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We Need To Talk About Fannie Mae A Bit

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A couple of weeks ago, I learned about a new Fannie Mae program that was rolled out to lenders called Collateral Underwriter, or CU. From the press release:

Fannie Mae created the online tool in 2013 to analyze appraisal data it had been receiving from lenders electronically since 2012. With the rollout in early 2015, mortgage lenders will have access to the same information that Fannie Mae uses to evaluate property appraisals. It will enable lenders to review appraisals and address issues before delivering the loans to Fannie Mae.

It’s got the appraiser community in an uproar:

Only a few days into the release of the Fannie MaeCollateral Underwriter and my prediction of this being the biggest process change in the appraisal industry since the HVCC is becoming a reality for the field appraiser.

Appraisers and lenders are flabbergasted about what to do with the recent findings and feedback that CU has provided regarding appraisers’ work.

The appraisal community blogs and forums are packed full of questions regarding how to handle CU and how to properly defend appraisal reports as well as who’s responsible for review this information.

Fannie Mae’s guidance that the lenders are responsible for reviewing and interpreting the CU findings has turned into some lenders sending all the findings to the appraiser to comment on with no interpretation or guidance.

Granted, the program is new, there’s a lot of confusion, and a lot of unknowns. But while the industry’s been obsessed with Zillow and drones and such, something like Collateral Underwriter is likely to impact the real estate agent on the ground far more than any of those things. If you’re in the industry, I think it’s worthwhile to at least learn about it at a high level. Let me get the conversation started.

I’d like to thank Rick Lifferth, Founder and CEO of Data Master and a still-active appraiser with 40+ years of experience, and Bill Garber, Director of Government and External Relations for the Appraisal Institute, for taking the time to educate me on the topic as best as they could. Any errors or mistakes in this post are because I’m a poor student, not because they haven’t tried.

CU, In Brief

We might as well go straight to the horse for a brief overview of what CU is. Read this from Fannie Mae.

For those that don’t like to read (in which case, I wonder why you’re here… but anyhow), CU is a free tool provided to lenders by Fannie Mae that scores an appraisal and elements in an appraisal on a 1 to 5 scale, with 1 being “low risk” and 5 being “high risk”.

It’s important to understand that “risk” here means something like “variance from the model” rather than “the loan is risky”. It measures how an appraisal differs from what the system expects based on past appraisals, valuation models, etc. etc. (Fannie hasn’t said, and no one really knows, what elements, in what weights, go into the expected results.) So a “high-risk” appraisal simply means that it differs from what Fannie’s automated system expected to see; the loan and the property itself may be extremely low-risk indeed.

CU is built on top of Fannie Mae’s Uniform Appraisal Dataset (UAD), a massive database of virtually every property and every comparable in the U.S. built from a mix of public records, purchased private data, and some 12 million appraisals and 20 million transactions to date submitted to Fannie Mae by lenders. In Rick and Bill’s judgment, the UAD is the finest sold-data database in the country, if not the world.

The process goes (or is supposed to go) something like this:

  • Buyer and seller come to agreement
  • Buyer applies for a mortgage
  • Lender orders an appraisal
  • Appraiser goes out and does his thing, and submits an appraisal to the lender
  • Lender submits the loan and the appraisal to Fannie Mae
  • Fannie kicks back a report, including the scoring of the appraisal using CU
  • Lender reviews the appraisal with the CU score merely to help them assess where they need to focus for more answers or more details
  • Lender makes the loan, transaction closes, REALTOR is able to hand the buyer the keys, etc. etc. Happiness abounds.
  • Fannie purchases the loan

The trouble is that the program is so new that there are many an unknown, and many a lender isn’t setup to do a proper review of the appraisal.

The Trouble With CU

On the whole, both Rick Lifferth and Bill Garber were supportive of CU, at least at the level of concept and program. They pointed out that CU is one reaction to the bad old days before the Crisis. Pre-Crisis, Fannie would buy loans from lenders without even looking at the appraisal; they simply trusted the lender and the appraiser. We all know all of the various ways that was abused by bad actors. But the entire system of evaluating mortgage risk did fail; no one argues that.

To correct the systemic flaws, Fannie implemented a number of steps, and CU is merely the latest (and probably not the last) step. At the level of idea/concept/program, all that CU is is another tool for lenders to use for quality control of appraisals (and therefore, of the appraisers that they use). Nothing wrong with quality control.

