Why is Freddie Mac launching automated reviews for certain refinances that have apparently worked well for five years?
In June 2017, Freddie introduced refinance appraisal waivers on qualifying properties, expanding the loan purchase program 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 would no longer allow these valuation waivers, known as Automated Collateral Valuation (ACE). , on withdrawal refinances and certain “non-cash-out” refinances, beginning July 17.
In its place, Freddie can offer borrowers “ACE plus PDR” (property data report). It’s Freddie’s internal “automated assessment model” or AVM and a kind of physical inspection. The PDR is generated by a data collector who must answer some 200 questions after an on-site 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 have not received these assessment waivers. Even under Freddie’s new model using ACE plus PDR, it still won’t work for properties over $1 million.
The alternative or option for the lender is to order an appraisal by a licensed appraiser. Two to four unit refinance properties and investment properties are also not eligible for this nuanced AVM and PDR process. You will need a full assessment for these.
And you could be waiting a very, very long time for that evaluation appointment, which I will come back to a bit.
According to its FAQ, Freddie’s goal is to buy loans (mortgage lenders fund loans and sell funded or closed loans to Freddie) backed by the most reliable and appropriate valuation models available, helping to mitigate the risk associated with default.
Why have automated valuation waivers been reliable for nearly five years for so many refinances – but now not so much? Representatives for Freddie declined to comment.
Think of this kingpin as a canary in the housing coal mine.
Housing prices have been rising for a decade. The two-year pandemic has pushed prices to consecutive record highs. As interest rates rise after years of record lows, will Freddie’s predictive model struggle to adjust in a bear market?
There are good reasons to curb this automation.
Automated waiver does not answer several key questions: Has the property been updated yet? Is there deferred maintenance? Did someone rip out the light fixtures and not replace them?
“Nothing compares to (an appraiser performing) a physical inspection,” said Lance Siegel, president of HVCC Appraisal Ordering Inc. “You can’t see the cracked foundations, the dry rot, the termites, and the ceiling stains ( water leaks).
Waivers also aren’t as reliable when you’re worried about potentially falling prices. If I had to guess, Freddie probably wants to slow equity mining.
When home prices flatten or decline, there is a synergistic effect, as distressed sales and foreclosures cannot be ignored when considering comparable sales or offsets. The higher the price of the home and the accompanying loan, the more potentially affected taxpayers will accept a defaulting Freddie loan.
So why isn’t a trained data collector that answers 215 questions combined with Freddie’s five-year AVM good enough for more expensive properties, those at $1 million or more, and apartment buildings? investment, for example?
Let’s just call it risk management.
If an error is made, it is more likely to be made by the combination of the ACE and the PDR than by an evaluator. Thus, evaluators get the assignments that are likely to have more complexity and more financial risk. More valuable properties, for example.
The decreasing number of certified appraisers adds to the complexity of loan approvals.
During the Great Recession, Congress in 2009 incorporated the Home Appraisal Code of Conduct into the Dodd-Frank Act of 2010. The idea, in part, was to put a firewall between appraisers and bidders. mortgages so originators can no longer pressure an appraiser to hit a certain number to receive the appraisal job.
This led to rating management companies, which came into play in 2010. These companies receive rating orders from originators, adding a step to the process and slowing down what was once a more straightforward order. The work was then distributed to the appraisers, with the management company taking a portion of what had previously been all appraiser earnings.
For the 2020-2021 fiscal year, California had 9,442 licensed appraisers, according to Monica Vargas, assistant director of communications at the California Department of Consumer Affairs. When the market crashed, the state 20,032 appraisers over the 2008-2009 financial year.
You need a bachelor’s degree and 1,500 hours of apprenticeship to get an appraiser’s license, according to Siegel of HVCC Appraisal Ordering. And, you have about a third more work to do on each appraisal than in 2010, thanks to pre-recession hinky mortgage tactics.
Freddie’s new departure from the AVMs will have another consequence – much longer turnaround times for getting the assessments done.
Prices are over the moon. Median Southern California home prices hit a new high of $706,000 in February, up 15.4% from February 2021, according to CoreLogic. That’s 19 straight months of double-digit gains.
The median home price in Orange County is nearly $1 million, hovering around $985,000. That’s half 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, the Freddie Mac Mortgage Rate Survey indicates that the 30-year conforming fixed rate rose to 4.16%, its highest level since May 2019.
And the prime rate went from 3.25% to 3.5% when the Fed raised short-term interest rates. The prime rate has a big impact on home equity lines of credit because 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 plan to buy, plan to hold for at least five years.
Freddie Mac Rate News
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% drop in mortgage application volume from the previous week.
Conclusion: Assuming a borrower gets the average 30-year fixed rate on a conforming loan of $647,200, 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 30-year conventional high balance ($647,201 to $970,800) at 4.375%, a 30-year conventional high balance at 4.75% and a 30-year jumbo buy, pegged at 3.75 %.
Note: The 30-year FHA-compliant loan is limited to loans of $562,350 in the Inland Empire and $647,200 in LA and Orange counties.
Eye-catching loan program of the week: A 30-year purchase, an adjustable jumbo mortgage, locked for the first 10 years with an interest-only payment at 3.625% with no points.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected]