When you google “evaluation gap” – and I just did – a long list of search results appears. To my surprise, the top results weren’t linked to economists uncovering the intricacies of fluctuating house prices, key principles of avoiding overvaluation or pictures of stunt riders jumping over canyons full of printed PDF docs. (Okay, throw that last one out there.)
Thank you for reading this post, don't forget to subscribe!What I did see were links to lender websites explaining almost apologetically what the appraisal gap meant to their customers and telling them not to panic if it happened to them. Well, a cure for appraisal gap anxiety has appeared on the scene.
A purchase contract has the difference between what a buyer has agreed to pay for a home and an appraiser’s conclusion as to the fair market value of the property. This is usually seen as a problem when the appraised value is less than the purchase contract amount because lenders will not approve a loan amount higher than the appraised value. And homebuyers certainly don’t want to overpay and start their ownership journey with negative equity.
Depending on how the contract is written, the homebuyer must decide whether they want to walk away from the home, try to negotiate with the seller to lower the purchase price, or make up the difference. Come with cash. All of these choices create friction in the process, and the tighter the budget, the more intense the friction can be.
Buying a home is not for the faint of heart, especially when inventory is so low and affordability is a challenge. The up-and-down emotions of finding the right home, trying to get an offer accepted, and going through a multi-week approval process to make the biggest purchase of your life are not my idea of a good time.
Perhaps one of the most difficult emotional aspects of the valuation gap scenario is the lack of certainty. Because the appraisal is not ordered until after the purchase contract is complete, it may be a week or more until the borrower knows whether there is a difference. I’m in the appraisal industry and have every property tool at my disposal, but when buying my home I was still waiting for that appraisal to come in like it was a college acceptance letter.
As refinancing volumes decline and purchase loans become the dominant loan type, many lenders have rushed to create programs to give borrowers first certainty and remove worry. Innovative lenders and power buyers like TOMO, Betterr, Ribbon and others launched the Appraisal Difference program to give their customers the confidence to move forward with the loan process. These programs are designed to deter borrowers from shopping around to other lenders by providing a better experience, while promising to save borrowers from surprises, missed closings, or scrambling to find cash.
In terms of agency solutions, Fannie Mae and Freddie Mac have been offering appraisal discounts on purchase loans, but the percentage of eligible loans has been less than 15%, which is not enough to provide a consistent experience.
The truth of it is that an appraisal that comes in below contract value can be a powerful tool for the homebuyer and save them future pain and heartache. Having an intelligent model providing advance feedback on the likelihood of an offer backed by an evaluation would be a welcome sanity check for consumers. Secondary market loan buyers will also see accurate value, even if they agree to a purchase price less frequently, which leads us to the recent news from Fannie Mae.
Fannie Mae recently announced a Price Acceptance + Asset Data solution. On its surface this appears to be a valuation choice, but it is clear in listening to Fannie Mae’s public comments that the program is increasing the number of loans that are eligible for consideration of price certainty.
Lenders determine if a loan is eligible by submitting the purchase contract amount to the desktop underwriter along with other loan data points. If they receive a response back that the price has been accepted, they will need to order an asset data collection from an approved vendor to meet the requirements. When you combine the value acceptance (formerly known as artist appraisal waiver) with the value acceptance + property data, the percentage of eligible purchase loans can be substantial.
Property data collection can take a few days depending on when a person gets access to the property but price approval is instant. I look forward to seeing how the lender will choose to communicate with the borrower. Will they take it like the aforementioned assessment protection programs and try to communicate certainty as soon as possible? Or wait till the asset data collection comes back? Either way, the Value Recognition Program is an important step toward being a cure for the anxiety of the assessment gap.
I’d certainly like to see more programs like this one that make assessment gap concern the exception rather than the norm. Giving borrowers direct confidence in their purchase contract amount reduces friction for every stakeholder involved. Perhaps this will spark more focused innovation while improving the proposal process and move us one step closer to “buy it now” certainty. We’ll have better details as they become available on April 15.