There are at least three problems at least at this early stage.

1. Lenders Are Not Setup to Do Adequate Reviews

As Bill Garber pointed out, even if the idea of helping lenders perform more efficient reviews of appraisals is a great one, fact is that far too many lenders (if not most lenders) today simply lack the systems and the people to conduct proper reviews of appraisals. Expecting loan officers or underwriting people to know what the make of CU flags and scores, then to conduct a review of an experienced appraiser’s work on a property, is simply ridiculous. Bill said that some banks do in fact have solid internal appraisal departments staffed by experienced appraisers, who know what’s trivial, what’s important, what needs to be questioned, and what does not. In those cases, CU is not only not disruptive, but helpful.

Trouble is that those banks are few and far in between, at least now. Over the next couple of years, if banks start making the right hires and setting up the right systems, this problem will go away. But at this point, no one actually knows how the whole thing is going to work when the lenders don’t have the capability to conduct proper reviews.

Will they simply just kick back the appraisal back to the appraiser with a blanket “explain these variances please” type of request? Will they just take the path of least resistance and just deny the loan? If you’re an underwriter, and you’ve got 70 loans to go through, maybe the one that comes back with a “2” CU report just gets denied to save you time. Who knows?

2. CU Results In Delay & Expense

One impact that is for sure, and unlikely to go away, is that CU adds time to the process.

Even though Fannie Mae has stated publicly that CU scores are not “rules” that determine whether it will buy a loan or not, but merely guidance to lenders to review the appraisal in greater depth, human nature is such that lenders don’t want to take unnecessary risks. At a minimum, the lender will go over that appraisal, ask the appraiser to justify or qualify or support the problematic areas (see below), before making its own determination.

That step takes time. Rick related a story of how a recent appraisal ended up taking two additional days after he submitted the appraisal to the lender, because he had to spend time not only answering the questions, but also educating the non-appraiser loan officer about appraisal issues he simply did not know.

From the Housingwire article linked to above:

The examples above show that most of the CU findings will be left up for interpretation and the problem with this is everyone is interpreting the appraiser is wrong, not that Fannie’s information is wrong or that it’s a misfire.

This has caused a title wave of revision requests from lenders for things appraisers don’t have any reason to comment on — other then there appears to be some differences in FNMA database that no one can see.

4. Appraisers are going to want more money

Appraisal fee’s have been squeezed during the past few years and with CU’s rollout, there seems to be a tremendous amount of additional work that is going to be needed on appraisal reports to address flags. Appraisers will want compensation for this additional work. It’s a little too early to tell but it appears appraisal fee’s will be on the rise and rightfully so.

Bill granted that CU does add time to the appraisal process, and likely expense as well (since an appraiser’s time is not free), but related an interesting theory/hope. Apparently, post-Crisis, many a lender had been requiring far more than what Fannie requires. For example, Fannie only requires three comps; some lenders want as many as ten comps for a variety of reasons. He thought that maybe, over time, if the stars align, lenders might start to understand that they don’t need to go so far overboard and will scale back these extra demands. Who knows? Time will tell.

3. Confusion

As that last sentence suggests, the biggest problem with CU is that there is simply too much confusion around it right now. No one really knows how it’s going to work in practice.

Some appraisers are just pissed off that their work is being questioned by a computer program. As Rick put it, “Who’s the appraiser here? Me with my 35 years of experience in this neighborhood, or some computer program?” Since Fannie Mae doesn’t provide any explanation or guidance on why it flagged one or more parts of an appraisal, CU leaves appraisers wondering what to do and how to answer the questions from the lender.

Furthermore, Fannie Mae makes it clear that the lender is not supposed to just kick back the CU report to the appraiser:

Q3. How should lenders use CU findings to inform conversations with appraisers?

Fannie Mae expects lenders to use human due diligence in combination with the CU findings, and will actively follow up with lenders who are reported to be asking appraisers to change their reports based on CU findings without any further due diligence by the lender.

Fannie Mae encourages lenders to carefully review the appraisal report – including all commentary – before seeking clarification from the appraiser. Don’t assume the appraiser is wrong just because you see a CU message. Taking messages or alternative sales at face value and simply asking your appraiser to address them is neither effective nor efficient. CU is intended to supplement a lender’s human due diligence. After completing a thorough review, lenders should be able to have constructive dialogue with appraisers to resolve specific appraisal questions or concerns. Lenders should not, however, make demands or provide instructions to the appraiser based solely on automated feedback.

