February 13, 2015
Editorial by Woody Fincham, SRA
Over the next several days I will be posting up my thoughts on the recent Fannie Mae Lender Letter Lender Letter LL-2015-02. This is part 2. Part 1 is here.
So let us dive in to looking at that Lender Letter. Each of the quoted sections comes from the Lender Letter, which is cited above this. Following each are my thoughts on the quoted section.
“CU does not accept or reject appraisal reports or characterize an appraisal as “good” or “bad.” The CU risk score and messages pertain to risk and identify potential defects in the appraisal report. The lender is not obligated to “clear” or “override” the CU messages. The messages are meant to be used as red flag messages that lenders should use to assist with their appraisal analysis and inform their decisions based on a complete analysis and understanding of the appraisal report.”
I think this clarifies some of the biggest concerns to what CU is and is not. Most large lenders and appraisal management companies (AMCs) have been using all sorts of third-party review rule sets and data pools for many years. So this is nothing new under the sun. It really is the first time they are pulling in data that is verified by appraisers. It has the potential to be a good thing, but it could very well be a bad thing. It will depend on how the lenders use it in their respective review processes. It is certainly bad for appraisers if they approach it the same way that they approached the 15% and 25% adjustment guidelines. I will not get into the old adjustment guidelines to deeply yet, but we all know that many lenders were set in stone about the 15% and 25% guidelines when Fannie Mae was not. Yet lenders and AMCs still required adherence to those guidelines in some cases as hard and fast rules.
Working in a market as I do in Charlottesville, VA I understand where some concern would come from in the appraisal community. Much of my personal work involves complex residential assignments. From what I gather from those I have spoken to at Fannie Mae, and what information I have read about CU, I imagine many of my reports will become a four or five in their system. I deal with properties that require regional research because they are status homes: essentially unique and custom to the market. I would assume that these types of properties represent less than 5% of that MSA, and transfer infrequently. The market is also small on the urban-side and voluminous in the rural and transition from suburban to rural type properties; acreage varies greatly. The fact the MSA is in the Appalachian Mountains and that Fannie Mae requires segregation of finished basements from above grade living area; an overwhelming number of homes are built on slopes that have basements. I think you see that unless I am in a planned neighborhood or condominium development, it is unlikely my work product can be seen as conforming. By circumstance, these properties will rate high in risk.
If I felt like my ability to perform work would be affected by the CU rick scores, then I would be up in arms as well. Many of my colleagues believe that the CU risk score will affect them. While I cannot say that it will (or will not), if AMCs/lenders decide to use the information to benchmark appraiser quality it could be a nightmare for some appraisers. When you get to my thoughts on the 15% and 25% adjustment guidelines, later in this piece you will see more of my perspective on this. I could be wrong, but I am not going to be overly concerned… yet. Until I see things happen contrary to Fannie Mae’s stated position, I will defer on an alarmist attitude.
“CU does not provide an estimate of value to the lender. CU provides a numerical risk score from 1.0 to 5.0, with one indicating the lowest risk and five indicating the highest risk. Risk flags and messages identify risk factors and specific aspects of the appraisal that may require further attention.”
I know many appraisers were convinced that this was not the case. Many were positive that Fannie Mae was going to assign scores to the individual appraisers. It is easy to see why that would be a concern, as the last major Fannie Mae policy change dealt with the Uniform Appraisal Dataset (UAD). Appraisers are directly monitored on consistency of data for comparables with the UAD, but not with CU.
It is easy to mix it all up. If you submit data in violation to their UAD standards, that does affect you. The CU rating score does not. It is relative to the report itself, not to the appraiser. With that stated, AMCs and lenders COULD use consistent high-risk scores on reports as a means to stratify appraisers as problematic from those that get lower ratings. If this type of comparison was made a tracked, it could affect me. I do not compete with the typical mortgage-use appraisers in my market. Plenty stay in homogenous subdivisions and I cannot do the work that they do at the price points they do them. If their resulting reports are lower-risk scores by the nature of the conformity these properties present versus the types of properties that I typically work with, I will be seen as an inferior appraiser. Fannie Mae may state their position on such things but that does not mean the lenders and AMCs will not distill and extend the information they see further.
This is getting into the realm of conjecture; as such, there is not a whole lot of merit to it at all. It does make one stop and ask questions though. I try not to worry about things that I cannot control so I will leave such thoughts alone for now. But I will come back to the way lenders took the 15% and 25% adjustment guidelines out of context and altered the profession. I will have some more on that later, of course.
