Almost one month after Fannie Mae’s Collateral Underwriter was launched, we are starting to see some of the effects through revision requests from our lender clients.

However, I have to say that after all the anticipation and skeptics discussing how much CU will make our lives miserable, I find that not to be the case. Yes, like any new quality initiative there are some bumps in the road but overall they seem to be quite minor.

Let’s face it — the appraisal industry has experienced many changes over the past ten years. A quick recap: In March of 2005 Fannie Mae released a series of 11 appraisal report forms covering single-family homes, small residential income properties, manufactured homes, and condominium and cooperative properties. There was a slight learning curve, but appraisers were able to embrace the changes quickly. Once introduced, we could all agree that the forms proved to be a significant improvement from the old ones.

As a direct result of the financial crisis and housing bubble in 2007-2008, significant additions to the appraisal process were introduced in 2008. The 1004MC form was released to help provide clarity and enhance the transparency of the conclusions made by the appraiser related to market trends and conditions. Many were concerned, triggering confusion and frustration with appraisers as to how to complete the form, and of course, many were worried about how much more time it would take to complete an appraisal. Somehow, over time, the 1004MC became standard, although I still see several publications continuing to provide better FAQs for this form.

So now we are back to CU. Collateral Underwriter is a proprietary model-driven tool developed by Fannie Mae that provides an automated appraisal risk assessment to support proactive management of appraisal quality. Fannie Mae made CU available to lenders for free to provide transparency and help lenders more effectively and efficiently identify issues with appraisals.

The Uniform Appraisal Dataset and the Uniform Collateral Data Portal were introduced in July of 2011 and required that both interior and exterior-only Inspection Single-Family and Individual Condo Forms completed in compliance with the UAD.

Over 750,000 appraisals have been submitted through UCDP. CU leverages the standardized data that grew over time, creating an extensive database of property records, market data, and proprietary analytical models to analyze key components of the appraisal including data integrity, comparable selection, adjustments, and reconciliation. There are 21 defined hard stops or fatal errors, and 17 of those errors are immediately identified through our automated QC function. The remaining four of the 21 Hard Stops are based on proprietary information held by Fannie Mae. SWBC is able to run the appraisal through UCDP, which will identify if the other four. 

One misconception that somehow flooded the media is that Fannie will use CU as a decisioning engine and, based on the findings, will reject the loan. This is far from the truth. The fact is, CU is not a decisioning engine. It will not deny an appraisal or loan.           

The CU Risk score is comprised of three main components including property eligibility/policy compliance red flags, over-valuation red flags, and appraisal quality red flags. Under the appraisal quality red flags there are four property components that are considered the key appraisal components:

Data Integrity

Are physical attributes and transaction terms accurately reported? When CU was first deployed, we started receiving additional revision requests. Here are a couple of examples:

  • Per CU / FNMA: The quality rating for comparable #X is materially different than what has been reported by other appraisers in the market area. The appraiser must provide support for the quality rating applied.
  • Per CU / FNMA: The condition rating for comparable #X is materially different than what has been reported by other appraisers in the market area. The appraiser must provide support for the condition rating applied.

It can be a real challenge to ensure consistency amongst one’s peers. I would suggest that the appraiser maintain consistency with UAD when it comes to these attributes. In the end, there certainly can be false positives since in many instances the appraisal that is inconsistent with the rest of the market may actually be the only one reporting correctly. The appraiser should at all times include support and comments on how they analyzed and determined both condition and quality ratings. This should cut down on the number of revision requests.      

Comparable Selection

Are the selected comps reflective of the subject property?It is important that appraisers have geographic competency and can support and defend their comparable selection. Fannie Mae ranks appraiser-rated comps against a pool of available comps found most suitable by Fannie Mae's data set and automated analysis.

Adjustments

Are adjustments based on typical market reaction?Appraisers need to support their adjustments. How are they derived from the market? Fannie Mae relies on appraisers to make appropriate adjustments based on the local market. One hot area of concern that Fannie will pay close attention to will be Gross Living Area adjustments. Fannie Mae’s

Analysis shows little variation in median GLA adjustments over the years despite significant variation in price/SF. Fannie further analyzes the data by price tier. GLA adjustments remained much the same while price/SF increased dramatically. 

Fannie Mae believes there is strong evidence that adjustments have been made by appraisers to fit within guidelines that were not intended to be rules, but instead a trigger for commentary and rationale. The appraiser is expected to analyze the market for competitive properties and provide appropriate market-based adjustments without regard to arbitrary limits on the size of the adjustment. Fannie Mae reminds us that it does not have, and has never had, a limitation on a single-line item adjustment.

Reconciliation

Are the most recent comps given the most weight in reconciliation?This has always been a hot button for us. It’s important to understand that appraisers should be reconciling their comparable data. If the adjusted range is very close then one can clearly understand how the final value estimate was derived. However, in cases where the data may be somewhat limited and the adjusted range is relatively wide, then the appraiser must provide the analysis as to how the comps are weighted. What are the key components that would justify giving one comp more weight than another?

We have and will continue to identify the typical underwriter concerns that are triggered by CU. The bottom line: It has always been expected that the appraiser performs adequate analysis and report their findings throughout the report so that the reader can make a prudent loan decision.

As for CU, it’s here to stay and it will only get more powerful, given the amount of data that is mined everyday. Appraisers have embraced change for many years and for the most part, they adapt well. They have been forced to be reactive to these changes when it would be more prudent and effective to bring them in as part of the solution. I think the perfect world would include the ability for appraisers to have access to the data. After all, are we not trying to protect the integrity of the valuation process in order to mitigate the risk to both the lender and the borrower? Would it not make sense to push this to the appraiser’s desk? You would have the best of both worlds. We could have world-class data and analytics in the lap of a qualified and competent appraiser with first-hand knowledge of the local market. What a concept.