BLOG VIEW: As lenders and appraisers continue to sort out how Fannie Mae's Collateral Underwriter (CU) will impact their business, we wanted to share some early data analysis performed by Nadlan Valuation. The following is based on our review of seller-servicer reports (SSRs) over the past week.
First, a reminder: CU provides a 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.
Here is what we found: Of the reports reviewed by our company, the issue that appears to trigger the most 4 or 5 ratings by CU was that the appraisal's comparables were different than those selected by the Fannie Mae model. Of the SSRs reviewed by our firm, 21% received a 4 or 5 rating, and of that 21 percent, 64% had the comment that the appraisal comps were different than the model-selected comps.
The remainder of the reports reviewed by our firm – or 79% – received scores of 1 through 3. Of those, 60% commented that the appraiser's information and adjustments were different than other reports, by the same appraiser or others.
Of the reports with a score of 1, 2 or 3, 14% commented that the appraiser's adjustments were different than the Fannie Mae model's net adjustments.
Twenty-six percent of the reports receiving a score of 1, 2 or 3 had no explanation or comment.
Typos or errors did not seem to trigger high scores, even if the comps data differed from peer appraisers. Those reports still got a score of 2 or 3.
Fannie Mae's CU – which is an automated model – provides 20 comparable sales for a property. While it's still early and this is a relatively small sampling, there appears to be a strong connection between the different appraiser and CU model comps and a higher score by CU.  Â
Guidance From Fannie Mae
So is this situation normal? And where do CU's comps come from, anyway? A Fannie Mae Lender Letter dated Feb. 4 states the following: ‘CU's selection of comparable sales considers the relevance of each potential comparable sale based on physical similarity, time, and distanceâ�¦ 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.’
Fannie Mae indicates that in the majority of cases, there may be no material difference between comparable sales used by the appraiser and those identified by CU. The agency advises lenders, ‘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.’
What Should Appraisers Do?
Most appraisers are accustomed to receiving questions from underwriters asking them to explain why they didn't include certain sold properties as comps. Yet often, the comps selected by a lender's automated valuation model (AVM) are simply not comparable. AVMs don't have the ability humans do to pick and choose true comparable sales. The AVMs don't know the condition of the homes, the accurate square footage or the differences in neighborhoods. In our view, automated models are not a substitute for a competent, certified appraiser with boots on the ground.
What's the bottom line for appraisers? I recommend that appraisers spend a few extra minutes when writing appraisal reports to elaborate more on the choice of comps and to provide more commentary about the market conditions and the adjustments applied. That way, when an underwriter receives a report back from CU with a 5 score, the underwriter can read the appraiser's report and understand the logic and rationale behind his or her conclusions.
I recommend that appraisers, lenders and AMCs continue to use their own review and due diligence processes on appraisals.
Meanwhile, we will continue to keep a close eye on how CU is impacting both appraisers and lenders. Stay tuned for more updates.
Sam Heskel is president of Nadlan Valuation Inc., a national appraisal management company serving small to mid-size banks and credit unions.
(Do you have an opinion to share with MortgageOrb? Get in touch! Send an email to pbarnard@zackin.com.)
