Dynamic Risk Management Enables Flexible Response
In the past year, the world has faced a disruption that we could not have imagined at the beginning of 2020. For housing finance originations in the United States, the global pandemic challenged us in new ways. Historically low mortgage interest rates fueled record origination volumes in an industry that often relies on face-to-face interaction, during a time when in-person contact has been difficult.
Despite the challenges, Fannie Mae supported 1.5 million single-family home purchases and 3.4 million single-family refinances in 2020, more than double our acquisition volume compared to 2019. Our ability to support the market was not by chance. Process and technology innovations over the past decade and lessons from earlier crises have led us to develop industry standards to foster underwriting efficiency and lower mortgage origination costs, while ensuring underwriting quality and rigorous risk management. By leveraging technological advances developed in recent years and deploying additional flexibilities like those I describe below, we’re keeping the housing market liquid in these unusual times.
Verifications of Employment Flexibilities
With physical offices closed or with limited on-site staffing during the pandemic, we temporarily offered flexible options to accept a verification message from an employer’s work email address in lieu of a verbal verification of employment, which was typically obtained by calling an employer’s human resources department. This flexibility safely maintained market stability and served borrowers, particularly when the pandemic began and many places of employment shut down quickly without forwarding phone numbers to staffed phone lines. As businesses have adjusted to working offsite, this flexibility is set to retire on April 30, 2021.
We launched exterior-only and desktop appraisals for certain loan types to maintain liquidity in the market and to help manage collateral risk in the face of social distancing and travel restrictions. Traditionally, appraisers could gather information from parties to the transaction (borrower, realtor, property contact, etc.); however, they could not rely on it without additional independent verification (e.g., from the county tax or assessor office). This temporary flexibility allows the appraiser to rely on the information without having to undertake the secondary verification. As a result, many appraisals were completed using this alternative and it provided an opportunity for a real-world test of traditional appraisal variants. In turn, it sparked increased adoption and development of innovative technologies in the industry, including virtual inspections enabling homeowners and other third parties to use a smart device to obtain interior photos or video augmenting the property data already collected by the appraiser.
This flexibility supported more than 150,000 borrowers in 2020. To control for risk, we created an additional line of quality control measures to monitor the quality of the appraisal flexibilities. Although we reviewed close to 3.5 times the number of appraisal flexibilities as traditional appraisals, we found similar quality and a similar distribution of risk scores in Collateral Underwriter® (CU®).
While the flexibility is set to expire on May 31, 2021, feedback from the market on the appraisal flexibilities has been generally positive, and the experience has been helpful to inform potential enhancements to our standard practices.
While appraisal waivers are not new, the advancements we have made in data standardization and digitization over the past decade have enabled us to offer appraisal waivers as a more standard course of business, subject to loan and collateral eligibility. Combining standardized, digitized appraisal data with advanced analytics, Fannie Mae created Collateral Underwriter in 2012 to support our own property valuation risk management processes. In 2015, we provided it to lenders to support their own risk management. We now use CU and digitized Uniform Appraisal Dataset data as part of our typical appraisal waiver process to support the risk analysis that we use to determine which loans are eligible for the waiver.
Model analytics and risk models can be beneficial to the overall process because they have the potential to remove human error and bias from the collateral analysis. In addition, they provide borrower benefits through reduced turn times and loan origination costs. On average, consumers save ~13% of their total costs to close when an appraisal waiver is executed. In the last two years, we estimate that consumers have saved ~$1 billion in appraisal costs due to appraisal waivers.
In 2020, we observed an increase in appraisal waivers. This increase in usage, relative to prior years, can be partly attributed to increased adoption by underwriters for efficiency and cost savings. It is also driven by the typical increase in appraisal waivers in a low interest rate environment, like we experienced in 2020, given the high propensity of refinance loans, which are more likely to meet appraisal waiver eligibility. Despite these volumes, we continue to focus on ensuring that CU and other Fannie Mae valuation models continue to have data to support our analytics and risk assessment. In 2020, more than 8.6 million appraisals were completed and submitted to the Uniform Collateral Data Portal® (UCDP®), the highest we have seen since UCDP was initiated in 2011.
Remote Online Notarization
We previously allowed remote online notarization (RON) in limited instances and expanded its use to support closings during the pandemic. RON uses real-time, two-way audio/video communication to allow a notary and a person signing the documents to be in different physical locations and electronically apply signatures and the notarial seal. Already used in the digital mortgage or “eMortgage” process, the RON process has been even more valuable to both lenders and borrowers in a time when physical distance became more of a necessity than just a convenience.
The RON process requires the use of multi-factor authentication to verify a borrower’s identity, requires all notarized documents to be tamper-sealed to prevent tampering or altering of data after signing, establishes security protocols governing the audio-visual session, and requires that a video recording of the session be saved and accessible upon request for a minimum of 10 years or longer if required by the state.
This flexibility supported over 6,500 borrowers in 2020. In October 2020, we made this efficiency broadly available on a permanent basis, permitting the delivery of documents closed using RON in 45 states and the District of Columbia. Our Selling Guide sets forth the requirements – including the system, security, and authentication requirements – for closing documents to use the RON method for closing and delivery to Fannie Mae.
Fannie Mae’s commitment over the past several years to improving its risk management capabilities using data, technology, process improvement, and innovation enabled our rapid deployment of prudent risk flexibilities to support the originations market as the pandemic and its impact unfolded. The current disruption is not over yet, and as we work with our industry partners and stakeholders to navigate through it, we’re also anticipating the ongoing need to adapt to market changes while managing risk. As we continue to adapt, Fannie Mae remains focused on fulfilling our mission to provide market liquidity and access to affordable home financing, and to preserve safety and soundness.
Senior Vice President, Single-Family Chief Credit Officer
April 27, 2021
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