FNMA Ensnares Appraisers in Farcical Probes
“Even amidst tragedy there is sometimes farce,” wrote author Daniel Prokop.
Unleashing tragedy and farce in equal measure, mortgage giant Fannie Mae is using its muscle to coerce lenders to repurchase early COVID-era loans. Fannie apparently deems them now too risky for its portfolio. As a ploy, say observers, Fannie is generating automated appraisals similar to Zillow’s “Zestimates” and using them to undermine appraised values in loans it wants to offload.
Fannie’s automated system then sends unsigned boilerplate complaints to state appraiser licensing boards – a scorched-earth tactic that requires appraisers to sometimes spend years clearing their names in the often baseless complaints. Fannie reportedly then cites the ongoing investigations, which Fannie itself triggered, as further evidence of the need for the lender buybacks.
The complaints are said to be arriving at such velocity that some state appraiser boards are in fight-or-flight mode, having to decide whether to ignore the complaints outright or staff up to deal with them. A regulator in Ohio told one appraiser that the Ohio state board alone was receiving about 40 new complaints monthly from the mortgage giant, each one requiring a separate investigation that can last up to one year. In some cases, state officials have reportedly exploited the influx of complaints from Fannie as a pretext to featherbed.
The upshot: Appraisers are now having to spend hundreds of hours and tens of thousands of dollars apiece dealing with the fallout of these nuisance complaints, which Fannie Mae, now in federal conservatorship, is able to churn out at little cost in money and time.
Cincinnati appraiser Kristine Bertrand received a letter from her state informing her she was under investigation after Fannie Mae had sent a computer-generated complaint to her state board. It was based on her selection of comparables in an early pandemic-era desktop appraisal.
“Fannie didn’t like any of my comparable choices,” she said. “[The complaint] was very vague. It didn’t provide an alternate value. The letter contained no contact information. I wasn’t able to face my accuser.”
The state investigation into Bertrand’s appraisal began in the beginning of this year. She has since had to hire a lawyer.
One former Florida appraiser, who asked to remain anonymous as his case is ongoing, cites the sales comparables Fannie’s computerized tool asked him to consider.
“Fannie wanted me to use three comparables that were geographically closer but had different bedroom counts, different ownership structures – one was a condominium – and two were clearly inferior in condition. One backed to a strip mall and was on a busy bypass road. Also, the appraised property had a pool. None of Fannie’s comparables had pools.
“I did a complete rebuttal showing them how inappropriate the comparables were. I sent it in and thought it was the end of it. A few months later, I got a call from the Florida state board.”
The investigator with the state told him that the state had received a substantial number of these complaints but unfortunately had to investigate each one individually, he said.
Another appraiser, who also asked his name be withheld, is currently dealing with a similar complaint. He believes something more nuanced is at play. He believes Fannie Mae’s aggressive push for lenders to buy back loans is a result of lax COVID-era underwriting. Fannie, he believes, wants to rid itself of as many of these loans as possible, since they may contain legal blocks on foreclosures if they were purchased during the pandemic. By strong-arming lenders to buy back the loans, Fannie will reduce future legal and financial liabilities, said the appraiser.
To aid with this buyback push, he believes Fannie has reduced the threshold inputs in its Collateral Underwriting system – Its Zillow-like valuation algorithm – so that now there is basically a 50-50 chance an appraisal will score “low.”
Appraiser Danielle Marie Evans, who was targeted by a similarly unsigned boilerplate complaint from Fannie to her state’s licensing board, agrees. “This is a way for Fannie to secure its portfolio,” said the Tampa, Fla.-based appraiser. “After guaranteeing or buying the loan, Fannie is trying to offload risk. If there is any pretext – a grammatical error, a typo, a subjective element that its computer model disagrees with – a letter will be generated.
“This is causing massive devastation to appraisers across the country,” said Phil Crawford, an Ohio appraiser and host of the “Voice of Appraisal,” a podcast popular with appraisers. This situation with Fannie Mae is really serious. This has a very good chance to disrupt [the appraisal industry] as a whole in ways never seen before. These complaints are coming from some sort of weird internal email service within Fannie Mae and there are no signatures on them. In this country, I think you have the right to confront your accuser.”
Because many of the loans are still performing, and many of the homes collateralized in the mortgages rose in value in the housing boom of 2021 and much of 2022, Crawford believes appraisers are being convicted of a “pre-crime” – reminding him of the 2002 film “Minority Report.”
Computer modeling in valuation has proven unreliable. Last year, Zillow reported it would be shuttering its iBuying business because it had bought homes, aided by its valuation algorithms, for prices higher than it believed it could sell them. It told investors it would be writing down $304 million in value in the third quarter from its Homes segment.
One of the frequently cited causes of the 2007-2008 financial crisis was faulty automated valuation models used by S&P, Fitch and Moody’s. Their computer models assigned investment-grade ratings to junk-quality mortgage-backed securities and collateralized debt obligations. The investment-grade ratings allowed the securities to be purchased by pension funds.
“This trend is not going away,” said Evans. “The experience with Fannie Mae took two years of my life. My health was affected. The emotional toll that it took – it’s about your livelihood, your business, your license is being threatened. I had to focus on my defense. It was never a value-related issue. None of my math was wrong. A boilerplate letter generated by a computer at Fannie Mae in less than 30 seconds resulted in a two-year odyssey of financial pain and loss for me.”
She described her experience dealing with Fannie Mae as Kafkaesque.
“There’s nobody on the other end, nobody to defend yourself to, nobody to answer your questions – it’s the dead hand of a massive bureaucracy. Also, they don’t have certified appraisers review your work. That is one of the most terrifying aspects of this.”
Underscoring the nameless, faceless nature of the nuisance complaints, Bertrand has received computer-generated surveys from Fannie Mae inquiring about her customer experience. “You can’t make this up,” she said.
Said another appraiser from the Rustbelt who has been targeted by an unsigned complaint: “You feel like Fannie Mae is simply trying to get rid of appraisers. A lot of appraisers feel that way. There is a lot of value in a human that is going to the property, looking at the overall condition, the upgrades and updates to the property, providing photos of every room; a computer is not going to pick up on whether a property is next to a park or next to a landfill. It’s not going to pick up smells from a nearby steel mill or chicken poultry farm.
“[As a result of the complaints] your insurance goes up,” said the appraiser. “You have to hire an attorney, and you have to now disclose that you’re under investigation. I can’t get on panels. It’s very, very stressful and it’s very scary.”
Evans predicts that as interest rates climb, the costs to lenders to buy back loans will increase dramatically, making Fannie’s complaints more pernicious.
“I don’t think the states should be even accepting these as complaints against appraisers if there’s no signature,” said Crawford in a recent podcast. “In this case, you’re just dealing with this gigantic corporation out there saying [you] didn’t do it right and the next thing you know, you have to defend yourself against the Fannie Mae version of a ‘Zestimate.’”
- Fannie’s Loan Buyback Sophistry Relies on Modifying Analysts’ Behavior - October 16, 2023
- Finding of Bias in Home Valuations Fails by Own Measure - August 14, 2023
- The Nightmarish End of Home Appraisals - July 31, 2023