What you need to know about Fannie Mae’s Collateral Underwriter

Have you heard of Fannie Mae’s Collateral Underwriter yet? It’s coming in a matter of days on January 26, and it’s been called an “appraisal time bomb” by some, while others say it’s no biggie. Today I want to give you the scoop on what it is as well as some of the potential impact it might have.

Fannie Mae is watching appraisers closely - by sacramento appraisal blog - image purchased and used with permission

What is Collateral Underwriter?

Collateral Underwriter (CU) is a property appraisal review tool created by Fannie Mae to help mortgage lenders manage risk.

What will Collateral  Underwriter do?

  • CU performs an automated risk assessment on appraisals geared toward Fannie Mae and returns a risk score, flags, and messages to the submitting lender. CU will provide a risk score for the appraisal of 1-5 (1 being the lowest risk and 5 being the highest).
  • CU will analyze comparable sales selected by the appraiser and recommend alternatives.
  • CU will compare adjustments the appraiser has given with what other appraisers have done in the same area (Fannie Mae has been mining data from over 12 million appraisals since 2011, so they definitely have some data at their disposal).
  • CU will use census block groups to analyze market trends.
  • CU will review specific information in each appraisal such as the sales price, lot size, bathroom count, bedroom count, age, location, size of the basement, condition, quality of construction, view, and GLA (gross living area). In 2011 Fannie Mae mandated appraisers to begin using UAD codes in their reports to describe all of these elements. You may have read a report and thought, “Why the heck is the appraiser saying the property is in ‘C4’ condition? What does that even mean?” Well, that is a Fannie Mae UAD code to describe a specific condition, and now that Fannie Maw has over 12 million appraisals in their system with these codes, it has allowed Fannie Mae to give birth to the CU review tool.

Fannie Mae Collateral Underwriter - Data Mining Image Purchased and Used with Permission - by Sacramento Appraisal Blog

5 things to know about Fannie Mae’s Collateral Underwriter:

  1. Fannie loans only: CU is only used for loans geared toward Fannie Mae, and not for divorce appraisals or any other private appraisals. CU is also not used on 2-4 unit properties or “drive-by” appraisals.
  2. Not FHA/VA: CU is not used for FHA and VA loans (I’d be shocked if they didn’t adopt it later though).
  3. Commentary: The CU tool does not read any of the commentary by the appraiser, which can be key to understanding comp selection, adjustments, and the final value.
  4. Neighborhood boundaries: CU uses census block groups for data analysis instead of specific neighborhood boundaries that may be readily understood in the market. Pulling data from the right neighborhood can make a HUGE difference in a valuation, don’t you think?
  5. Adjustments & comps: Fannie Mae has heaps of data to compare to any new appraisals that come into the system. Not only do they know about sales in the neighborhood, but they also know which comps other appraisers have used, and even value adjustments given by other appraisers. CU knows if an appraiser says a comp is in good condition (C3) in one report, but then says it is in fair condition (C5) in a different report. CU will pay special attention to comp selection, adjustments, and the final reconciliation of value.

Fannie Mae Collateral Underwriter - by Sacramento Appraisal Blog

Potential Impact of Fannie Mae’s Collateral Underwriter:

  1. Unknown: The truth is we don’t really know how CU will impact the market. It could be a game-changer for the mortgage industry and appraisal profession, or it could feel like the same old same old.
  2. Slower loan process: As CU is implemented, expect a learning curve, and thereby a slower loan processing time. It’s going to take some time for lenders, appraisers, and underwriters to work out the bugs.
  3. More conservative appraisals: One of the unintended consequences of CU may be more conservative appraisals.
  4. Headaches for appraisers: The fear among appraisers is that lender clients will now come back to say, “CU has identified 20 other comps in this census block. Why did the you not use these?” Hopefully that will not happen (assuming the appraiser did a good job of course), but increased scrutiny will be bound to cause appraisers to spend more time responding to CU.
  5. Higher cost for consumers: If CU does end up putting more work on appraisers, it may lead to higher appraisal fees. After all, more work requires more time (which is money).

