Fannie wants to reduce appraisal

Transcription

1 VOLUME 23 ISSUE 1 January Fannie's Collateral Underwriter - big changes and what it means for you Fannie wants to reduce appraisal risk and has been collecting UAD data since late 2011 to do this. With Collateral Underwriter (CU) every appraisal will receive a risk score from 1.0 to 5.0. This does not mean an appraisal is "good" or "bad". It reflects the risk for the lender. For example, a huge house in a tract of small homes or declining values. CU is an appraisal review tool, much more sophisticated than previous rules-based tools.. In my opinion this is finally a good use for the UAD data that appraisers have been providing for three years. Hopefully, the skill level and professionalism of residential appraisers will be increased. It will make us get more support for our adjustments and think more about our adjustments. More important, it will identify appraisers who are not competent, try to make values higher, put incorrect comps and analysis in their reports just to get appraisals done faster, don't check for typos, etc. Some appraisers are already receiving warnings for inconsistent Q&C ratings, and low GLA adjustments. Many more warnings will be sent out. For appraisers, the most significant change will be a focus on adjustments. Your adjustments will be compared with your "peers" and Fannie's "model" which is regression based. Note: I have used some direct excerpts from Fannie documents. They are included in quotation marks. Acronyms CU - Collateral Underwriter - starting 1/26/15 - will be integrated into DU DU - Desktop Underwriter - interface for underwriters for credit and collateral - used for many years UAD - Uniform Appraisal Dataset - used since late 2011 UCDP - Uniform Data Collection Portal - connects to CU starting 1/26/15. Significant changes in messages. IN THIS ISSUE What about FHA, VA, and non- Fannie loans No UAD. No CU. However, they may start looking for adjustment support as Fannie tends to be the mortgage leader. Fannie is pro- appraisers In contrast with many in the lending industry, Fannie has always been pro-appraiser. FIRREA passed in 1989, which did not require appraisals for transaction amounts under $250,000. But, Fannie still required appraisals. They consider the "boots on the ground" appraisers to be the most knowledgeable and objective source of values and description of a property. AVMs, real estate agents, Zillow, etc. don't even come close. What are the pluses for appraisers? I really think that CU will make better appraisers of most of us. I have not been spending enough time on adjustment supports. Comparing my appraisals with those from other appraisers will make me think more. Disability - your greatest risk page 14 January 2015 Appraisal Today PAGE 1

2 I will be more careful checking for typos. If you work in rural areas, CU will be able to determine if the comp distance from the subject is appropriate. If you appraise unusual homes, and who doesn't, CU will consider factors othe than distance, such as time, age and sq.ft. when determining which comps are appropriate. Fannie is focusing on what is important, instead of checking to see if the boxes are checked correctly or being perfect on filling out UAD, which have little or nothing to do with values. For appraisers who cut corners or "push" values and make us all look bad, they will be identified and get warning letters, or worse. Working for low fees and/or fast turn times and cutting corners will become much more risky. Maybe fewer appraisers will do this. Maybe experienced and knowledgeable appraisers will be treated as professionals, including decent fees, and stop leaving the business. Fannie vs. lender requirements Fannie requirements are changing. No one knows for sure what they will mean for appraisers, but at least it is a widely accepted set of requirements. Unfortunately, lenders can ask whatever they want. If you accept an assignment be sure you know what they are. If the AMC does not send you the lender's requirements, or change them after you have completed the appraisal, you need to dump that AMC. Well run AMCs have web access to client requirements, tell you what they are, and don't change them. Some AMCs have very long lists of requirements. I suspect they are compililed from all their lenders. You need to dump these AMCs. PAGE 2 Appraisal Today January 2015 Will appraisals take more time to do? I suspect that when CU starts there will be a lot of confusion. I don't know if appraisals will take more time or less time because of CU during the adjustment period. If you have not been using your comps database, you will need to start using it. If you don't have support for the adjustments that CU looks at, you will need to get ready for adjustment questions. If you try to make few, or no adjustments, you will have to change and learn how to make adjustments. There may be fewer stupid requests from Fannie's UCDP. The CU warning messages are much more specific. If you don't carefully check yoru appraisals for typos, there will be more time required to fix your errors later. If you try to get higher values, you will probably get warning letters, or worse. That will be very good for the appraisal profession. What is Collateral Underwriter? Per Fannie: "Collateral Underwriter is a proprietary appraisal review application developed by Fannie Mae that performs an automated analysis of appraisals submitted to the Uniform Collateral Data Portal (UCDP)." "CU leverages an extensive database of property records (and sales transactions), market data, and proprietary analytical models to analyze key appraisal components including data integrity, comp selection, adjustments, and reconciliation ". Results of CU's automated appraisal analysis include the following: " A comprehensive Risk Score on a scale of 1.0 (lowest risk) to 5.0 (highest risk) Identifying both high values and why Risk Flags to identify factors contributing to high risk scores Detailed messaging to highlight specific aspects of the appraisal that may warrant further attention The CU web interface provides additional content and functionality to assist with deeper analysis of the appraisal. Fannie Mae utilizes CU as part of our ongoing appraisal quality and collateral risk management efforts." What is the purpose of CU? Per Fannie, "The purpose of Collateral Underwriter is to identify appraisals with heightened risk of property eligibility or policy compliance violations, overvaluation, and appraisal quality issues." "CU provides lenders with additional transparency and certainty by providing them access to the same appraisal data and analytics used in Fannie Mae's quality control framework." "In summary, our 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." Comparing your report to your "peers". My experience from relocation appraisals I have been doing relocation appraisals for almost 30 years. My appraisals are compared with one or two other appraisers. We all appraise the same property. Here are a few examples. It is very seldom that we have the same GLA. If we do, it may be suspicious. (Maybe we compared "notes" on the appraisal.) One appraiser made a large view adjustment and one of the other appraisers did not. Are the two (or three or more) values close, or not? Why? For many years, there was a small group of local appraisers who did relocation appraisals. Our descriptions of the subject and market conditions were similar. We used similar sales and listings.

3 But, more recently, many experienced relocation appraisers are cutting way back or quitting appraising. Sometimes the other appraiser(s) have little relocation experience, or experience in the market. I have to spend a lot of time explaining what I did as compared with the other appraiser. I did not like this and recently have been turning down more relocation assignments. I have no idea what the "peers" Fannie will be comparing us to. How much experience do they have? What type of education and training do they have? Do they have local knowledge? Maybe all appraisers will not be seen as the same in the future. Maybe AMCs will select appraisers that are more knowledgeable, can explain what they are doing, etc., particularly for the higher risk loans. What data on adjustments will be available to the underwriter online? The comp selection information below will be accessed through Fannie's UCDP Web interface. Comps up to one year old from the appraiser and other data sources (CU-other appraisers and public records). Fannie selects additional comps by using Census Tract Blocks (CTB). The comps are ranked. Warning messages are seen. Appraisal comps and 20 model selected comps are rated on a spreadsheet. Users can select and deselect comps and sort comps. Users can do a new comp search by using criteria such as GLA and age. Aerial and street views for the subject and comps by clicking a button Local market trends graphs "Heat maps" displaying Census Tract Block Group-level statistics such as median sales price, price/gla, median days on market, etc. I have included several pages from Fannie's Underwriter webinars at the end of this newsletter to see what they look like. What are Census Tract Blocks? Unfortunately I was unable to find a source of maps for CBG so you can see where Fannie looks for comps. When I find a source, I will let you know. Before census tract numbers were available online, I used census tract printed books, and still have them in my office. Often, in my area, they were a good indicator of small neighborhoods boundaries. This is the only widely accepted way that Fannie can define neighborhoods for CU to use. Fannie says they prefer market area boundaries that the appraiser says is appropriate, but for the underwriter to use this area, it has to be input manually into CU by the underwriter or reviewer. Underwriters and appraisals About 20 years ago, when Desktop Underwriter was first starting, I attended a Fannie training class for underwriters. They all said they hated to underwrite appraisals because they were hard to understand and evaluate. Compared with appraisals, credit underwriting is much, much easier as it is based on facts - income, credit score, debt, etc. To help underwriters, later UCDP was set up and specific warning messages were added to help underwriters evaluate appraisals. With CU, the messages are much clearer and are based on facts, such as an appraisal which has GLA that varies significantly from other appraisers and from the appraiser's previous appraisals. Rather than the warning that the GLA in the subject description was not the same as in the sales comparison grid. Or, the bedroom count does not correlate with the room count. And, of course, from the appraiser's point of view, who cares? Will appraisers still be needed? Yes. Appraising is an art and a science. AVMs have limitations. Only "boots on the ground" appraisers will understand everything that influences property value. For example, I think that CU will put a premium on experienced, knowledgeable appraisers who can resolve issues with appraisals with high risk scores. Unfortunately, many have left appraising and/or will be leaving soon due to AMCs. Hopefully, CU will slow down the "brain drain". I am predicting that the higher the risk rating, the more experienced, knowledgable appraisers will be needed. I don't think AMCs will be broadcasting orders for $200 to all the appraisers on their lists for these appraisals. UAD has standardized property data for the first time Standardized property data did not exist until the UAD. MLSs vary on where they get their data. Assessor's offices vary widely and some are not computerized, although some AMCs seem to consider them more reliable than appraisers' data. Some states are non-disclosure, so sales prices are not available publicly. Another problem is how recent is the data? Almost every data source has outdated information, except appraisals submitted for loans. Most consider appraisal data to be the "Holy Grail" as it is considered the most reliable, but until UAD it was not standardized and was not available. Freddie and Fannie have been collecting data from appraisals for many years, but it was hard to use as it was not standardized. Appraisers have been supplying Fannie with UAD data since late Some time recently, Fannie started January 2015 Appraisal Today PAGE 3

