Fannie Mae and Appraiser Quality Management An Overview Missouri Appraiser Advisory Council Educational Conference Jefferson City, Missouri April 8, 2016 Greg Stephens, SRA, MNAA, CDEI Chief Appraiser, SVP Compliance Metro-West Appraisal Company Topics include: Seminar Topics Uniform Appraisal Management Uniform Appraisal Data Portal Uniform Appraisal Dataset Appraiser Quality Monitoring System Fannie Mae Warning Letters Proactive Appraisal Practices Seminar Schedule 1:00 PM 1:15 PM: Seminar Overview 1:15-2:20 UMDP, UADP, UAD 2:20-2:30 - Break 2:30 3:40 AQM and Fannie Mae Letters 3:40 3:50 Break 3:50-4:15 4:15-4:30 - Wrap Up 1
Seminar Content Resources The content for this seminar came from personal interviews with Fannie Mae staff, presentations by Fannie Mae staff, Fannie Mae training webinars and videos. Disclaimer: The content of this presentation is comprised of the personal observations of the data provided by Fannie Mae relating to the Uniform Appraisal Data Portal, Uniform Appraisal Dataset, Appraiser Quality Monitoring Program, Collateral Underwriter Program. When It All Started 2003 - Fannie Mae Began Gathering Data 2011 Implemented Uniform Mortgage Data Program Uniform Appraisal Data Portal Uniform Appraisal Dataset 2013 Introduced Appraiser Quality Monitoring 2015 Implementation of 2016 Appraisal Data Sharing Between GSEs 2
Fannie Mae Perspective Prior to UADP: Fannie Mae received 3 bits of information Property Address Borrower Name Backed into appraised value based on LTV Process - Reactive rather than Proactive Process Post- UADP: As of January 2016 Fannie Mae has received over 20 million electronic appraisal reports through the data portal. Fannie Mae Perspective Data Provides In-Depth Analysis of: Individual Appraisers Behavior; Appraiser s Peers Behavior; Fannie Mae Perspective Data Also Provided Framework For: Appraiser Quality Monitoring Program; ; 3
Uniform Mortgage Data Program Uniform Mortgage Data Program 4
Uniform Mortgage Data Program Uniform Collateral Data Portal Uniform Collateral Data Portal 5
Uniform Appraisal Dataset Uniform Appraisal Dataset Uniform Appraisal Dataset 6
Uniform Appraisal Dataset Appraisal Quality Monitoring (AQM) Appraisal Quality Monitoring (AQM) 7
Appraisal Quality Monitoring (AQM) Appraisal Quality Monitoring (AQM) Appraisal Quality Monitoring (AQM) 8
Appraisal Quality Monitoring (AQM) Appraisal Quality Monitoring (AQM) Appraisal Quality Monitoring (AQM) 9
Appraisal Quality Monitoring (AQM) Q32. Is it acceptable for an appraiser to use sales that are not truly comparable to the subject? Yes. If there is a shortage of truly comparable sales in the area where the subject property is located, either due to the nature of the property improvements or the relatively low number of sales transactions in the neighborhood, the appraiser might need to use as comparable sales, properties that are not truly comparable to the subject property. In some situations, sales of properties that are not truly comparable to the subject may simply be the best available and the most appropriate for the appraiser s analysis. The use of these sales is acceptable provided the appraiser adequately documents the analysis and explains why these sales were used. This may often be the case in rural locations where the best and most appropriate sales may not be truly comparable to the subject being appraised. Appraisal Quality Monitoring (AQM) Q33. Can the appraiser use comparable sales that closed over twelve months ago? Yes. The best and most appropriate sales may not always be the most recent. A sale more than 12 months old may be more appropriate in situations when market conditions have impacted the availability of recent sales as long as the appraiser reflects the changing market conditions. Additionally, older comparable sales that are the best indicator of value for the subject property can be used if they are appropriate. For example, if the subject property is located in a rural area that has minimal sales activity, the appraiser may not be able to locate three truly comparable sales that sold within the last twelve months. In this case, the appraiser may use older comparable sales as long as he or she explains why they are being used. Q34. Are there any limitations to the distance that a comparable sale may be located from the subject? No. Comparable sales located a considerable distance from the subject property can be used if they represent the best indicator of value for the subject property. In such cases, the appraiser must use his or her knowledge of the area and apply good judgment in selecting the comparable sales that are the best indicators of value, and the appraisal must include an explanation of why the particular comparables were selected. This may be especially important for appraising rural housing since rural properties often have large lot sizes, and rural locations can be relatively undeveloped. Appraisal Quality Monitoring (AQM) https://www.fanniemae.com/content/faq/appraiser-quality-monitoring-faqs.pdf See Appendix A 10
