Fannie Mae Filed a Complaint Against Me
An appraiser shared the following with us which was posted on one of the appraisers’ groups.
Fannie Mae filed a complaint against me with my state appraisal board. Here’s what happened.
In June of 2021, I completed an appraisal for a conventional purchase. The appraisal was ordered by an AMC on behalf of a lender. At that time, the real estate market was still being wildly affected by the COVID pandemic. Remote work was in full swing, and consumers were desperately seeking to get out of the cities. Prices for all types of residential properties were rising rapidly, and this held especially true for niche properties that consumers believed would make a good short-term rental.
My subject was a mountain cabin, in reasonably close proximity to a National Park. This approximately 900sf, 1.5 story, 2-bed, 1-bath cabin was situated on a critically sloped 2.5 acres of wooded land. This is not unusual at all. Many similar properties exist, but they are spread across a wide area. The inspection was uneventful. I was given a lockbox combination and inspected the vacant home. It was unremarkable. A basic Q4, C3 home.
I completed the appraisal, selecting comps with the same market appeal. It’s important to keep in mind that the primary market for the subject is as a second home. A “getaway” would be an appropriate term. Most consumers would not seek out the subject for full time residency. With limited data, I selected similar comps, three within five miles of the subject, and two from farther away (15-20 miles), but within the same niche market, and clearly substitutes.
The subject exists in a heterogeneous market. All of the properties are somewhat unique, and larger adjustments are required than what would be expected in more suburban/homogeneous markets. Still, I had good market support for every adjustment made. None of my adjustments were arbitrary. The pre-adjustment spread between the comps was about 52%. The post-adjustment spread was about 15%. While this is wider than what is ideal, it was the best possible (supportable) with the available market data. A standard deviation plus or minus the median post-adjustment prices left the contract price pretty in the middle of the range. So, the contract price is where I reconciled the opinion of value. I delivered the report.
Five days after the report has been delivered, I received a revision request. The AMC stated that the lender indicated the appraisal received a high risk score by Fannie Mae. Fannie Mae provided two sales and two listing based on their “model”. In addition to the sales provided by Fannie Mae, I was asked to provide at least two better comps. As anyone who has been an appraiser for more than five seconds can attest, you use the best comps available. There were no “better comps” to be used.
As for the comps provided by Fannie Mae, this is what they suggested to be used as comps for the mountain cabin described above: A partially constructed home on 44+ acres, an attached home in a 55+ community, and two homes in a nearby town (suitable for primary residency). No one shopping for the subject would cross-shop ANY of the suggested comps by Fannie Mae’s model. I responded kindly, and in depth regarding each of the suggested sales as to why they were inappropriate for inclusion. I also addressed the fact that the comps already utilized in the sales comparison approach were the best available. I submitted the response.
In June of 2022, one year after completing the original appraisal report, I received an email from the AMC stating the lender had received a repurchase demand from Fannie Mae. The demand letter cited an accounting error during the origination of the loan (not an appraisal issue) and the appraisal as the reason for the buy back. This was the first time I had ever experienced this problem. None of their comments seemed to make any sense. I had a terrible time understanding why this appraisal was such a problem for Fannie Mae. I have attached the Fannie Mae comments and my responses below. I have redacted the areas that could reveal sensitive information.
Fannie Mae Comments
Comparable Sale(s) Physical Features Reported Inaccurately – Condition / Quality of Construction – Fannie Mae’s Selling Guide states that it is an unacceptable appraisal practice if there is a misrepresentation of the physical characteristics of the subject property, improvements, or comparable sales. The appraisal did not accurately reflect the physical features of comparable(s) two and three. The appraiser reported Q5 when evidence obtained from public records (exterior/interior photos) indicated Q4. See linked document labeled Defect Support Doc Value.
A property with a quality rating of Q5 is defined as: Dwellings with this quality rating feature economy of construction and basic functionality as main considerations. Such dwellings feature a plain design using readily available or basic floor plans featuring minimal fenestration and basic finishes with minimal exterior ornamentation and limited interior detail. These dwellings meet minimum building codes and are constructed with inexpensive, stock materials with limited refinements and upgrades. Comp 2 with its basic A-Frame design, small economy windows on most of the home, cheap, low-quality paneled walls, basic and quite limited cabinetry and countertops with the only appliance in the kitchen being a range-oven, and barely functional bathroom due to its basic, economical construction, functional utility problems, and basic electric baseboard heating with no air conditioning, falls well within the definition of a Q5 quality rating.