4 using the UAD data. It was first used internally by Fannie. I suspect it was used Appraiser Quality Management (AQM). A few appraisers were prohibited from doing appraisals for Fannie loans. As of December, 2014, the new list did not include any new names. Hopefully more of the "push the value" and "get them done as fast as possible" appraisers will be identified. What date did UAD start and how much data has been collected? UAD started for conventional loans delivered to the GSEs on or after March 19, 2012 (and with application dates on or after December 1, 2011). Over 14 million appraisals and over 20 million transaction records have been collected by UCDP so far. About 20,000 appraisals are coming in every day. When will CU start? The effective date is January 26, Lender "beta testers" started using it about 6 months ago. You may have already received some of the warning message requests for correction. Why is Fannie using CU? CU is being used for collateral risk reduction, before the loan is made. Credit risk reduction is much, much easier as it is based on facts, such as credit scores, income, etc. Appraisal risk levels will be quantified, with a score from 1.0 to 5.0, allowing lenders to focus on appraisals identified as higher risk. Typical for lending, there are significant changes after crashes, such as the 1989 S&L crisis, which involved primarily commercial property loans. This resulted in FIRREA and appraisal licensing. Looking at the recent past, Fannie had been only looking at loans after they were closed, which is too late to identify problems, as we all learned in the 2008 mortgage crash. What you MUST do now - have consistent UAD data among your appraisals You can't control what your "peers" do, but you can make sure your data for a comp is consistent when ever it is used. Use your software vendor's database and populate it with all your subject and sales back to when you first started using UAD. Hopefully, you have already done this. Even if you think that you seldom, if ever, use the same subject or comp more than once, you may be surprised. Also, UAD data is only 3 years old now, but as the years pass you will not be able to remember if you are using comps again. Otherwise, you will not be able to avoid having different data in different appraisal reports. For example, for a comp at 123 Smith Ct. in XX city for an appraisal for 234 Jones St. you used 4 bedrooms. When you used the same comp in another appraisal you used 3 bedrooms. This probably will result in a CU warning message. There may be a good reason why you changed the data. Write it in your report. Even if it does not get read by the underwriter or reviewer, it is there and you don't have to spend time looking for it. Support for adjustments - a very big change for appraisers No one knows yet how much, and what type of, support underwriters and reviewers will be looking for. Fannie does not say anything about how to support adjustments, only sends a message that yours are not consistent with the "model" or your peers adjustments. I have been appraising for 40 years and often don't have good "support" for adjustments as I don't typically work in conforming tract neighbor- hoods. I always know what is important to buyers in a particular market, and that an adjustment is needed, but I don't know the exact adjustment amount. What makes me nervous is that my state regulator wants to see support for my adjustments, not that Fannie wants to see it. If I lose my appraisal license I will not be able to get much appraisal work, even non-lender work. Fortunately, much of my work is commercial and 5+ unit apartments, where dollar adjustments are typically not used. What adjustments do you need to support or respond to when questioned by an underwriter or reviewer? Below I have a list of what adjustments CU will be looking at. No, it will not be looking at pools, outbuildings, etc. CU looks at what Fannie considers important and works well with regression models. GLA, bedroom and bath counts, location, view, basement size, Q&C ratings, age, etc. See the list below. Fannie is also using other analysis methods such as comparing Q&C ratings that are not consistent among an appraiser's appraisals. What appraisal data will Fannie be analyzing? There is lots of UAD standardized data, but much of it is not used in CU now. For example, Design and Car storage. Text fields are also not used as they are not standardized. But, for now, Fannie will be using the UAD standardized data below from the subject and comps: Sales price Lot size Above-grade bathroom count Above-grade bedroom count Age Below-grade area Finished basement area PAGE 4 Appraisal Today January 2015

5 Location Location rating View View rating Quality Condition GLA Total bedroom count Total bathroom count Total living area Be sure you check your comps database to be sure you are using the same data you used before. How to provide support for adjustments What Fannie does not like is low, or no, adjustments just to make appraisals "look good" and get few "stips". If you work in large conforming tracts, it is reasonably easy. AMVs are regression based. Regression works well in conforming tracts with conforming homes. The farther your subject is from this, the less reliable is regression. Regression is typically best on GLA, which all properties have. You will have to use other methods, such as matched paired sales, broker interviews, cost analysis, etc. Some appraisers have been doing regression analysis on MLS and public records, using their own methods or software they have purchased. There are some non-statistical methods, such as cost approach and matched paired sales. I will be looking at software that is available for adjustments in the February issue of Appraisal Today. So far, the best I have seen, and easiest to use, is Redstone, developed by Bradford forms software. Bradford developed several products, CVR and Compcruncher, that were not widely adopted. Bradford has been working on these products for 5-6 years. They used these product to help develop Redstone. Pricing will be per use, tentatively $5 to $15 per use. I will be reviewing this in the February issue. On which properties will Fannie not be able to obtain data? Fannie loans not using full appraisals will not provide UAD data. Data from loans not sent to Fannie will not be captured, for example jumbo loans, VA, FHA, etc. There have been many all cash sales with no loans on purchase. However, some investors refinance so they can get money to buy more properties. Is anyone else using risk reduction software? VA is using LoanSafe from Corelogic which analyzes appraisals for risk, but does not capture appraisal data. However, VA is now requiring UAD so they are planning something. Is CU required for lenders? No. What about AMCs? Their lender clients decide what they send to their AMC vendors. Some have access to the UCDP portal and some don't. AMCs will not have access to CU. They may have access to UCDP. They will be able to view risk scores, flags, and messages in UCDP, but will not have access to the Web-based CU applications. CU will generate warning messages and hard stops, but it is the lender's decision which to send to their AMC vendors. The only part of Fannie's two webinars that addresses AMCs is from the end of the second seminar (Understanding the CU Risk Score...) with recommendations to AMCs and Lenders. Here is a direct quote: "We've talked a lot about lenders' use of the CU messages, but realize many lenders have designated appraisal management companies, or AMCs, as your agents to submit to UCDP on your behalf and consume GSE appraisal feedback. If that is the case, please make sure you work with your AMCs to clearly establish policies and procedures for how they may use the CU results. You should also confirm that they've attended our overview and training sessions." What about reps and warranties and buy backs? The reason that lenders keep increasing their requirements is that they are afraid of buy-backs, where the lender has to pay Fannie back for the cost of loans that have defaulted. Representations and warranties reduce this problem for lenders. Fannie is loosening their requirements for credit to help reduce this risk for lenders. Per Fannie: "Fannie Mae is not currently offering representation and warranty relief with the use of CU. However, CU will be integrated with Desktop Underwriter (DU) in the first half of 2015 to give lenders a more holistic view of risk by displaying the CU risk scores, flags, and messages in DU." "The integration will provide a foundation for future rep and warranty relief on property value. Fannie Mae is working with our regulator, FHFA, on details and timing, and we will provide more information as it becomes available." Fannie will be using UAD appraisal data and public records Fannie will have data from all the UAD appraisals plus public records, but lacks full MLS data. Appraisers have full MLS data but no UAD data I don't think Fannie has MLS data directly from the MLSs. They may have some from a data partner. Lack of full MLS data could definitely mean that the Fannie model will not have access to the primary data source for almost all appraisers. This could January 2015 Appraisal Today PAGE 5

