.
Starting July 17 Freddie Mac will require lenders to submit a property data report or PDR for any loans that refinance, take out cash and receive an offer to waive the appraisal. The PDR requires an interior and exterior assessment and documentation of the property’s condition. A trained data collector will have to collect the information but does not have to be a licensed appraiser. This report does not require the lender to represent and warrant the value of the property, so is not the same as an appraisal. But it does eliminate many of the benefits of the appraisal waiver—a lower cost and simpler origination process. Freddie Mac also states that some rate and term refinances will be required to get a PDR, presumably a loan-by-loan decision made by its automated underwriting system.
It is likely that requiring a PDR will slow prepayment speeds if loans that would have received a waiver will now need a PDR. However, there is a chance that some loans that previously would have been required to obtain an appraisal could receive an offer of a waiver with PDR. That could defray some of the slowdown associated with the PDR process, since obtaining a PDR still may be more efficient than obtaining a full appraisal. And the lender will usually prefer an appraisal waiver, even if a PDR is required, since it provides rep and warrant relief.
Although Fannie Mae and Freddie Mac both have appraisal waiver programs, the programs are not identical. Their regulator, the Federal Housing Finance Agency, prefers to align business practices at the two enterprises since that contributes to a healthy market for MBS securities. This is especially true of policies that can influence MBS prepayment speeds since UMBS pools issued by Fannie Mae and Freddie Mac are fungible. However, each has a proprietary model to determine whether to offer waivers. Fannie Mae is not yet requiring PDRs and allows appraisal waivers for investment properties. Investors will need to watch whether restricting access to waivers leads to lower cash-out volume and discount prepayment speeds in Freddie Mac’s securities compared to Fannie Mae.
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