Fannie Mae Update: Presenter: Julie Jones August 23, 2017 2017 Fannie Mae. Trademarks of Fannie Mae. 1
Disclaimer An Important Note about the Seminar Content While every effort has been made to ensure the reliability of the session content, Fannie Mae s Selling and Servicing Guides and their updates, including Guide Announcements and Release Notes, are the official statements of Fannie Mae s policies and procedures and control in the event of discrepancies between the information in this seminar and the Guides. 2017 Fannie Mae. Trademarks of Fannie Mae. 2
Content Appraisal Quality Collateral Underwriter Appraisal Quality Monitoring Fact vs. Fiction Day 1 Certainty Recent Policy Updates Appraisal & Appraiser Volumes Recommendations Resources Questions 2017 Fannie Mae. Trademarks of Fannie Mae. 3
APPRAISAL QUALITY 2017 Fannie Mae. Trademarks of Fannie Mae. 4
Why Is Appraisal Quality Important? Correct and complete data is essential to establishing an accurate value. A misleading appraisal impedes the underwriter s ability to make a sound decision. Poor quality undermines the appraiser s credibility, casting doubt on his/her body of work. Current market conditions mask collateral risk. Analysis of historical data suggests correlation between overvaluation and risk of default. Value is the V in LTV. 2017 Fannie Mae. Trademarks of Fannie Mae. 5
Key Appraisal Components RECONCILIATION Are the most relevant comps given most weight? ADJUSTMENTS Are adjustments based on typical market reaction? COMP SELECTION Are the appraiser s comps representative of the subject? DATA INTEGRITY Are the subject and comparables accurately described? PROPERTY ELIGIBILITY Is the property eligible for delivery to Fannie Mae? The lender must ensure the property meets our property eligibility guidelines and that the appraisal accurately reflects the property s condition, value, and marketability. 2017 Fannie Mae. Trademarks of Fannie Mae. 6
Unacceptable Appraisal Practices Development of or reporting an opinion of market value that is not supported by market data or is misleading Misrepresentation of the physical characteristics of the subject property, improvements, or comparable sales Failure to comment on negative factors with respect to the subject neighborhood, the subject property, or proximity of the subject property to adverse influences Selection and use of inappropriate comparable sales Failure to use comparable sales that are the most locationally and physically similar to the subject property 2017 Fannie Mae. Trademarks of Fannie Mae. 7
Lender Appraisal Responsibilities * The lender is responsible for ensuring that the subject property provides adequate collateral for the mortgage. The lender must provide a complete appraisal report that accurately reflects the market value, condition, and marketability of the subject property. Compliance with the Appraiser Independence Requirements (AIR) Appraiser selection Ensuring the appraiser has utilized sound reasoning and provided evidence to support the methodology chosen to develop the value opinion Continually evaluating the appraiser s work through the quality control process * Refer to Selling Guide for full requirements and details 2017 Fannie Mae. Trademarks of Fannie Mae. 8
COLLATERAL UNDERWRITER 2017 Fannie Mae. Trademarks of Fannie Mae. 9
Collateral Underwriter Statistics Registered Lenders Registered Users Appraisal Submissions 19,308 *Statistics as of August 2017 2017 Fannie Mae. Trademarks of Fannie Mae. 10
Collateral Underwriter (CU TM ) Overview WHAT IS IT? CU is a proprietary appraisal review application developed by Fannie Mae. It is the latest addition to our comprehensive suite of risk management and loan quality tools available to our lender partners. WHAT DOES IT DO? CU leverages an extensive database of market data and analytical models to highlight appraisals with heightened risk of property eligibility and policy compliance violations, overvaluation, or quality issues. WHAT FINDINGS DOES IT RETURN? CU produces a risk score, risk flags, and detailed messages to help lenders identify specific aspects of the appraisal report that may require further attention. It does not approve or reject appraisals. HOW CAN LENDERS GET THE FINDINGS? The risk score, risk flags, and messages are available through UCDP, DU, EarlyCheck, and the CU web application that includes additional content to inform the analysis of the appraisal. 5.0 WHY HAS FANNIE MAE SHARED CU WITH LENDERS? We are sharing CU with lenders to support more proactive management of appraisal quality and to provide greater transparency and certainty to our lender partners on loans delivered to Fannie Mae. 2017 Fannie Mae. Trademarks of Fannie Mae. 11
