Fannie Mae has released a new analytics tool, exclusively for the use of lenders, which is intended to help underwriters sniff out problematic appraisals – and it’s causing some consternation among appraisers.
The product, called Collateral Underwriter (CU), draws upon Fannie’s own internal database of millions of appraisal reports, allowing underwriters to compare and contrast new reports submitted by appraisers with prior reports on similar sales. Underwriters can now see not only the properties the appraiser selected as comparable and any adjustments they made to the value of those properties, but also how other appraisers have evaluated the same comps in their reports.
“They have seen every comp [appraisers] use at least five times [before],” Steve Sousa, executive vice president of the Massachusetts Board of Real Estate Appraisers, explained to a room of appraisers at a recent educational seminar exploring CU’s capabilities.
Among those abilities: If appraiser Smith describes a home as being in excellent condition relative to its neighborhood, while appraisers Jones, Lee and Washington describe it as being merely average, CU will point that out. The program can also generate its own list of possible comparable properties, so that an underwriter can see if there’s other nearby sales of similar homes that the appraiser omitted. The program can also track “self-consistency” among a given appraiser’s reports – so if an appraiser cites 123 Elm St. in one report and rates its conditions as average, then uses 123 Elm in another report and describe its condition as poor, the program will flag that.
Perhaps of most concern for appraisers, however, is that CU compiles these various data and uses them to generate a “risk score” on a scale of 1 to 5. If, for example, the comparable properties selected by the appraiser don’t line up with CU’s selection, or if an appraiser describes a neighborhood as wholly residential while CU has it classified as mixed-use commercial and residential, that appraisal could be scored as “riskier” than one which matches CU’s predictions.
What’s not clear is what that will mean for the appraisal – and the appraiser. Fannie has been at pains to emphasize that it wants lenders to consider CU as merely an aid to the underwriting process, not as the final word on whether a loan should or should not be issued on a given property, and that just because a report is flagged by CU, that doesn’t mean Fannie won’t purchase the loan.
“Fannie Mae expects lenders to use human due diligence in combination with the CU findings. … 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,” Fannie sternly warned lenders in a FAQ about the program posted on its website.
But the conservative post-housing crash lending environment – and particularly following the wave of forced buy-backs that followed the crisis – has left many lenders extremely leery of issuing any loan which may not meet with the government-sponsored entity’s approval.
Many lenders are still struggling to figure out how to incorporate CU and its reports into their existing underwriting process, Sousa said. While some lenders have their own in-house appraisal reviewers, who can evaluate which of CU’s red flags are serious and which are frivolous, not all do.
Since the product was released in late January, he has already noticed an uptick in inquires from lenders about his reports, said Paul Morgan Jr., president of JP Morgan & Co. RE Appraisers and Consultants in Wakefield.
“It’s certainly made the work more challenging,” said Morgan. “There’s been a lot more questions, many of them good questions, some of them irrelevant.”
Some industry observers are worried that lenders that lack their own in-house reviewers may simply blindly defer to CU’s assessments rather than risk issuing a loan that may come back to them.
Even if lenders do ultimately come down in favor of the local appraiser’s report despite any red flags CU sends up, it will likely mean more work for appraisers, as lender’s efforts to show due diligence will result in appraisers being asked to revisit old reports, answer questions and collect and submit more data to back up their valuations.
“It takes time to stop what you’re doing in your practice, going back to the file, reanalyzing what you already relied on, using new info – and [lenders] don’t want to pay for that,” said Tony Federico, principle of Haverhill-based Valuation, Consulting and Compliance Solutions.
Indeed, the introduction of CU is also having an effect on the broader regulatory and review environment, as lenders and state regulators are beginning to pay attention to some of the potential problems highlighted by CU and give them more scrutiny in their own review processes.
Appraisers have got to “expect that their appraisals are going to receive a lot more scrutiny from a number of different sets of eyes,” said Sousa.