TheMReport — News and strategies for the evolving mortgage marketplace.
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14 | M R EP O RT FEATURE A s a consequence of the current global pan- demic, our world looks remarkably different than it did just a few months ago. What started as a request for people who had traveled interna- tionally or exhibited symptoms of COVID-19 to stay home rapidly evolved into shelter-in-place re- quirements and additional social- distancing measures for most of the country. This up-ended "busi- ness as usual" for nearly all sizes and types of businesses, including appraisers. Social distancing has put ap- praisers in a uniquely precarious position. The collection of subject property information and photos is central to every appraisal as- signment. Yet nearly everyone is staying at home—the very place appraisers need to go to conduct the property inspection—one of the most critical parts of the appraisal. To complete many appraisal assignments, appraisers were being asked to violate key advice for containing the spread of COVID-19 by visiting proper- ties when they knew nothing about the residents' potential exposure to the virus. Likewise, because appraisers often visit many homes, the homeowner had no way of knowing the exposure risk an appraiser would bring into their home. Around most of the country, especially in population centers with high densities, home- owners are rightly denying any outsiders access to their homes. Thankfully, the GSEs, banks, and credit unions temporar- ily put a hold on most interior inspections for appraisers to help both appraisers and borrowers stay safe during the pandemic. Virtual inspections are now being allowed that also help both par- ties stay safe until a widespread vaccine for COVID-19 becomes available. Conducting virtual inspections correctly, however, requires appraisers to use the right tools and technologies—and have borrowers willing to partici- pate in the information gathering process. The Value of Virtual Inspections A s the magnitude of the COVID-19 pandemic became clear, market liquidity became a big concern for mortgage lenders and investors. The GSEs quickly responded to this by issuing guidance for "virtual inspections." When accessing a home is either prohibited by state order, or and when one or both the homeown- er and appraiser feel there is too much at risk to justify an interior inspection by the appraiser, the GSEs allow appraisers to complete appraisals by using photos and data supplied by the homeowner. These flexibilities are designed to keep the housing market moving while enabling service providers to minimize exposure to health risks. However, many borrowers also want or need to refinance their homes. This presents a significant challenge because the flexibility offered by the GSEs is deliberately focused on purchase transac- tions. The GSEs apply different standards to many refinances and, for that matter, most cash-out refi- nances. But there is a solution. Before this pandemic, the decision to obtain a desktop or exterior-only appraisal was driven exclusively by loan risk factors, specifically the "three Cs" of credit, capacity, and collateral. A lender never needed to conscious- ly place public health and safety into the decision metric. Also, it was the lender, not the appraiser, that made the initial decision whether to use a desktop or exterior-only appraisal. I say "ini- tial" decision because under some circumstances, the initial loan risk decision may have supported something other than a so-called full appraisal. Upon developing the scope of work for an appraisal assignment, the appraiser might have discovered factors about the property that would result in el- evating it to an interior appraisal. Setting the pandemic aside for a moment, in ordinary circum- stances, lenders generally prefer an interior inspection by the appraiser and a "full" appraisal. If there was no difference in either the price of an appraisal or turnaround time for different ap- praisal types, everyone would opt for the most complete appraisal option available. A primary driver in this decision is the potential representation and warranty (rep and warrant) relief offered by the GSEs when an application meets certain criteria. Going back to the COVID-19 flexibilities and purchase trans- actions, the same "rep & war- rant" relief that is available for a traditional 1004 appraisal is now also available when the 1004 appraisal is done as a desktop appraisal, provided the Loan Collateral Advisor (LCA) or Collateral Underwriter (CU) risk score threshold is met. From a risk perspective, originators can get the same rep & warrant relief whether they insist on an interior inspection or not. However, insist- ing on an interior inspection may place both the homeowner and appraiser at a risk great enough to cost them their lives. Some lenders have opted for exterior-only appraisals when an interior inspection cannot be made due to COVID-19 concerns. However, as an alternative to a desktop appraisal done on a 1004, the lender may believe they are getting a better appraisal, but they are also losing the chance for rep & warrant relief. For instance, appraisals on Form 2055 are not The Digital Necessity Proper virtual inspections requires appraisers to use the right tools, tech, and have borrowers willing to participate. By Bill King