Score and Message Summary The objective of CU is to assist lenders with assessing property eligibility and appraisal quality. It does not provide approvals or denials, nor may it be used as basis for a credit decision. CU Risk Score The score reflects CU s automated assessment on a scale of 1.0 (lowest risk) to 5.0 (highest risk). Property Eligibility/ Policy Compliance Risk Flag Overvaluation Risk Flag Appraisal Quality Risk Flag A score of 999 indicates a score could not be generated. Risk flags identify factors contributing to high scores. Fatal UAD Edits Data Integrity Messages Proprietary Messages and UAD Edits highlight potential property eligibility or policy compliance violations. Critical Proprietary Messages Comparable Selection Messages Adjustment Messages Reconciliation Messages Statistical modeling estimates probability of material overvaluation. However, no opinion of value is provided. Appraisal Quality messages direct users to specific aspects of the appraisal that may warrant further attention. The CU Risk Score, Risk Flags, and Messaging do not affect the UCDP submission status and are only warnings. Messages are intended to alert users to potential issues and do not need to be cleared. 2017 Fannie Mae. Trademarks of Fannie Mae. 12
% of Appraisals CU Messages Over 80% of appraisals had less than three CU messages per appraisal last quarter. 50% Message Distribution by Count 40% 30% 30.1% 31.2% 20% 19.8% 10% 10.2% 4.8% 3.8% 0% 0 1 2 3 4 >=5 Number of Messages Populated * Stats from the 2nd Quarter of 2017 2017 Fannie Mae. Trademarks of Fannie Mae. 13
% of Appraisals CU Messages (cont d.) Data Discrepancy and Adjustment messages are the most frequent messages. 100 CU Message Frequency by Type 80 60 40 43.9% 43.0% 20 0 10.9% 1.2% Data Discrepancy Comp Selection Adjustments Reconciliation Message Type * Stats from the 2 nd Quarter of 2017. 2017 Fannie Mae. Trademarks of Fannie Mae. 14
APPRAISAL QUALITY MONITORING 2017 Fannie Mae. Trademarks of Fannie Mae. 15
AQM Overview Action Due Diligence Analytics Action Due Diligence Analytics Possible Actions High Frequency of Data or Adjustment Issues Data Quality Issues These actions are driven by the automated detection of persistent data discrepancy issues on key property characteristics (e.g. GLA, comp sale price, lot size, BR, BA, etc. ) These actions are targeted training opportunities when quality issues are limited to recurring inconsistencies. Initial data-discrepancy letter to Appraiser Follow-up letter (after 6+ months with no improvement) to Appraiser with specific examples on Fannie Mae loans Patterns of Appraisal Quality Issues Appraisal Credibility Issues These actions are driven by the results from deep-dive reviews of appraisals from appraisers identified by our analytics tools to be higher risk. Manual QC reviews are conducted on a representative sample of the appraiser s work to identify patterns of issues indicative of inadequately supported valuations. Possible Actions Implausible Work Patterns (e.g. volumes) Appraiser Licensing Issues Letter to appraiser highlighting persistent issues with the credibility of their appraisals. Notification to appraiser and lenders of 100% post-purchase QC sampling for the appraiser Letter to appraiser and notification to lenders invoking policy to no longer accept appraisals from that appraiser. 2017 Fannie Mae. Trademarks of Fannie Mae. 16
What actions have been taken? Fannie Mae began communicating externally to appraisers in December 2013. Since December of 2013 over 4,200 education and training letters have been sent directly to appraisers. After a six month monitoring window approximately 93% of appraisers have improved their performance on the issue noted in the training letter they received. Approximately 10% of appraisers contacted have responded via email or snail mail with comments, questions, or concerns. Most of the responses to the training letters have been neutral or positive. The objective of Fannie Mae s Appraiser Quality Monitoring initiative is not to put appraisers on the AQM list, but to improve appraisal practice within the industry. 2017 Fannie Mae. Trademarks of Fannie Mae. 17
