The New & Improved Fannie Mae “FRAUDULATOR 2.0”
Originally known as Fannie Mae’s Collateral Underwriter (CU), and subsequently Collateral Underwriter 2.0 (CU-2)i this always dubious product of Fannie Mae is increasingly being referred to by some, if not many American Appraisers as The Fraudulator / Underwriter 2.0 (FU-2).
To be clear it is not limited to the Collateral Underwriter (CU & CU-2) software. The new Fraudulator (FU-2) combines the CU products with their numerous improper uses. The end result of which includes OUTRIGHT FRAUD being perpetrated against banks via the repurchase letters Fannie Mae now issues on a quota based system rather than because of legitimate appraisal defects. Whistle blowers available on confirmation of congressional protection.
Additional people and entities adversely affected (if not themselves also being defrauded) are those appraisers improperly defamed; state regulators, taxpayers, The U.S. Treasury, and any other Fannie Mae investors being misled about loan quality and collateral adequacy.
Prior to its release and adoption, member(s) of The Appraisal Foundation’s old Appraisal Practices Board had concerns about a then proposed automated system being proposed by Fannie Mae to screen appraisals. I was then sent a complete copy of the CU patent application for review back in 2014. A few immediately apparent concerns were:
- Not one of the seven original software developers was an active appraiser. Two had previously been low level licensees with very few years’ experience. Both had let their licenses lapse.
- The system was essentially based on regression analysis, with all the limitations and pitfalls associated with over reliance on regression and or multiple linear regression.
- The entire database had been compiled from misused data stolen from appraisers between 2011 and 2014. Purported data sets were scraped from or extracted from appraisals never intended for such use.
- The appraisers were never compensated for the extra unauthorized purposes their appraisals were now being put to. We calculated the impact of that theft from $12,000,000 to $15,000,000. National stature attorneys expressed agreement after multi hour conferences with their owners and senior associates. However, litigation over past data theft is not the intent of this narrative.
Fannie Mae’s original CU and CU 2 were never designed or suited to review either appraisers or appraisal quality. Instead, it was designed (very poorly) to be used as a rapid screening tool to rate risks associated with collateral. Meaning it was never intended to infer appraiser or appraisal inadequacy or defect. Its sole purpose was to raise a red flag that some aspect of collateral submitted to securitize loans being purchased by Fannie Mae have some type of underwriting defect or concern.
As originally designed and licensed for use by Fannie Mae to lenders, the CU was only intended to flag uploaded appraisals that needed or required further human intervention.
That could mean an appraisal review or possibly documented response to the concerns raised. The Fannie Mae CU license agreement with lenders prohibited lenders from simply copying and forwarding the “CU messages” contained in the Submission Summary Reports (SSRs) that lenders use to merge uploaded appraisals with loan application packages at the originating, or correspondent lenders.
That Fannie Mae prohibition recognized inherent defects or limitations of the CU system that required humans to intercede before appraisers were asked or required to replace or add additional comparable sales in support of their conclusions.
The most common abuse when implemented is that lenders would often require analysis of all 20 extra ‘potential sales comparables’ developed by CU… whether relevant sales or not.
Fannie Mae’s CU essentially checks back up to two years previous to the effective date of value, by nearby census tracts for all sales which meet the varying comparable sales selection criteria being sought. This put an exceptional burden on appraisers any time a value was lower than desired or hoped for by a lender or their borrower clients.
Some loan officers (typically for brokered loans) learned early on the CU scores could be manipulated by the selection of comparable sales, and by how they were ‘rated’ using the UAD system of absolute quality and condition (Q&C) ratings. Two average (typically C3 to C4) range condition sales rated at C3, could have one rated C3 & one at C4 to artificially reduce the overall CU score.
Hence a limit on lenders being able to do this was established. The license agreement dictated that lenders must first have a human review of the appraisal to determine (1) that the ‘new’ sales were in fact relevant, and (2) that their use would likely have an effect on the conclusions and value indicated before they could direct appraisers to reconsider based on CU developed data. CU manipulation was never addressed (in public or with appraisers). This is important further in this narrative.
Appraisers asked early on for access to the CU system (developed using unauthorized data from those same appraisers in the first place). Collectively we believed nearly all underwriter and lender / borrower concerns regarding selection of the most relevant potential comparables could be eliminated if appraisers had access to this data before the appraisals were concluded.
