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.
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.
5 things to know about Fannie Mae’s Collateral Underwriter:
- 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.
- Not FHA/VA: CU is not used for FHA and VA loans (I’d be shocked if they didn’t adopt it later though).
- 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.
- 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?
- 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.
Potential Impact of Fannie Mae’s Collateral Underwriter:
- 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.
- 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.
- More conservative appraisals: One of the unintended consequences of CU may be more conservative appraisals.
- 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.
- 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:
- 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.
- 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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Bout’ time you got on board Mr Lundquist! (grin) An additional point: Oddly, Freddie Mac has not adopted this program. This is atypical behavior in that the two entities generally move in lock-step. Further investigation would prove enlightening.
Ryan is a highly respected public speaker. If you are a Realtor in the Sacramento area you should ask him to come speak on this topic at your next office meeting. This is an important topic that will have an affect on your income in 2015 !!
Ha ha. Thanks Mike. It’s been on my radar for a while, but I just didn’t have room to get to it until now. Good point on Freddie Mac. I’m glad you mentioned that. I would have to think FHA/VA and Freddie will jump on eventually (unless it’s an utter train wreck).
Thanks for the kind words. I’m glad we’re connected.
By the way, I’m actually speaking about CU this morning at the Folsom MLS meeting for anyone interested (8:30am).
You alluded to more conservative appraisals….This may be manifested should lenders pressure to use “low risk” comps. As always the appraisers will need the fortitude to use the most comparable sales. This could have substantial impact if appraisers bow to pressure vs doing their job. In non-conforming markets, could get interesting.
Very well said Mark. Thank you. I agree on “As always the appraisers will need the fortitude to use the most comparable sales.” Fannie says a risk of 5 does not mean the loan cannot go through, but lenders are expected to do their due diligence. I would expect many “5” ratings for non-conforming properties. When a property doesn’t fit in a neat little package and compare well with others, the appraisal tends to just look a bit ugly.
Being the devils advocate, it is interesting that if an owner, loan officer, or real estate agent provided us with certain sales and then also questioned our adjustments (by telling us what others are using for adjustments) that cold be construed as pressuring the appraiser, which is a violation, but this obviously is not. In addition I get the feeling that this is a “gotcha” moment because Fannie Mae is not providing this information up front where we can address it from the start. They are however going to let us complete the appraisal and then spring this info. on us. I hope it ends up being positive but the fear of the unknown is definitely there for appraisers.
I hear you Tom. Fannie says they won’t share information with the appraiser, and that lenders are not allowed to share information with a vendor (the appraiser). That being said, I’m sure we’ll see someone share something at some point so we can see how CU looks at certain properties. In some senses this does put fire under appraisers to not just nearly blindly fill out a form, but instead choose the best comps and make legit adjustments.
I’ve been looking forward to hearing your prospective on CU. Great job being neutral. I have four points. One is that Fannie says CU is not an AVM, yet it provides up to 20 ranked comparables. If I provide ranked comparables to a client, USPAP says I am doing an appraisal. Point two is that appraisers will likely feel like they have less room to support a contract price when everything looks reasonable, but the comps are falling just short. This is because CU will not flag appraisals that are estimated to be low risk or values that are too low. Appraisers that do not want to be hassled will have a bias towards a lower number, just like appraisers did when they did not want to be hassled about gross and net adjustments (they made smaller adjustments). Point three is that doing anything different than your peers could look to CU like you’re the appraiser who has done wrong. Often I find out things about comparables that I know my peers have not found out. Maybe I called the agent and found out that the pictures look great, but the property was really not great. Could CU start flagging and “black listing” the best appraisers for doing more research than others? Point four is that Fannie has no transparent system for appraisers who get black listed to know when they are black listed or how they can get off the list. This takes me back to point two. Scared appraisers are conservative appraisers. http://www.aqualityappraisal.com/Four+Reasons+Real+Estate+Appraisers+Fear+Fannie+Mae+CU
Home run, Gary. You made this post better. Thanks for the points as well as the link. I sincerely appreciate the thoughts. Doing away with the gross and net adjustments is not even going to break bad patterns among appraisers. That is something that is deeply ingrained.
They are moving in lockstep, just not with the exact same tool (although it is believed the rules will be very similar). Freddie Mac will use a separate property QC tool built by ClearCapital. However, the error messages are not yet integrated into UCDP and won’t be by Jan 26th.
Thanks for the insight Matthew. That’s good to know. Do you know why Freddie Mac went with ClearCapital instead of CU?
VA already uses an analytic tool similar to this and has for quite a while. The lenders do not get the results only VA does and then VA will check the appraisal to see if items warned about are explained. From what I am told by VA the CU is partially modeled off the VA tool. I believe it will all be in how it is handled. Garbage in / Garbage out so to speak. If the information is in the hands of folks that still do not read the reports or understand them it will be a problem. If they use it similar to how VA has been using their tool then it should not be a big deal. This is one case where FNMA is “following VA” so to speak.
Thanks Cynthia. I agree about ” I believe it will all be in how it is handled. Garbage in / Garbage out so to speak.” I can imagine this whole thing being a nightmare for any appraisers working with bottom feeder AMCs that will simply pass along the red flags without discretion. At the same time, this is going to challenge appraisers to consider their comps, adjustments, and standard boiler plate jargon. In a year from now it will be interesting to see how this conversation has unfolded. Like you said, it all comes down to how it is handled. My sense is the better lender clients will handle it far better than the bad ones.
This is terrible news. A lot of a properties value is subjective. For example, we had an end unit, lower level condo that is on top of a complex where the greenbelt is, and spent $60k in renovations on it. If you comp it against a model match unit, that although may not be an end unit and be rehabbed as much, it would comp out at about $415k. Luckily we sold it for $470k with 2 offers, one all cash. You can’t argue with the market. The appraiser would have been penalized for being apart of such a value, but in reality the value was spot on.
Thanks Joshua. I appreciate your example. There is definitely going to be a need for appraisers to explain their adjustments more effectively (and why there might be a model match that sold for significantly less than the appraised value). Additionally, we absolutely need common sense underwriting.