Comparable Selection Manipulated to Produce Lower CU Risk Score

Comparable Selection Manipulated to Produce Lower CU Scores

Appraisers harassed to use sales not comparable to lower CU risk score…

Readers that have followed my past Collateral Underwriter (CU) articles already know my opinion of it. It was flawed system design starting with its underlying database. Designed by seven people that did not have a valid appraisal license between them!

Setting aside the basic database flaw in CU, it was and is a system that’s highly susceptible to manipulation. The CU scoring parameters can be modified at the lender-user end. Even if that were not possible, it is still subject to manipulation.

As Phil Crawford points out, FNMA first came out with a flawed collateral risk scoring system, ostensibly to promote trust in the underlying collateral its notes or mortgages are secured by. NOW it has published an incentive for lenders to manipulate that very scoring system! FNMA has announced that loans with collateral risk scores of 2.5 or lower will be free from collateral recourse risk to the lender in the event of default.

Think about that.

Now consider the following: FNMA CU is (in part) by default a census tract based locational rating system. The default setting is for all sales in closest proximity to the subject, going back up to two years to be used as a base against which any other comparable sales are scored. The FNMA sales are NOT NECESSARILY comparable properties!

Let’s assume we are either in a rural area or a suburban area in which very few sales take place. People with comparable houses to your subject (1,650 sf) simply do not move out of the area. You do an appraisal for a refinance. Necessarily, you are forced to use comparable sales more distant to the North, South, East, and West. in competitive areas. Your comparable sales are from 1/3 mile to a mile distant. The CU score is 3.75.

CU also provides up to ’20 alternate purported comparable sales‘. Some are 2 year old sales. Most (in this example) are 850 sf to 1,150 sf in GLA. The lender “directs you” to use one or two of these more proximate sales and simply give no weight to them. You do so, even though not one of them is truly ‘comparable’ to your subject. The CU score drops to 2.45.

That’s a best case scenario. Try justifying inclusionary use of dissimilar sales when the report hits the state complaint desk after the loan defaults. Especially if FNMA or FDIC represents that the original CU score of 3.75 was ‘manipulated by the appraiser to produce a lower 2.75 score!

In the real world, the lenders seeking low CU scores will also look at your condition ratings not only for the subject, but for the comparables. You’ll see pressure to change that C4 to a C3 or the other way around. That too may drop the CU score to an “acceptable” amount. FNMA holds the lender accountable for assuring that the appraisers pictures support the Q&C ratings assigned by the appraiser. Photos are now to be used for purposes never intended by appraisers. No longer will living room, kitchen and bath be acceptable. You will have to provide a dozen or two photos that clearly demonstrate the C3, C4 or C2 condition and quality ratings. Non appraiser “reviewers” at AMCs or lenders will now argue or harass the appraiser into ‘proving’ their condition and quality opinions (beyond the printed FNMA UAD descriptions).

I’ve accused the CU system of being tantamount to fraud from day one, after having studied the FNMA CU Patent Application. On the basis of its flawed database alone, it is a gross misrepresentation of “risk” to investors.

Now, only two years after its roll out FNMA itself has undermined any possible credibility CU might have held with investors by providing the very incentive that will induce lenders to circumvent CU! Inducement to try to harass appraisers into modifications or amendments that will result in lower CU scores.

FNMA CU was never a good risk scoring tool for FNMA OR lenders. The ONE USE it could have proven beneficial for was a forbidden use. It would have made a good tool for appraisers to use either before selecting potential comparable sales OR to apply during their draft report writing. It provides a graphic of potential report anomalies requiring possible further explanation.

FNMA simply assumed appraisers could not be trusted with such information. They wrongly assumed we’d now appraise ‘to CU’ rather than to market. Where we COULD have used it as an additional checks and balance against our own perceptions of market data, it was denied to us. At a minimum it would have been a good tool to identify areas that require more elaboration and explanation for factors known to be outside “peer models”.

