First, what is “CU”? CU is the acronym for Fannie Mae’s new in-house tool for examining credit risk called ‘Collateral Underwriter’. Fannie Mae is rolling it out to Lenders and, indirectly, to their AMC partners in January 2015. Their objective is to distribute CU to support more proactive management of appraisal quality by empowering lenders to address potential appraisal issues prior to loan delivery.
Starting January 26, 2015, all lenders and lender agents will have full access to the program which includes the CU risk score along with the risk flags and messages with 100% rollout completed sometime in April, just in time for the beginning of the height of the selling season.
Collateral Underwriter is a proprietary appraisal review application developed by Fannie Mae that performs an automated analysis of appraisals. CU’s purpose is to identify appraisals with heightened risk of property eligibility or policy compliance violations, overvaluation, and appraisal quality issues. Gone are the days of ‘Let’s Challenge The Market’. I already know what some are thinking and yes, it will be very interesting to see if this will stagnate appreciation or not? Many appraisers are deeply concerned about this and so they should be. With this new system, if appraisers do not fall in line so to speak, they will get flagged and possibly be removed from the Fannie Mae list of approved appraisers. Considering Fannie Mae & Freddie Mac are the largest players, getting flagged could very well drive some out of business. So to reiterate, the CU program is to ‘to identify appraisals with heightened risk of property eligibility or policy compliance violations, overvaluation, and appraisal quality issues.’
Fannie Mae’s aim they say is to provide additional transparency and certainty to lenders by giving them access to the same appraisal data and analytics that they use in their own internal quality control framework, including their post-acquisition loan review process and their Appraiser Quality Monitoring initiative. However, since the advent of DODD-FRANK, much has changed in the lending industry, one of the biggest changes came with the removal of lenders being able to ‘Cut Value’ of an appraisal. This factor alone can be the subject of another blog or a speaking engagement “I Have an 800 FICO and Why Can’t I Refi My Home” or “what is Red Lining”?
Fannie Mae has been working for several years on the development of more advanced appraisal analytics (since DODD-FRANK), which led to the creation of Collateral Underwriter. Now, they are able to perform a more comprehensive analysis of the appraisal, focusing on things like data integrity, comparable selection, adjustments, and value reconciliation, by leveraging an expansive database of market data collected through UCDP (every appraisal in the US is sent through this portal to Fannie & Freddie) and proprietary analytical models. Rather than rely on generic, rules-based guidelines, CU produces model-derived, market-specific results that treat each subject property and each market differently.
It must be noted; CU does not provide an estimate of value. CU is intended to be an appraisal review utility and is not an automated valuation model, or AVM. Lenders will be alerted to appraisals with potential overvaluation, but will not receive a value or a range of values. It will then be the lenders responsibility if they wish to lend on that particular property and then run the risk of having to repay the loan if the borrower runs into hard times.
Starting in January 2015, the CU risk score, risk flags, and messages will be available to all lenders and their lender agents. In summary, Fannie Mae’s objective is to distribute CU to support more proactive management of appraisal quality by empowering lenders to address potential appraisal issues prior to loan delivery while still in the underwriting process.
It looks as though CU will now supply “up to 20 comparables” that are “ranked by risk” to the lender and/or AMC partner based on Fannie Mae’s proprietary algorithms. They will include the appraiser’s comparables (that have each been assigned a risk rank) along with Fannie Mae’s computer generated comparables.
Are there any Realtors or Appraisers that work with a lender/AMC that has a process for ‘value reconsideration’ in place already? Most of you? I thought so… Now consider that not only are appraisers required to respond to these additional comparable requests but will also be expected to respond to reviewer supplied CU risk rated comparables. Most lenders and their AMC partners currently do not have ready access to local data. As of January 26, 2015 they both will as a routine course of business. It is a sure bet that many cost conscious AMCs will use low cost unlicensed staff to ‘review’ these computer generated comparables and ask for the originating appraiser to respond to any that have a lower ‘risk rank’ than the comparables selected by the appraiser.
That’s just the tip of the iceberg. In the webinar the trainer specifically states that there is no standardized way for CU to determine neighborhood boundaries. So Fannie Mae’s solution is to break down market areas by what the US Government calls ‘Census Block Groups’. They abbreviate this as “CBG”. Watch out for this acronym. It’s an arbitrary and silent killer. Why? Because in many cases CBGs do not align well with actual neighborhood boundaries. Further, the trainer specifically states that Market Conditions and trends will also be calculated using, in part, CBGs. This is in stark contrast to Fannie Mae’s own Market Conditions Addenda. This is a form that appraisers are required to fill out (and submit as part of the report) using only neighborhood data. Appraisers will most likely be expected to reconcile any market trend differences between Fannie Mae’s somewhat arbitrary CBG based ‘trends’ and the neighborhood trends as defined by the appraiser in the Market Conditions addenda. If you would like to view the webinar for yourself, you can access the video by clicking the link http://fanniemae.articulate-online.com/ContentRegistration.aspx?DocumentID=592074fd-9a70-439f-80ff-71bfb7cf5063&Cust=77787&ReturnUrl=/p/7778797335
So, there are many questions yet to be answered when it comes to CU and the Real Estate Industry. I can think of a few such as, how will this affect the loan process? Will it be a deal killer? Will appraisals become more conservative? Will appraisals become more detailed and increase the appraisal cost? Will this affect the overall number of sales or is this just something that only lenders and appraisers need to worry about? Will there be ‘unintended consequences’, such as delayed loan closing or worse yet, will this damage the US economy?
With the rollout of CU, many things ‘again’ in the industry will change. What I see as the main change here is this, with the lenders already telling appraisers how to appraise a property a certain way or they won’t accept the appraisal, DODD-FRANK and the reasoning behind “I Have an 800 FICO and Why Can’t I Refi My Home”, it is even more important than ever to be accurate when listing a home when the pricing is involved. Even though a home may sell for top dollar, it doesn’t mean it will appraise under the lender guidelines for top dollar. In a case where someone would like to know what their home is worth “TO THE BANK” considering the odds are very good that the next buyer will be getting a mortgage, sellers, buyers or sellers agents and buyers agents may want to consider a pre-listing or pre-purchase appraisal prior to entering into a listing or purchase contract. More so on the listing side however, it is VERY prudent on the buyers side if it is a cash sale.
For more information about pre-listing or pre-purchase appraisals you can see our service page http://www.pennsylvaniaappraisers.com/pre-listing-pre-purchase-fsbo-appraisals.htm or watch our YouTube video on the subject http://youtu.be/-qLDWXPR80I
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