“CU’s selection of comparable sales considers the relevance of each potential comparable sale based on physical similarity, time, and distance. The selection process is not based on the relative “risk” or sale price of a comparable sale nor is there a “lower is best” approach. In fact, CU may assign a high risk score to an appraisal when the model identifies alternative sales that are potentially more relevant than the comparable sales used by the appraiser, regardless of whether the alternative sales are higher or lower in price.”
This certainly is concerning for appraisers. Appraisers are paid to perform the research and when we do it, we can get defensive about someone questioning it. Call it professional pride, but this can be a catalyst to incite negativity among us quickly. It is probably a good idea that appraisers write their reports with the above in mind. Part of this may be addressed by including commentary regarding ideal and typical improvements for the shared competing market.
Since the risk flags are triggered by not using properties that are more similar on paper, commentary may need to change to deal with these items in mind. Canned commentary certainly will not work in many situations. I know this means taking the time to write custom commentary in every report, but with enough foresight, it is easy enough to build a template that is set up as a skeleton to which specific report comments can be added. I have also suggested to a few colleagues, when asked, that they approach this similar to ERC (employee relocation) reporting. Possibly embedding a chart of all the comparables surveyed from MLS prior to distilling then down to the comparables in the actual report. I realize this is more work, but if we start seeing lots of kickbacks on this issue, this might be a way to avoid it.
The way CU is setup, at least how it has been explained thus far, is that data is stratified by census block groups (CBG), which goes into the next quote…
“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 Mae is not suggesting that appraisers use Census Block Groups to define comparable search areas, but appraisers remain responsible for indicating when comparables are from outside of the subject neighborhood and for addressing any differences.”
This has caused quite the banter in social media appraisal groups and pages. There are all kinds of issues with this concept. The most obvious one is that appraisers do not stratify by CBGs normally. It would be great if the software companies could create or add a way to also tag which CBGs each comparable comes from or address it in the rules set reviewer in each of the form packages. This would at least allow a streamlined tool to allow the appraisers to comment on this item. Perhaps even a data point that could appear in MLS data. Most addresses are geo-coded now, so it would be an assumingly easy thing to do by over laying the CBG maps to existing maps.
Obviously, Fannie Mae chose this methodology because neighborhoods will vary market to market. My concern with it comes from the staff reviewers at lenders and AMCs (Quality Control or QC Staff) that are not familiar geographically (geo competency) with the area. This certainly gets back to USPAP regarding writing the report at level commensurate to the intended users. Explain away would the obvious answer, but that also require the readers and QC Staff to read the reports thoroughly. I often hear from folks involved in QC review that they prefer cogent writing and brevity. From some of the reviews I have personally gotten from lower-level QC staff (unlicensed appraisers); it seems many struggle with common terms in real property economics. I struggle with dealing with those that gloss over when I use terms such as linkage, commercial zones, obsolescence, etc.
This also still sets up the appraisers to deal with non-appraisers applying arbitrary guidelines. While distance guidelines are now going to be relaxed, in their stead I dread the likely possibility that QC Staff will want CBG differences addressed. A bit later, I will address the sun setting of the 15% and 25% adjustment guidelines, but one has to see the possible pitfalls with CBGs that the lender-leveraged adjustment guidelines created. QC staffs need to be well trained to deal with this. Nothing prevents individual lenders and AMCs from requiring more than Fannie Mae’s suggestion as to how to implement the CU into their work processes.
“The risk analysis performed by CU is for exclusive use by the lender in their analysis of the appraisal report. After completing a thorough review, a lender should be able to have constructive dialogue with the appraiser to resolve specific appraisal questions or concerns. Although the lender may use output from Collateral Underwriter to inform its dialogue with appraisal management companies and appraisers regarding appraisals they supplied, the CU license terms prohibit providing these entities with copies or displays of Fannie Mae reports that contain CU findings, including without limitation the CU Print Report, the UCDP Submission Summary Report, or any other CU report. The lender must not make demands or provide instructions to the appraiser based solely on automated feedback. Also, the CU license terms prohibit using it “in a manner that interferes with the independent judgment of an appraiser.” Fannie Mae expects the lender to use human due diligence in combination with the CU feedback, and will actively follow up with lenders who are reported to be asking appraisers to change their reports based on CU feedback without any further due diligence.”