The definition of Q4 is defined as: Dwellings with this quality rating meet or exceed the requirements of applicable building codes. Standard or modified standard building plans are utilized and the design includes adequate fenestration and some exterior ornamentation and interior refinements. Materials, workmanship, finish, and equipment are of stock or builder grade and may feature some upgrades. Comp 2 does not exceed the requirements of local building codes, and little to no exterior ornamentation or refinements. The interior refinements are non-existent. Stock/builder grade materials would typically include the use of drywall (Comp 2 has cheap panels), a substantially larger kitchen (Comp 2 only has one, small section of low-quality countertop and a range-oven as the only appliance), and a bathroom tall enough that individuals 6′ tall could stand up straight in more than half the room. (Comp 2 is limited in this way). It would be misleading to label Comp 2 as a Q4 based on the definition as it clearly meets the definition of a Q5.
Considering the same definitions above, Comp 3 was constructed with economy of construction and basic functionality as the main considerations. The ceiling consists of raw plywood. It uses basic, electric baseboard heating with no air conditioning. A portion of the home is on piers instead of a concrete foundation, and there is no fenestration or exterior ornamentation. While the condition (not to be conflated with quality) of the home makes it look “shiny”, its overall quality closely correlates with the definition of a Q5 home. It would be misleading to label Comp 3 as a Q4 based on the definition as it clearly meets the definition of a Q5.
The following are considered unacceptable appraisal practices: 1) use of adjustments to comparable sales that do not reflect market reaction to the differences between the subject property and the comparable sales, 2) not supporting adjustments in the sales comparison approach, and 3) the failure to make adjustments when they are clearly indicated. The lender must also thoroughly review the “sales comparison analysis” adjustment grid. The lender must ensure there are no calculation errors and that substantial adjustments are addressed in the appraisal.
Failure to Adjust Comparables
Use of adjustments that do not reflect market reaction to the differences between the subject property and the comparable sales, not supporting adjustments and failure to make adjustments are considered unacceptable appraisal practices. The subject property was C4 while comparable sales one, three and four were C3. Based on our research, the appraiser should have made an adjustment for the difference between the subject and comparable sale(s).
This statement is inaccurate. The subject is, and is reported as being, in C3 condition. The adjustments are made consistently and appropriately based on sensitivity analysis as described in the summary of the sales comparison approach, which is located in the supplemental addendum.
Inadequate Comparable Adjustment(s) Use of adjustments that do not reflect market reaction to the differences between the subject property and the comparable sales, not supporting adjustments and failure to make adjustments are considered unacceptable appraisal practices. The appraiser made positive [redacted] adjustment(s) for date of sale/time to comparable sales two, three and four, respectively. The adjustment(s) were excessive based on our research.
The market data was thoroughly vetted in the original appraisal. Only properties competitive to the subject in its unique, niche market were utilized. I cannot comment on what research was conducted by Fannie Mae as no supporting evidence has been provided the give any indication that the adjustments were excessive. $/Sqft in competitive properties rose sharply over the 12 months preceding the effective date of the appraisal. I emphasize competitive because the subject exists in small market of properties which appeal to consumers as second homes. Comparing the subject to properties that mainly compete as primary residences would skew the data, and not accurately represent the market for the subject. When plotted and a trend line applied, the rate of change in the market is clearly visible and well supported (See graphic below). The amount of the adjustment is derived directly from the market data. It is important to note that the competitive niche market of the subject is rising faster than what is generally expected of typical single family housing in surrounding markets. All of the conclusions developed in the appraisal are well supported. [chart showing the actual data redacted]
Inadequate Comparable Adjustment(s) Use of adjustments that do not reflect market reaction to the differences between the subject property and the comparable sales, not supporting adjustments and failure to make adjustments are considered unacceptable appraisal practices. The appraiser made positive [redacted] adjustment(s) for quality of construction to comparable sales two and three, respectively. The adjustment(s) were excessive based on our research.
Lenders are responsible for the accuracy and completeness of the appraisal and its assessment of the marketability of the property and must take appropriate action to ensure that appraisers do not engage in unacceptable appraisal practices, including, misrepresentation of the physical characteristics of the subject property, improvements, or comparable sales.
The adjustments for quality are reasonable, appropriate, and well supported utilizing sensitivity analysis. The difference in quality between Comp 2 and Comp 3 when compared to the subject is substantial. Consumers in the market are well aware of this and act accordingly. It is the reaction of market participants that drives these large adjustments. I cannot artificially make a smaller adjustment because they appear large when compared to other markets. To do so would be misleading to the intended user(s) of the report. While I cannot comment directly on the research conducted by Fannie Mae, I can say that all of the comparables I have utilized are directly competing with the subject property, and appeal to the same market.
Subject Physical Features Reported Inaccurately – Condition/Quality of Construction Fannie Mae’s Selling Guide states that it is an unacceptable appraisal practice if there is a misrepresentation of the physical characteristics of the subject property, improvements, or comparable sales. The appraiser inaccurately represented the condition and/or quality of construction of the subject property as C3 when evidence obtained from the appraisal (exterior/interior photos) indicated the subject property was C4.
