Data Cancer Infecting the Real Estate Market
The ability to do an appraisal for Fannie Mae or Freddie Mac is getting rarer these days now that the GSEs are waiving appraisals on the majority of transactions. Despite drones being everywhere and the GSEs being in receivership, the latter is desperate for higher loan volumes to feed their origination infrastructure. Higher mortgage rates have crushed refinance loan volume and slowed sales volume. What can the GSEs do to increase mortgage volume? Remove appraisals from the majority of first mortgage transactions and relegate appraisers to mere data collectors. During the pandemic, the share of appraisal waivers used in mortgage lending went from 12% to about 60%. They have created the phenomenon known as “data cancer” which reduces an appraisal to a rubber stamp that contaminates the comps used for future sales. No one has focused on this issue more than my friend Phil Crawford of Voice of Appraisal: A Waiver in Phil’s Backyard!!!
Phil provides an explanation of the Data Cancer phenomenon using 2024 data within a subdivision of Cincinnati. He has been talking about this issue on his show for at least five years.
During the pandemic, FHFA, the federal regulator of the GSEs, waived interior property inspections by appraisers under the guise of protecting us. I was on that call, along with Phil when FHFA made that decision. I remember discussing with him afterward that while I appreciate their concern for our safety, this waiver policy seemed like a test run to standardize waivers, exposing consumers, taxpayers, and real estate agents to significant liability. Fannie Mae announced these changes recently expanding the loan to values (LTVs) from 80% to 97% on first mortgages! First mortgages used to be off limits to appraisal waivers. Fannie Mae is guaranteeing a purchase mortgage with 3% down and no interior inspection performed. What could go wrong?
Freddie Mac follows nearly all policies issued by Fannie Mae. Perhaps to confuse the public against the stigma of “Appraisal Waivers,” which were created in 2016, they were rebranded as “Value Acceptance.” They are being marketed by Fannie Mae as a way to save the consumer money. This is completely disingenuous since appraisals are the least expensive part of the mortgage process and appraisers are the last remaining individuals before the closing, that aren’t paid a commission. In other words, appraisal waivers gut the concept of consumer protection. The institutional culture at the GSEs, particularly Fannie Mae is quite arrogant, despite being in receivership.
Trillions of dollars of RMBS in the bond market are backed by appraisal valuations and now that is going to be turned on its head. The higher risk and flight from quality will raise mortgage rates in the long run due to the higher risk as investors learn about this. I’d love to know what Moody’s thinks about this development. I have heard their analysts speak at several events extolling their reliance on appraisers.
What Is Data Cancer?
“Data Cancer” is created when Fannie Mae or Freddie Mac waive the appraisal inspection and a homebuyer pays a price that is above the current market or has an amenity defect that would result in a lower value than the price paid. That inflated sale becomes a “comp” forever and can impact the entire submarket.
Remember that up until closing, the only person that is not compensated based on the buyer being able to close the sale is the real estate appraiser (ok, ok, usually lawyers too).
Looking At The Sales Data
These was a steady flow of sales in this new subdivision of similar sized properties. Another way to look at the sales in this market is price per square foot given the homogenous lot and home sizes.
The peak price per square foot was observed in May at $213.67 based ginned up by the $195.10 sale that had an appraisal waiver the month before. The remaining sales from June through November didn’t have appraisal waivers but remained at a consistently higher level enabled by the earlier sales. There was no appraisal done for the first sale. It’s multiple bids suggested that the $184.86 price was at market or a little on the high side. The second sale of the year was consistent with the first and had an appraisal but had no Tidewater process which means the appraiser’s value supported or exceeded the price. The third sale had an informed cash buyer. The fourth sale had an appraisal waiver leading to the higher price for the fifth sale that appeared to set the market price for the remainder of the year. This is unfortunate for all the buyers and illustrates “data cancer” in action.
Fannie Mae contends they saved the home buyers an estimated appraisal fee of $625 but this appraisal waiver methodology placed an inflated sale as a comp used in subsequent appraisals for the rest of the year. The unfortunate buyers in May and June were particularly screwed by the Fannie Mae waiver policy. There is no such thing as a free lunch.
Final Thoughts
Think of “Data Cancer” as a sale that is allowed to close without an unbiased party given a chance to carefully review the property and the local market. The sale closes and is relied on during future appraisal assignments in the market. The arrogance of the GSEs is such that they think they can model this with their software yet they can’t. It appears that they are more interested in goosing up market activity to keep their mortgage pipelines full than protecting the consumer even while they are still in receivership. The GSEs firmly believe their software analytics can replace human beings walking through the property for it to be used as collateral for a mortgage they guaranty. I believe that there will be future litigation against real estate agents/brokers and mortgage brokers by consumers that over paid for their properties. I remember making a presentation in Dallas a few years ago with a local real estate broker and she said that the vast majorty of sales during the pandemic housing boom had appraisal waivers. Wow.
- Data Cancer Infecting the Real Estate Market - January 31, 2025
- GSE Exec Boasts Scheme to Slash Appraiser Numbers - May 2, 2024
- Valuation Connect Demands Licenses, Denies Fair Pay - April 9, 2024
