GAAR Harness the Power of Technology to Create the BEST Appraisal Reviews Possible

GAAR Harness the Power of Technology to Create the BEST Appraisal Reviews Possible Presented by FNC March 21, 2012

INTRODUCTION General Information: Conference Web Page Audio & Supporting Documents Submit questions to: marketing@fncinc.com Technical Issues with Today s Webinar: ncbrown@fncinc.com Survey 2

GAAR TEAM PRESENTERS Kathy Coon, SRA Chief Appraiser-Director, Appraisal Quality Control kathy@fncinc.com 662.236.8136 Gwen Magrisso Manager GAAR gmagrisso@fncinc.com 662-236-8140 3

AGENDA GAAR: Overview GAAR Series: Compliance, Risk, External Examples DNA Rules Critical Rules Leveraging GAAR in the Review Process Appraisal Score GAAR: Viewer QC Vigilance Appraiser GAAR Compliance GAAR Advantages Wrap Up 4

GENERALLY ACCEPTED APPRAISAL RULES GAAR Overview Kathy Coon

GAAR A TOOL GAAR is an automated appraisal review and scoring tool. GAAR does not: Determine value Determine the acceptance or rejection of an appraisal Make any decisions on the resolution of the GAAR alerts Replace underwriters, reviewers, appraisers 6

THE IMPORTANCE OF COLLATERAL Key to security of each individual loan Key in the security and success of banks and mortgage lenders Key to stability of economy 7

THE SYSTEM WASN T WORKING Issues: Large volumes of residential loans Pressure to close loans quickly Lack of tools/lack of time to closely review appraisal reports Minimal time allocated to prefunding reviews Industry underwriting guidelines insufficient Complete dependence on appraisers 8

THE SYSTEM WASN T WORKING Results: Overvalued properties Fraud Random appraisal reviews post-closing were ineffective Costly repurchases due to valuation issues If collateral overvalued, loan defaults more costly 9

FNC RESPONDED TO THE CHALLENGE Using highly advanced technology, FNC developed a comprehensive, welldocumented system of automated rules to: Thoroughly review appraisal reports preclosing, yet not delay the process. Provide more thorough post-closing reviews with the ability to target riskier appraisals. This system of automated rules is known as Generally Accepted Appraisal Rules (GAAR ) 10

HISTORY OF GAAR FNC began developing appraisal review rules in 1999 GAAR Version 1.0 for the Uniform Residential Appraisal Report (URAR) was developed in 2004 GAAR 6.1 is the current version 11

APPRAISAL FORMS SUPPORTED BY GAAR Uniform Residential Appraisal Report (Fannie Mae 1004/Freddie Mac 70) Manufactured Home Appraisal Report (Fannie Mae 1004C/Freddie Mac 70B) Exterior Only Inspection Residential Appraisal Report (Fannie Mae 2055/Freddie Mac 2055) Individual Condominium Unit Appraisal Report (Fannie Mae 1073/Freddie Mac 465) 12

APPRAISAL FORMS SUPPORTED BY GAAR Exterior-Only Inspection Individual Condominium Unit Appraisal Report (Fannie Mae 1075/Freddie Mac 466) Small Residential Income Property Appraisal Report (Fannie Mae 1025/Freddie Mac 72) Market Conditions Addendum to the Appraisal Report (Fannie Mae 1004MC/Freddie Mac 71) 13

APPRAISAL FORMS SUPPORTED BY GAAR UAD FORMATTING* Uniform Residential Appraisal Report (Fannie Mae 1004/Freddie Mac 70) Exterior Only Inspection Residential Appraisal Report (Fannie Mae 2055/Freddie Mac 2055) Individual Condominium Unit Appraisal Report (Fannie Mae 1073/Freddie Mac 465) Exterior-Only Inspection Individual Condominium Unit Appraisal Report (Fannie Mae 1075/Freddie Mac 466) *UAD-Uniform Appraisal Dataset 14

