Fannie Mae Launches Collateral Underwriter and Appraiser Quality Monitoring

By Anna DeSimone
February 4, 2015, Fannie Mae published Lender Letter LL-2015-02: Appraisal Tools, Processes and Policies.  The purpose of the Lender Letter is to provide clarifications and additional information regarding Fannie Mae’s valuation-related tools and policy updates announced within the past 12 to 18 months. These include Collateral Underwriter™ (CU™), Appraiser Quality Monitoring (AQM), and updates to the Property Eligibility and Appraisal Requirements section of the Selling Guide.
This article highlights the Collateral Underwriter and Appraiser Quality Monitoring sections of the Lender Letter.  Please refer to a subsequent Compliance Monitor article regarding updates to property eligibility and revisions to the Selling Guide.
Collateral Underwriter
CU is a proprietary model-driven tool developed by Fannie Mae that provides an automated appraisal risk assessment to support proactive management of appraisal quality. As previously announced, Fannie Mae is making CU available to Fannie Mae-approved lenders in 2015 to provide transparency and to help lenders more effectively and efficiently identify potential issues with appraisals.   A significant amount of CU information and training is provided on Fannie Mae’s CU web page, including a fact sheet, FAQs, and On-Demand eLearning courses that are available 24/7.
Key Points
  • The use of CU is voluntary and at no cost to the lender.
  • CU is a Fannie Mae–only risk management tool.
  • CU does not make a credit decision and the lender may not use CU to make a credit decision.
  • CU does not accept or reject appraisal reports or characterize an appraisal as “good” or “bad.” The CU risk score and messages pertain to risk and identify potential defects in the appraisal report. The lender is not obligated to “clear” or “override” the CU messages. The messages are meant to be used as red flag messages that lenders should use to assist with their appraisal analysis and inform their decisions based on a complete analysis and understanding of the appraisal report.
  • CU does not provide an estimate of value to the lender.
  • CU provides a numerical risk score from 1.0 to 5.0, with 1 indicating the lowest risk and 5 indicating the highest risk. Risk flags and messages identify risk factors and specific aspects of the appraisal that may require further attention.
  • CU’s selection of comparable sales considers the relevance of each potential comparable sale based on physical similarity, time, and distance. The selection process is not based on the relative “risk” or sale price of a comparable sale nor is there a “lower is best” approach. In fact, CU may assign a high risk score to an appraisal when the model identifies alternative sales that are potentially more relevant than the comparable sales used by the appraiser, regardless of whether the alternative sales are higher or lower in price.
  • CU considers under-valuation and over-valuation risk, based in part on factors such as the relevance of the comparable sales chosen, and whether or not the appraiser made appropriate adjustments when warranted.
  • CU takes location into account using Census Block Group levels, which are subsets of Census Tracts. This is the most viable proxy for location in the absence of standardized neighborhood definitions, and more effective than use of arbitrary distance guidelines. Fannie Mae is not suggesting that appraisers use Census Block Groups to define comparable search areas, but appraisers remain responsible for indicating when comparables are from outside of the subject neighborhood and for addressing any differences.