Appraisal Quality Monitoring (AQM) Q1. What actions will Fannie Mae take with respect to specific appraisers? Yes. Fannie Mae will provide information directly to appraisers whose appraisal reports exhibit a pattern of minor inconsistencies, inaccuracies, or data anomalies. The intent and expectation of communicating these issues to appraisers is for training and educational purposes, and to provide them with an opportunity to improve their work. Future appraisal reports from those appraisers will be monitored to assess improvement. Fannie Mae also has developed a process to identify appraisers whose appraisal reports exhibit egregious issues. In those cases, Fannie Mae will contact the appraiser and the lender that delivered the loan(s) informing them that either 100% of the loans submitted with appraisals from the identified appraiser will be reviewed by Fannie Mae in the post-purchase file review process or Fannie Mae will no longer accept loans with appraisals completed by the specific appraiser. Appraisal Quality Monitoring (AQM) Q2. Why will Fannie Mae correspond directly with appraisers without notifying lenders? One of our objectives is to improve the quality of appraisal data submissions. Training and educating the appraiser through targeted correspondence is expected to be an effective way to improve data quality in many instances. Q4. Will appraisers have the opportunity to appeal or offer a rebuttal? Yes. Fannie Mae will offer a formal rebuttal process for appraisers whose work has been identified as requiring 100% review or whose work product is no longer acceptable to Fannie Mae. Appraisers who are sent letters initially for reports that exhibit a pattern of minor inconsistencies, inaccuracies, or data anomalies will not have a formal rebuttal process because the letter is intended for educational purposes to provide them with an opportunity to improve their work; however, the appraiser may choose to respond to the letter. Appraisal Quality Monitoring (AQM) Q15. Will Fannie Mae report to state regulatory boards and/or law enforcement? Matters involving suspected fraud will be reported to Fannie Mae s Mortgage Fraud group, consistent with company policy. That group will notify state appraiser licensing boards in appropriate circumstances, and provide information to law enforcement agencies consistent with applicable rules and guidelines for reporting suspected fraud. 11
Inaccuracies and Inconsistencies Looking For Patterns Self-Discrepancies Inaccuracies and Inconsistencies An appraiser used the same comp six times: Another Appraiser used a comp nine times: Twice as a Q3 Four times as a Q2 4 times as a Q4 4 times as a Q3 1 time as a Q2 An appraiser used the same comparable sale 25 times and 22 times there were changes. Subjective 12
Credible Credible How many appraisal reports can you do a day? 1 2 3 4+ Credible 13
Appraisal Messaging See Appendix B https://www.fanniemae.com/content/release_notes/ucdp change notification 01262015.pdf Hard Stops Hard Stops 14
Warning Letters Warning Letters Accessing Fannie Mae Site www.efanniemae.com 15
Accessing Appraiser Page Accessing Appraiser Page Accessing Appraiser Page 16
Accessing Appraiser Page Accessing Appraiser Page Accessing Appraiser Page 17
Accessing Appraiser Page Accessing Fannie Mae CU Accessing Fannie Mae CU 18
Fannie Mae Site www.efanniemae.com 19
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Data Discrepancy Messages Data Discrepancy Messages 21
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(CU) FAQs Updated December 1, 2014 (CU ) is a proprietary appraisal risk assessment application developed by Fannie Mae to support proactive management of appraisal quality. CU is the latest addition to Fannie Mae s suite of risk management tools for lenders, and will be available to them in January 2015. https://www.fanniemae.com/content/faq/collateral underwriter faqs.pdf See Appendix C 23