OTHER FORMS SUPPORTED BY GAAR Client Specific/Custom Forms Desktop Valuation Forms BPO Forms ( GAAR-like review rules) 15

GAAR SERIES - INTRODUCTION Compliance Rules Series Basic (Fannie Mae, Freddie Mac, USPAP and Regulatory Compliance) UAD (The Uniform Appraisal Dataset) 1004 MC (Market Conditions Addendum) FHA VA Risk Rules Series External Rules Series 16

GAAR SERIES NAMING CONVENTION The GAAR naming convention was developed to ensure ease and familiarity for the user. This part of the rule name refers to the specific GAAR Series C= Compliance Rule R= Risk Rule MC= Market Conditions FHA= FHA Rule VA= VA Rule EXT=External Rule 17

GAAR SERIES NAMING CONVENTION The GAAR naming convention was developed to ensure ease and familiarity for the user. This part of the rule name refers to the section of the specific appraisal report form: SUB= Subject CONT = Contract N = Neighborhood S = Site IMP = Improvements SCA = Sales Comparison Approach **examples above relate to the URAR form 18

Explanations of GAAR Series Examples of Rules

DEFINE: SCREENING - RULE FIRINGS - ALERTS Screening: Term used for the automated review of the Rules. Rule Firings: Term used when any of the Rules do not clear the automated review. Alerts: Term used to describe the Rules that fired. Just because a Rule fired does not mean the appraiser did something wrong. Multiple alerts do not mean that the appraisal report fails to meet industry guidelines. Multiple alerts do not mean the value is not supported. 20

GAAR COMPLIANCE SERIES Compliance Series: Basic Screens appraisals for: Fannie Mae and Freddie Mac guidelines Uniform Standards of Professional Appraisal Practice (USPAP) Banking and Thrift regulatory compliance 21

GAAR COMPLIANCE SERIES UAD & 1004MC Compliance Series: UAD (The Uniform Appraisal Dataset) Screens appraisals for: GAAR Compliance UAD standardized responses Compliance Series: 1004MC (Market Conditions Addendum to the Appraisal Report) Screens appraisals for: GAAR Compliance Consistency of data contained within the appraisal form 22

GAAR COMPLIANCE SERIES FHA & VA Compliance Series: FHA Screens appraisals for: GAAR Compliance Additional FHA-specific rules Compliance Series: VA Screens appraisals for: GAAR Compliance Additional VA-specific rules 23

GAAR COMPLIANCE SERIES CONTRACT FNC-C-CONT-003-01 I did (did not) analyze the contract for sale for the subject purchase transaction: The did not box is checked, And the Assignment Type is noted as: Purchase Transaction 24

GAAR COMPLIANCE SERIES NEIGHBORHOOD FNC-C-N-012-01 NEIGHBORHOOD: One-Unit Housing Trends: Property Values: The "Declining" box is checked 25

GAAR COMPLIANCE SERIES SALES COMPARISON APPROACH FNC-C-SCA-090-01 Sales or Financing Concessions: Comparables: Field for any comparable has a positive entry 26

GAAR COMPLIANCE SERIES - UAD IMPROVEMENTS FNC-C-IMP-309-06 Describe the condition of the property (including needed repairs, deterioration, renovations, remodeling, etc.): The field does not contain one of the following terms for the subject's overall condition rating: C1, C2, C3, C4, C5 27

GAAR COMPLIANCE SERIES - UAD SALES COMPARISON APPROACH FNC-C-SCA-105-04 Location: Subject: The field does not contain one of the following rating terms: A, B, N 28

GAAR COMPLIANCE SERIES - UAD Compliance solely with UAD formatting does not ensure a compliant appraisal report: This document is not intended as a sole quality review tool for appraisal reports. Compliance with the UAD and UCDP specifications does not relieve lenders of their responsibility to meet the GSE s appraisal related policies and guidelines. * *Fannie Mae and Freddie Mac Uniform Appraisal Dataset Specifications. Field-Specific Standardization Requirements Document Version 1.2 29