Advice to the Real Estate Community:

  1. Real Estate Agents: Make sure your clients know how strict the underwriting process has become for appraisals. I’m not saying you need to sit down with your clients and watch Fannie Mae’s CU tutorial (that’s probably a quick way to lose clients). All I’m saying is this is one more reason to price properties correctly since the appraisal is going to be even more scrutinized now. Also, if you accept an offer that is clearly out sync with neighborhood values, the lender is going to have a ton of data at their disposal about neighborhood values – even if the appraiser happens to “hit the number” somehow.
  2. Appraisers: Many appraisers are gravely concerned about CU, though many lenders have been reaching out to say, “Hey, we’ve already been scrutinizing you, so don’t worry about this.” Only time will tell how this will impact business and the industry. All we can do is choose the best available comparables and make reasonable market-supported adjustments. There will be a learning curve to know how to avoid red flags so to speak, but explaining why we made adjustments and supporting those adjustments will be a big theme this year for lender work. The bottom line is appraisers will need to add more commentary in their reports. If you are making the same adjustments in every single report regardless of the location of the property, it’s time to stop that because adjustments vary depending on the neighborhood. If you are struggling to support adjustments, it may be a good year to find a mentor as well as take some quality continuing education. If you do not know how to graph sales, make that a top goal this year. On the other hand, if you are an experienced appraiser, find ways to be a mentor to other appraisers by answering their questions – whether on forums or in person. As I said in 10 things appraisers can do to improve the appraisal industry, “Too many appraisers think they are right about everything, but at the end of the day being right doesn’t help anyone grow. Find ways to share your knowledge and build others up.” Lastly, if it ends up costing you more time to do your work, it may be time to consider raising your rates.

Helpful Links:
Fannie Mae’s Collateral Underwriter Home Page
Collateral Underwriter FAQ (pdf)
Collateral Underwriter Fact Sheet (pdf)
Into to Collateral Underwriter Recorded Tutorial
CU Risk Score, Flags, & Messages (Recorded Tutorial)

Questions: How do you think Fannie Mae’s Collateral Underwriter will impact the market and/or the appraisal profession? Anything else you’d add? I’d love to hear your thoughts.

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A tale of three appraisals on one house

What do you get when you have three appraisers appraise one house? It sounds like the start to a cheesy real estate joke, but unfortunately there’s nothing funny about this scenario.

A home owner hired me recently for some value perspective after there were three separate appraisals done on his house for sale. Since there was a huge discrepancy between the values and contract price also, the seller wanted to find out what his house was really worth. So he hired me to review the appraisals and talk with him about the market. And yes, I have permission to share this story.

Background: His house in the Sacramento area listed at $210,000 and had 7 offers right around $210,000 (conventional, FHA & VA), and a cash offer at $198,000.  Some offers asked for 1-3% concessions back to the buyer, but others did not. The first accepted offer was $210,000 and the second was $213,000.

three separate appraisals

1Appraisal #1: This appraisal came in at $192,000. The appraiser made an adjustment for a declining market and a hefty adjustment downward for being located on a feeder street too. These adjustments essentially knocked off about $10,000 in value (and they weren’t supported in my opinion). All things considered, this appraisal looked low, especially in light of a pending sale the appraiser used in the report that subsequently closed at $195,000 (and was 200 square feet smaller with less upgrades – located on the same street).

2Appraisal #2: After the first buyer moved on, a second buyer came along. The contract price was $213,000 and the appraisal came in right at contract. All things considered, it just seemed the appraiser was maybe reaching for the contract price on this one. Still, it’s amazing to see a $21,000 difference between the first two appraisals.

3Appraisal #3: This was a review appraisal from the second buyer’s lender, and the value came in at $185,000. The reviewer did an exterior inspection of the property and the “comps” were simply not comparable. There is nothing similar about dirty distressed sales and the subject as a clean and upgraded home. Just because something has sold nearby does not mean it is a “comp”. This appraisal was good for nothing not the highest quality I’ve seen. The buyer was actually willing to pay the difference in cash between the contract price and a potentially lower appraised value, but the review coming back at $185,000 was a huge amount for the buyer to consider paying. This reviewer was probably paid very little for the job he did, yet his appraisal ended up playing a huge role in the transaction.

Any lessons we can learn? Situations like this aren’t pretty, but there are still some important take-aways to remember in this market:

  1. Appraisers, do a better job.
  2. Agents, be ready to answer questions and provide market insight to appraisers when they ask you questions about one of your sales or listings. In light of low inventory, it’s critical to obtain insight from real estate agents – especially on listings. Also, here are some tips for talking with appraisers in an HVCC world.
  3. Borrowers and owners, if you’ve at the receiving end of a bad appraisal, ask the lender what their process is for doing an appraisal rebuttal or challenge, and then follow their guidelines. You may need to offer new comparable sales, market data or possibly obtain a new appraisal. If the lender is not willing to work with the new data, and you feel strongly the original appraisal is not accurate, you may need to switch lenders. Keep in mind the appraisal sticks with the property for 120 days if it is an FHA loan, but that’s not the case with a conventional loan. It may be worthwhile to consult with an appraiser who is a market specialist in your area also. The appraiser cannot advocate for your cause, but can provide unbiased market research for you. Here are some tips for how to challenge a low appraisal.
  4. Let’s remember that market value and price are not always the same thing – even when inventory is low. Despite multiple offers, we won’t always see properties appraise at or above contract price.
  5. This market is not easy for anyone to interpret, yet it’s easy to blame various parties for a deal not working out – particularly appraisers. In the case above, the shoddy appraisal work was clearly to blame, yet that’s not always the case when a transaction goes south. All I’m saying is let’s give blame where it is due and when it is due, but be objective in our critique.

