Fitch: Coronavirus to Drive More ‘Outside-the-Box’ Appraisals in RMBS

Fitch Ratings, New York, said traditional “full” pre-close home appraisals, viewed to be best practice, are becoming less common in the mortgage origination process as homes are more difficult to access during the coronavirus outbreak.

The Fitch report noted originators are increasingly bypassing traditional interior property inspections and looking to new guidance provided by government regulators and the GSEs offering temporary alternatives for new loans.

“It is appropriate during this period to continue to perform more outside-the-box pre-close appraisals for loans designated to be included in private label securities,” Fitch said. “Exterior-only inspections can be effectively used during the coronavirus outbreak without introducing material additional credit risk in many purchase and rate-term refinance transactions.”

The report said newly originated cash-out refinance transactions should continue to receive interior inspections as part of the appraisal process. Also some originators have continued to request interior inspections for all of their production. “This will likely mean that over the coming few months PLS pools will consist of a combination of loans with both full and exterior-only appraisals,” Fitch said. R

Fitch Managing Director Roelof Slump said Fitch expects the mortgage loan origination market to largely transition back to appraisals with interior reviews after the coronavirus outbreak lessens — perhaps on a state by state basis — once appraisers are able to more commonly gain access to homes.

In March, Fannie Mae and Freddie Mac announced temporary flexibility of their ‘full’ appraisal standards; Fitch said this approach is “reasonable” for usage in private-label RMBS. “While qualifiers exist, the new guidance provides for exterior-only appraisals on rate/term refinances of each respective GSE owned loan and the use of exterior only appraisals or desktop appraisals on purchase transactions below certain LTV thresholds; cash-out refinances continue to receive standard ‘full’ appraisals including an interior inspection of the property,” Fitch said.

Roelof said Fitch does not see a material increase in credit risk associated with this temporary approach due to the anticipated loan purpose limitations and scrutiny received through third-party due diligence valuation reviews. “Usage of appraisal waivers on agency-eligible loans has continued in the coronavirus environment, but remains a relatively small portion of PLS,” Fitch said. “Fitch has observed that many originators have updated their non-conforming loan guidelines to reflect the March guidance from the GSEs. Mortgage originators are likely to apply this policy for the duration of the coronavirus outbreak; new loan closings are expected to reflect the revised approach over the coming months.”