GAAR COMPLIANCE SERIES - FHA CONTRACT FNC-FHA-CONT-009-01 CONTRACT: Contract Price$: The Contract Price field is blank or contains terms other than refinance, refi, And the box is checked Refinance Transaction for the Assignment Type in the Subject section 30

GAAR COMPLIANCE SERIES - FHA SITE FNC-FHA-S-084-01 Off-Site Improvements - Type: Street: The field does not contain any of the terms: asphalt, blacktop, concrete, gravel, macadam 31

GAAR COMPLIANCE SERIES - FHA IMPROVEMENTS FNC-FHA-IMP-309-04 Describe the condition of the property (including needed repairs, deterioration, renovations, remodeling, etc.): Lead-Based Paint Hazards: Field contains any of the terms: lead, chipping, defective, peeling, or scaling And the field for Year Built contains a numeric entry less than 1978 32

GAAR COMPLIANCE SERIES - VA SITE FNC-VA-S-075-01 Site: Utilities: Sanitary Sewer: The "Other" box is checked And the Describe field contains any of the following terms: Cisterns, Community, Pit Privies, Springs 33

GAAR COMPLIANCE SERIES - VA SALES COMPARISON APPROACH FNC-VA-SCA-282-01 Energy Efficient Items: The Subject field contains the term: SOLAR And a minimum of one of comparables 1-3 does not contain the same term 34

GAAR COMPLIANCE SERIES 1004MC Market Conditions Addendum to the Appraisal Report INVENTORY ANALYSIS (Market Conditions Inventory Analysis) FNC-C-MC-INV-004-00 Inventory Analysis: Overall Trend: Total # of Comparable Sales (Settled) There is no box checked 35

GAAR COMPLIANCE SERIES 1004MC Market Conditions Addendum to the Appraisal Report MARKET RESEARCH and ANALYSIS (Market Conditions REO) FNC-C-MC-REO-001-00 Are foreclosure sales (REO sale) a factor in the market? There is no box checked 36

GAAR COMPLIANCE SERIES 1004MC Market Conditions Addendum to the Appraisal Report MARKET RESEARCH and ANALYSIS (Market Conditions Financing) FNC-C-MC-FIN-001-01 Seller-(developer, builder, etc.)paid financial assistance prevalent? The YES box is checked 37

GAAR COMPLIANCE SERIES The advantage of GAAR Compliance: An automated version of industry minimum guidelines Results in a more thorough review of basic industry guidelines Basic underwriting guidelines are not sufficient to screen risky appraisals. 38

GAAR RISK SERIES The GAAR Risk Series was developed to provide a more in-depth review of the appraisal reports beyond compliance. The FNC GAAR team developed a series of automated rules that could: Check for inconsistencies and red flags Simultaneously check multiple fields Review for tolerances 39

GAAR RISK SERIES The Risk Rules alert to the possibility of excessive adjustments, misleading information, and unsupported values. The Risk Rules are the most advanced and comprehensive guidelines created to assist in screening appraisals beyond basic underwriting criteria. 40

GAAR RISK SERIES The Risk Series screens appraisals for: Inconsistent data found in related fields on the appraisal report forms Red flags, which may indicate potentially overvalued and/or fraudulent appraisals GAAR Risk Series is unique to the industry, providing in-depth rules not published in industry sources or guidebooks. 41

GAAR RISK SERIES SITE FNC-R-S-048-01 Utilities: Electricity: The "Other" box is checked for Electricity, And the Site Area is reported in acres, And the "Urban" or the "Suburban" box is checked for Location in the Neighborhood Characteristics. 42

GAAR RISK SERIES IMPROVEMENTS FNC-R-IMP-309-01 In response to: Describe the condition of the property (including needed repairs, deterioration, renovations, remodeling, etc.): The field contains the term: broken And the "as is" box is checked in response to This appraisal is made in the Reconciliation section. 43