Q1. How is CU feedback provided? CU feedback is available in two ways: 1) Real-time feedback in UCDP: Effective January 26, 2015, a CU risk score, flags, and messages are provided in real time after an appraisal is submitted to Fannie Mae through the Uniform Collateral Data Portal (UCDP ). The CU risk score, flags, and messages are provided on the Fannie Mae tab and the UCDP Submission Summary Report. Any UCDP user that submits an appraisal to Fannie Mae has access to the CU risk score, flags, and messages. 2) CU web-based user interface: For in-depth appraisal analysis, the full CU application is available to Fannie Mae sellers via a web-based user interface (registration required). Q2. How should lenders use CU? CU is a tool intended to assist lenders in underwriting appraisals. CU is effectively predictive of appraisal defects, but there are false positives. Well-informed human judgment should take precedence over automated results. The various CU tools can be used to validate or dismiss potential red flags. The risk analysis performed by CU is for use by the lender in their analysis of the appraisal report; excerpts may be shared with the appraisers in proper context upon completion of the lender s due diligence review. 24
Q5. If lenders are prohibited from providing copies or displays of reports that contain CU findings to third parties, can they still use Lender Agents to work on their behalf? Yes. Lender Agents who submit appraisals to UCDP on behalf of their lender clients have access to the CU findings through the Fannie Mae tab in UCDP, on the Submission Summary Report (SSR), or through a direct integration with UCDP if applicable. Both lenders and Lender Agents acting on lenders behalf are prohibited from distributing the CU Print Report or the SSR, making demands of or providing instruction to AMCs/appraisers based solely on the CU automated output, or using CU to interfere with the independent judgment of the appraiser. Q6. Are lenders and appraisers expected to address all 20 alternative comparable sales that may be identified by CU? No. CU generates up to 20 alternative comparables for the purpose of providing context for the appraisal report reviewer. Fannie Mae s expectation is not that all alternatives be addressed or that only the CU topranked comps be used. Lenders may examine the alternative comparables in the course of reviewing an appraisal report to determine if their use may result in a different conclusion about value from that provided by the appraiser. Q7. Does CU favor lower-priced comparables and encourage under-valuation? No. Appraiser-provided comparables are analyzed by CU and ranked against a pool of available sales based on physical characteristics, location, and sale date. The sale prices of these comparables is not a factor in the ranking. High CU risk scores may be due to potential under-valuation, as well as potential over-valuation, or other factors. CU does not take a lower is better approach. Q11. Is use of CU mandatory for Fannie Mae sellers? Fannie Mae strongly encourages lenders to utilize the CU risk scores, flags, and messages provided upon submission of an appraisal to UCDP, and to access the web-based application for in-depth analysis, but use of CU is not required. Review the available training and other resources for more information about the benefits of the CU feedback. Q12. What is meant by a CU risk score? CU will provide a numerical risk score from 1.0 to 5.0, with 1 indicating the lowest risk and 5 indicating the highest risk. Risk flags and messages identify risk factors and specific aspects of the appraisal that may require further attention. Details are available in the elearning course Understanding the Collateral Underwriter Risk Score, Flags, and Messages Q14. Are there appraisals that will not receive a CU risk score? CU analyzes appraisals in UAD format on appraisal forms 1004 (Uniform Residential Appraisal Report) and 1073 (Individual Condominium Unit Appraisal Report). 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. 25