Any questions, stories or insight? Why do you think there is such a difference in appraised value in situations like this? I’d love to hear your comments below.

If you have any questions or Sacramento area real estate appraisal or property tax appeal needs, contact me by phone 916-595-3735, email, Twitter, subscribe to posts by email or “like” my page on Facebook

Four reasons why appraisals “come in low”

There is much discussion these days about “low” appraisals and even “Appraisal Hell”. Sure enough, these issues showed up again yesterday in an article on Reuters entitled “Special Report: What’s a home worth? Pick a number, any number“. I wanted to give a few comments about this article as well as some reasons why homes sometimes appraise for less than the agreed upon price between a buyer and seller. My two cents:

1) Price is too high:  Sometimes the agreed-upon price on a home is too high. If one buyer and seller agree to accept a certain amount for a property, the agreed upon price is not always consistent with market value. There is a real difference between price and market value because market value would gauge what a typical buyer would pay for a property, not just what one specific buyer is willing to pay. As appraiser Patrick Egger says, if you lined up 100 buyers to purchase a particular home, what would the majority of these buyers pay for the specific property? The answer to this question would probably produce a pretty good number for what the home is worth. But you might have a small pool of buyers who would be willing to pay far above asking price, right? Maybe it’s a “honey, buy this house at any cost” situation, friends or family live next door, or simply a high offer is presented to beat out all other offers. 

2) Really bad appraisal:  Let’s face it, there has been some very warranted scrutiny of the appraisal industry over the years, and especially since May 2009 when HVCC was implemented. Maybe the appraisal really was bad (inexperienced appraiser, out of the area appraiser, really quick shoddy appraisal, appraiser didn’t know the market and just guessed at value).  You know appraisals are an issue too when phrases like “Appraisal Hell” are coined to describe that place where Borrowers go when appraisal issues hold them back from getting a loan. However, it’s important to keep in mind that a “low” appraisal isn’t always due to a bad appraisal for reasons explained in this post.

3) Strict Lending Guidelines:  The article above gives a scenario where a couple paid for seven appraisals with different lenders before deciding to call it quits (because the appraisals did not come in high enough for their loan). My heart goes out to the couple for all the money they spent, but part of me wonders if there is more to the story. I wonder why the two appraisals at asking price were deemed suspicious by two different lenders. That’s a red flag in my mind, or maybe it’s just a testimony to hyper-regulation and lenders being finicky. But maybe the appraisals looked inflated for some reason too? Guidelines in lending have certainly become more strict in recent years, especially after the housing bubble burst.

4) Counter-offer to “No Man’s Land”:  Sellers sometimes counter the buyer with a higher price despite the buyer offering at asking price. At times this counter offer works out very well, but other times it might push the property into “no man’s land” (above market value). Many experienced local real estate agents are careful about this scenario as they work with their clients. In these instances, if the appraisal “comes in low” (below the higher accepted contract price), the value might not really be low, but rather indicative of where the sales price should have been. Of course sometimes properties are marketed at lower prices in order to get multiple offers quickly, and it’s not too surprising to see that market value ends up being above the original list price in many of these cases. Ultimately, it’s nice to be able to boost up the sales price and try to fit concessions or credits in a higher sales prices, but sometimes there might not always be room to do that.

In the past few months I’ve been hired multiple times due to bad appraisals. Usually a client or local real estate agent will ask me to do a full appraisal to help give the buyer a better sense of the market (this is usually when buyer’s are coming in with a more sizable down-payment than 3.5% – FHA). Other times clients will hire me as a consultant or reviewer (no value rendered) to take a look at the original appraisal they disagree with. My job in these scenarios is to  review the report and point out some things for the original appraiser to consider.

What do you think? What has been your experience with appraisals? What is your remedy to deal with a “low” appraisal?

If you have any questions or a need for an appraisal or consulting in the Sacramento area, give me a call at 916.595.3735, send me an email, catch me on Facebook, or see my company website at www.LundquistCompany.com.