GAAR RISK SERIES SALES COMPARISON APPROACH FNC-R-SCA-069-02 Sale Price: Comparables The Sale Price fields of two of comparables 1-3 contain entries less than the subject property s Opinion of Market Value by greater than 10% 44

GAAR RISK SERIES SALES COMPARISON APPROACH FNC-R-SCA-069-04 Sale Price: Comparables The 1st 3 comparables have Sale Prices greater than the subject's Opinion of Market Value 46

GAAR RISK SERIES SALES COMPARISON APPROACH FNC-R-SCA-219-02 Room Count: Bedrooms: Subject: The subject has 1 bedroom And two of comparables 1-3 have more than 1 bedroom. 47

GAAR RISK SERIES SALES COMPARISON APPROACH HISTORY FNC-R-SCAHIS-030-01 Price of Prior Sale/Transfer: Comparables The Price of Prior Sale is higher than any comparable s Sale Price reported in appraisal. 48

GAAR EXTERNAL SERIES Gwen Magrisso

GAAR EXTERNAL SERIES Compares information from external data sources to uncover inaccuracies in the appraisal report Verifies information contained within the appraisal report Helps validate the comparables Is the data in the appraisal report accurate? Do the physical characteristics for the subject property and comparables as noted in the appraisal report differ significantly from information contained in public records? 50

GAAR EXTERNAL SERIES Provides additional information about the subject property and its market area Includes a market-based price trend and momentum analysis to identify declining trends 51

GAAR EXTERNAL SERIES FNC-EXT-PROP-000-03: The Subject Property sold within the last 36 months from effective date of appraisal 52

GAAR EXTERNAL SERIES FNC-EXT-PROP-000-16: Subject Property Sales History: The most recent recorded transaction is a Distressed Sale (11/13/10). A Distressed Sale is typically a Lender Sale or another type of Court Ordered Sale 53

GAAR EXTERNAL SERIES FNC-EXT-PROP-000-18: Subject Property: Subject Property is located in a Non- Disclosure State (name of state) 54

GAAR DNA Rules Draft Not Acceptable Kathy Coon

GAAR DNA RULES DNA (Draft Not Acceptable) Rules: Specific rules to ensure that the appraiser has completed the appraisal form prior to it being routed to the underwriter or reviewer. These are referred to as DNA based on system status Each client determines rules to be classified as DNA. 56

GAAR DNA RULES FNC-C-REC-001-00: RECONCILIATION: This appraisal is made: There is no box checked Message to the Appraiser: RECONCILIATION: This appraisal is made: Check the appropriate box 57

GAAR DNA RULES FNC-C-RECDATE-000-00: RECONCILIATION: Effective Date of the Appraisal: The field is blank Message to the Appraiser: RECONCILIATION: Date of the inspection and the effective date of this appraisal: Complete the field 58

GAAR DNA RULES FNC-C-CERT-003-00: CERTIFICATION: APPRAISER: Signature: The field is blank Message to the Appraiser: CERTIFICATION: APPRAISER: Signature: Complete the field 59

GAAR DNA RULES - UAD FNC-C-S-006-01: SITE: Area: The site area is equal to or exceeds 43,560 sq. ft. And the field does not contain the site size reported in acreage (ac) Message to the Appraiser: SITE: Area: Complete the field with site area reported in acreage (ac) 60

GAAR DNA RULES - UAD FNC-C-CERT-054-00: CERTIFICATION: LENDER/CLIENT: Name: The field is blank Message to the Appraiser: CERTIFICATION: LENDER/CLIENT: Name: Complete the field with the name of the Appraisal Management Company. If No AMC involved enter "No AMC" 61

