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Appraisal Time Bomb? Or Loaning Savior?

TrakLogix will be releasing a short series of blogs to discuss Collateral Underwriter. Please check back for updates.

(Interested in more TrakLogix blogs? Check out our “5 Step Plan To Grow Your Business” – a marketing series to help our customers expand)

 

On October 20, 2014, Fannie Mae announced that it will make Collateral Underwriting (CU) – its proprietary appraisal risk assessment analysis available to its lenders on January 26, 2015. Essentially, Collateral Underwriter is a tool that will allow lenders to evaluate appraisal reports using the same analytics used by Fannie Mae. Collateral Underwriting was developed by Fannie Mae with the appraisal data prepared by appraisers and delivered to the GSE’s by lenders and AMCs.  While Fannie Mae is giving Collateral Underwriter access to lenders, it is not giving access to Appraisers.

 

Basically this is what we have learned:

 

CU will provide up to 20 additional comps to be used against appraisals. They are put into an algorithm to determine the risk on the appraisal. These automated comps are compared with the comps on the appraisal report, and if 2 or more CU comps are considered less risky, than the appraiser might have to then defend their work.

 

What does this mean for you?

 

No one is quite sure yet, it is much too early to tell. There is a lot of speculation going on. I certainly dont want to sensationalize anything, so I’m more than happy to give an overview of WHAT COULD HAPPEN.

If CU flags a report, the appraiser will be contacted to resolve the flags, although this MAY not always happen. Other than 21 defined “fatal edits”, Collateral Underwriter messages don’t necessarily have to “pass” before Fannie will purchase the loan. The messages are to simply “highlight aspects of the appraisal that may require further attention.” This is Fannie Mae’s way to tell the appraiser to read the flagged sections to ensure comments or explanations are provided per their Selling Guide standards.

The Collateral Underwriter doesn’t break down neighborhoods. For instance, you could have a high value neighborhood adjacent to a low value neighborhood. This means that some of the possible comps an appraiser may have to respond to may be irrelevant – but are still capable of derailing transactions.

Fannie plans to initially focus on adjustments and material differences for key property characteristics and ratings for Quality, Condition, View and Location. Focus on what you need to do to provide a credible and compliant appraisal reports that demonstrate logic, reasoning and evidence for your opinions and conclusions.

Here are 6 things to make sure you are doing as a best practice:

  • Review and stick to appraisal fundamentals; brush up on your techniques.
  • Derive supportable adjustments from market data rather than using a list handed down to you from your grandfather who was an appraiser 50 years ago.
  • Develop and explain how you derived your GLA adjustments; don’t use the same $35/sf adjustment for your $50,000 properties and your $500,000 properties, unless you can truly support it with market evidence. Yes, they check all of your reports for patterns like that.
  • Double check your subject and comparable data and if it differs from MLS, public records data, or any other data source on which you relied, provide an explanation from your research.
  • Be consistent between reports with ratings for quality, condition, view, location. If you have good reason to change a rating from one report to another, document it properly in the appraisal report. If you have reason to believe your information is better and that your opinion may differ from that of other appraisers be prepared to support it.
  • Be cognizant of your adjustment factors and include support for your opinions and conclusions as they might differ from other appraisers or an automated valuation model.o extraordinary.

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