FACT VS. FICTION 2017 Fannie Mae. Trademarks of Fannie Mae. 18
Comparable Selection FICTION Comparables must be within 6 months. Comparables must be within 1 mile. Comparables must be within +/- 10% of the subject s GLA. 2017 Fannie Mae. Trademarks of Fannie Mae. 19
Comparable Selection FACTS FROM THE SELLING GUIDE Comparable sales that have closed within the last 12 months should be used in the appraisal; however, the best and most appropriate comparable sales may not always be the most recent sales. Comparable sales from within the same neighborhood (including subdivision or project) as the subject property should be used when possible. There are no specific distances referenced in the Guide. Comps should have similar physical & legal characteristics when compared to the subject. These characteristics include, but are not limited to, site, room count, gross living area, style, and condition. 2017 Fannie Mae. Trademarks of Fannie Mae. 20
Comparable Selection How does CU analyze comp selection? CU considers date of sale, location, and physical similarity of comparables. The significance of each factor as well as the significance of each individual physical attribute is model-derived and marketspecific. The appraiser s comps are ranked against other known sales in the area not against arbitrary guidelines. 2017 Fannie Mae. Trademarks of Fannie Mae. 21
Adjustments FICTION Line adjustments cannot exceed 10%. Net adjustments cannot exceed 15%. Gross adjustments cannot exceed 25%. 2017 Fannie Mae. Trademarks of Fannie Mae. 22
Adjustments FACTS FROM THE SELLING GUIDE The appraiser s adjustments must reflect the market s reaction to the difference in the properties. Failure to make market-based adjustments is noted as an unacceptable appraisal practice. The expectation is for the appraiser to analyze the market for competitive properties and provide appropriate market based adjustments without regard to arbitrary limits on the size of the adjustment. Fannie Mae does not have specific limitations or guidelines associated with net or gross adjustments. The number and/or amount of the dollar adjustments must not be the sole determinant in the acceptability of a comparable. The appraiser s adjustments must reflect the market s reaction (that is, market based adjustments) to the difference in the properties. 2017 Fannie Mae. Trademarks of Fannie Mae. 23
Adjustments How does CU analyze adjustments? CU performs regression analysis using millions of property transactions to produce statistically-derived and market-specific adjustments for time, physical attributes, and location. Appraiser s adjustments that are significantly different than the model and their peers are flagged by CU and contribute to the overall CU Risk Score. 2017 Fannie Mae. Trademarks of Fannie Mae. 24
Market Conditions FICTION Fannie Mae will not acquire properties in declining or over-supplied markets. Fannie Mae requires explanation when the subject is higher than the predominant neighborhood value. Fannie Mae will not accept positive time adjustments in appreciating markets. 2017 Fannie Mae. Trademarks of Fannie Mae. 25
Market Conditions FACTS FROM THE SELLING GUIDE Fannie Mae purchases mortgages secured by properties in all neighborhoods and in all areas. There are no specific requirements for declining markets except to make time adjustments to comparable sales when appropriate. The appraiser must provide the predominant value as a single value or a range. No other requirements apply. Adjustments may be either positive or negative depending on the market changes over the time period analyzed. 2017 Fannie Mae. Trademarks of Fannie Mae. 26
Market Conditions How does CU analyze market conditions? The CU risk score reflects property eligibility, the appraiser s opinion of value, and the methodology used to arrive at that opinion of value. Properties in markets with over-supply or declining property values are not more likely to receive high risk scores so long as the appraiser chooses appropriate comps and makes appropriate adjustments. 2017 Fannie Mae. Trademarks of Fannie Mae. 27
Appraisal Resubmissions FICTION Collateral Underwriter assigns higher scores to appraisals with multiple submissions. Fannie Mae targets appraisals with multiple submissions for post-acquisition review. Fannie Mae places appraisers on the AQM list if their assignments have high re-submission rates. 2017 Fannie Mae. Trademarks of Fannie Mae. 28
