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Shaking out inexperience and corner-cutting
Fannie Mae unleashed its Collateral Underwriter (CU) application on January 26th and in March, Freddie Mac will roll it out. The program’s purpose is to review every submitted appraisal for accuracy, overvaluations and undervaluations, the use of the “right” comparables and consistency. Appraisals are reviewed before loan submission and scores between 1 and 5 are given, with 5 being high risk. The appraisal process may take longer if the report is rejected because of the application’s built in “hard stops.” When a report is rejected, a list of 20 comparables is generated, which are then used to question the appraiser with.
Census tracts are the new geographical metrics when culling comparable data, rather than the “within one mile” comps. CU therefore concludes that the appraiser should get their comparable data using census tracts. Census tract data is baked into this very sophisticated application and it will select what it determines to be the best comparisons. The days of “10% line item” or “25% gross adjustments” and comparables are gone. The comps with the lowest risk will be those with the most similar parameters such as bedroom and bath count, square footage, lot size and amenities.
CU mandates the use of Fannie Mae’s Market Conditions analysis form, which can add 3-6 months to recognize a market trend. This could ultimately repress values in an up-trending market as time/ market condition adjustments won’t be supported and used with Collateral Underwriter, whether in a positive or negative market. CU insures that every comp adjustment is supported by facts using paired data analysis and/or regression analysis.
Because every appraisal will be submitted using the appraiser’s license number, if there’s a pattern of high risk valuations that’s tied to an appraiser, he or she will be given a warning letter. According to Fannie Mae, if the appraisal quality doesn’t improve after this, the appraiser will be placed under 100% and/or on the “do not use” list. Unfortunately, the appraiser will not get an explanation from Fannie Mae or they won’t know if they have any recourse to defend their work.
Experienced or senior appraisers that properly use the scope of work and have “paired data” and “regression and market trend analysis” knowledge may not find issues with CU. The appraisers that work with appraisal management companies (AMCs) and who may cut corners because of the AMCs paying “cram down fees,” will most likely have issues with CU. PEMCO Limited works with high quality appraisers, paying them fair and competitive fees. This helps us maintain the level of quality we expect for our network like competitively short turn times and accuracy upon delivery.
It might seem that with the changes that come with Collateral Underwriter that AMCs wouldn’t have to do much if any review and quality control. Would this signal the beginning of an end or at least a decline in appraisal management companies? Would AMCs be able to justify getting 35% to 50% of the appraiser’s “customary and reasonable” fee and continue the “cram down” business model?
See How Should AMCs Compete in Today’s Regulatory Environment?
See Do Appraisal Management Companies Sacrifice Quality for Quantity?
Of course not. First, before Collateral Underwriter, the GSE’s and largest banks were already using their own software which analyzed appraisal reports to determine quality. Second, AMCs provide more value than just quality control. Appraisal management begins long before placing an order, with finding the most qualified appraisers for an appraiser panel and ensuring that the reports are submitted in a timely manner. For more information on how PEMCO Limited can help, go here.
When an order is placed, AMCs are the bridge between the clients to make sure the assignment is seamless, compliant and that it exceeds all requirements and expectations. Collateral Underwriter is a robust technology which will help standardize appraisal review and quality control, but it will not manage the entire process.
Resources:
HousingWire. Will Fannie Mae’s Collateral Underwriter kill appraisal management companies?
HousingWire. Does the mortgage industry still need Appraisal Management Companies?