Readers that have followed my past 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!

Lets 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 N., S., E., & W. in competitive areas. Your comparables are from 1/3 mile to a mile distant. The CU score is 3.75.

CU also provides up to ’20 alternate purported comparables‘. 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.