28th March 2015

Life After the New CU System

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Life After the New CU System

by Isaac Peck, Associate Editor – WorkingRE.com

On January 26, 2015, Fannie Mae’s new Collateral Underwriter (CU) tool was made available to lenders, an event that was highly anticipated by the appraiser community.

While Fannie Mae has been using CU to analyze appraisals since 2013, this latest move grants lenders doing business with Fannie Mae the ability to use the tool. This essentially gives lenders access to the same appraisal analytics currently being used in Fannie Mae’s quality control process and Appraiser Quality Monitoring (AQM).

With lenders now having such a powerful analytical tool directly at their disposal, the big questions for appraisers are how this is going to change the appraisal process, what kind of additional work will be required, and ultimately, how this is going to change the appraisal profession going forward.

How CU Works
In simple terms, CU is a risk management tool that neither rejects nor accepts appraisals, but simply provides “trouble codes” and a risk score to lenders and Fannie Mae regarding potential issues with an appraisal. CU uses complex algorithms to rank an appraiser’s comps against a pool of comps and provides a ranking of how the appraiser’s comparables and adjustments compare with those generated by the model.

Early feedback from appraisers indicates that the CU report generates 20 “comparable” sales and ranks the appraiser’s comps within the list. Some argue that if appraisers have done their due diligence and explained their analysis, they should not worry about CU’s additional sales data. On the other hand, some appraisers feel that CU is an incredible overreach that puts pressure on the appraiser and prevents them from doing their work independently. (See Collateral Underwriter: First Feedback for more.)

Just like other automated valuation models, CU analyzes comparables by looking at the proximity to the subject property, physical similarities, date of sale, and a number of other factors in determining which comparables the model prioritizes.

CU also thoroughly analyzes an appraiser’s adjustments, using regression analysis and analytical models, as well as comparing the appraiser’s adjustments with adjustments reported by other local appraisers. Fannie Mae’s Director of Property Valuation and Eligibility, Robert Murphy, has said that in many cases there is no statistical significance to appraisers’ square footage adjustments, with many using generic rules-of-thumb, such as $40 a square foot, and that CU is clearly intended to address this issue.

CU also looks at Quality and Condition (Q&C) ratings, and will flag an appraiser’s rating if it differs from the prescribed definitions supplied by Fannie Mae and/or those of their peers.

What’s Changed?
It’s important for appraisers to note that this is not a complete change to the status quo, as Fannie has been using CU to flag appraisals and asking lenders go back to appraisers for additional clarification, since it first began development of CU in 2011. Some appraisers have already faced inquiries and “hard-stops” from lenders based on CU’s analysis. The difference is that instead of Fannie Mae passing the information to the lender, the lender now is able to analyze the appraisal with CU before it is ever delivered to Fannie Mae.

Additionally, according to a report issued by Mercury Network, of the 95 CU messages that affect appraisers, more than half address very simple issues that appraisers are already accustomed to dealing with regularly. However, many appraisers believe that CU will increase the number of inquiries and comp reconsiderations that appraisers field from AMCs and lenders- with the added time per report putting more pressure on the already shrinking bottom lines of many.

Please Explain
The problem for many appraisers is that explaining these additional inquiries requires more time per report. Here are some example messages from CU that appraisers are being asked to provide additional data on:

• The GLA adjustment for comparable #2 is smaller than peer and model adjustments.

• The GLA adjustment for comparable #3 is smaller than peer and model adjustments.

• The reported total below-grade area for comparable #4 is materially different than what has been reported by other appraisers.

• The view adjustment for comparable #4 is materially different from peer and model adjustments.

• The appraiser’s net adjustments for the comparable sales are materially different from the model net adjustment.

• The quality rating for comparable #2 is materially different than what has been reported by other appraisers. Please provide supporting commentary for your data on this condition.

Richard Hagar, SRA and nationally recognized educator, says that many of the requests that he and his staff have fielded so far are questions that are already addressed in the report. “Our responses so far have been, ‘That is explained on page three.’ However, we’ve had a few instances where we needed to go back and address something that CU flagged, or ‘curing a deficiency’ in appraisal terms. So there is value in this system,” says Hagar. As the lender and AMC processes improve, appraisers may find that the number of inquiries and call backs decrease. “Good lenders and AMCs should be stopping and reading the appraisal report before contacting the appraiser regarding a CU warning message, because if the appraiser is doing his or her job correctly, an explanation supporting that should usually be in the report,” says Hagar.