Specific information or excerpts from the CU findings on which the lender seeks clarification may be shared with an AMC or appraiser, with appropriate context and after analyzing the CU findings to determine whether there is an issue that the AMC/appraiser may need to address. The legal terms and conditions for CU prohibit:

  • using the licensed application in a manner that interferes with the independent judgment of an appraiser,
  • providing access to CU’s web-based user interface to third parties (including appraisal management companies (AMCs) and appraisers), and
  • providing copies or displays of Fannie Mae reports that contain CU findings to AMCs and appraisers (note that AMCs who are registered to use UCDP as Lender Agents will see the CU risk score, flags, and messages available through UCDP). [Emphasis in original]

Except that as noted above, most lenders do not have right people to “carefully review the appraisal report” or have “constructive dialogue” with appraisers. How would they even know what to look for, or what to ask the appraiser in that case?

I asked Rick and Bill if they knew what the “acceptance rate” by Fannie Mae was of loans with “high-risk” appraisal scores, which the lender accepted after review. They did not. Lenders themselves don’t know whether Fannie Mae will look at a loan differently if its appraisal carries one score or another, despite the reassurances by Fannie Mae that CU is just a tool to help lenders do QA on appraisals.

The Cream Puff Property Issue

One practical warning/fear/unknown of CU is for so-called “cream puff” properties. This is a house that is extremely well-maintained, perhaps aesthetically pleasing, or in some way far more desirable to most of the comps in the neighborhood. (Think master planned communities with cookie-cutter floor plans.)

The seller, the buyer, the two agents involved, and the appraiser (with local experience/knowledge) all recognize that the house is more valuable than all of the comps. The buyer is more than willing to pay the higher price, because that house is “The One” in the neighborhood. Appraiser knows it, and appraises it accordingly.

At this point, there is little doubt that CU will kick back that appraisal and flag it with a “high risk” score because it will differ from the model based on nearby properties, nearby appraisals, nearby comps, etc.

Again, no one really knows what will happen from there. (Well, the appraiser is going to have to spend more time explaining why the appraisal is so different for this property, so the cost of appraisal will be higher. That part is for certain.) Will the bank accept the explanations for the cream puff property, or save itself the headaches and just deny the loan? If the bank accepts the explanations, will Fannie accept them too?

If you’re the seller of such a property, do you automatically take a lower all-cash offer because you know there’s going to be a problem with appraisal? If you’re the listing agent, do you advise the seller to take the lower cash offer because of CU? If you fail to so advise the seller, are you guilty of professional malpractice, because you should have known about CU?

If you’re advising a buyer, do you have to advise them to go after the really nice properties, and low-ball because it’s unlikely to appraise correctly the first time around? If you fail to do so, are you guilty of failing your fiduciary duty? Ack!

No one knows yet how this is going to play out, but that’s a real scenario going on right now.

NAR, And Its Engagement

According to Bill Garber, up until recently, NAR really wasn’t involved with all of this. It’s more of an appraiser issue, not a REALTOR issue. But apparently in the last couple of weeks, NAR’s had some meetings and teleconferences around Fannie’s CU program and how that impacts the housing market, transactions, and REALTORS.

The Appraisal Institute is generally in favor of CU, and attempts to impose quality controls on appraisals and appraisers. The details and the unknowns are the issues now. I suspect that the power of NAR in Washington DC can be helpful, if it gets engaged with the issue. Call your local AE or GAD and ask if they know what’s going on with CU.

Conclusion?

Eh, don’t know if anyone can draw any hard conclusions just yet. As I’ve said, no one really knows exactly how all this is going to play out.

In the short term, it appears that we’re going to see appraisals take longer, cost more, and potentially create problems with financing. Over time, particularly as lenders start to hire more qualified staff and put in systems for real appraisal review, those problems may go away. But if you’re an active broker/agent in the marketplace, I don’t know how you can avoid learning more about this issue, how it’s going to impact your buyers and sellers, and what it’s going to do to the speed of a transaction.

Your comments, observations, experiences, etc. are particularly welcome on this one.

-rsh

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