Thursday , 28 January 2021

A Step In The Right Direction

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


About Lisa Desmarais

Lisa Desmarais
Lisa Desmarais, SRA, operates a residential appraisal company just outside of Boulder, Colorado along with her husband, Richard T. Desmarais. She has been in private practice for 20 years and has been fortunate enough to have experienced the appraisal industry from many different angles. She has had the opportunity to serve on the Colorado Chapter of the Appraisal Institute, work for the Denver County Assessor as a hearing officer, be hired to complete appraisal investigations for the State of Colorado Department of Regulatory Agencies, and been hired to design and write two publications consisting of appraisal case studies on behalf of the Colorado Energy Office. But most importantly, she has created professional friendships far and wide with an extraordinary group of Real Estate Appraisers.

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    Kudos for your optimistic perspective. When I still accepted residential secondary mortgage work I never detected the Clients F and Clients A. Indeed I never found a loan originator who wanted anything other than fast and cheap. That coming down from national lenders who compete to sell least-cost loans to Fannie. The lenders, as has amply demonstrated, have far more effective methods of managing risk than hiring an appraiser.
    George Hatch rather brilliantly identified appraisers as a tax on loan originators that is greatly resented. The lenders did not ask for appraisers nor do they want them. Many, and with some good factual support, do not believe that appraisers are well trained enough to give any input of relevance to the lending process. We as an industry have yet to identify what quality in appraising is and lenders know that if they believe the appraisal it passes.
    While verification may be needed in some cases, what is really important is confirmation if you are getting your information from reliable sources. Verification is for information that you don’t believe in the first place. Apparently the authors of USPAP missed that.
    I look forward to a positive outcome from CU, but in my pessimistic view is that it is intended and will be used as a “gotcha” to get rid of the residential secondary mortgage end of the industry. Frankly Fannie has the most of the data she needs, certainly more than any one else, and will and is a heartbeat away from being the world’s biggest AVM. Surely by now she has an algorithm to periodically update her data base. Catching bad appraisers is a red herring.
    As for Fannie making a positive move by dropping the percentage limits on adjustments, that was no brainer and Fannie was told over and again that it was inappropriate. Fannie doesn’t appear to be seeking input, but neither does the much of the leadership in our industry.
    I’d like to offer ideas to improve the profession and I keep trying. It seems we have a deeply entrenched culture of “gotcha” in this industry, and it is definitely over-burdened with rules. So far, from my perspective, our leadership is only interested in educating and designating appraisers because it is lucrative. Note: almost every profession and industry I know of, even used car dealers, have an award for the good guys.
    We do have miles to go to get to the starting line and I hope you are right and I am wrong about CU being the key to open the treasure chest. We’ll see.

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    I think you mean Client F as being amc’s, which I do very little work for. I think the biggest differences is, Client A uses “good appraisers” they trust and know they are getting an accurate appraisal. If they weren’t they would try someone else. As for fees and turn time, they know that not all properties are similar and some require more time and cost more. Again they are looking for a quality appraisal and willing to pay for it. We know what Client F wants, cheap and quick and meet the guidelines.

    What FNMA whats is to train appraiser F to do the work of Appraiser A, through amc’s (who control most appraiser’s now) for less money and quicker turn time. They are training appraisers to do what they want, an to use their numbers. Just sign at the bottom.
    The CU scares me too, as to where they get their data from. Locally, there is a difference between county record and what a lot of MLS systems have. That’s why I measure everything I do and have noticed that a lot of appraisers don’t do. I was even in court and the other appraiser use the county records which was wrong. Once this was pointed out, appraiser F lost credibility.

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    My biggest issue with the CU is the inability of the automated system to view custom commentary in the report. As the author stated, each report requires a specific approach, and thus generates different commentary in the body of the report. My first CU experience, I received a 4 out of 5. It was a complex assignment, and the CU system didn’t know how to read the explanations from the report for items out the realm of what is considered “normal”. It’s the place of underwriting to sort out these issues, but when you work for an AMC, they often have form checkers who don’t understand the appraisal at all. CU a good step? Possibly. Is it going to create more work for even those of us that feel we’re doing the extra research required? Certainly.

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