However, CU will still result in more work for appraisers, according to Hagar. But the bright side may be that sloppy appraisers will be weeded out (or forced to improve) and good appraisers can raise their rates. “A lot of the good banks and AMCs recognize what’s going on and they expect appraisers to raise their rates. Some might look at this as requiring additional work but the requirement for better work, analysis, accuracy, and explanations was always there,” said Hagar. “The CU is checking to see if it REALLY is in the appraisal or is someone trying to slip an appraisal through the system without doing their job right. CU does add another level of work and an extra amount of detail. As a busy appraiser myself, I expect many appraisers to increase their fees, especially those who currently are accepting low fees and are not including the correct analysis to begin with. It’s going to be a lot harder for appraisers to slap together a report and move on.”

“I’ve received two phone calls from appraisers since CU came out who are raising their rates by $100. One is overwhelmed with business because he does good work and the other is raising his rates because he’s been cutting corners and recently has been caught by the CU system- he needs more time to do proper reports. Fannie Mae has started asking him for proof of all of his adjustments, so he’s recognizing that he has to do more work to fill out the form,” says Hagar.

The bottom line, according to Hagar, is that CU will enforce the requirement that proper support and explanation be in an appraisal. “Appraisers will need to explain and defend everything they’ve done in the appraisal. It could have been a Q&C rating, an adjustment, why your upstairs square footage is materially different from your peers, and much more,” Hagar says.

Warning Messages

Appraisers have been eager to discuss how best to avoid CU warning messages or red flags, but experienced appraisers advise that the goal is not necessarily to avoid them, but to anticipate them and explain your methodology. If appraisers are to remain independent, they shouldn’t necessarily be using the same Q&C ratings as their peers, or even the same Gross Living Area (GLA). For instance, if many local appraisers use incorrect MLS data in their reports, or incorrectly agree on a particular quality rating, does that mean an appraiser should alter their opinion to avoid call backs? The solution, according to Hagar, is to stand your ground and explain why you’re right. Why the property is actually a Q4, why your GLA is correct, or why your adjustment is more appropriate. Of course, first you have to know that you are correct and that is why proper education and training are so important, according to Hagar. “If you didn’t have the correct training in the beginning, you better get it now.”

Appraiser Access to CU Data
A debate is raging why only lenders have access to CU. A Network of State Appraisal Organizations, which includes nearly 20 state appraisal coalitions, have sent a letter to FHFA Director Melvin Watt, urging him to give individual appraisers access to CU data. The Network argues that CU’s “identification of alternative property sales as possible better comparables for analysis will likely result in the rejection of reports and the requirement for appraisers to spend considerable additional time responding to questions as to why those other sales were not used.”

However, some appraisers, while agreeing with the potential concerns regarding CU, take a contrarian approach with regards to giving individual appraisers access to the CU data. (Click Here to sign the petition to allow appraisers access to the UAD data.) Mike Foil, an appraiser from Arizona, writes in an online forum that while he agrees with the concerns of the Network, he does not support their solution. “We are independent appraisers who are paid to render our expert opinion about the subject property and a value for the same. If I use a comparable that, based on observation and research, believe to be a ‘C4’ for UAD purposes, but then find out from running CU ahead of submission, that other appraisers used a ‘C3’ for the same property; should I then use what other, unknown appraisers have used just so my report has one less flag? My answer is no! I am not being paid to submit a report based on what other people think, I am being paid for my professional opinion,” argues Foil.

Foil says he absolutely does not want CU data when he performs his appraisals. “I want to do my job, to the best of my ability and then stand on that. Giving CU data to the appraiser is one more step toward taking the profession in the direction of becoming an automated, mechanical function of the loan process. If you are insecure and need CU to tell you how to do your job, then I believe you are part of the problem,” says Foil.

This again speaks to the issue of whether appraisers should go along with what other appraisers are reporting as Q&C ratings, adjustments, or GLA in order to stay under the radar, or if the appraiser should do their own independent research and analysis, and stand by their opinions.

Either way, appraisers should be prepared to support and defend their methodology and conclusions.

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