Rather than allowing it to be used where it could help the appraisal process, FNMA has restricted its use to those engaged in the contingent or commission side of the transactions. The lenders.

No risk there, right? As far as I’m concerned this is the final nail in the coffin of FNMA as a GSE. It is long past time for the federal government to STOP UNDERWRITING BAD POLICIES at FNMA! IF FNMA wants to play in the international securities markets, then let them do so as a purely private, uninsured (by government) entity and let the SEC regulate them!

Let the investor market prove how trusted CU is once the underlying inferred guarantees of the full faith and trust of the USA are removed.

Michael Ford
Latest posts by Michael Ford (see all)
Image credit flickr - Tony Bowden
Michael Ford

Michael Ford

Over 28 years appraising all property types and interests, in Southern California real estate. VP/Chairman National Appraiser Peer Review Committee, American Guild of Appraisers, #44OPEIU/AFL-CIO. - Michael Ford on e-AppraisersDirectory

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6 Responses

  1. Avatar Raymond says:

    well….i will repeat myself, again; appraisers and the appraisal profession have lost all control, influence and input in the preparation of an appraisal for lending purposes. Lenders, AMCs and lender interest groups control the entire appraisal process. These groups control the fees, turn time, comp selections, comp adjustments, report comments, picture requirements, etc, etc. The independent appraiser is NO longer an independent appraiser preparing impartial, objective and unbais opinions of value.  The appraisal process in the lending arena is the closest thing to “professional slavery”.  the appraiser must comply or lose business; comply or be blacklisted. let all get real now.

  2. Avatar GWS says:

    No need to worry. Once Fannie and soon to be Freddie both start using the (Property Inspection Waiver)  PIW, there will be no need for appraisers or the CU anymore..  By the way, once they finally have gotten rid of lender work appraisers, who’s going to maintain their database?  Or should I say OUR database.

    Just glad I don’t work for banks anymore. Divorces, family disputes and foreclosures are doing just fine.

  3. Avatar Koma says:

    Mike, Thanks for the article. The only thing I have to say in response is DUH. Manipulation has happen before and as history has taught us time and again it will happen again. Well the “smartest” group had built the Titanic…

  4. Avatar John Pratt says:

    You have put into words my exact thoughts when I heard about Fannie’s new ” Day 1 Certainty ” program..  Amcs or lenders can run your completed appraisals thru CU and if it rates over 2.5 they can review the warning and request that you make changes to the report just to get the rating to 2.5 or less and they can do this as many times as they want because Fannie is only  concerned with the final rating no matter how many times the report was run thru the system. You might as well throughout anything about influencing the appraiser and Appraiser Independents.

    Many appraisers will bow to the demands of the Amc/Lenders just to get paid and stay on their list of approved appraisers. Sad day for the appraisal industry.


  5. Avatar Jack Of All Trades says:

    Head for the exits , run like hell……and don’t look back.

  6. ALL APPRAISERS across the USA: I’ll be appearing before the APB/TAF (now an open forum meeting after BOT clipped APB wings) later this month.

    ANYONE that wants me to present YOUR views please email them to me in a cogent, CLEAN language email that I can simply print out to present to the TAF. Whatever your view or opinion, I will submit it directly to TAF.

    Lisa Desmarais who is/was the only residential appraiser on the APB has previously said they WANT appraiser input. She’s sincere about this. She had always been thoughtfully responsive to our concerns.

    My email is (mike at MfFord DOT com)-two “ff’s”.

    I cant print reply comments from here very well at all so please send as separate emails. Name (at least first name) and state; license level if you want, and approximate number of years appraising. ANY AND ALL OPINIONS about ANYTHING having to do with appraising and regulations is welcome! I need your comments on or before 02/20/2017.

    Thank you.



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Comparable Selection Manipulated to Produce Lower CU Risk Score

by Michael Ford time to read: 4 min