GAAR CRITICAL RULES Kathy Coon

GAAR CRITICAL RULES GAAR CRITICAL Rules Specific rules to be reviewed regardless of the Appraisal Score. Specific rules to ensure that an appraisal or underwriting stipulation has been met prior to closing. The client determines rules to be classified as Critical. 63

GAAR CRITICAL RULES FNC-C-CONT-021-00: CONTRACT: Is there any financial assistance (loan charges, sale concessions, gift or down payment assistance, etc.) to be paid by any party on behalf of the borrower? The YES box is checked 64

GAAR CRITICAL RULES FNC-C-S-084-01: SITE: Off-Site Improvements-Type: Street: The PRIVATE box is checked 65

GAAR CRITICAL RULES FNC-C-S-129-01: SITE: Are there any adverse site conditions or external factors (easements, encroachments, environmental conditions, land uses, etc.)? The YES box is checked 66

GAAR CRITICAL RULES FNC-C-IMP-030-01: IMPROVEMENTS: General Description: Effective Age (Yrs): The effective age reported (10) is greater than the actual age (3). 67

GAAR CRITICAL RULES FNC-C-IMP-066-01: IMPROVEMENTS: Foundation: Evidence of Infestation; Dampness; and/or Settlement box(es) checked. 68

GAAR CRITICAL RULES FNC-C-REC-001-01: RECONCILIATION: This appraisal is made "subject to (following required inspection... ) 69

GAAR Leveraging in Review Process Gwen Magrisso

AUTOMATED REVIEW PROCESS 1. Appraiser uploads appraisal report. 2. Data is extracted from appraisal forms into standard format. 3. GAAR is run on appraisal data and DNA issues are identified. The appraisal is returned to the appraiser with a list of DNA items to correct. 4. GAAR Series is run on the final submitted appraisal to identify issues and potential stipulations. 71

AUTOMATED REVIEW PROCESS 5. The Appraisal Score is run. 6. Based on GAAR firings and the Appraisal Score, the appraisal is routed for review. 7. A detailed review is conducted using QC Vigilance and the GAAR Viewer. 8. A final report is provided to underwriter with stipulations and valuation analysis. 72

SCORING FNC has developed a score based on GAAR: Appraisal Score Provides an indication of valuation concerns and/or items requiring follow up. 73

APPRAISAL SCORE Based on GAAR Statistically derived weights for the rules Provides assistance with automated review and underwriting of the appraisal. 74

GAAR VIEWER Tool to view the rule firings on the appraisal form Shows rule description and field(s) related to the rule 75

QC VIGILANCE Tool for QC review Shows subject and comps from the appraisal and also other recent sales Creates grid for analysis Produces a report on results 76

GAAR MANUAL Helps user understand how the rule functions Provides recommended follow-up action for reviewer and appraiser Includes supporting documentation for the rule Interactive tool built into GAAR Viewer 77

GAAR RISK MANUAL 78

APPRAISER GAAR COMPLIANCE Based on GAAR Compliance Rules Provides flags for the appraiser Includes marketrelated external rules Available on CDNA Portal 79

GAAR Advantages Kathy Coon

GAAR - ADVANTAGES Efficient pre-closing and post-closing appraisal reviews More thorough than manual reviews Pre-closing reviews: Can catch potential appraisal problems prior to funding loan Provide more thorough reviews without delay in closing loans Shifts focus to preventing losses 81

GAAR - ADVANTAGES 100% of appraisals reviewed consistently Assists in fair lending compliance (every appraisal reviewed the same way, with the same rules) Assists in ongoing training for new or inexperienced reviewers Enables users to focus on problem appraisals for more thorough desk or field reviews 82

GAAR - ADVANTAGES Assists in communicating with appraisers Provides automated tracking and storage of GAAR results External Rules validate the information contained within the appraisal report External Rules provide a variety of market trends indicators 83

GAAR Wrap-up & Submission of Questions Kathy Coon

FOR MORE INFORMATION Diana Richardson Sales Manager diana@fncinc.com 662.236.8310 86