We were denied.
Early in 2015 (Lender Letter LL-2015-02) Fannie Mae eliminated certain historic percentile guidelines.
Peers 2014 analyses linked as follows:
While Fannie Mae didn’t focus on or even address this, the impact of that policy change negated the value and credibility of their entire “peer based” adjustment database. The database developed from 2011 through 2014.
If the database was compiled over periods Fannie Mae’s own data showed to be developed from improper appraisal practices of appraising to guidelines rather than to credible market perceptions, then at best the database would provide skewed results.
New “to market” data was simply added to the flawed database rather than replacing it. The errors may have become diluted as to impact, but they were never eliminated.
Neither I nor Fannie Mae have any credible information on the exact impact of the data dilution. For my part I would not knowingly ingest raw sewage. Nor would diluting it with pure or unadulterated water change my mind.
The same should apply to Fannie Mae’s CU; CU2.0, or as many appraisers refer to it their FU-2.
Read the linked previous description of how CU was explained in February of 2015 versus how it is described below.
As an aside, read it again (bullet points) it is based on census tract and census block demographic information. Location based demographics which if representative of specific neighborhoods has race based biases baked into them. Another separate issue members and users relying on the CU/CU2 & FU2 “systems” need to consider.
Back to the main issue.
Here is how current web searches will describe Fannie Mae’s CU:
In 2016 Lenders had a different interpretation of what CU did or did not do.
Note that any pretense that CU is not an appraiser or appraisal review system is completely out the window by 2016. Had it been redesigned in only 1+ year?
Though as promised in 2014 that scores of 1-5 were or could be ok, by 2016 CU scores of 4 or 5 were virtual loan stop signs.
Later it became 3.5 then 3.0 and now the magic number for Fannie Mae is 2.5. Not that 2.5 is required to make a loan.
Just that scores in excess of 2.5 can be and are reviewed up to a year or a year and a half after a loan is made.
The AQM sections of Fannie Mae may opt to refer such appraisals to state regulators, and or place the appraisers responsible for them on partial to complete monitoring lists. Meaning all or some appraisals uploaded by those appraisers will be reviewed internally by Fannie Mae or they will not be purchased at all. (My current as well as former inside sources tell me Fannie Mae’s reviewers simply laugh at AQM “exceptions” as not being credible.).
The LQC and CURE/Underwriter Teams are now on a quota system in their treatment of files where the collateral was rated over 2.5.
They are verbally told (required) to write repurchase letters on at least 50% by volume of files that cross their desks. If they do not write 50%, they are subject to enhanced personnel management ‘review’. Last year it was purportedly only 30%. No records were available from my sources as to what the correct percentage of actual defective appraisals is or should normally be. Except to say it is believed to be very much lower than 50%. Very much lower than 30% as well. Best guestimate? 5%-10%+-.
This is the set up to the fraud being alleged.
As the union Chairman of the American Guild of Appraisers National Appraiser Peer Review Committee (CNAPRC, AGA, #44 OPEIU, AFL-CIO) it’s been my job to closely review complaints made against our members by states, HUD, and GSEs. Especially those made by Fannie Mae.
Over the past six months to a year the volume of Fannie Mae originated complaints (they refer to them as TIPS in their news fluff pieces) made to many state appraisal regulatory agencies has exploded.
As the volume of complaints increased, I noted curiously that the number being sustained or concurred with by state agencies declined. In fact, in the past six months plus, not one state where we have interceded for our members has found those members in violation of USPAP. Not one.
Most recently, an AGA member who was a very long time appraiser for Ameris Bank because of his consistently credible and reliable appraisals received notice from his state regulators of two complaints by Fannie Mae.
By the time I heard of this case this highly respected bank had already hired their own reviewer who reportedly found no fault with the appraisals or its conclusions.
I also reviewed the appraisals involved. This was a senior residentially designated appraiser-member of the Appraisal Institute. Not a novice by any means. As I reviewed his work it was impeccable. In many respects it was / is superior to my own typical product as to form and format.
I was at a loss as to why Fannie Mae’s FU-2 teams would find exception to his work or his conclusions. The CU scores were not high (around 3.0-3.5). It was an atypical property, but the appraisal job was thorough and very credible.
I wrote to his state regulators on behalf of our union (The Guild) and our member. Ultimately the State cleared our member of any wrong doing or violations of USPAP.
