With the new collateral underwriter, Fannie Mae, in my opinion, is trying to solve a legitimate problem in regards to how adjustments are derived and applied.
Over the years, Fannie Mae has issued an increasing number of guidelines for lenders and appraisers. Astute lenders and appraisers took these guidelines as they were intended, as guidelines. Logic and market data were of the utmost importance, while the guidelines were used only for further direction and clarity. These lenders understood a good product when it was received. They placed more emphasis on USPAP standards, appraisal methodology, credibility and logic and less on looking for rote comments addressing certain guidelines. Naturally, these type of lenders gravitated towards appraisers who did their part to produce credible work, which in turn decreased the lending risk associated with the appraisal.
As an unintended consequence of issuing guidelines, however, Fannie Mae has published a letter to lenders that recently acknowledged[1] what many in the industry have known for years: that certain guidelines issued by Fannie Mae have been incorrectly “…implemented as an eligibility ‘hard stop’ and that the “… focus of many appraisers had become keeping the…adjustments…within the guidelines instead of reflecting actual market reaction…”
The appraisers who opted to “keep adjustments within guidelines” and not reflect actual market data, could only do so by working with lending clients who did not guard against such practices. In this way, the appraiser could spend years writing reports that quickly made it through underwriting, and not even being aware of the fact that their work would not pass the scrutiny of a state licensing and disciplinary board.
This created a sort of dual-appraisal world. One type of lending client (“Client F”) only understood how to judge an appraisal based on automated review systems; the other type of lending client (“Client A”) underwrote the appraisal from a more holistic approach. Appraisers for both types of clients learned very quickly what data and information was important to which client. They aligned themselves with the lenders who matched the particular and chosen skillset of that appraiser.
Appraisers working for Client F could produce appraisal reports without verifying comparable sales, without making note of which method was specifically used to derive each adjustment, without weighing the data, without summarizing their opinion of highest and best use, or, for that matter, without even providing a written addendum that did not contain anything other than cloned statements used in all of their appraisals. Client F rarely acknowledged the fact that different properties take different amounts of time to appraise and, as a result, offered only one set appraisal fee for all assignments. That appraisal fee was equal to what the appraiser was being paid 20 years ago.
Appraisers for Client F learned quickly that to survive, they had to spend roughly the same amount of time on every appraisal, regardless of complexity or research issued they faced. They also learned if they exceeded Fannie Mae guidelines, this would take more time and create more work for the appraiser. By staying within the boundaries of the guidelines, they saved time, were able to have the appraisal pass through underwriting and thus continue to survive on the fees they were being paid. But, they were also operating outside of acceptable appraisal practice.
Appraisers working for Client A, on the other hand, have been having a different experience. Their work was valued and the lender trusted that there are many legitimate times when an appraisal would take more time to complete than most appraisals. The lender and the appraiser negotiated a customary and reasonable fee for the work.
Thus, very different types of appraisal reports were being delivered to Fannie Mae, and I suspect, Fannie Mae took note and clearly, needed to do something
Thus, Fannie Mae began mining appraisal reports. I applauded them being able to understand the appraisal product they were receiving. I now, however, sit in shock as the unverified data just referred to above has been lumped in with the verified data. Their system cannot tell the difference. The results and conclusions of data are now being used to judge all written appraisal reports, even though Fannie Mae itself acknowledges they are concerned “that the adjustments might be artificially low” and that “analysis of the [Fannie Mae] data supports the notion that comparable adjustments are not necessarily market-based”.
I am hoping the current collateral underwriter system is a first step, and not the last step, towards solving some of the issues noted above. On the positive side, Fannie Mae has absolutely started a very important conversation. Appraisal websites are abuzz encouraging appraisers to brush up their skills for supporting adjustments and developing credible opinions of market value. Appraisers are signing petitions and asking for changes. Lenders are giving feedback.
My guess is Fannie Mae is listening. No, this first step is not the perfect solution, but it acknowledges the issues in the industry. The dirty laundry for the appraisal industry has been aired, thank goodness. We can all only become better with each participant admitting their contribution to the current problems noted in the industry. So please, everyone continue with great gusto, to let their opinions be known.
[1] Fannie Mae Lender Letter 2015-02, February 04, 2015