6 definitely cause data discrepancies between appraiser comps and the Fannie model's comps. Particularly relevant for appraisals is pendings and listings. Be ready to address this problem when asked about the comps you used and your data source. What geographic coverage does CU have? Per Fannie "CU is able to score about 97 percent of appraisals submitted from the 50 U.S. states and the District of Columbia. Properties in the U.S. territories cannot be analyzed." What appraisals will not get CU risk scores? "The primary reason for unscored appraisals is an inability to geocode the subject property or an inadequate number of appraiser-provided comparables. Rarely is a lack of alternative sales observations the cause of an unscored ("999") appraisal." "Currently, CU is unable to geocode properties in the U.S. territories (Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands). In some cases, CU may be unable to geocode new construction because the address is new and not yet recognized by the geocoding service." What appraisal forms will be used? Only 1004 (Uniform Residential Appraisal Report) and 1073 (Individual Condominium Unit Appraisal Report) will be used. "Appraisals submitted on other forms, including the following, are not analyzed: Form 2055, Exterior- Only Inspection Residential Appraisal Report; Form 1075, Exterior-Only Inspection Individual Condominium Unit Appraisal Report; Form 1004C, Manufactured Home Appraisal Report; Form 1025, Small Residential Income Property Appraisal Report; Form 2090, Individual Cooperative Interest Appraisal Report; and Form 2095, Exterior-Only Inspection Individual Cooperative Interest Appraisal Report." What about rural areas? Per Fannie, "In rural areas, it may be necessary for the appraiser to select sales from a greater distance and further back in time than in areas with higher sales density and more homogeneous housing stock. CU compares the appraiser-provided comps against a pool of observed sales transactions in the subject market and not against arbitrary, "rule of thumb" guidelines." "CU will not provide a high risk score solely because the comparables are dated, located several miles away, or require significant adjustment from the appraiser. If CU's comparable selection model finds the appraiser-provided comparables to be the best available, the appraisal will likely receive a low risk score if no other potential issues are detected." Building permits Fannie documents refers to building permits several times, but does not discuss how they will be used. They could be used to see if the a property has been remodeled. For example, an appraiser says average condition, but there has been extensive remodeling or the opposite. Fannie will only have access to online sources, such as Buildfax. What are warning messages? CU generates about 110 appraisal warning messages. Lenders are not required to "fix" them. They may, or may not, send the messages to their AMC vendors. See the attached "Appendix A" for the list of warning messages. What are "hard stops" These 21 messages stop the appraisal from being submitted to Fannie Mae. They must be fixed or "overrided" by the underwriter. Many are probably "typos", but some are a good way to identify appraisers and supervisory appraisers who are not allowed to submit appraisals to Fannie or require 100% review. Per Fannie:..."lenders will receive a "Not Successful" status when one or more of the 21 appraisal messages are issued. Lenders will be required to review the Fannie Mae appraisal message(s) to verify if the information is correct as submitted or if a new or corrected appraisal is required. If the information is verified as correct and it is determined that there is no impact to loan eligibility, the lender may request a manual override and provide a reason code to change the submission status to a "Successful" status in UCDP." Examples: The appraisal indicates that the subject property has legal nonconforming zoning and cannot be rebuilt to the current density. This data indicates that the property is ineligible for delivery to Fannie Mae. The sales contract was not analyzed State certificate is not provided on transaction amount over $1 million Appraiser license does not match subject property state. See the attached "Appendix B" for the list of hard stop messages. CU warning messages are significantly different from previous messages Fannie Mae started using warning messages in UCDP a few years ago. Per Fannie, "The Fannie Mae Proprietary Messages in UCDP (were) rules-based alerts focused on data reasonableness, property eligibility and policy compliance. CU is model-based and performs a more comprehensive analysis of data integrity, comparable selection, adjustments, and reconciliation." Example: Number of bedrooms Old warning (FNM0025): the sub- PAGE 6 Appraisal Today January 2015

7 ject property's number of above grade bedrooms relative to the total number of rooms appears excessive. New warnings (#FNM0409): The appraiser has reported materially different abovegrade bedroom counts in one or more appraisal reports (#FNM0410): The reported abovegrade bedroom count is materially different than what has been reported by other appraisers Per Fannie, "Prior to CU, Fannie Mae Proprietary Messages were launched in These messages focused primarily on data reasonableness, property eligibility, and policy compliance. Those messages were a great start, but Fannie Mae has also been working for several years on the development of more advanced appraisal analytics, which led to the creation of Collateral Underwriter. Now, we 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 and proprietary analytical models." How much data does Fannie have from different appraisers for an individual property? Some of the warnings result from your appraisal being compared with appraisals from your "peers". Fannie says they have, on average, 5 data sets for each property - subject or comps, from appraisers. To me, this seems like a lot of records on each property accumulated over only three years. Science vs. art in appraising I have been writing about AVMs since They sometimes have severe limitations. They only get certain types of data. There are often significant discrepancies among different data sources. For example, 5 appraisers have very similar GLAs on a property, but the 7th appraiser has another number. Who is correct? Sometimes it is the 7th appraiser who saw something that the other appraisers missed? I now work in a very small geographic area, my city. I regularly attend brokers open houses and know all the local agents. I follow local development trends. I am very knowledgeable in my city. However, previously I worked a wider geographic area. I was definitely not as informed in other cities. That's why Fannie realizes that appraisers are important. When there is a high risk score, they will need to use these experienced appraisers to figure out what is happening. Why don't appraisers have access to CU? Fannie wants appraisers to do independent appraisals. Only appraisers are "boots on the ground" and can see what computers can't see. If appraisers have access to CU, they will use computer software instead of their own analysis. When they find out what CU says, they will be tempted to just use it. Even the data is difficult to use as there are multiple sources of the same data. GLA is a good example - public records plus an average of 5 appraisers. Who has access to CU? "CU risk scores, flags, and messages will be provided in real time after an appraisal is submitted to Fannie Mae through the Uniform Collateral Data Portal (UCDP ). The CU risk scores and messages will be provided on the Fannie Mae tab and the UCDP Submission Summary Reports. Any UCDP user who submits an appraisal to Fannie Mae will have access to the CU risk scores, flags, and messages." "For in-depth appraisal analysis, CU will be available to Fannie Mae sellers via a web-based application (registration required). Correspondents will also have access to the web-based application in 2015, but on a different timeline from approved seller availability." "Other UCDP users that are not Fannie Mae sellers or correspondents including appraisal management companies (AMCs) that have UCDP access as lender agents will be able to view the CU risk scores, flags, and messages in UCDP, but will not have access to the web-based application." Does CU provide a value or specific adjustments? Per Fannie, "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." "CU does not provide specific adjustment numbers. It compares adjustments in the appraisal with the Model, adjustments in other appraisals done by the same appraiser, and with other appraisers' adjustments." CU Risk Score Lenders may use the CU risk score (from 1.0 to 5.0, with 5.0 the highest risk) to segment appraisals by risk profile, resulting in more efficient resource allocation, workflow management, and collateral risk management processes. Per Fannie "the objective of CU is to assist lenders with assessing property eligibility and appraisal quality. It does not provide approvals or denials, nor should it be used as a basis for a credit decision." "It's important that you think of the CU risk score in terms of "low risk and high risk," and not in terms of "good or bad". As with any automated analysis, there is opportunity for false negatives and false positives. While January 2015 Appraisal Today PAGE 7

