The latest Lender Letter distributed by Fannie Mae was issued to dispel misconceptions about the intent and process of Collateral Underwriter (CU), and to share their analysis of adjustments from the 700,000 appraisals collected in Q1 2014. It’s obvious that Fannie is making an effort to provide transparency and education on the CU initiative with their on-demand webinars, documentation and Q&A’s around this topic. If you haven’t taken the opportunity to check out one of their educational offerings, trust us, it’s worth your time to understand and be informed about what CU is and is not.
Within the latest letter they addressed several statements buzzing around the valuation community, such as:
- "CU does not make a credit decision and the lender may chose not to use CU to make a credit decision." In other words, using CU is voluntary by a lender, not mandatory. We’ve heard a varied number of lenders state that after testing CU they are not planning on using the product, which is perfectly acceptable.
- "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 has determined, although not perfect in all situations, that Census Block Group levels consist of similar market participants on a demographic level, such as income and employment type.
- "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." If they do, it is meant to occur after the lender has reviewed the data to make a determination the data is worth passing onto and requesting further review by the appraiser. It is not suppose to be an automatic – send the data to the appraiser process, without a lender’s review and determination that such data may be useful to the appraiser.
- "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." As a matter of fact, many lenders have similar systems they have spent a good amount of money to create, and those lenders are probably less likely to use CU.
- "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." In other words, if you are doing a diligent job, you are likely going to get more work because your appraisal report will go through the process quickly and without hassles.
The other major misconception that Fannie identified surrounds the Appraiser Quality Monitoring (AQM) process and its relationship to CU. Fannie has made it clear that the AQM program is NOT a fully automated process. There is a significant amount of human intervention that occurs prior to issuing any communication to the appraiser. The AQM process does, however, leverage data and technology like CU to crosscheck appraisal data and bring to light potential deficiencies. Only after the appraisal has undergone the proper due diligence – Fannie Mae then determines if the appraiser’s work needs to be monitored or if there circumstances were more likely an isolated incident. Fannie further states that, "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."
The analysis data shared in the Lender Letter was insightful concerning the common behavior of appraisers when developing UAD reports. Back in December 2014, Fannie Mae updated their Selling Guide to remove the net and gross adjustment guidelines. Initially, the guidelines were based on the premise that the best comps require the fewest adjustments – which in theory makes sense. Although well intended – these guidelines were translated as a rule by many of the sellers and servicers, so in areas where there are few comps to choose from, some appraisers were backfilling their adjustments to match the rule, rather than picking comps that accurately depict the market. Fannie’s hopes in sharing these graphs are that appraisers know there is no adjustment "rule," and instead they should provide commentary and rationale for comps with higher net and gross adjustments if they are believed to be the best and most similar to the subject.
Once again, if you have not visited Fannie Mae’s CU information page or taken one of their on-demand webinars, we encourage you to check them out. For a refresher on what ACI is doing in response to CU, visit the Compliance page on ACIweb.com.