Appraisal Resubmissions FACTS CU analyzes each appraisal submission independently. The number of submissions in no way affects the CU score. Fannie Mae uses the last appraisal submission as the document of record and only uses CU findings from that submission as a factor in our discretionary QC selection. Fannie Mae in no way discourages lenders or appraisers from making necessary corrections to appraisal reports and resubmitting to UCDP. Fannie Mae encourages lenders and lender agents to submit to UCDP as early in the process as possible to retrieve CU results and incorporate them into their quality control processes. 2017 Fannie Mae. Trademarks of Fannie Mae. 29
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Certainty on Appraised Value Harnessing the power of Collateral Underwriter (CU ), Fannie Mae will offer freedom from representations and warranties related to the property value for eligible loan casefiles. Submit an appraisal through the Uniform Collateral Data Portal Get real-time feedback from CU With a CU risk score of 2.5 or lower, the appraisal is eligible for freedom from reps and warrants on property value. 2017 Fannie Mae. Trademarks of Fannie Mae. 31
With a CU Risk Score of 2.5 or Lower CU Risk Score of 2.5 or lower: Eligible for relief but note below information CU Risk Score above 2.5: Not eligible for relief The lender is NOT responsible for the following requirements in Selling Guide B4-1, Appraisal Requirements*: The lender REMAINS responsible for the following requirements in Selling Guide B4-1, Appraisal Requirements*: Underwriting the appraisal report to determine whether the subject property presents adequate collateral for the mortgage. Ensuring the appraisal accurately reflects the market value of the property. Ensuring the appraiser used sound reasoning and provided evidence to support the methodology chosen to develop the opinion of value. Analyzing the comparable sales used in the appraisal report, including the description, selection, adjustments, and reconciliation of the comparables. Description of the subject property. Accuracy and completeness of all data on the appraisal that pertains to the subject property and project (if applicable), other than the appraised value. This includes the subject property s condition and quality ratings (Selling Guide section B4-1.3-06). Ensuring the subject property meets the property eligibility requirements in the Selling Guide. * Please reference the Selling Guide for full text 2017 Fannie Mae. Trademarks of Fannie Mae. 32
Value Rep & Warrant, Simply Stated (CU Risk Scores of 2.5 or Less) Lender is Responsible for: Description of subject Property eligibility Lender is Not Responsible for: Selection of comparables Description of comparables Adjustments to comparables Value reconciliation 2017 Fannie Mae. Trademarks of Fannie Mae. 33
Property Inspection Waiver (PIW) DU may provide lenders an offer to waive the appraisal for certain refinance transactions. Lender submits casefile to DU DU issues offer to waive appraisal Lender accepts the appraisal waiver offer Lender delivers loan to Fannie Mae with the DU casefile ID and SFC 801 Day 1 Certainty for property value, condition, and marketability Note: Lenders must order an appraisal if they have reason to believe that an appraisal is warranted. 2017 Fannie Mae. Trademarks of Fannie Mae. 34
PIW Eligible and Ineligible Transactions Eligible Transactions (effective 8.19.17) One-unit properties, including condominiums Limited cash-out refinance transactions: o principal residences and second homes up to 90% LTV/CLTV o investment properties up to 75% LTV/CLTV Cash-out refinance transactions: o principal residences up to 70% LTV/CLTV o second homes and investment properties up to 60% LTV/CLTV Purchase transactions: o principal residences and second homes up to 80% LTV/CLTV Loan casefiles that receive an Approve/Eligible recommendation Ineligible Transactions Properties located in a disaster-impacted area Construction and construction-to-permanent loans Two- to four-unit properties Loan casefiles in which the value of the subject property provided to DU is $1,000,000 or greater HomeStyle mortgage products (Renovation and Energy) DU Refi Plus loan casefiles* Texas 50(a)(6) loans Leasehold properties, community land trust homes, or other properties with resale restrictions Cooperative units and manufactured homes DU loan casefiles that receive an ineligible recommendation Loans for which the mortgage insurance provider requires an appraisal Loans for which rental income from the subject property is used to qualify *DU Refi Plus loan casefiles will continue to be eligible for the DU Refi Plus property fieldwork waiver. 2017 Fannie Mae. Trademarks of Fannie Mae. 35
