January 2015 marked the initial rollout of Collateral Underwriter (CU) as a risk management tool for lenders and servicers. There has been much discussion concerning the impending demise of the appraisal profession as a result of CU’s primary function; helping lenders identify risk factors within the appraisals ordered. Appraisal Management Companies (AMC) are already seeing an increase in declined orders, particularly on complex assignments. More appraisers are indicating that they now worry about the increased underwriter critical review and the possibility of landing on FNMA’s AQM review list.
It is important to note that CU is a proprietary model that provides an automated appraisal risk assessment to support proactive appraisal quality management. The key to CU is to understand that the scoring an appraisal receives is derived by the number of model-driven flags it raises. In some instances, CU may raise multiple flags for the same issue. Since the model itself relies on information collected from recently completed appraisals within a census-defined market, it is easy to see that where market activity is limited, CU has limited reliability.
This leads to the first big myth, that CU has an absolute scoring reliability for every property and that it is the end-all model for valuation accuracy on every property. Complex assignments generally operate outside of the strengths of CU, where appraisal information is limited. This could be attributed to a property’s rural nature, special circumstances attributed to over/under-improvement, neighborhoods with limited turnover or high owner retention. Complex assignments often result in higher CU risk scores as comparable selection and adjustments appear excessive.
High CU risk scores do not automatically trigger AQM reviews, and lenders using CU should not consider its feedback as necessarily reflective of an individual appraiser’s work. CU has an adjustment comparison tab that can show the appraisal report adjustments against the CU model’s adjustments. In many instances, it is easy to see where the appraiser’s adjustments skew the value in one direction or another when compared to CU’s peer driven adjustments.
As always, it falls on the individual appraisal auditor to look at the data if something in an appraisal seems unreasonable or unsubstantiated. CU is one tool among many to consult when deciding if, in fact, more information is required.
This leads to the second myth, that CU is the only QC product currently being used by lenders to score an appraisal. As noted in the recent Fannie Mae Lender Letter LL-2015-02, “CU is an appraisal risk management tool. It is not the first product of its kind and is not the first automated technology that lenders have used to assist with their quality control processes. Lenders have long been using automated products, checklists, and overlays, which may have led to unnecessary correction requests to the appraiser.”
Many large lenders are not currently using CU for their QC process, nor are they required to do so. Modeling large data sets of easily quantifiable comparables has been going on for years. Many propriety tools are available to lenders, AMCs and appraisers alike that operate in a similar fashion to CU. It is safe to say that every appraisal submitted has been audited many times over and some form of modeling QC product has been used to assist in the auditing process.
On many occasions, I have written and spoken to appraisal organizations and reiterated the same message. Appraisers who know their local market and make a good faith effort to define highest and best use, implement accurate data, select appropriate comparables, provide market supported adjustments, denote the methodology involved and give weight to the most relevant comparables have nothing to fear from any lenders reviewing criteria. The strength of an appraisal depends on the process and the narrative support provided. According to the previously mentioned Lender Letter, Fannie Mae indicates, “CU can identify issues with appraisal reports, and it can also validate the many appraisal reports that are very well-supported. The net result should be that lenders, AMCs, and appraisers should not expect any significant increase in correction requests or need for rework.”
CU has certainly influenced the world of valuations; however, professional appraisers will always have a valuable role. Appraisers who develop strong relationships with AMCs, such as USRES, are able to gain partners and resources for professional growth. While CU may create some cause for concern, appraisers should lean on their AMC partners, experience and capabilities to demonstrate commitment to quality and success.