RURAL RESIDENTIAL APPRAISALS UNDER SCRUTINY BY COLLATERAL UNDERWRITER
by Staff Appraiser
January 2015
On January 26th, Fannie Mae made Collateral Underwriter (also known as CU), available to lenders as a way to evaluate appraisal reports and determine the risk that the appraisal may be overvalued. Lenders will have the ability to submit an XML appraisal file in Uniform Appraisal Dataset (UAD) code through the CU portal. The portal will analyze numerous details of the appraisal report, including subject information, comparable selection/integrity of information, and adjustments made to the comparable sales. It will then cross-reference the appraiser’s comparable selection with other sales in the market, as well as compare the appraiser’s adjustments to other adjustments made by other appraisers in the market area. Based on this data, CU will determine a risk score, on a scale of 1 (low risk) to 5 (high risk), of the likelihood that the appraiser’s value is over-inflated.
I foresee two problems with CU’s method, and the first pertains to availability of data. CU is optimized for use in major metropolitan markets, where large-tract home developments are common, and in those areas, I believe that it will be a useful tool. However, in rural northeast Missouri and west-central Illinois, and even larger towns in the area like Hannibal, Quincy, and Kirksville, I am afraid that the system will unduly flag rural appraisers as high-risk, due to the scarcity of sales data. As a result, GSEs may become reluctant to assume any obligation for loans on these properties.
The second problem regards the imperfection of the market. CU uses multiple regression analysis to gather all the data in the market, crunch tons of numbers using advanced statistical modeling formulas, and determine adjustments for comparable sales. It then compares those to the appraiser’s adjustments and assigns a risk score to the appraisal. The idea behind the CU system is to keep appraisers consistent. However, CU does not recognize the imperfections in the market which result in high sales and low sales. These two problems undermine the reliability of CU's risk score, especially for rural markets.
I anticipate that CU will impact residential appraisers, lenders, and market participants in this region in a variety of ways:
CU will help to eliminate incompetent appraisers, as well as those who purposely over-inflate values.
Each appraisal will require more time to complete, as more comments will be required from the appraiser to justify the valuation and the methods used to arrive at it.
Appraisal costs will increase. While we do not plan to increase our fees for residential appraisals at the moment, the increased amount of time spent on reports may merit a fee increase at some time in the future. Lender personnel costs may also increase if revision requests increase.