8 CU is effectively predictive of appraisal defects and overvaluation, a high score does not necessarily mean the appraisal is bad. Lenders should perform additional due diligence on appraisals with high risk scores to determine if corrections are necessary. If they are not, it is beneficial to have adequate commentary from the appraiser and documentation in your loan file." Property eligibility/policy compliance risk flags "You have probably already seen the fatal Uniform Appraisal Dataset, or UAD, edits. These are the joint Fannie Mae/Freddie Mac edits that cause a Not Successful submission status in UCDP and require resubmission of an appraisal. Critical Proprietary Messages or "hard stops" are the 21 messages that will require manual override or resubmission of a corrected appraisal. They are not used very often and are discussed below." "Overvaluation is critical to Fannie. Sophisticated statistical modeling is used to identify appraisals with higher probability of material overvaluation. There are no more granular messages associated with this risk flag, but other messaging and information contained in the user interface will assist lenders in assessing this risk." Appraisal quality risk flags - Data Integrity - GIGO Fannie is "looking to determine if the physical attributes and transaction terms of the subject property and comparables are accurately reported. This is the bottom of the pyramid here because it is the foundation for any appraisal report. We all know the old saying "garbage in, garbage out". If the subject or comps are not accurately represented, it can influence our judgment of the entire appraisal report. It affects whether or not comps look similar to the subject, the direction and magnitude of the adjustments, and which comps should receive most weight in reconciliation." Is the data plausible? For example, is the lot size 40,000 acres or 40,000 sq.ft.? Consistency within a single appraiser's body of work. Is the comp data the same? For example, for 123 Main St., the appraiser used a sales price of $200,000 and in another appraisal used $225,000. "Consistency between the appraiser and his/her peers. We expect that in nearly all cases, an appraiser's description of any comp should be consistent with the description provided by their peers." "It is important to know that Fannie Mae is not looking to split hairs or start he-said/she-said arguments between appraisers. For example, we would not flag small differences in gross living area or cases in which appraisers are split down the middle between C3 and C4 condition. We are looking for material dif- PAGE 8 Appraisal Today January 2015

9 ferences and outliers." "In summary, appraisals with multiple data discrepancy messages and/or egregious errors will get higher CU risk scores. Users should confirm the accuracy of the appraiserprovided data when they see these messages, particularly in cases where there are a number of errors or material discrepancies." My comment: Of course, much of this is due to appraisal "typos", which we all make, or failure to check the previous times a comp was used in your appraisals. Consistency with peers is more tricky. If you disagree with data from MLS or public records, which is used by many appraisers, be sure to explain why in your appraisal. Data Integrity - Comp Selection Per Fannie, "The appraiser is responsible for providing comps that are most similar to the subject property. If they are not, results of the appraisal may be compromised. Sample warnings: " The reported sale price is materially different than what has been reported by other appraisers. This is what we call a "peer discrepancy". This message fires because CU sees five other appraisers reporting a sale price of $300,000, while our appraiser is the only one reporting a sale price of $325,000. Obviously, both of these prices can't be right. Our appraiser states a sale price of $279,900. Three other appraisers report a sale price of $240,000. Our appraiser has also reported $240,000 in a previous report." If an appraiser does this on all, or most of, the comps used, this is very suspicious. This is another reason for using your comps database. If the appraiser just likes to "push" value, this is a significant red flag, much more serious than using different Q ratings because he/she did not check a comp database. "The appraiser provided the best comparables available" "Nearly every report Fannie Mae sees has some comment to the effect of "the appraiser provided the best comparables available". "CU will help lenders determine in which cases this comment is true and in which cases it is not." Data Integrity - Comp selection - time, distance and physical similarity Per Fannie, "When comparables have been selected, the appraiser must make adjustments for differences between the subject and the comparables. How they adjust is a critical factor in appraisal quality. Adjustments should reflect the typical market reaction to these differences, and not generic rules of thumb." "Collateral Underwriter's comp selection model is one feature that makes it unique. CU takes into account physical similarity, time, and distance when analyzing the overall January 2015 Appraisal Today PAGE 9

10 relevance of comp transactions. The significance of each of these factors may vary from market to market and may change over time. CU does not assign a fixed weight for each of these factors, but instead uses advanced statistical analysis to treat each appraisal and each market differently." "It is important to know that amenities like swimming pools, outdoor kitchens, accessory units, and outbuildings are not reported in standardized format and therefore cannot be considered by the CU model. So when you encounter subject properties with these types of amenities, please take this into consideration when reviewing the CU results." "The significance of each physical feature is also model-derived and market-specific. For example, in Washington, DC, a double lot may only mean a few thousand extra square feet of lot size, but could significantly impact value. In rural Washington state where many properties have several acres or more, another acre may contribute only a few thousand dollars to market value." "With distance, comps in close proximity are obviously preferred if all else is equal. However, modelderived location factors are considered in addition to straight line distance. We also consider the availability of other comparables and their distance from the subject." "Going back to our prior example, travelling one mile for a comparable in Washington, DC could take you across several neighborhoods and dramatically different price tiers. In a rural area, you might go 5, 10, 20 miles away or further with no significant impact on value. CU would treat each of these situations differently." "The same goes for time. The model will go back one year from the effective date of the appraisal for comparables, but date of sale receives more weight in comp selection in rapidly increasing or declining markets. For example, if you were in a market last year with double digit home price appreciation, CU would probably prefer more recent sales. Conversely, if you are in a market with very stable values, the model may go back 9 to 12 months to find comps that are more proximate or similar." "CU ranks the appraiser-provided comps against a pool of available sales, not against arbitrary time, distance, or similarity parameters." "Appraisals with material disagreement between the appraiser-provided and model-selected comps will receive higher risk scores. In these cases, lenders should research if other more relevant comparables were available but not utilized by the appraiser. If so, you may wish to ask the appraiser to consider these sales or provide explanation of why they were not used." I have included the Comp Selection Example in the attachment to this newsletter. It is on Page 9 of the Fannie Webinar "Understanding the CU risk score, flags, and messages. Adjustments "Collateral Underwriter produces statistically-derived market-specific adjustments for all UAD-standardized physical characteristics, date of sale, location, and sales type. For physical similarity, CU uses regression analysis to produce adjustments for property features. Different models are used for single family and condo property types. The magnitude of the adjustment for each physical feature may vary from market to market." "CU also makes time adjustments to comparables. These adjustments may be negative or positive. The frequency of time adjustments from appraisers is startlingly low, particularly over the past few years when we have seen rapid home price appreciation in many markets. In fact, looking at some of the hottest markets, we saw time adjustments on only five percent of comps over 6 months old." "There is a common misconception that Fannie Mae will not accept positive time adjustments in fact, Fannie Mae is looking for an accurate market value, and accepts both positive and negative time adjustments as appropriate." Differences in location are also adjusted for. In absence of clear neighborhood definitions, CU uses Census Block Groups, or "CBGs" as defined by the US Census Bureau, and make adjustments based on sale prices within these areas." "CU also makes market-based adjustments for Sales Type. REO sales, Short Sales, Relocation sales and non-arms length transactions are adjusted against arms-length transactions based on observed discounts and premiums between these sales types. This too, varies from market to market." "The key point here is that CU does not adhere to the widely recognized and often misinterpreted 15% net and 25% gross adjustment guidelines. Many believe that Fannie Mae will not accept comps with adjustments in excess of these guidelines, which is also not true. Long-standing reliance on generic guidelines has led to what Fannie Mae believes is widespread under-adjustment by appraisers. As stated in our Selling Guide, adjustments may be an indicator of comparability, but lower adjustments are not necessarily more accurate adjustments." "In summary, rather than take a "lower is better" approach to the adjustments, CU will flag adjustments that are in the wrong direction or are significantly different than the appraiser's peers and the adjustments derived by our statistical models. In these cases, lenders should determine if the appraiser's adjustments are adequately supported and reflective of market reaction." PAGE 10 Appraisal Today January 2015

