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When appraisal reports are generated and subsequently reviewed as a result of the mortgage loan origination process, lenders and their underwriters should be fully aware that HUD and Government Sponsored Entities (GSEs) expect that their appraisal guidelines be followed. While this expectation is not a new responsibility or not arising from a compliance-related issue related to any mortgage-related legislation coming out on the past few years, some underwriters have been a little hesitant to challenge appraisal report data. In today’s elevated compliance and enforcement environment, this could prove very costly to lenders.
HUD transitioned from rotating appraiser assignments to the “Lender Select” process in 1994. Mortgage Letter (ML) 1994-54 clearly stated that “lenders must accept responsibility equally with the appraiser for the integrity, accuracy and thoroughness of the appraisal and will be held accountable by HUD for the quality of the appraisal.” In ML 2009-28, appraiser independence was addressed: “the DE underwriter who has responsibility for the quality of the appraisal report is allowed to request clarifications and discuss with the appraiser components of the appraisal that influence its quality.”
With ML 2013-12, HUD revised its indemnification policy, which allowed it to demand indemnification from the underwriting mortgagee where the loan was insured under the Loan Insurance program; two of the indemnification standards includes:
- Failing to address property deficiencies which are identified in the appraisal that affects the health and safety of the occupants or the property’s structural integrity in accordance with HUD requirements; and
- Failing to ensure that the property’s appraisal satisfies HUD appraisal requirements and other applicable HUD requirements.
Because of this, HUD is authorized to execute an Indemnification Agreement on an FHA backed loan transaction if it’s definitely concluded that the Lender Insurance mortgagee knew or should have been aware of serious and material violations of HUD appraisal requirements.
The GSEs can also request repurchases if it has been determined that their appraisal guidelines were not met on their purchased loans. Fannie Mae validates all of the loans they purchase electronically; they can demand a repurchase within a three-year time frame, this includes performing loans.
Appraisal Review Tools and Fannie Mae’s Collateral Underwriter
There are tools available to underwriters which can help enhance their appraisal review capabilities, such as Risk Assessment Scorecards, Automated Valuation Models (AVMs) along with free sites such as Google Earth, Zillow/Trulia and Fannie Mae’s Collateral Underwriter (CU) application.
Full real estate solutions provider, PEMCO Limited, wrote in an article on CU:
“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.” Tiffany Ousley, a reviewer at PEMCO Valuations, said “CU leaves no room for appraisal report gray areas, either your data fits or doesn’t.”
Lenders can still deliver loans to Fannie Mae with appraisals that are scored in the high risk category, but adequate due diligence must be performed on appraisal cases with major issues.
What if Fannie Mae were to give appraisers access to the rich data stored by CU which could allow appraisers to ‘reverse engineer’ their valuation process? Not only would appraisers be able to proactively research additional comparable sales and market data, but the number of delays caused by lenders asking appraisers to reconsider their findings based on additional CU-provided market data and sales would be reduced.
Although lenders are not required to use CU, Fannie Mae strongly encourages lenders to use the risk scores and feedback messages they receive on appraisal reports submitted through the Uniform Collateral Data Portal (UCDP).
Fannie Mae Appraisal Deficiencies Identified
Based on Fannie Mae’s analysis of appraisals that have been submitted through their UCDP, Fannie Mae started sharing specific appraisal deficiencies with lenders. Lender Letter LL-2013-10 from December 10, 2013, outlines the following examples:
- Appraiser licensing information is analyzed when appraisal reports are submitted through Fannie Mae’s UCDP. Fannie Mae’s reviews have identified instances where loans were delivered with appraisals completed by appraisers whose licenses were suspended or revoked as of the date of the report. UCDP will issue a warning message which requires the lender verifying the appraiser’s licensing information. If this is not done, it will result in a repurchase request.
- Inconsistent and inaccurate appraisal work will be identified by Fannie Mae through data analysis from their UCDP submissions. Appraisers are provided this information directly as a learning tool for improving their reports. The Uniform Appraisal Dataset (UAD) requires that rating selections should be determined on an ‘absolute’ basis rather than a ‘relative’ basis. When the property transaction is compared to other properties, the condition rating should not change.
- In 2013, Fannie Mae started developing lists of appraisers identified as requiring 100 percent review on a post-purchase file review basis as a result of its data analysis. Also, starting in December 2013, Fannie Mae identified appraisers who they will no longer accept loan appraisals from. The Appraiser Quality Monitoring (AQM) page on Fannie Mae’s website enables approved Fannie Mae Sellers and Servicers to check to see if a specific appraiser’s name is listed. These AQM lists will be posted monthly and will offer a formal rebuttal process to the appraisers identified on these lists.
- Reporting a comparable sale having a C4 rating on some reports and C3 on others.
- Appraisers reporting different GLA measurements and/ or sales prices on the same property when it’s used as comparable sales.
HUD/FHA’S Most Common Appraisal Deficiencies:
Below is a list of the most common underwriting deficiencies based on HUD’s Post Endorsement Technical Reviews (PETRs) and listed in HUD’s “Lender Insight” quarterly publication along with some applicable FHA appraisal guidelines.
Comparable sales selections are not good (such as using dissimilar style properties such as a ranch home when the subject property is a two story Tudor, using older sales data when more recent sales data is available, comparable sales outside the area or more than a mile from the subject property in urban or suburban areas, when closer comparables are available.
- Inappropriate and/ or inconsistent comparable sales adjustments, such as an appraiser not utilizing a consistent GLA adjustment factor, inappropriate location, condition and/or view adjustments that are not supported, large adjustments exceeding the 10 percent line item, 15 percent net adjustment and 25 percent gross adjustment without an appropriate explanation.
- Not addressing repair items properly or in an acceptable way. The 92800.5B Form should be used to condition any FHA Minimum Property Requirements (MPRs) which are outlined in the report and a clear Inspection Report should be provided in the case file.
- Property does not meet FHA MPR or standards. Some examples are:
-Manufactured Housing unit without a permanent foundation or file without a Professional Engineer’s certificate showing that the foundation complies with HUD’s Permanent Foundation Guide for manufactured Homes, no appraiser access to inspect crawl space and/or attic
-Neighborhood, Site and/or Improvements section of the appraisal report concerns.
Property does not have proper zoning compliance and is not grandfathered in, property is located in a declining area and a minimum of two comparable sales within three months were not provided and at least two pending sales or active listings were not provided.
-Substantial repairs are required in order to meet FHA MPRs,
-located in a Flood Hazard area and there’s no adequate proof of flood insurance provided
More FHA appraisal guidelines to evaluate:
- Is the FHA-required Remaining Economic Life (REL) estimate provided by the appraiser? If given, does it support the requested mortgage loan’s term?
- Did the appraiser provide front and rear subject property photos, a street scene and front photos of the comparable sales? MLS photos are not allowed as a substitute for appraiser taken photos of the front of the comparable sale properties. Any item of value should be photographed and included in the report, such as an outbuilding or garage should be included.
- Is the appraisal report signed and dated by the appraiser? Is the appraiser an active FHA Appraiser Roster member and is the appraiser license current as of the effective appraisal date?
LoanLogics White Paper found on National Mortgage News. Appraisal Review Responsibilities for Mortgage Lenders — It Starts with You.