None of the other three dozen plus complaint cases to many other states I reviewed also had supported or credible issues. In fact, the Fannie Mae complaints appeared as cobbled together generic boilerplate with little regard to the applicability of the allegations.
Those instances, more than any other single case, made me dig deeper. I reached out to our contacts at or for Fannie Mae.
That’s when I learned about the quota system. As well as even more allegations of non-compliance by Fannie Mae with the Financial Reform Recovery & Enforcement Act of 1989.
The term fraud was first used by these sources in describing circumstances and background to me. Not one of these appraisal complaints casually reported by Fannie Mae (mostly via email to regulators, as ostensible “tips”) were themselves SR3 or SR4 compliant.
As it turns out they (Fannie Mae “Reviewers”) also repeatedly violated the Ethics Rule of USPAP and its prohibitions against bias, deception / being misleading, advocacy, predetermined assignment conditions, misrepresentation of role, communication with intent to defraud, communication of results known to be misleading, knowingly allowed others to communicate misleading results, violated requirements of record keeping rule, & performing assignments in grossly negligent manner.
Also, though their reliance upon geographic location and neighborhood based rating systems (such as Neighborhood Scout) or their own census tract derived locational keyed ratings scores (de facto redlining). It was hard to find a line of the Ethics Rule (between 188 and 207 of USPAP) that they have not collectively violated.
A strong argument can be made that every other (50%) of these assignments constitutes acceptance of contingency prohibited assignments (find fault or lose your salaried position).
I have even harsher critiques of the managers of the AQM, LQC and CURE Teams for not only allowing these actions but promoting them. FHFA you are very remiss in your oversight obligations. Though Fannie Mae managers did tell all staff (April 2023) to stop talking about the issues to outsiders. I guess hide it rather than fix it is their motto.
I’m told there are no USPAP compliant work files in support of the appraisers’ review findings, or alternate values. The appraisers have been told that because they are a GSE (Secondary Mortgage Market service) that they are exempt from the requirements of USPAP under FIRREA. That isn’t how FIRREA reads.
Title 12 CFR Chapter III Subchapter B Part 323:
title XI provides protection for federal financial and public policy interests in real estate related transactions by requiring real estate appraisals used in connection with federally related transactions to be performed in writing, in accordance with uniform standards, by appraisers whose competency has been demonstrated and whose professional conduct will be subject to effective supervision. This subpart implements the requirements of title XI and applies to all federally related transactions entered into by the FDIC or by institutions regulated by the FDIC (regulated institutions).
Federally related transaction means any real estate-related financial transactions entered into after the effective date hereof that:
(1) The FDIC or any regulated institution engages in or contracts for; and
(2) Requires the services of an appraiser.
Real estate-related financial transaction means any transaction involving:
(1) The sale, lease, purchase, investment in or exchange of real property, including interests in property, or the financing thereof; or
(2) The refinancing of real property or interests in real property; or
(3) The use of real property or interests in property as security for a loan or investment, including mortgage-backed securities.
An exception noted is:
12 CFR 323.3(a)(10)(ii) Essentially: The transaction either:
(i) Qualifies for sale to a United States government agency or United States government sponsored agency; or
(ii) Involves a residential real estate transaction in which the appraisal conforms to the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation appraisal standards applicable to that category of real estate.
My contention is that quota based findings do not conform to ANY proper recognized appraisal standards.
I’ll let the learned legal experts for Fannie Mae, FDIC, FHFA and Texas TALCB (since Dallas, Texas is where virtually all of these deficient ‘appraisals’ are performed) decide if a GSE is regulated.
So, where is the fraud?
When Fannie Mae tells any FDIC regulated bank (or NCUA regulated credit union) that they must repurchase or reprice a loan in which improperly alleged “Fatal Appraisal Flaws”, or “Fatal Appraisal Defect” is given as a reason that the loan was not eligible for sale to Fannie Mae in the first place. At the point in which the bank is coerced into actually buying back the loan.
… and the appraiser is treated as collateral damage when their professional reputation is defamed by Fannie Mae.
I’ve known at least two appraisers to have had heart attacks after they were confronted with unfair state complaints originated from spurious sources. One died.
