Will Fannie Mae’s New Collateral Underwriter™ Crush the Appraisal Process?

by Tony Abate · January 22, 2015

If you have been anywhere near lending or real estate social media lately, you have seen a great deal of news about what FNMA will be doing with appraisals. Much of the chatter would lead one to believe that we are facing a world of chronic low appraisals, delays in closings, & increased costs for consumers. Not to mention an almost Armageddon-like stifling of property values. Much of this remains to be seen, & like all new things, it can be difficult to separate fact from “distortion”. My personal expectation on all of this is that we will see “evolution”, & not so much a “revolution” regarding property appraisal evaluations.

This coming Monday, January 26^th, 2015, FNMA will take a big step forward in using its newest risk assessment tool, Collateral Underwriter™ (CU). To quote FNMA: ”Collateral Underwriter™ is a proprietary appraisal risk assessment application developed by Fannie Mae to support proactive management of appraisal quality”. Here is a quick overview of the process: when a lender reviews an appraisal, it is already sending an electronic version of the appraisal to FNMA using what is called the Uniform Collateral Data Portal (UCDP). FNMA uses the data for a variety of quality control checks, most of which are evaluated after closing in a post-purchase loan review. As of this coming Monday, upon submission to the UCDP, the CU assessment tool will activate, & will provide the lender with a real-time risk assessment of the appraisal. The risk assessment will “score” the appraisal & potentially return a variety of messages. In the end a risk score between 1and 5 will be returned, with “1” representing a potentially “low risk” appraisal, & “5” being a potentially “high risk” appraisal. Here are a couple of very important things to note:

Underwriting guidelines relative to appraisals & property review do not change with the implementation of CU.
FNMA is providing CU as a risk assessment tool to for lenders to use as they deem appropriate. This in of itself is not unique. At last check, FNMA offers at least nine different automated risk assessment tools for lender use. My expectation is that over time, lenders will build policy around the results that come from the CU assessment.
The CU model does not provide an opinion of value of the subject property.
FNMA has not established any guidelines or requirements suggesting that an appraisal needs to have a certain risk score in order for a loan to be purchased by FNMA.

According to FNMA, the tool uses a very sophisticated evaluation process, & does not simply grab public record data for comparison sake. In fact, there are some potential positives that may come from this, as FNMA is using this introduction to highlight some misinformation that currently hampers the appraisal process. Here are some potential “wins”:

CU will evaluate “time adjustments” on an appraisal. Appraisers use time adjustments to account for market differences between the sale date of a subject property & the sale date of a comparable property. This hampered all of us when the market was trying to improve, & appraisers would still need to sometimes put a downward time adjustment on an appraisal, indicative of a declining market. FNMA has taken this opportunity to indicate that they see very few positive (upward) time adjustments on appraisals, but when properly supported, this is perfectly acceptable and within guidelines. I don’t know if I have ever seen a positive time adjustment on an appraisal, & it is good to see FNMA endorse this when properly supported.
FNMA is using this rollout to reiterate the fact that it is acceptable for appraisals to have adjustments in excess of 15% net & 25% gross. In fact, in their CU training, FNMA has indicated that “long standing reliance on generic guidelines has led to what FNMA believes to be wide spread under-adjustment by appraisers”. This is definitely a change in tone!

One of the interesting aspects of the review is that CU will evaluate appraisal data against other appraisals completed by the appraiser, along with data from appraisals completed by the appraiser’s peers. As you might imagine, the property database that FNMA has is huge. So for instance, if it is discovered that the appraiser used the same comp on two different appraisals (perfectly acceptable), but the comp data was inconsistent, then this would raise a “risk” flag. In the same vein, if an appraiser has data on an appraisal that is not consistent with many other appraisals in the immediate area, that could raise a risk flag.

In summary, some good may come of this. It would seem to me that the risk with this would be misuse or over-reliance on this tool by lenders and FNMA, when the intent is for the tool to provide guidance, not gospel. Here is an article from FNMA’s Housing Industry Forum that provides another interesting look: http://www.housingindustryforum.com/content/collateral-underwriter-improves-efficiencies-manages-risk#.VMGF_md0zIU

Only time will tell how all of this plays out. Stay close to this blog & I will keep you as informed as I can on this very important topic. Keep your seatbelts fastened!