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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5 New Year’s Resolutions for the Real Estate Community

Have you ever dropped the ball on one of your New Year’s goals? We’ve all been there. That’s why I want to suggest some goals that are actually highly attainable. Here are some suggestions for New Year’s resolutions for the real estate community. I see these things all the time, so I thought it would be worth mentioning. By the way, I’m a humble guy and this is coming from a good place. Let’s improve in big and small ways to find profound success this year.

  1. abbreviation for Carbon-Monoxide-Detector - by sacramento appraiser blogAbbreviate Carbon Monoxide Detector Correctly: If you didn’t know, carbon monoxide detector is shortened to CO – not CO2. If you want some clever ways to remember that, check out 5 Ways to Remember Carbon Monoxide is “CO” instead of “CO2″.
  2. Pronounce “REALTOR” Correctly: I am not a grammar snob by any stretch, but I wanted to point out a common error. REALTOR is often pronounced as “REAL-A-TOR” even though there is actually no extra “A” in there. It is correctly pronounced as “REAL-TOR”.
  3. share-posts-on-social-mediaMore Listening on Social Media: The online sins of the real estate community are overselling and self-promotion, so listening to conversations and a focus on building relationships on social platforms is definitely something relevant. Join the conversation by asking questions, being personable and sharing helpful information rather than overly promoting your products.
  4. Step off the Toxic Platform for Appraisers or Agents: There is often enmity between appraisers and real estate agents – as if they are mortal enemies. Part of this is understandable because both parties are doing different jobs for the same transaction, but it crosses the line when either party speaks from a platform of hostility toward the other group. I hear agents bash appraisers and talk about them like they are village idiots. Likewise, I hear appraisers talk about real estate agents like they are uneducated morons. This is not professional – especially in a public forum. We can do better. Yes, there are issues with low appraisals as well as subpar agents, which means there is a place to complain. However, when complaining becomes a shtick or lifestyle, that’s not a fun place to live. If you find yourself continually ranting about appraisers or agents, it may be worth finding ways to step off that toxic platform and avoid being a perpetual complainer. Besides, it’s good for life and business to be positive.
  5. Other: What resolution would you suggest for the real estate community? Comment below.

I hope this year is unfolding well for you so far. Happy New  Year!!

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7 reasons why buyers offer more than a house is worth

Have you noticed how some listings are receiving multiple offers at list price even though they are priced way too high for the neighborhood? I’m talking about the type of listings where agents and others all think, “There’s no way in heck it’s going to appraise that high.” But buyers are still offering at list price and even above. What does this tell us about the market?

Possibilities for why buyers offer full price even when the list price is REALLY high for the neighborhood:

  1. Value: The market has increased in recent months.
  2. Strategy: Since inventory is so tight in the Sacramento area, buyers feel the need to offer at list price or above to get into contract.
  3. Rejection: Buyers have become burned-out from getting their offers rejected, so they’re offering at higher levels to help compete with other buyers.
  4. Cash Competition: There is so much cash in the market, so financed offers need to find a way to be more attractive to sellers (higher offers can help).
  5. Money: It’s really cheap to borrow money right now, so taking out a larger loan is not as big of a deal.
  6. Financing: When buyers finance nearly all of their purchase (FHA), they’re essentially spending someone else’s money. It’s a whole lot easier to offer more when you’re not spending your own money, right?
  7. Good Deals: Many buyers still remember how high prices used to be, so offering more in today’s market still feels like a deal because current values are far lower in the post real estate “bubble” burst.
  8. Other: What do you think?

Housing Inventory in Sacramento County - Graph by Trendgraphix - posted on Sacramento Appraisal Blog

My take as an appraiser: Having multiple offers can be one indicator for how the market sees a property, but it’s not the end-all fool-proof metric for determining value. For example, 10 offers at list price sounds sincerely convincing on paper to establish value, but we also must sift through factors above to try to understand the motivations of buyers – not to mention consider competitive sales and other market metrics. After all, as mentioned above, there are many reasons why a buyer or group of buyers might offer more for a property than it is actually worth.

Listing a property at any price level: I was talking to an investor friend recently about how he could pretty much list his properties at any price level right now (relatively speaking), yet still generate multiple offers due to scarcity of supply. This isn’t true in every case of course, but it’s definitely a realistic dynamic in the Sacramento area real estate market.

All things considered, it’s easy to blame appraisers when appraisals come in “low”, and there are certainly scenarios where appraisers should be blamed. However, in cases like this where offers are unrealistically high for the market, the appraisal probably should come in “low”, right? By the way, check out a previous article if you need help challenging a low appraisal.

Anything you’d add? Any stories to share? Realtors, have you seen listings get into contract far above what you think is realistic? What advice would you give to buyers trying to get an offer accepted these days?

SacBiz Journal Mention: By the way, I was quoted in a Sacramento Business Journal article last week on a related topic of “Homebuyers starting to pay higher prices as investor market dominance wanes.”

If you have any questions or Sacramento home appraisal or property tax appeal needs, let’s connect by phone 916-595-3735, email, Twitter, subscribe to posts by email (or RSS) or “like” my page on Facebook

Blame appraisers when it’s due, but don’t forget about the housing market

If the appraised value comes in lower than the contract price, did the appraiser do something wrong? It’s easy to think the appraiser has been negligent somehow if the contract price is not met, but that’s not necessarily true. Appraisers have been getting slammed lately by the National Association of Realtors among other sources for “low appraisals”. There are certainly horror stories and situations where botched appraisals have killed a deal. Believe me, I know this from many relationships I have with investors and real estate agents in the Sacramento area. That’s exactly why I’ve given tips for challenging a low appraisal. But let’s remember that negotiations are normative in real estate and a list price and contract price are not necessarily a reflection of value.

Case-in-point: I appraised a flipped property in Elk Grove recently and my appraisal came back close to $10,000 below the contract price (but still above list price). While this is frustrating for the seller or listing agent, there was no ill-intent or agenda on my part. I could be blamed for bringing down the housing market and stalling a recovery, but I simply interpreted the market in this case. The lender’s appraisal department actually agreed with my appraisal too as we talked in-depth about why the appraised value was reasonable. Recent sales in the neighborhood did not support the contract price, current listings did not support the contract price, I did not use distressed sales for comparables (those were far lower than equity sales) and even offers on the subject property supported a lower value. The seller ended up accepting the highest offer – an FHA offer asking for closing costs back. All other offers were conventional or asked for no closing costs, and they all came in near or lower than the appraised value. The type of financing is not a definitive point for establishing value, but buyers not using their own money tend to make higher offers, don’t they?

Don’t forget to point the finger at the market: It’s interesting to me that appraisers are often blamed for a lack of recovery in the housing market. I wrote two days ago about the increase in the percentage of short sales in the 95757 zip code of Elk Grove. While this is encouraging news on some levels (less foreclosures), short sales also tend to sell lower than traditional sales, which means the housing market is ultimately weighed down if short sales represent 39% of all sales in a given zip code. Short sales usually have to be priced more aggressively to generate interest and/or close quickly before foreclosure. Some banks are not easy to work with either, which can also impact pricing too. I’m not saying at all that appraisers are not to face blame for shoddy work, but when the market has a total of 66% of all sales being foreclosures or short sales (as in the case above), it’s important to keep in perspective just how much the market is driving property values.

My points: 1) Give blame when it is due; 2) Market > Appraisers.

What do you think? Does this seem reasonable or am I off my rocker? What are the factors helping and hurting our housing market right now? What role do you see flipped properties playing in the housing market?

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