Q15. How does CU handle new construction? CU does not treat new construction any differently than existing properties. Q17. How are the CU risk scores, flags, and messages different from the current Fannie Mae Proprietary Messages in UCDP? CU is model-based and performs a more comprehensive analysis of data integrity, comparable selection, adjustments, and reconciliation. Q20. Are appraisals rescored when resubmitted to UCDP with corrections? Yes. Upon resubmission CU analyzes the revised appraisal as if it were a new appraisal. Depending on the nature of the revisions, the CU risk score, flags, and messages may or may not change. Note, however, that use of a manual override to clear a hard stop in UCDP would not result in any changes to the CU risk score. Q24. Do appraisers have access to CU? No! Appraisers will not have access to CU. CU was developed as an appraisal review tool for internal analysis and is now being made available to Fannie Mae lenders for review of appraisals they have submitted through UCDP. Appraisers are welcome to use the resources on the CU web page, including viewing the recorded on-demand trainings: Introduction to provides basic information about CU s features, including screenshots. Understanding the CU Risk Score, Flags, and Messages provides information to help lenders use the CU feedback in their appraisal review process. CU User Interface Basic Training covers basic use of CU functionality and navigation for end users of CU s web-based user interface for efficient and effective use 26
Q25. Will the use of CU as an appraisal review tool by Fannie Mae lenders result in more work for appraisers, who may be asked to make changes based on the CU feedback? Fannie Mae s current requirements and expectations for lenders have not fundamentally changed. The Fannie Mae Selling Guide states in Section B4 1.1 02: Lender Responsibilities, that the lender is responsible for (among other requirements): ensuring the appraiser has utilized sound reasoning and provided evidence to support the methodology chosen to develop the value opinion, particularly in cases that are not covered by Fannie Mae policy In the process of underwriting the appraisal, lenders should ask appraisers to provide any clarifications or updates required to satisfy the lender that Fannie Mae s requirements are met. A number of appraisal review tools are available in the market and in use by lenders. Appraisers also have access to much of the market data used in the course of appraisal review and can reasonably be expected to anticipate many questions that might arise, and address them proactively in comments on the appraisal report. Appraisers that make a good faith effort to use the most similar comparables, provide accurate and consistent data, and support their adjustments with market data and analysis can generally expect a minimum of CU feedback that would cause a follow up request from the reviewer. CU s analysis may in some cases help the lenders appraisal reviewers better understand the appraiser s rationale and possibly reduce back and forth between the lender and the appraiser. CU Risk Score 27
CU Interface CU Comparable Selection CU Comparable Selection CU does not accept or reject appraisal reports or characterize an appraisal as good or bad. The CU risk score and messages pertain to risk and identify potential defects in the appraisal report. The lender is not obligated to clear or override the CU messages. CU s selection of comparable sales considers the relevance of each potential comparable sale based on physical similarity, time, and distance. The selection process is not based on the relative risk or sale price of a comparable sale nor is there a lower is best approach. In fact, CU may assign a high risk score to an appraisal when the model identifies alternative sales that are potentially more relevant than the comparable sales used by the appraiser, regardless of whether the alternative sales are higher or lower in price. Fannie Mae does not instruct or suggest to lenders that they ask the appraiser to address all or any of the 20 comparables that are provided by CU for most appraisals. It is also not Fannie Mae s expectation that appraisals should contain only CU s top ranked comparable sales. In the majority of cases, there may be no material difference between comparable sales utilized by the appraiser and those identified by CU. Before asking the appraiser to consider any alternative sales, it is imperative that the lender analyze the relevance of the sale and determine if the use of such sale would result in any material change to the appraisal report. If the lender determines that there would be no material change, then they should not ask the appraiser to make revisions. Appraisers who make a good faith effort to provide accurate data, select appropriate comparables, make market based adjustments, and give weight to the most relevant comparables should feel no significant negative impact as a result of the use of CU. 28