POLICY UPDATES 2016-2017 2017 Fannie Mae. Trademarks of Fannie Mae. 36
Policy Updates 2016-2017 B4-1.1-03, Appraiser Selection Criteria (01/31/2017) UPDATED: Appraiser Trainees Fannie Mae allows an unlicensed or uncertified appraiser, or trainee (or other similar classification) to perform a significant amount of the appraisal (or the entire appraisal if he or she is qualified to do so). If an unlicensed or uncertified individual provides significant professional assistance, he or she must sign the left side of the appraiser certification as the Appraiser if: he or she is working under the supervision of a state-licensed or state-certified appraiser as an employee or sub-contractor, the right side of the appraiser certification is signed by that supervisory appraiser, and it is acceptable under state law. If the jurisdiction does not provide license numbers for trainees, the term Trainee should be entered in the Other field in the Appraiser Certification section. 2017 Fannie Mae. Trademarks of Fannie Mae. 37
Policy Updates 2016-2017 B4-1.1-03, Appraiser Selection Criteria (01/31/2017) cont d. If a supervisory appraiser is used, the supervisory appraiser does not need to physically inspect the subject property or comparables, but must sign the right side of the report and certify that he or she: directly supervised the appraiser that prepared the appraisal report, has reviewed the appraisal report, agrees with the statements and conclusions of the appraiser, agrees to be bound by certifications as set forth in Fannie Mae s appraisal report forms, and takes full responsibility for the appraisal report. A supervisory appraiser may not sign the left hand side of the appraisal report unless he or she has met the requirements of the appraiser as noted in the License and Certification section in this topic. 2017 Fannie Mae. Trademarks of Fannie Mae. 38
Policy Updates 2016-2017 B4-1.1-05, Disclosure of Information to Appraisers (12/06/2016) UPDATED: Contract Changes After the Appraisal is Completed If the contract is amended after the effective date of the appraisal in a way that does not affect the description of the property, then the lender is not required to provide the amended contract to the appraiser nor obtain a revised appraisal. Some examples of amendments that do not require the lender to provide the amended contract nor obtain revisions to the already-completed appraisal report include: sale price, transaction terms, financing concessions, seller-paid closing costs, names or initials, closing date, and correction of minor clerical errors such as misspellings. 2017 Fannie Mae. Trademarks of Fannie Mae. 39
Policy Updates 2016-2017 B4-1.3-08, COMPARABLE SALES (01/31/2017) UPDATED: New (or Recently Converted) Condos, Subdivisions, or PUDS In the event there are no closed sales inside a new subject project or subdivision because the subject property transaction is one of the first units to sell, the appraiser may use two pending sales in the subject project or subdivision in lieu of one closed sale. When the appraiser is using two pending comparable sales in lieu of a closed sale, the appraiser must also use at least three closed comparable sales from projects or subdivisions outside of the subject property s project or subdivision. 2017 Fannie Mae. Trademarks of Fannie Mae. 40
Policy Updates 2016-2017 B4-1.3-09, Adjustments to Comparable Sales (01/31/2017) UPDATED: Sales or Financing Concessions Fannie Mae recognizes that the effect of sales or financing concessions on sales prices can vary with the amount of the concessions and differences in various markets. Adjustments must reflect the difference between what the comparables actually sold for with the sales or financing concessions and what they would have sold for without the concessions so that the dollar amount of the adjustments will approximate the reaction of the market to the concessions. If the appraiser s analysis determines that the market s reaction is the full amount of the financing concession, a dollar-for-dollar adjustment is acceptable. 2017 Fannie Mae. Trademarks of Fannie Mae. 41