Selection and use of inappropriate comparable sales and failure to use comparable sales that are the most locationally and physically similar to the subject property are each considered an unacceptable appraisal practice. The lender must ensure that the appraisers analyze listings and contract sales, closed or settled sales and the most recent and similar sales available as part of the sales comparison approach.
This statement by Fannie Mae is inaccurate. C3 condition is defined as: The improvements are well maintained and feature limited physical depreciation due to normal wear and tear. Some components, but not every major building component, may be updated or recently rehabilitated. The structure has been well maintained. Note: The improvement is in its first-cycle of replacing short-lived building components (appliances, floor coverings, HVAC, etc.) and is being well maintained. Its estimated effective age is less than its actual age. It also may reflect a property in which the majority of short-lived building components have been replaced but not to the level of a complete renovation.
The subject fits well within the C3 definition. The subject is well maintained, it’s effective age is lower than its actual age, and there is no deferred maintenance.
C4 is defined as: The improvements feature some minor deferred maintenance and physical deterioration due to normal wear and tear. The dwelling has been adequately maintained and requires only minimal repairs to building components/mechanical systems and cosmetic repairs. All major building components have been adequately maintained and are functionally adequate. Note: The estimated effective age may be close to or equal to its actual age. It reflects a property in which some of the short-lived building components have been replaced, and some short-lived building components are at or near the end of their physical life expectancy; however, they still function adequately. Most minor repairs have been addressed on an ongoing basis resulting in an adequately maintained property.
The subject is in superior condition to that of a C4 home. C4 deferred maintenance and physical deterioration that makes the subject effective age close to it actual age. There is none of this. The subject much more closely resembles a C3 home based on the definitions.
Use of Physically Dissimilar Comparable Sale(s) – Gross Living Area Fannie Mae’s Selling Guide states that comparables that are significantly different from the subject property may be acceptable; however, the appraiser must describe the differences, consider these factors in the market value, and provide an explanation justifying the use of the comparable(s). Appraisers must use comparable sales that are the most locationally and physically similar to the subject property. Comparable sale(s) one was superior to the subject property in gross living area. The subject had [redacted] square feet while comparable one had [redacted] square feet. The appraiser has not provided an adequate explanation why the specific comparable(s) was used.
Comp 1 is a good substitute for the subject when all on the units of comparison are given consideration. It is the same quality and condition as the subject, it is close to the same age, the site size is reasonable similar, and is it the most recent competitive sale to the effective date. Above all else, even though it is a superior property (including GLA), it appeals to the same market. The same consumers that would interested in purchasing the subject would absolutely cross-shop Comp 1.
In late November on 2022, I received a notification from the state that a complaint had been filed, and a case was being opened. I was required to submit written responses to investigators regarding the allegations. A copy of the email sent from Fannie Mae (note that no actual person signed it) to the Appraiser Board read:
The first thing I did when receiving the notice was to pick up the phone and call my insurance provider. They are excellent, and have given me sound advice in the past. I left a message for their legal department. While I was waiting for a return call, I read through my policy documents to know what I could expect in the way of coverage. It turns out that my insurance company was a great resource, in not only providing context for what may have (actually) led to the complaint, but also by informing me of what the process would be like, and providing me with a number or resources to help get me through to process.
After informing my insurance provider, I responded to the allegations. It was more or less a copy/paste of my rebuttal to the repurchase demand. If I had never received a copy of the Fannie Mae letter to the lender, there would have been little, if any, context for the complaint as it was emailed to the state. I was glad to at least have some context.
Beginning in late January of 2023, I began to receive phone calls and emails from the state investigator. She was pleasant and professional. She was tasked with preparing all of my factual information. Was I licensed? Was the company I worked for licensed? For how long? All of the factual items were being assembled. We went back and forth through March of 2023.
In late June 2023, I received a letter from the appraisal board stating that I was to attend an “informal fact finding conference”, scheduled for the end of August 2023. I called my insurance company to inform them of the unfolding events. My contact at the insurance company was surprised that the complaint was not dismissed. She, and an in-house reviewer had looked at the appraisal and did not anticipate any problems. I was told that I would be provided with an attorney to help me with the process.
In early August, I was introduced to the attorney who would be assisting me with this process. I provided her with all of the information, and she hired another appraiser to review my appraisal. The next time I spoke to my attorney was a few days before the informal fact finding (IFF) conference was scheduled. She had received the results of the appraisal review and it left all of us scratching our heads. The overall findings were that the report was good overall. The reviewer said he might have done a few things differently, but he could not cite any specific problem that should result in disciplinary action by the board.
The day of the IFF conference, I arrived and met with my attorney and the appraisal board administrators. It turns out the this “informal” conference is anything but informal. A conference room is setup like a courtroom. One table in the front with a board member sitting, facing the rest of us. Two more, offset to the left and right for the administrators reading my charges, and my attorney and I. More tables were behind us, filled with new staffers to observe the proceedings. A stenographer was in place to generate a transcript of the meeting.
