FNMA Ensnares Appraisers in Farcical Probes

Jeremy Bagott
Latest posts by Jeremy Bagott (see all)

Fannie Mae Bullies Lenders, Ensnares Appraisers in Farcical Probes. 

You feel like Fannie Mae is simply trying to get rid of appraisers. A lot of appraisers feel that way…

“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.’”

Image credit flickr - H Matthew Howarth
Jeremy Bagott

Jeremy Bagott

Jeremy Bagott is a real estate appraiser and former newspaperman. His most recent book, “The Ichthyologist’s Guide to the Subprime Meltdown,” is a concise almanac that distills the cataclysmic financial crisis of 2007-2008 to its essence. This pithy guide to the upheaval includes essays, chronologies, roundups and key lists, weaving together the stories of the politics-infused Freddie and Fannie; the doomed Wall Street investment banks Lehman and Bear Stearns; the dereliction of duty by the Big Three credit-rating services; the mayhem caused by the shadowy nonbank lenders; and the massive government bailouts. It provides a rapid-fire succession of “ah-hah” moments as it lays out the meltdown, convulsion by convulsion.

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12 Responses

  1. Avatar CJK says:

    I said it all along “The same people who are saying desktops and drive-by reports are just fine, will be the same people who will be coming after you later.” The state appraiser boards are just as bad as FNMA. Make sure your E&O is up to date. I am not sure if I will renew my license at the end of next year. I had a 40 year run and most of it was enjoyable.

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  2. Avatar QED says:

    This is pure evil. I wouldn’t be surprised if a savvy lawyer sees an opportunity here to represent a number of appraisers affected by this and initiates a class-action lawsuit against Fannie Mae. Of course, the lawyer will walk away with $200 million and the individual appraisers will just get thousands…

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  3. Avatar CJK says:

    I do not understand, if FNMA is completing a computer-generated review as soon as the appraisal is completed (prior to the closing), how are they now finding fault with the appraisal years after the fact? One of my clients would send me these reviews as soon as they closed out the appraisal with me. So, is FNMA doing a review prior to the closing with the appraiser receiving a “good” 1 – 2.5 score “Low protentional of over valuation.” But as soon as the loan has issues, they do a second review on the same report with a different “bad” 2.5 – 5 score? Does FNMA send the state the first review with the good score or only the second review with the “new” bad score? The appraisal boards need to do a better job and stop kissing the backside of FNMA and outfits like Chase. I know it is all about the money and the more they punish the appraisers the more money they make. But you would think that at some point someone with intestinal fortitude would stand up and do the right thing. Or is it more of the same “Let’s just blame it all on the appraisers again, no one really cares about them.”

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  4. Avatar the other mike ford says:

    oh good lord, you could not pay me to be an appraiser.

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    • Baggins Baggins says:

      That’s kind of the problem with being an appraiser these days, lol. Everyone dips into the appraisal fee upstream, even though they’re not providing any valuation services. The damaging effects are widespread, causing a general confidence loss in valuation services which comes from the top down…

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  5. Avatar Kenneth Mullinix says:

    What a story. I just went through a investigation with the VA for being a “Racist Compliant”. The same thing happened to me as these appraisers. 8 months or trying to defend myself to baseless allegations from a home owner who thought his home was worth more than I appraised it for. Of course he knows more about appraising than I do. I have only been appraising for 35 years. And yes I am about done, this article only confirms to me that the industry is in trouble. Get out while you can!!

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  6. Avatar Kay Smith says:

    I had a review position in Denver sometime back. A staff appraiser visited our office and after never even speaking with me, bad mouthed me to my supervisor. His opinion helped get me fired. He was a youngish, very arrogant man but since he worked with Fannie, they admired him. I got fired during my early probationary period without a discussion. Then a few weeks later, someone from FNMA called me and offered me a staff appraiser job! Needless to say, I was not at all impressed with them and turned down the offer. I simply reopened my private practice and did very well, still do although it’s been slow this year. The company I briefly worked for, soon after went out of business and got sued.

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    • Baggins Baggins says:

      Kay, was that Alon Hill? Have any leads on companies similar to them today? I observed one remote out of GA last year but did not grab it in time. If you were referring to forensic review.