11 "In the Adjustment Example, here are some of the messages: "Comps #1, #2, and #3 would all receive Message 607 that states the appraiser's GLA adjustment is smaller than peer and model-derived adjustments. As this message states, for adjustment messages like this to fire, the appraiser's adjustment must be significantly different from the majority of their peers and be significantly different from the CU model." "In this case, comps are selling for $200 to $300 per square foot of gross living area, but the appraiser is adjusting only $15 per square foot. Both their peers in this market and CU's model-derived adjustments are much higher than $15 per square foot." - "Last, the appraiser makes a nominal $3,000 adjustment for a second garage stall across all comparables. Garages are something you may not pay much attention to, but it still matters to buyers and sellers. This example property happens to be in a cold weather climate with long harsh winters and buyers in an $800,000 price tier. Many buyers there would not even consider a home with a single car garage. $3,000 equates to less than a dollar per day amortized over the life of a loan. Buyers in this price tier would certainly expect a much larger discount to consider a one-stall garage." "Although Net and Gross adjustments are very low in this example, they are not reflective of market reaction, and the comps may not be as similar as the appraiser's net and gross adjustments suggest." My comment: I have included the full Adjustment Example in the attachment to this newsletter. It is on Page 10 of the Fannie Webinar "Understanding the CU risk score, flags, and messages. Value Reconciliation "Even when Data Integrity, Comp Selection, and Adjustments are great, there can be problems if the reconciliation is not sound. To provide an accurate opinion of value, appraisers should give the most weight to the most relevant comparables in their reconciliation." "In the example, The first thing we notice is a very wide range of sale prices, from $510,000 to $720,000. Even after adjustments, the range still extends from under $550,000 to $720,000. Comps #1 and #2 appear quite similar to the subject and are located on the same street. They sold for only $510,000 and $550,000 respectively. Comp #3, however, sold for $720,000." "So one of these things is not like the other. Why may that be? Closer examination of this comp shows it has the largest GLA, nearly three times the lot size, and is farthest away from the subject. Research suggests that property values in this neighborhood are dramatically higher than in the subject neighborhood." "So not only is it physically the least similar to the subject, but it is located in a higher-priced neighborhood. Nonetheless, the appraiser gives nearly all weight to this comp in reconciliation. So while this is "bracketed", the appraiser is giving most weight to the least relevant comparable, and as a result is inflating value." My comment: I have included the full Reconciliation Example in the attachment to this newsletter. It is on Page 13 of the Fannie Webinar "Understanding the CU risk score, flags, and messages. The appraiser definitely appears to be "pushing" value. How Fannie uses UAD data Freddie and Fannie have been collecting data from appraisals for many years, but the data was not standardized and was difficult to use. Appraisers have been supplying Fannie with UAD data since late Recently, Fannie started using the data. It may have been first used in Appraiser Quality Management (AQM)to get rid of the very "bad" appraisers. A few appraisers were prohibited from doing appraisals for Fannie loans. UAD data provided Fannie with objective, standardized information, such collecting the names of all appraisers for all Fannie appraisals. For example, an appraiser who was signing off as the only appraiser doing 100 or more appraisals per week. (As of December, 2014, the new AQM list did not include any new names.) Recently, Fannie has been sending warning letters to appraisers about inconsistent use of Quality and Condition ratings by comparing the data from all their appraisals and finding inconsistencies. In the past month or so, appraisers have been getting warning letters about using low GLAs. Using UAD data Fannie found that $25 per sq.ft. was widely used all over the country, even though there were substantial difference in sales prices and construction costs. Now, after three years of data collection, with Collateral Underwriter, Fannie will be using more of the UAD data. Fannie compares your appraisal data and adjustments with "other appraisers" There is no way you can know what every "other appraiser" will do. But, I have some suggestions below. The phrase used is "materially different". On the plus side, this will "catch" appraisers who change the data to make fewer adjustments, higher Q and C ratings, etc. Fannie is looking primarily for appraisers who overvalue properties and for incompetent appraisers. For example, Quality and Condition ratings are not exact and it is hard to know what other appraisers will use. But, if the subject is old and not updated, you would not expect another appraiser to use a high rating. January 2015 Appraisal Today PAGE 11

12 If you think your data sources are not correct, but other appraisers may use them, make a comment in your appraisal. Then you will remember. An underwriter or reviewer may read it. For example, public records says 1,560 sq.ft. GLA. You measured it and that is not correct - it was not measured correctly by the assessor, a data entry error, or a permitted addition is not included. Or, you included a "walk out" basement because this is a standard practice for real estate agents, sellers and buyers in your area. Appraised value conflicts within your appraisal This is easy to avoid and can show appraisers who are trying to get a high value. Above or below the range of the adjusted comps Above or below the range of the Appraisal Today ISSN Appraisal Today is published 12 times per year by Real Estate Communication Resources. Subscription rate: $99 per year, $169-2 years Publisher Ann O'Rourke, MAI, SRA, MBA ann@appraisaltoday.com Subscriber Services Theresa Lua M,T,W 7AM to noon Friday 7AM to 9 AM (Pacific time) info@appraisaltoday.com (24 x 7) Circulation Hancock Mailing Service Editorial and Subscription Offices 2033 Clement Ave., Suite 105 Alameda, CA Phone: Fax: info@appraisaltoday.com Appraisal Today is sold with the understanding that the publisher, editors, and others associated with the publication are not engaged in rendering accounting, legal, or other professional services. It does not attempt to offer specific solutions to individual problems. Questions about specific issues should be referred to the appropriate professional for analysis by Real Estate Communication Resources. All rights reserved. The contents of this publication may not be reproduced either whole or in part without consent. unadjusted comps Near the maximum or minimum adjusted comparable sale value with support from only that comparable sale How is Fannie estimating adjustments? The documents refer to a "model". This is a statistical model, probably regression-based. Adjustments - the biggest change If questioned, it is good if you can show how they got their adjustments. If you can't, I assume that somehow you will be able to change your adjustments, hoping they are acceptable. Adjustments - compare with peers and model GLA - smaller or larger than peer and model adjustments. This is Fannie's current "hot button". Just don't use the same small adjustment in all your appraisals whatever the median home price or size. Condition and Quality - smaller or larger than peer and model adjustments For some reason, Fannie says "materially different" from peer and model adjustments for the adjustments for: Lot size View MBA Loan Volume Application Index 1/13 to 12/ Location Other adjustment warning messages Wide range of adjusted values indicates potentially inadequate adjustment. The adjustment is in the wrong direction Negative or postive net adjustment indicates the comp is materially superior to the subject, but the appraised value of the subject is materially higher A brief history of appraisal property data - why Fannie wants appraisal data Before licensing, appraisers could only get access to MLS by quarterly "sold books" in many MLSs. So, there were various appraiser co-ops around the country where appraisers contributed data from their appraisals. One of them was CMDC (California Market Data Co-op) started by S&L appraisers in the 1970s. I was an active member until licensed appraisers got MLS access in the early 1990s. There was another large co-op based in Atlanta, GA. I was involved in an effort in the late 1980s to develop data standards for appraisers. There were many Market Index PAGE 12 Appraisal Today January 2015

13 discussions of "pull down menus" for use in classifying such characteristics as type of roof, floor coverings, etc. The choices were controversial and nothing was ever adopted. Plus, there are wide differences among geographic area in terminology. But, I learned a lot about the difficulties of standardizing appraisal data. Recommendations for AMCs and lenders on how to use CU results "CU is effectively predictive of overvaluation and appraisal defects, but produces some false positives and false negatives, just like any other automated analytical tool. A high CU risk score does not necessarily mean an appraisal is bad, nor does a low score necessarily mean an appraisal is good. The same is true with individual messages. For this reason, lenders should not make appraisal review decisions based solely on this automated feedback." "Lenders may choose to use the CU risk score to triage workflow and allocate resources more effectively. However, Fannie Mae will not provide specific guidance or recommendations on where to set any thresholds. We recommend that lenders take time to familiarize themselves with CU and establish their own risk tolerance." "As we discussed in the score and message overview, risk flags identify factors contributing to high CU risk scores, and messages highlight specific aspects of the appraisal that may require further attention. However, they do not affect the UCDP submission status and are only warnings. We recommend that you consider these messages while you perform your review, but you don't need to "clear" the message." "Additional data, analytics, and functionality in the CU user interface will provide users with further context and clarity behind the CU scores and messages. Separate training will be available on the user interface." "Last, whether you're an AMC or a lender, we encourage you to use CU to inform conversations with your appraisers. Because information in CU is sourced primarily through data submitted to UCDP, local appraisers should have access to much of this same data particularly comparable sales and local market trends." "So you should be able to have constructive dialogue with appraisers to resolve appraisal questions or concerns. However, you should not make demands or provide instructions to the appraiser based solely on automated feedback. In other words, don't assume they're wrong just because you see a CU message." "For example, there may be a completely valid reason the appraiser selected the comparables that were used, or their description of a comparable may be correct even though it conflicts with descriptions from other appraisers." "Fannie Mae recently reviewed an appraisal in which one appraiser disagreed with 23 other appraisers on the square footage, number of bedrooms, and number of bathrooms on a comparable. After further review of the appraisal and other data sources, we realized that one appraiser got it right and 23 got it wrong. The odds of this happening are very slim, but we suspect risk managers and quality control associates would still be glad that they took a closer look at this one." Where to get more information In this article I have read all the relevant Fannie documents. They were all written for lenders, particularly underwriters. None were written for appraiser. Some have lots of information for appraisers and some have little. I have included a few pages from the Fannie Webinars attached at the end of this newsletter. The December 2014 Fannie Webinars (Introduction to Collateral Underwriter and Understanding the CU Risk Score, Flags, and Messages) are worth listening to if you like to hear rather than read. Both are in PDF and can be printed. The introduction webinar does not include notes. The other webinar has some very useful notes. The print link is in the Resources tab in the upper right of the first screen on each webinar. Registration is required for the webinars, but you can stop and go back later. Link to Fannie Webinars: fanniemae.com/singlefamily/collateralunderwriter Bradford forms software had a one hour webinar which covered an introduction of big data and CU plus about ½ hour on their Redstone product that provides adjustments using regression. Webinar recording at nt.jsp?ei= Fannie will be releasing more information, including underwriter training classes, in January I will have them listed in my free Appraisal Today newsletter as soon as they are available. If you don't want to subscribe, check the archive link on They are sent out on Thursday, except when there is a holiday, such as Christmas. PAGE 13 Appraisal Today January 2015