Without exception every appraiser I ever interviewed for a state complaint will try to describe the visceral agony as similar to being punched in the gut or kicked in the groin when they first receive a state complaint or bank buyback notice.
Then they have to take an unreasonable amount of time away from work complying with the states needs to respond to the allegations as well as compile their electronic work files, print them out and merge them into their hard copy work files.
They cannot renew their Errors and Omissions Insurance at all as long as the complaints are pending. For those working with AMCs and some banks, that makes them ineligible for new GSE related appraisals.
Some marriages break up over complaint issues like this. Income is affected. Mortgage payments are jeopardized (along with all other credit payments). Legal fees are often an issue.
Is that all?
As bad as the above is, it is not ‘all’ that happens.
Banks can be driven out of business. Depositors and investors are not going to want to keep their money in a bank that has unmarketable loans on their books or that keep having to buy them back from Fannie Mae.
Loan fraud at the application and submission levels will increase. Once commissioned parties whose income depends on closing loans and then selling them to the GSEs realize that only loans with CU (or “FU-2”) scores of 2.5 have any relative degree of safety, borrowers with unusual but benign property conditions won’t have access to equity.
My suspicion is that many if not most of these high risk properties will subsequently be found to be located in predominantly minority owned neighborhoods.
Now might be a good time to look at exactly how the census tract prices are utilized. Both at Fannie Mae, and at Black Knight who previously claimed to have a demographic keyed AVM designed to eliminate bias, and who has been selected as one of the six preferred companies to help Fannie Mae roll out its bifurcated-trash (I’m being polite) products.
“Trash Products” that arguably work best only in the CU / CU-2 (or FU-2) automated collateral review environment.
Fannie Mae does NOTHING that Freddie Mac, FHA, and VA can’t do better. The U.S. Government thought Fannie Mae bad policies could be prevented by placing them into conservatorship. Clearly that didn’t work. Their new direction is worse than the actions that resulted in them being put into conservatorship in the first place.
These events are occurring far below the level of Fannie Mae CEO Priscilla Almodovar. I’m told its several layers below Lyle Radke as well. However, it IS his responsibility as he is Director of Fannie Mae’s Collateral Policy team.
My hopes are:
- That federal regulators will take a much closer look at Fannie Mae collateral policies and practices.
- An immediate cessation of quota based repurchase letters will take place within a week of this being published.
- That ALL complaints or “tips” claiming to have been “after review” by Fannie Mae are signed by the responsible parties complete with their license numbers.
- That all Fannie Mae internal property reviews flagged by CU / CU-2 or (FU-2) processes must be subjected to USPAP Compliance including SR3 and SR4,
- Members of Congress more closely exercise their oversight with respect to this rogue GSE.
- That Members of Congress also review the proposed Value Acceptance SCAM products calling for waivers; unqualified third party inspectors, and bifurcation of appraisal by anyone other than licensed appraisers or licensed trainee appraisers operating under direct supervision of a properly licensed appraiser-mentor.
Lastly, it is more than past time to stop taking Fannie Mae’s word for how “robust” and wonderful their CU/CU-2 and FU-2 automated processes are. Congressional oversight needs to be directed at the actual software and algorithms used.
Specifically, what improper metrics are being weighted in CU, CU-2 & FU-2 scoring, and most important of all, HOW are baked in census tract demographics being scrubbed or adjusted to eliminate any negative impact based on race, or other prohibited metrics?
The one single constant in the U.S. loan production process since the Civil Rights & Fair Credit Acts were passed is that census tract numeric data was mandatorily required to be placed on all appraisals. That is where lender/loan/equity bias originates!
It is the one single source for which any malevolent intended persons could analyze racial characteristics of an area and directly redline… or embed it in their algorithms drawing from that core information.
Congress must appoint a team of appraisers and software experts to look under the hood at ALL automated valuation systems being used by GSEs. Team participant weighting should be toward appraiser representation. Software algorithm & data science expertise can be found in the appraiser community. It’s rarer to find appraiser expertise in the software community.
My recommendation is that representatives from the Appraisal Institute, American Society of Appraisers, American Guild of Appraisers, NAR and functioning and effective State Coalitions be appointed to address these concerns.
- i CU current version is 5.0. FNMA claims CU is now ‘available to appraisers’. That’s deceptively misleading. It MAY be available to limited staff appraisers as sub licensees of lenders. Independent appraisers have not generally been given access to it.