APPRAISAL & APPRAISER VOLUME 2017 Fannie Mae. Trademarks of Fannie Mae. 42
Submissions Observed Unique Appraiser Credentials 700,000 Monthly Appraisal and Appraiser Volume 70,000 600,000 60,000 500,000 50,000 400,000 40,000 300,000 30,000 200,000 20,000 100,000 10,000 0 0 Jul-17 May-17 Mar-17 Jan-17 Nov-16 Sep-16 Jul-16 May-16 Mar-16 Jan-16 Nov-15 Sep-15 Jul-15 May-15 Mar-15 Jan-15 Nov-14 Sep-14 Jul-14 May-14 Mar-14 Jan-14 Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar-12 Appraisal Submissions Series2 2017 Fannie Mae. Trademarks of Fannie Mae. 43
The Problem: Appraisal Demand vs. Appraiser Capacity Analysis suggests that recent challenges with costs and turn times are more a result of high volume over a prolonged period than they are a sharp decline or shortage of appraisers. However, a decreasing number of licensed appraisers overall and fewer new licenses being issued are problems that should not be ignored. While there are many reasons for appraiser attrition and lack of new entrants to the profession, the underlying issue is that is that demand for appraisal services is highly variable and the capacity of appraisers collectively as an industry and on an individual level is inelastic. The end result is unpredictable earning potential for appraisers and volatility in costs and turn-times for their clients neither of which supports a stable housing finance system. 2017 Fannie Mae. Trademarks of Fannie Mae. 44
A Scalable, Sustainable Solution A successful long-term solution must include the following components: a viable plan to attract and retain new valuation professionals to the field, a more efficient appraisal process to increase the capacity of each individual appraiser, use of data, analytics and technology to produce more credible and transparent valuations, and alternative means of valuation that responsibly reduce demand for traditional appraisals in certain cases. 2017 Fannie Mae. Trademarks of Fannie Mae. 45
RECOMMENDATIONS 2017 Fannie Mae. Trademarks of Fannie Mae. 46
Recommendations for Appraisers Know that reliance on arbitrary guidelines may have unintended consequences Appraisers, AMCs, and lenders have long-relied on many rules-of-thumb to determine quality. Compliance with these rules-ofthumb does not necessarily guarantee an accurate valuation or well-supported appraisal. Take necessary steps to ensure accurate and consistent data for the subject and comparables Double-check sales prices and property attributes with MLS data, public records, and other available resources. comparable sales in multiple reports, be sure data is accurate and consistent with prior reports. If you use Don t let your MLS search obscure your view of the market Understand that an overly-restrictive search in MLS may fail to yield all relevant data points that are necessary to inform your market analysis, comp selection, and opinion of value. Make market based adjustments for time, location, and property attributes Remember that failure to make market-based adjustments is a violation of Fannie Mae policy. Adjustments should be based on statistical analysis and reflective of the market s reaction to differences in the properties. Provide your clients with thoughtful commentary and responses Avoid reliance on canned commentary and defensive responses to lenders questions. Thoughtful commentary and exhibits can reduce further requests for correction and clarification. 2017 Fannie Mae. Trademarks of Fannie Mae. 47
RESOURCES 2017 Fannie Mae. Trademarks of Fannie Mae. 48
Visit the Updated Appraiser Site for More Information https://www.fanniemae.com/singlefamily/appraisers HIGHLIGHTS: 1 ST Appraiser Newsletter Updated FAQs Additional Training Modules Currently Being Added - 1 st Up is CU & AQM: Separating Fact from Fiction Link to Directly to Part B of the Selling Guide Sign Up for Email Updates 2017 Fannie Mae. Trademarks of Fannie Mae. 49
Visit The CU Web Page For More Information https://www.fanniemae.com/singlefamily/collateral-underwriter Available Resources: User Guide (Provides Complete List Of CU Messages) elearning Courses Webinar Registration FAQ s Newsletter 2017 Fannie Mae. Trademarks of Fannie Mae. 50
QUESTIONS? 2017 Fannie Mae. Trademarks of Fannie Mae. 51