14 Many appraisers worry about the risk of getting sued for an appraisal, but one of your greatest risks is becoming disabled and unable to work. To appraise at your full capacity, you have to be able to walk, hear, and see. If disabled, you may be able to continue working, but at reduced capacity. Or, you may not be able to do field work, but you can do desktop appraisals and reviews. But, you will probably not be able to work at all for a period of time. Since appraisers spend a lot of time driving, getting in an auto accident is a much higher risk than for people working in an office. Other risks include getting injured during an inspection, plus the risks we all have of a serious medical problem. Jack Jones had a successful appraisal business, netting him over $75,000 per year. Combined with his wife's income of $45,000 per year as a dental hygienist, they have a very comfortable life, with two kids in college and one in high school. One day, Jack was driving down the freeway and was rear-ended by a large truck. He had emergency surgery for massive injuries. His family was informed that he will survive, but it will be many months before he can return to work, even on a parttime basis. After the initial jubilation that he will live, his wife starts thinking about how they will make it financially. His medical insurance will cover the medical and rehabilitation costs. All of Jack's net income was generated by his own appraising and reviewing. His overhead costs will continue even when he is not working (MLS dues, CE, E&O, etc.). Jack and his wife have enough in savings to cover 4 months of lost income, but they don't have any disability insurance. Disability - your greatest risk When Jack used to have associate appraisers in his office to do appraisals, he still would have produced about 30% of the income himself. Plus, he reviewed and co-signed all their work and was the primary contact for clients. We all have insurance for autos and fire. Most of us have life insurance and E&O insurance. But, your greatest risks aren't not being sued over an appraisal or having your house burn up. The Social Security Administration estimates that one in four 20-yearolds will become disabled and unable to work before they reach the age of 67. Do It Now Don't wait. Do it now. I had back surgery in 1988, two years after starting my business. I was very fortunate - it was successful and I had a full recovery with only 6 weeks off of work. I had an office manager and two associate appraisers which really helped. Did I have disability insurance before the surgery? No. Did I get it? Yes, but it excluded any back problems. An appraiser I have known for many years was diagnosed with advanced breast cancer 9 years ago at the age of 62. Her prognosis was not good and she did not expect to survive very long. She had a 5 year disability policy, up to age 65, for a relatively low premium with "own occupation" coverage for appraising and received $2,000 per month until she was 65. It was partial income replacement but really helped. She survived and is healthy now. She regularly encourages appraisers to get disability insurance. Life vs. disability insurance Should you have life, disability, or both? The reason for life insurance is to protect your family financially if you die. As you get older and your children leave home, this is less important. I had a disabled spouse and had life insurance for many years as he was unable to work full time. When he passed away, I dropped the insurance. Disability is a much greater risk than death, but the coverage is for much lower amounts - monthly payments up to 60% of your income. Self employed persons can't get workers comp coverage (unless they are incorporated). Most people are not disabled for the rest of their lives. This insurance can help you if unable to work for a short or long period. Disability insurance keeps you going while you are recovering. I no longer have disability insurance as I receive $3,000 in Social Security per month. (I waited until age 70 to start collecting.) Risk of becoming disabled for appraisers There are lots of varying statistics on becoming disabled at some time during your working life, varying from 80% to 20%. Much of the data and analyses come from the disability insurance industry. But, these numbers are averages. Appraisers work in the field, which is much riskier than an office job. I used to determine Personal Disability Quotient(PDQ) for appraisers. This is from a non-profit organization, Council for Disability Awareness. The example I used: Female, Age 45, Height 5 ft. 3 inches, weight 125. There were four choices for type of job - Mostly Office, Little Office, Little Physical, Mostly Physical. I selected Little Office. No tobacco, average healthy lifestyle, no treat- PAGE 14 Appraisal Today January 2015

15 ments for high blood pressure, etc. Here are the results: Your chances of being injured or becoming ill and unable to work before you retire for 3 months or longer - 22% If you do become disabled for 3 months, your chances of the disability lasting 5 years or longer - 43% The average length of a long-term disability for someone like you is 86 months To calculate the financial risk or Earnable Income Quotient (EIQ), I used an income of $60,000 per year, annual increase of 2%, and retirement at age 65. The answer was $1,457,842. Results for selecting Little Physical for type of job the probability of being disabled for 3 months or longer increased to 28%. The other numbers were the same. I strongly recommend doing this analysis for yourself. It only takes a few minutes and is very easy to do. Social Security You have Social Security coverage, if you have enough quarters in. But, it typically takes over a year to get started, and the benefits are relatively low compared with current earnings. Also, you must be unable to perform any gainful activity and the disability must be expected to last at least 12 months or result in death. Where to get disability insurance Disability insurance policies are available from many insurance brokers and companies. Check with your personal insurance broker. Liability Insurance Administrators, who sells appraisers E&O insurance offers it at The Appraisal Institute offers a group disability and professional overhead coverage to its members through REAGIT. NAIFA also has a disability group plan. Check to see if any of your groups offer it. Please note that some people say that it can be difficult to collect from an insurance company and it may take awhile. Be sure to google companies you are interested in to see if there are any problems getting paid. Private disability insurance Disability insurance can only be purchased for partial, not full, replacement of income, typically 60%. The insurance company wants to be sure you are financially motivated to return to work. However, disability income from a private policy is not taxable, so it's probably close to your after-tax income. What to look for in a policy: 1. Coverage for "own occupation". 2. Both non-cancellable and guaranteed renewable. 3. Optional inclusion of partial disability. 4. Optional cost of living adjustments. Primary cost factors: 1. The dollar amount of income to be received. (The higher the income, the higher the premiums.) 2. Length of waiting time before benefits start. (The shorter the wait, the higher the premiums.) 3. Duration of the benefits. (The longer the duration, the higher the premium.) For an appraiser, you should get coverage for "own occupation", or coverage if you are unable to appraise. Many companies try to deny insurance by saying you must be able to do "any gainful occupation". Your policy should be both noncancellable and guaranteed renewable. You may want to include coverage for partial disability: unable to perform one or more parts of a job. A cost-of-living adjustment ensures that your benefit goes up over time. This is particularly important for any very long-term disability. Disability coverage for you, your spouse, or both? How much income do you want to replace if disabled? If you or your spouse provide most of your family income, you will probably want to insure only the higher-earning person. If you want as much protection as possible, insure yourself and your spouse. Long term individual coverage costs You can expect to pay between 1% - 3% of your annual gross income for a quality policy. Example: If you are earning $50,000 per year you can expect to pay between $500 - $1500 per year depending on your occupation, age and the level of benefits and optional riders that you include on your policy. Quotes vary widely, so shop around. All the options make it confusing sometimes. Here's a sample quote for "own occupation": The cost varies with age, gender and occupation. A healthy, 35-year-old man who earns $75,000 per year in a white-collar profession would pay about $100 a month to The Guardian for a policy with a $4,000 monthly income benefit that continues to age 65 if he's permanently injured. If he buys it at 40, the same insurance costs about $120 a month. Sample quotes are below for: payment to age 65, $3,000 per month income, 90 day waiting period, total and partial disability. As you get older, your risk increases. Below are sample comparative rates. Partial disability: Age 35: $1,200 per year ($40 per $100 of coverage) Age 45: $1,800 per year ($60 per $100 of coverage) Age 55: $2,550 per year ($85 per $100 of coverage) PAGE 15 Appraisal Today January 2015