We began by a reading of the charges. I was asked to respond to each one. I started to read from my prepared statements, when I was interrupted by the administrators. Turns out, they just wanted me to refer to my written statements, and make sure they were submitted for the record. After this, it was finally time for the lone board member to ask me some direct questions.
He asked me to start by explaining to him what process I used to select my comparable sales. I did. He then asked me if, to the best of my knowledge, anyone from Fannie Mae had actually inspected the subject. I responded that to the best of my knowledge, no one from Fannie Mae inspected the property. He then asked me to elaborate on what qualified me to appraise properties of this type.
This question was the open ended opportunity one can only hope to be given in this situation. I described how a large part of my appraisal practice is unique properties. Properties that consist of odd designs, houses on top of stables, properties with easement, encroachments, and all manor of complexities. I concluded by stating that the subject was one of the more “normal” properties I have appraised.
At this point, he leaned back in his chair and said “I’m just trying to figure out why Fannie kicked this one back to us”. The conference ended a short time later. Both the attorney and I felt comfortable with the line of questioning that had transpired. I was confident that I had answered them to the best of my ability. Still, having never gone through this process before, I couldn’t help but wonder what a deep dive into my report would reveal. I was kept awake at night re-reading the report in my head trying to think if there was anything I had missed, and could have done better. At this point, it didn’t really matter. I was simply waiting for whatever was next.
In late September 2023, I received some good news. The appraisal board member that had conducted the IFF conference had issued his recommendation of finding no violation on any of the counts. I spoke to my attorney, who informed me that the next step was for this recommendation to go before the entire appraisal board in a public meeting. At that time, they would vote on whether or not to accept the recommendation, or to take other action. The meeting was scheduled for mid-October 2023. Needless to say, I felt a little better. Still, when discissions are made “by committee”, you never know what the outcome will be. I waited for the public hearing.
The Public Hearing
On a cool fall day in mid-October (today), I drove to attend a hearing that could have serious implications for my career. If I were to suffer a disciplinary action, I could not have a trainee for a period of three years. My current trainee would be out of luck, and I couldn’t stand the though of having to tell him to find another supervisor. Additionally, while my insurance provider had assured me I would still be coverable if I was found to be in violation, I did worry about the ever increasing expense load of staying in business. Only time would tell how this was gong to go.
The meeting started, and I heard the cases go through one by one. There were about a half-dozen cases in front of mine. Some were interesting. The man in front of me was fined $2,000 and his license put on probation after having been found in violation of USPAP. Then came my turn.
My attorney and I sat in front of the board and administrators. The chairman informed me that both us could speak for up to five minutes. At the advice of my attorney, I simply stated that I had nothing to add, but would be happy to answer any questions they had. With no questions being raised, a motion was made to accept the recommendation of a finding of no violation. With a quick second, and a unanimous vote to follow it was all over. Two and a half years after I wrote the report, I was finally in the clear.
This was a stressful process. An appraiser’s entire career could be upended by one of these complaints. After responding to the repurchase demand, I worried I had really done something wrong, and was too ignorant to know what it was. After I received the complaint, the more I thought about it, the more it bothered me. I know that all of us appraisers should be able to defend our work, and not take things like this personally, but I did. I still take it personally.
After reading Jeremy Bagott’s letter “INSIDER: FANNIE’S LOAN BUYBACK SOPHISTRY RELIES ON MODIFYING ANALYSTS’ BEHAVIOR” posted on October 13, 2023, I knew exactly how this complaint came to be. This complaint, which has sought to drag me through the mud for the last year and a half, appears to be for the sole purpose of satisfying Fannie Mae’s quota of complaints. Furthermore, it is clear that the Collateral Underwriter software (if indeed that is what was used in Fannie Mae’s “model”) is placing emphasis on garbage comps, and no human is actually reviewing them. Or, if a human is reviewing them as the article states, Fannie Mae is incentivizing the reviewers to side with their software instead of actual people.
I have loved being an appraiser. It was a really cool job. I will continue to be for a least as long as it takes to finish my obligation to my trainee. But, I no longer really enjoy it. Every property I look at, I wonder what problems it will bring, instead of being excited to solve the puzzle. I find myself actively looking for other opportunities to use my skillset. I don’t know what the next chapter of my professional life will be, but I suspect writing appraisals won’t be a part of it.
I know many of you are suffering the same problems. Even if the fees get better (I charged $2,000 for the appraisal that was subject to this complaint), it’s still not worth the headache of one of these complaints. I wish all of you the best, and I hope you have positive outcomes in your pending cases. As for the rest of you, continue to advocate for your profession. Write your congressional leaders, your senators, and your state boards. Advocate for appraisers now, while we’re still here.
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