Rating Number Game Threatening Appraiser Independence
CU rating number magically moved lower on the scale…
While it’s presently a tad bit slow for order volume, this is a good time to evaluate a potentially troubling item instituted by Fannie Mae in conjunction with their Collateral Underwriter (CU) review process for appraisal reports. This has the ability to be abused by lenders and AMC’s. Hope you will take time to peruse this message and the podcasts.
Unfortunately, we need to get a bit deep into the weeds here so that you get a grasp on potential challenges some ‘intended users’ may have with your reports.
One of the key attractions for lenders to use CU is their avoidance of loan buy-backs if a mortgage loan defaults. But to absolve a lender of buy back responsibility, the CU report ‘rating’ number must be 2.5 or lower. Remember, in CU the low number is good, and the high number (5 max) is considered to be risky.
They claim that this is a rating of the report data only pertaining to a specific property and is not a judgment of the appraiser. But human nature being what it is, a ‘high’ numerical rating probably will negatively impact the appraiser to some degree. Especially if a particular appraiser consistently submits reports that result in ratings of 3+.
Through contacts with other appraisers, Phil has learned that FNMA has established a THRESHOLD RATING NUMBER whereby a lender can avoid the buy-back responsibility under the ‘Reps and Warranties’ process when loans are sold to FNMA. That rating number is 2.5.
Aparticular AMC has issued information about this to vendor appraisers so that they know this policy is in place. The podcast has examples of this AMC’s attempt to get the rating number lower from what CU originally reported, by asking appraisers to ‘modify’ a previously submitted report.
Some of the manipulation appears to involve use of additional comparable sales (not necessarily ‘comps’) which are closer to the subject than the original comp properties. When additional properties closer to the subject are added to the report, the CU rating number magically moved lower on the scale. A report can be submitted to CU as often as any change to the report is made.
This distance issue appears, to me, to be contrary to FNMA’s explanations when they first implemented the CU. They claimed then that they were not going to place significant weight on their old distance guidelines based on Urban, Suburban and Rural subject locations, which is the way countless appraisers have been trained. When CU came out, they said “just give us the best comps based on characteristics, regardless of how far from the subject they are.” I’m now thinking they have quietly reverted to their old policy where distance is critical to obtaining a low rating number. It’s done via the “black box” algorithm FNMA uses in their CU, which they refuse to allow appraisers to fully understand.
The point of this message is to be a warning to appraisers. You might start getting ‘correction notices’ from your clients to add new properties into a report that have a ‘crow flight’ distance less than the existing comps have. The example Phil related was the AMC said “just use any property, even though it’s not a true comparable.”
Another possible way to lower the CU rating number is to change the reported Q or C number for the subject. A point made in the podcasts is some reviewers may ask appraisers to modify that number based on the reviewer’s opinion of Quality or Condition from looking at the subject photos in the report.
This can become the real challenge to, and violation of, appraiser independence, manipulating data just to appease a lender who wants to fly under the 2.5 rating number threshold any way possible.
Now that you know the background, take a listen to the Voice of the Appraisal podcasts E137 Chucky has a Girlfriend!!! 1/22/2017 and E138 Manipulating Chucky and Alexis Craig!!! 1/28/2017.
If any of you encounter this situation henceforth forward from any client, please provide the details to me. We need to know who is doing this, and what is being requested.