16 Only full disability Age 35: $1,020 per year ($34 per $100 of coverage) Age 45: $1,560 per year ($52 per $100 of coverage) Age 55: $2,220 per year ($74 per $100 of coverage) Cost of Living adjustment increases payments by about 20% Increasing the waiting period from 90 to 180 days would decrease the payment by about 10%. Reducing the waiting period further, from 60 to 30 days would increase the payment an additional 20%. A lifetime benefit would increase the payment by about 20%. However, there are many variables, such as when the disability started and whether it was due to accident or sickness. Short term disability coverage - another option Most disability lasts less than one year. Short term insurance is much less costly than long term. New businesses and part-timers It is very difficult for new business owners to obtain disability insurance as they have no income stream. Part timers who work less than 26 to 30 hours per week typically can't get coverage as insurers figure there's no incentive to return to work. Professional overhead insurance Another cost-effective option is professional overhead insurance, which is short term, typically one to two years, and covers actual business overhead expenses such as office rent, support staff salaries, and insurance. You must continue to be in business after becoming disabled. For a 45-year-old, with a 30-day waiting time, and a 12-month period, a typical premium is $27 per year per $100 of coverage. For example, a $3,000 per month coverage would cost $810 per year. A 24-month benefit would cost $34 per $100, or $1,020 per year. Group insurance Check with organizations you are a member of to see if they offer a group disability insurance plan, which may be cheaper than a personal plan. The Appraisal Institute has disability and professional overhead group insurance. NAIFA also has a group plan. Key person disability What if your partner or a key employee became disabled? This insurance reimburses the business for the loss of a key employee and allows funding of temporary replacement or training of a successor. Some sample stats - One in five Americans aged 35 and older will experience a long-term disability one that lasts three months or longer before their 65th birthday - you are three times more likely to become disabled before age 65 than you are to die. - 23,000 people are killed in accidents at home each year...350,000 will be disabled. - 13,000 people are killed in workrelated accidents each year...2,200,000 will be disabled. - 21,000 people are killed in public accidents each year...2,700,000 will be disabled. - 51,000 people are killed in vehicular accidents each year...2,000,000 will be disabled. Where to get more information There is a good article from the New York Times at your-money/life-and-disability-insurance/06money.html explaining all the conflicting information, dealing companies that sell disability insurance, and links to other web sites. Most of the companies offering disability insurance are large life insurance companies such as Northwestern, Equitable, and Prudential. Using a broker experienced in disability policies is a good option. Be sure to google the insurance company to see if there are any problems getting paid. Check with your appraisal association or other business group to see if they have a group plan for personal disability or professional overhead insurance. PAGE 16 Appraisal Today January 2015

17 On the next 12 pages are excerpts from The December 2014 Fannie Webinars - Introduction to Collateral Underwriter and Understanding the CU Risk Score, Flags, and Messages The first 6 pages are from the Understanding the CU Risk Score, Flags, and Messages - good examples and comments and include pages 9 to 14 of the webinar: Page 9 - Comp Selection Example. - maps of which comps CU has selected plus comments below. Page 10 - Adjustments - Comments on 4 adjustments - Physical simlarity, Time, Location, Sale type. Page 11 - Adjustment Example - Grid with comps plus comments below Page 12 - Reconciliation - What CU looks for Page 13 - Reconciliation Example - Grid with comps plus comments below Page 14 - CU Data Quality and Model Error Messages - a few examples, many are probably typos The next 6 pages are very different. They are from the Introduction to Collateral Underwriter webinar and are the pages that underwriters see. AMCs and appraisers do not see these pages. Page 1 - Appraisal Page - Comp map, Messages, and comp grid Page 2- Dataappraisal - List of appraiser and Model selected comps. Sortable columns Page 3 - Configurable Comp Searches - the underwriter uses this page to change comp selection Page 4 - Messages - Examples Page 5 - Aerial and Street-view Photogaphy - What the underwriter has access to Page 6 - Local Market Trends - Graph and Heat Map - where price changes are located and comp locations The last 6 pages are from UCDP Fannie Mae Appraisal Messaging Change Notification - November 18, 2014 and includes all the Warning Messages and the Hard Stops. Please note that Warning Messages do not require fixing them. The Underwriter decides which ones to send to the AMC or lender. Hard Stops require a correction on the appraisal to get the appraisal accepted by UCDP. PAGE 17 Appraisal Today January 2015

18 Here are location maps for two appraisals with one mile radius circles drawn around the subject properties. These are from real appraisals of two different properties submitted through UCDP. The maps were generated in CU. You will see the subject property in green and the appraiser-provided comparables in blue. The dotted black circle represents a one-mile radius around the subject. By the way, Fannie Mae does not have a 1-mile guideline, but that is a common rule of thumb and we ll use it here for the sake of illustration. Note the distances to the comps. For the appraisal on the left, the comps are three to six miles from the subject. For the appraisal on the right, all the comps are less than a mile from that subject. Both of these appraisals have commentary from the appraiser stating that the comps they chose were the best available. Now, which of these is most troubling to you? Many of you may say the appraisal on the left, due to the distance of the comparables. Now let s look at alternative comparables found by CU. On the appraisal on the left, you ll see a few other sales noted by the orange icons. We see that all the alternative comps for the property on the left are at similar distances, several miles from the subject. It turns out that this subject is an older, small home on a large lot that is surrounded by newer, larger homes on much smaller lots. On the appraisal on the right, you ll see more than a dozen sales within a few blocks that were ignored by the appraiser. It just so happens that these homes are, by all accounts, very similar to the subject and selling for far below the appraised value. In summary, you could easily get turned around if you re using generic guidelines and a checklist approach to comp selection. You may let the appraisal shown on the right slide by with no further action taken, while you engage the appraiser on the left with requests for comparables in closer proximity when none exist. Using Collateral Underwriter, you may act differently. The appraisal on the left received a low CU risk score, while the appraisal on the right received a comparable selection message and a high CU risk score. So when we say CU is model based and doesn t rely on arbitrary guidelines, this is a good illustration. 9

19 The next step in the process is adjustments. Collateral Underwriter produces statistically-derived market-specific adjustments for all UAD-standardized physical characteristics, date of sale, location, and sales type. For physical similarity, CU uses regression analysis to produce adjustments for property features. Different models are used for single family and condo property types. The magnitude of the adjustment for each physical feature may vary from market to market. CU also makes time adjustments to comparables. These adjustments may be negative or positive. The frequency of time adjustments from appraisers is startlingly low, particularly over the past few years when we have seen rapid home price appreciation in many markets. In fact, looking at some of the hottest markets, we saw time adjustments on only five percent of comps over 6 months old. There is a common misconception that Fannie Mae will not accept positive time adjustments in fact, Fannie Mae is looking for an accurate market value, and accepts both positive and negative time adjustments as appropriate. Differences in location are also adjusted for. In absence of clear neighborhood definitions, CU uses Census Block Groups, or CBGs as defined by the US Census Bureau, and make adjustments based on sale prices within these areas. CU also makes market-based adjustments for Sales Type. REO sales, Short Sales, Relocation sales and non-arms length transactions are adjusted against arms-length transactions based on observed discounts and premiums between these sales types. This too, varies from market to market. The key point here is that CU does not adhere to the widely recognized and often misinterpreted 15% net and 25% gross adjustment guidelines. Many believe that Fannie Mae will not accept comps with adjustments in excess of these guidelines, which is also not true. Long-standing reliance on generic guidelines has led to what Fannie Mae believes is widespread under-adjustment by appraisers. As stated in our Selling Guide, adjustments may be an indicator of comparability, but lower adjustments are not necessarily more accurate adjustments. In summary, rather than take a lower is better approach to the adjustments, CU will flag adjustments that are in the wrong direction or are significantly different than the appraiser s peers and the adjustments derived by our statistical models. In these cases, lenders should determine if the appraiser s adjustments are adequately supported and reflective of market reaction. Let s look at an example. 10