Fannie Mae is pretty clear the impetus is not to strong-arm appraisers with the feedback and analysis done by the system. There is a real desire to keep human beings in the mix from Fannie Mae’s side. The possible disconnect I see will be on the competency of the QC Staff. The way many AMCs and lenders approach QC reviews is by hiring unlicensed staff people and expecting them to understand what valuation professionals do. Each appraisal is different and finding comments buried in a 20-50 page report is arduous at best; I can struggle with it and I have performed hundreds if not well over a thousand reviews in my career. The tactic that most QC staff uses now is simply kick to out a report because they cannot find a comment, or how the appraiser addresses the issues up front, and rely on the appraiser to point it out. There are already copious examples of appraisers stating they are often already addressed in the original report. Unless there is some reengineering of the process, this will only get worse as now the QC Staffs will be armed with more data.
One thing that we have already seen from CU is the copying CU comments being sent to the appraisers. I have seen several examples from colleagues where something was flagged in CU and no human review was done. No dialogue was attempted between the QC staff and the affected appraiser. Fannie Mae has made it clear that the CU scores and flags are meant to be dealt with by QC staff actually having dialogue with the appraiser. Instead, what we are seeing so far is many QC Staff people are simply copying and pasting CU comments and sending them as a standalone engagement for revision or commentary for the appraiser to deal with. That is not creating dialogue; it is asking the appraiser to the work for the QC Staff. One would think, after reading Fannie Mae’s letter that the expectation is for the QC Staff to check the report in question before calling on the appraiser to do anything. If the appraiser has reasonably commented or dealt with the issues of concern, they should be good to go.
Much of this is going to remain an issue with AMCs and lenders that continue to utilize the services of uneducated and undertrained QC Staff. Large lenders and AMCs that process lots of volume expect an awful lot of their QC Staff. Each appraisal, if written well, is stand-alone research project. It should be read and understood with the same care it was prepared. Pulling in someone that has never read an appraisal report as an hourly reviewer and expect them to get through the jargon and concepts that are summarized in a mortgage use report is counter-intuitive. Either the Lenders or AMCs need to start hiring competent and credentialed valuation professionals, or spend the resources needed to train raw talent. Both aspects are expensive, and neither is an option with the current compensation structures in the mortgage and valuation overlap of space. We will certainly discuss fee levels in depth a bit later.
“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. In the majority of cases, there may be no material difference between comparable sales utilized by the appraiser and those identified by CU. 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.”
The previous comments I have made are applicable here, too. The disconnect lenders had, again the adjustment ratio guidelines come to mind immediately, understandably make appraisers wince at this idea. The biggest concern, here again, is that QC Staff must be at a level of competency to understand that suggested comparable sales are just that, suggestions. The way this was handled pre-CU was to send an appraiser comparable sales that were not used and ask the appraiser to then comment on not using them or to possibly also include them. Of course, the comedy often ensues when the appraiser replies back that, “Two of the three comparables you sent me to consider are already in the report.” This type of real world scenario proves that where Fannie Mae may need to concentrate some of this reengineering of the process is on those that do review and QC work.
Not to plug the Appraisal Institute (AI), but this may be the very reason that the AI created the new review designations, AI-GRS and AI-RRS. Review is a completely different animal than Standard-1 and Standard-2 reporting. I understand that hiring such professionals is a higher cost, which means more cost to the consumer, but let us face it; you get what you pay for. At the very least, if the lenders want to have a positive outcome from the QC side, it should be built around utilizing well-trained professionals and the review designations are a step in the right direction in my opinion. And it really may not need to be at the consumer’s dime so much as maybe it should come from the lenders. The last I looked the larger lenders have no problems posting profit reports.
I spoke with a chief appraiser with a major AMC last week. He informed me that they have three levels of human reviewers. The first level is a combination of using technology to flag potential issues and areas that may need more in depth analysis. If there is enough need to elevate it upwards, it is then looked at by a non-licensed staff person. On the next and final level, a human being that is licensed is involved. It is apparently an effective way to do things, but even their internal processes still leave some room for improvement. When so much volume is handled by any given entity, and cost is always the biggest concern, it is impossible to hire but so much real talent. I will come back to cost a little later when I discuss fees and compensation.
End of part 2.
Stay tuned more to come over the next week. If you have any suggestions or want to share some war stories, please send them over to email@example.com.
 “Lender Letter LL-2015-02,” Fannie Mae, https://www.fanniemae.com/content/announcement/ll1502.pdf (February 2015)