Starting on January 26, 2015 Fannie Mae’s Collateral Underwriter (CU) will be available to lenders. What is the Collateral Underwriter? Per Fannie Mae it is a proprietary appraisal risk assessment tool to improve appraisal quality. Appraisals will be scored for risk from 1.0 to 5.0 with a 1 indicating the lowest risk and 5 indicating the highest risk.
Does the collateral underwriter provide an estimated value for the property? No it does not. Does it determine adjustments for the appraisal? No it does not. But it does provide feedback whether the adjustments do not appear to correlate with prior appraisals submitted to Fannie.
What are some of the concerns about the Collateral Underwriter?
- The CU uses census blocks instead of neighborhoods to determine the impact on location of a sale comparable.
- The CU will provide up to 20 properties that are ranked by risk, not necessarily the most suitable.
- Is the CU going to influence appraiser’s adjustments and values?
- With Appraisal Management Companies seizing the market share of appraisals for lender work since 2009 and hiring the lowest fee appraiser, and in many cases, appraisers not familiar with the market area, it brings into question the quality of the appraisal data Fannie Mae has accumulated.
- Fannie just recently removed the maximum adjustment guidelines of 15% net and 25% gross because appraisers were not making market adjustments in order to meet the guidelines. Will appraisers start appraising to minimize the CU risk factors instead of market value?
- CU appears to be concerned with risk of overvaluation instead of undervaluation. Accordingly, some are concerned this will lead to an emphasis on appraisals under valuing properties and impeding transactions.
It will be interesting to see how this plays out over the next year. Will it improve appraisal quality and remove appraisers performing poor or fraudulent appraisals? Or will it over burden appraisers with additional busy work which has no effect on value and increase the cost of appraisal services? Only time will tell.