20 In this example, the appraiser has provided four of the best comparables available. However, most are materially superior to the subject, and CU has issued a series of messages for suspected under-adjustment. Here are a few of the potential issues and messages that would fire on this appraisal Comps #1, #2, and #3 would all receive Message 607 that states the appraiser s GLA adjustment is smaller than peer and model-derived adjustments. As this message states, for adjustment messages like this to fire, the appraiser s adjustment must be significantly different from the majority of their peers and be significantly different from the CU model. In this case, comps are selling for $200 to $300 per square foot of gross living area, but the appraiser is adjusting only $15 per square foot. Both their peers in this market and CU s model-derived adjustments are much higher than $15 per square foot. On Comp #2, we see Message 611 that states the adjustments for lot size are materially different from the peer and model adjustments. In the appraisal report, the appraiser estimates the site value of the subject to be nearly half a million dollars. However, they make absolutely no adjustment for the fact that Comp #2 has a double lot. The appraiser s peers in this market and the CU model indicate that an adjustment would be warranted for a lot size difference of this magnitude. Last, Message 640 fires on all four comparables. This message states that the appraiser s net adjustments are materially different from the model s net adjustments. In addition to those issues already noted, there are other factors contributing to these messages. Nominal adjustments for the extra bathroom on Comp #1 and Comp #3 Adjustments of only $2 to $5 per square foot for basement finish on Comps #1, #3, and #4. To put this in perspective, the appraiser is adjusting less than 1% for a fully finished basement on Comp #4. Last, the appraiser makes a nominal $3,000 adjustment for a second garage stall across all comparables. Garages are something you may not pay much attention to, but it still matters to buyers and sellers. This example property happens to be in a cold weather climate with long harsh winters and buyers in an $800,000 price tier. Many buyers there would not even consider a home with a single car garage. $3,000 equates to less than a dollar per day amortized over the life of a loan. Buyers in this price tier would certainly expect a much larger discount to consider a one-stall garage. Although Net and Gross adjustments are very low in this example, they are not reflective of market reaction, and the comps may not be as similar as the appraiser s net and gross adjustments suggest. In summary, utilization of superior comps with inadequate adjustments can lead to material overvaluation. 11

21 The last component CU analyzes is value reconciliation. This is a fairly straight-forward examination of the relationship between the appraised value and the adjusted and unadjusted range of comparable sales prices. CU looks for the following: Appraised values far outside the range of unadjusted comp prices. Bracketing is not a requirement, but it is often worth a closer look at the appraisal when the subject is worth far more or far less than any of the comparables. CU also looks for appraised values outside the range of adjusted comp values. So for example, an appraised value of $250,000 when the adjusted range of comps spans $200,000 to $225,000. If you think this sounds silly, know that Fannie Mae is on pace to receive more than 20,000 appraisals from lenders this year that have a value outside the range of adjusted comp values. Somewhere in your next 100 to 150 appraisals, you will probably see this. Last, CU looks for cases with wide ranges of value and support from a single comparable. In layman s terms, this is putting all of your eggs in one basket. Again, this may be justified, but is usually worth a look in order to validate. The key point here is that CU looks at values at both the upper and lower ends of the range of comp values. Overvaluation and undervaluation may lead to higher CU risk scores and appraisal quality flags. Appraisals with any of these characteristics will receive reconciliation messages and higher CU risk scores. In these cases, lenders should confirm that the appraiser has given the most weight to the most relevant comparables in their reconciliation of value. Here is an example 12

22 Here is another appraisal on a loan delivered to Fannie Mae. Even though the comparables are among the best available, Collateral Underwriter generates a reconciliation message on this appraisal. Message 505 states that the appraised value is near the maximum adjusted comparable sale value with support from only that comparable sale. Simply put, the appraiser is putting all of their eggs in one basket. Let s look at some of the factors contributing to this message. The first thing we notice is a very wide range of sale prices, from $510,000 to $720,000. Even after adjustments, the range still extends from under $550,000 to $720,000. Comps #1 and #2 appear quite similar to the subject and are located on the same street. They sold for only $510,000 and $550,000 respectively. Comp #3, however, sold for $720,000. So one of these things is not like the other. Why may that be? Closer examination of this comp shows it has the largest GLA, nearly three times the lot size, and is farthest away from the subject. Research suggests that property values in this neighborhood are dramatically higher than in the subject neighborhood. So not only is it physically the least similar to the subject, but it is located in a higher-priced neighborhood. Nonetheless, the appraiser gives nearly all weight to this comp in reconciliation. So while this is bracketed, the appraiser is giving most weight to the least relevant comparable, and as a result is inflating value. 13

23 So we just covered the four key appraisal components and associated messaging. Those account for the majority of the new Fannie Mae messages and are the heart of Collateral Underwriter. There are two other series of messages: one to highlight potential data quality issues, and the 999s that provide reasons for unscored appraisals The first group is the CU Data Quality messages. These highlight suspected data entry errors. Data Quality Messages include the following: Invalid property addresses, dates in the future or distant past, or failure to report data in UAD format. Implausible sales prices, appraised values, or property features. Keep in mind we re talking about extreme cases here that are most likely the result of typos or truncated XML data. Other messages highlight appraisals with less than three closed sales, multiple uses of the same comp within a single report, or net/gross adjustments that don t match the sum of individual line item adjustments. These Data Quality Messages are very infrequent and can usually be resolved by the appraiser. The second set of messages called Model Error messages, or 999s explain why an appraisal was not scored. Examples of Model Error Messages include: Multiple data errors Unsuccessful geocoding of the subject property or a number of comparable sales Subject attributes that cannot be modeled, or areas with extremely limited sales activity. Geocoding errors are the most common cause of unscored appraisals. It is extremely rare that subject attributes or location cannot be modeled. Lenders should review these messages carefully to determine if the errors can be corrected by the appraiser or if they are unable to be resolved. For example, a home that is actually 20,000 square feet might simply be out of scope for our model. However, if that was a typo and the appraiser meant 2,000 square feet, they can correct and resubmit. It may be possible for CU to eventually geocode the subject property if the appraiser corrects an invalid address. However, if CU can t geocode because the property is brand new construction with an unrecognized address, there may be no possibility of resolution. 14

24 Appraisal Page The main appraisal page includes a comparable sales map, messaging center, details for the appraiserprovided comparables, and links to additional information and functionality. Comparable Sales Map CU Score and Risk Flags Message Center Appraiser-provided comparables Subject and comp characteristics Comparable Rank Datappraisal Collateral Underwriter by Fannie Mae Collateral Underwriter I October

25 Datappraisal The Datappraisal displays the results of CU s comparable selection model. Appraiser-provided comparables are ranked along up to 20 model-selected sales in the subject market. Appraiser-provided and model-selected comps Sortable Column Headers Users can select/deselect model comparables Collateral Underwriter by Fannie Mae Collateral Underwriter I October

26 Configurable Comp Searches Users can perform comparable searches by defining specific parameters for geographic boundaries, time frames, and physical characteristics. Users can draw specific geographic areas from which to choose comps. Users may also set specific parameters for comp physical characteristics and time frame. Collateral Underwriter by Fannie Mae Collateral Underwriter I October

27 Messages The Message center includes the Collateral Underwriter score, flags and messages in addition to UAD/UCDP edits and remaining Fannie Mae Proprietary Messages. CU Risk Score and Flags Detailed data integrity, comp selection, adjustment, and reconciliation messages UAD/UCDP Edits and FNM Proprietary Messages Collateral Underwriter by Fannie Mae Collateral Underwriter I October

28 Aerial and Street-view Photography Users can easily access aerial and street-view photography from the appraisal page with a simple point-and-click of the subject or any comparable on Collateral Underwriter s property map. CU provides a birds-eye view of the subject and comparables. Users can easily move between properties, rotate camera angle, zoom-in/zoom-out, etc. Street view imagery for the subject or any comparable can be accessed through the CU interface. Collateral Underwriter by Fannie Mae Collateral Underwriter I October

29 Local Market Trends Collateral Underwriter s Market Trend and Heat Map functionality provides users detailed insight into local market trends. The Market Trend function shows market appreciation or decline relative to prior sales of the subject property. Heat Maps display Census Block Group-level statistics such as median sales price, price/gla, median days on market, etc. Collateral Underwriter by Fannie Mae Collateral Underwriter I October