The risk analysis performed by CU is for exclusive use by the lender in their analysis of the appraisal report. After completing a thorough review, a lender should be able to have constructive dialogue with the appraiser to resolve specific appraisal questions or concerns. Although the lender may use output from Collateral Underwriter to inform its dialogue with appraisal management companies and appraisers regarding appraisals they supplied, the CU license terms prohibit providing these entities with copies or displays of Fannie Mae reports that contain CU findings, including without limitation the CU Print Report, the UCDP Submission Summary Report, or any other CU report.
The lender must not make demands or provide instructions to the appraiser based solely on automated feedback. Also the CU license terms prohibit using it “in a manner that interferes with the independent judgment of an appraiser.” Fannie Mae expects the lender to use human due diligence in combination with the CU feedback, and will actively follow up with lenders who are reported to be asking appraisers to change their reports based on CU feedback without any further due diligence.
Fannie Mae does not instruct or suggest to lenders that they ask the appraiser to address all or any of the 20 comparables that are provided by CU for most appraisals. It is also not Fannie Mae’s expectation that appraisals should contain only CU’s top-ranked comparable sales. In the majority of cases, there may be no material difference between comparable sales utilized by the appraiser and those identified by CU. Before asking the appraiser to consider any alternative sales, it is imperative that the lender analyze the relevance of the sale and determine if the use of such sale would result in any material change to the appraisal report. If the lender determines that there would be no material change, then they should not ask the appraiser to make revisions. Fannie Mae expects CU to enable lenders to accept appraisals “as is” with greater confidence.
CU is available only to approved Fannie Mae lenders, and is not available to other industry participants such as appraisers for several reasons, including:
  • Fannie Mae’s contractual relationship is with approved lenders. Based on the lender’s representations and warranties in accordance with the Selling Guide, it is up to the lender to determine which appraisals they submit to the Uniform Collateral Date Portal (UCDP) and ultimately whether to sell a particular loan to Fannie Mae. Additionally, it is their responsibility to underwrite the appraisal to determine acceptability with respect to property eligibility and other Fannie Mae requirements.
  • CU requires an appraisal submission to UCDP in order to run; it is not based on entering an address and retrieving market data.
  • CU is an appraisal risk management tool. It is not the first product of its kind and is not the first automated technology that lenders have used to assist with their quality control processes. Lenders have long been using automated products, checklists, and overlays, which may have led to unnecessary correction requests to the appraiser.
Appraisers who make a good faith effort to provide accurate data, select appropriate comparables, make market-based adjustments, and give weight to the most relevant comparables should feel no significant negative impact as a result of the use of CU. CU can identify issues with appraisal reports, and it can also validate the many appraisal reports that are very well-supported. The net result should be that lenders, AMCs, and appraisers should not expect any significant increase in correction requests or need for rework.
UCDP Appraisal Submissions
Lenders are reminded that the appraisal used to underwrite the loan must be delivered to UCDP prior to delivery of the loan to Fannie Mae. If necessary, lenders should contact any applicable vendor that manages their appraisal process (such as an appraisal management company) to reiterate this requirement. It is imperative that this occurs so that if the loan is selected for post-purchase review, Fannie Mae has access to the correct appraisal for review. This will avoid potential delays in the review process. Furthermore, lenders that use CU for appraisal review will want to submit the appraisal to UCDP prior to their appraisal review in order to be able to take advantage of the CU analysis.
Appraiser Quality Monitoring
Fannie Mae’s AQM process identifies appraisers whose appraisal reports exhibit a pattern of minor inconsistencies, inaccuracies, or data anomalies. The intent and expectation of communicating these issues to appraisers is for training and educational purposes, and to provide them with an opportunity to improve their work. Future appraisal reports from those appraisers are then monitored to assess improvement.
The AQM process can also identify appraisers whose appraisal reports exhibit more egregious issues. In those cases, Fannie Mae will contact the appraiser and the lender that delivered the loan(s), informing them that either 100% of the loans submitted with appraisals from the identified appraiser will be reviewed in the post-purchase file review process, or that Fannie Mae will no longer accept loans with appraisals completed by the specific appraiser.
There is a misconception in the industry that the AQM process is a fully automated process with no human intervention, which is incorrect. The AQM process leverages data and technology like CU to identify (with an emphasis on “identify”) consistent patterns or particularly egregious potential issues with appraisals, which in turn is used to flag them for review. However, Fannie Mae does not simply use the results from an automated system to determine if 100% file reviews are required or that the appraiser’s work is no longer acceptable to Fannie Mae. Prior to issuing any communication to an appraiser, Fannie Mae conducts a significant level of human due diligence.
Although information from CU is one tool that Fannie Mae uses in the AQM process, there is no direct connection between the CU risk score and AQM. High CU risk scores do not automatically trigger AQM reviews, and lenders using CU should not consider its feedback as necessarily reflective of an individual appraiser’s work.
Through the AQM process, Fannie Mae continues to identify appraisers whose work product indicates a pattern of either minor or more egregious issues. More information on each of the topics covered in this Lender Letter can be found on the Collateral Underwriter page of Fannie Mae’s website.
 
About the Author:Anna DeSimone is President and Founder of Bankers Advisory and Principal of CliftonLarsonAllen LLP. She can be reached at Anna@bankersadvisory.com

 
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Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.

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