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  7. Baggins Baggins says:

    Another winning article from Mr Bagott. How does he get ahead of this information? “As a result of lax underwriting”…. While the other appraisers were being dedicated instant hypochondriacs and begging for PPP loans, I simply ran the tail end of FHA REO before the HUD moratorium kicked in full swing and I never missed a beat. Conveniently not submitting anything to Fannie for like 6-8 months or so when the scamdemic took off. Boy it was nice. The roads were empty, I got places in record time. Annoying employees ran away from me instead of bothering. Copped some great deals on retail items and auto repairs too. We insulated ourselves by refusing to watch the propaganda television for quite some time, the tv stayed off.

    This is a great article to reiterate a complex lesson and more detailed understanding of mortgage markets I constantly try to relate to appraisers, especially the newer ones and amc appraisers whom think of this industry so two dimensionally as if it’s just all about volume, efficiency, and income. The real competition is not with other appraisers, but rather much more substantial and complex forces. The risk factors change with time and economic conditions, and at times may only have loose connections to appraisers work quality. So in good times they don’t look and lackluster methods fly. In volatile times the lid comes off and scrutiny becomes excessive, possibly of no fault of the appraiser. Which is why you should never use outsourced services, typing services, remote inspections, automatic form fills, comps sharing, and especially should never complete hybrids and discounted requests from unscrupulous volume based companies. You see, because when they dip into forensic review seeking to offload the risk, you don’t want to be the easy target. As this article indicates; real money, real events, real risk, real liability. It’s off the back burner now.

    “The trend is not going away”… Damned right it’s not. Triple dare you pepsi challenge to show me any counties in this country which have not had a notable uptick in treasurer and pending default filings. Sure, many can cure out as the market has been rising for some time, and they have room to deflate and still come out ahead, but not all. Investors know the margin is shrinking and see the writing on the wall. They’re probably reaching the point where forecasting and projections begin to indicate the possible losses can’t just be written down. As the bubble deflates… Right now this blowback appears random but those privy to CU analysis may be picking the easy fruit just for starters. Hard to say, get a map going and put a pin down every time every place an appraiser gets these letters. Probability of more to come appears rather high. Don’t get caught holding the empty bag because all it takes is one single time.

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  8. Avatar Koma says:

    Stopped taking Fannie Mae jobs back on 04/01 and couldn’t be happier. One client I had for 14 years stated all their jobs whether Fannie or not had to be completed to the ANSI standard and I said bye bye. Funny thing was 2 months later someone there reached out to me and asked if I had changed my mind and I said NOPE!

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  9. Avatar Douglas Kues says:

    I spent over four years under investigation by the state board for a blatantly obvious retaliatory complaint by a government agency appraisal firm against me for providing services to a private property owner ordering valuation services from me specifically to dispute unreasonably lowball offers of what federal and state constitutions mandate as fair and just compensation for the taking or private land for the public good. In retrospect I paid four years of my life and $10,000 (down from the $60,000 they demanded in resolution) to escape from further involvement. My family and my lawyer begged me to settle under threat of compounded legal fees to continue the battle. Following the settlement, I have drafted and made many inquiries over several of the false accusation made as “USPAP Violations”, and the state board has so far evaded a clear and informative answer in each and every instance. Indeed, they have not answered a single inquiry made in a genuine effort to obtain a meaningful understanding of the accusation and how the accusation may have violated USPAP, if indeed that was the case. Each time, the officer in charge has suggested that I reach out so some other education or guidance source for an answer, because they are enforcement administrator and not educators. My position was that they were the accusers and that most educators…. over the 35 years I have provided valuation, expert witness, legal consultation, and independent forensic appraisal services….. have been positive and thankful for my contributions and my help. In any event, reaching out to the accuser is non-productive as their attitudes and mindsets are beyond reproach. Good luck, fellow appraisers, but if they want to put you out of business, they can and will do so.

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    • Baggins Baggins says:

      Cosmic Cobra. From the inside, we have become acclimated to the excess. On the outside, nobody in their right mind bothers to keep up with a 2 year ever changing rule set pertaining to ethical rules which is constantly influenced by outside advocacy rather than ethic itself. 10 years ago? That’s 5 if not 6 books you need to purchase, just for starters. Can you imagine if the rules for drivers licensing, municipal ordinance, taxation, changed as frequently? Well, we’re not that far off but perhaps the appraisal industry is a pioneer in the transparency of the long game result, being a smaller industry where we traced to the inevitable end conclusion sooner than others.

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FNMA Ensnares Appraisers in Farcical Probes

by Jeremy Bagott time to read: 6 min
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