CU Location & Distance CU Location & Distance Inaccuracies and Inconsistencies 29
Inaccuracies and Inconsistencies CU Line Item Adjustments CU Line Item Adjustments 30
Net and Gross Adjustments Net and Gross Gone See Appendix D Condition Ratings Condition Ratings The Uniform Appraisal Dataset (UAD) includes definitions for Condition Ratings C1 C6. Fannie Mae will accept loans secured by properties with any condition rating (provided all other requirements are met), except that a C6 rating must be subject to and subsequently reflect the condition rating of the repaired property. It is important to note that loans secured by properties with C5 condition ratings are deliverable to Fannie Mae with as-is reports, provided the property meets the following C5 definition: The improvements feature obvious deferred maintenance and are in need of some significant repairs. Some building components need repairs, rehabilitation, or updating. The functional utility and overall livability are somewhat diminished due to condition, but the dwelling remains useable and functional as a residence. Note: Properties can have the same rating or description and still require an adjustment. It should be noted that this does not only apply to Condition and Quality ratings and can apply to other ratings or descriptions as well. For example, all water views may not be equal. In this instance, an adjustment should be made and explained in the Additional Comments section of the form or in an addendum. 31
Recognized Techniques Support Where Did You Get That Number? Support 85 50 70 45 65 90 60 100 80 75 55 35 32
Lack of Support Most Common Responses From Appraisers My Supervisor Their Supervisor Guessed Plucked It From Air What My Peers Are Doing That s Just My Opinion Years of Experience USPAP Standards Rule 1 3 In appraising, a loss in property value from any cause; the difference between the reproduction or replacement cost of an improvement on the effective date of the appraisal and the market value of the improvement on the same date The Dictionary of Real Estate Appraisal 33
Accrued depreciation is the difference between the cost of reproducing the building new and its present day value Page 230 The Appraisal of Real Estate Frederick Morrison Babcock. B.S. 1924 Recognized Technique Land Value and Depreciated Site Improvements 34
60 57 49 55 65 90 60 54 100 55 55 35 $30,000 Depreciation $10,000 Value Recognized Techniques Data Analysis Statistical Analysis Cost Related Adjustments Capitalization of Income Differences Market Survey 35
Recognized Techniques What is regression? The Dictionary of Real Estate Appraisal, Appraisal Institute defines regression analysis as: A method that examines the relationship between one or more independent variables and a dependent variable by plotting points on a graph; used to identify and weight analytical factors and to make forecasts. Utilize Tools Utilize Tools 36
Recognized Techniques Capture MLS Data Import into Excel 37
Scattered Graph 400000 Closing Price 350000 300000 250000 200000 150000 100000 50000 0 0 500 1000 1500 2000 2500 3000 3500 4000 4500 Linear Regression SUMMARY OUTPUT Multiple Regression Regression Statistics Multiple R 0.931347757 R Square 0.867408644 Adjusted R Square 0.86316572 Standard Error 19201.79402 Observations 130 ANOVA df SS MS F Significance F 3.0151E+11 75377576052 204.4365551 7.92944E 54 Regression 4 Residual 125 46088611699 368708893.6 Total 129 3.47599E+11 Coefficients Standard Error t Stat P value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 87959.97319 966777.9387 0.090982603 0.9276521 1825413.554 2001333.5 1825413.554 2001333.5 Apx Ttl SqFt 46.94987081 3.613748532 12.9920138 0.0000000 39.79781396 54.10192765 39.79781396 54.10192765 Year Built 44.63546686 482.7154615 0.092467448 0.9264747 999.9892748 910.718341 999.9892748 910.718341 Bedrooms 13259.60682 3983.44423 3.328678915 0.0011468 5375.876303 21143.33733 5375.876303 21143.33733 Full Baths 15393.35719 4758.408473 3.234980199 0.0015568 5975.876258 24810.83812 5975.876258 24810.83812 38
Multiple Regression Don t Give Up www.khanacademy.org You Can Learn www.khanacademy.org 39
THE BREAKFAST CLUB 40
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Diversify Divorce People will continue to die (Estate Work) Roads will continue to be built or widened (DOT) Relocated employees (ERC) Have good support and be able to support and explain your work. And finally 43