The Jan. 26 arrival of Fannie Mae’s Collateral Underwriter (CU) has many residential appraisers concerned about what the widespread adoption of the appraisal risk management tool might mean for the industry.
Although implementing CU technically isn’t mandatory for lenders, it is strongly recommended for all appraisals submitted through the UCDP.
Fannie Mae’s goal is to enhance appraisal quality by highlighting potential report errors through CU’s risk scores, flags and messages, but many fear the unintended consequences could overshadow the program’s objective.
The central issue revolves around how effectively lenders will be able to process CU’s feedback to separate the pertinent information from the superfluous.
“CU will provide a litany of data. I expect that initially there will be analysis paralysis with all of the data,” said Crispin Bennett, senior vice president and chief collateral risk officer for Memphis-based First Horizon National Corp. “Some lenders may look towards the mounds of information and try to apply hard rules, as they have done in the past. They may put more weight on the results than should be placed, and this may cause some knee-jerk reactions to some of the data asking the appraiser more questions, and trusting them less. As the institutions learn the limitations of the information within CU, and how the tool should be used, some of this should subside. However, this will have an effect on both the lender and the appraisers, as well as AMCs.”
Because lenders are going to have more feedback to sort through, the entire appraisal process is expected to become more drawn out. This could mean more questions from lenders, and more revision requests.
“Appraisers need to understand what the scores mean that CU is going to push out. …,” said Eric Schwartz, senior vice president and chief appraiser of Houston-based Amegy Bank. “They might not like it, but they need to be able to justify why they did not use several other sales someone else is saying might be more comparable, and they might need to be prepared to have to justify why the sales they chose are more comparable to the subject property.”
There is expected to be some growing pains for appraisers over the added emphasis on justifying the comps used as opposed to the comps CU suggests might be more fitting. Bennett said appraisers should try to get out ahead of some of the lenders’ questions by offering a more detailed report to prevent future headaches.
“Let’s say a property similar to the subject was available as a potential comparable, but the price that it sold for was significantly different,” Bennett said. “In his research, the appraiser determines that the property has issues that no longer qualified that sale to be considered as a comparable. In the old days, the appraiser may or may not have commented on that sale. Today, that question will likely be asked from the lender since the property may be indicated as another sale with a very different price in Collateral Underwriter. The appraiser needs to answer the question before the question is a question.”
The appraisers who can eliminate the need for excessive revision requests are the ones on the client’s panel who are likely to receive the lion’s share of work, Schwartz said.
But even with proper due diligence in preparing reports, there are likely to be instances where lenders overstep their bounds using CU, and their desire for additional information eclipses appraisers’ patience.
In this event, individual appraisers will need to make the business decision on whether or not Fannie assignments are worth their time and effort.
“One thing I have always stressed to appraisers is to know how much you need to make per hour,” Bennett said. “At the end of the day, time equals money. Be ready to analyze and determine if appraisals are taking more time, and therefore, the amount of reasonable compensation needs to be adjusted. It will be easy if appraisers understand Business 101, they’ll already know how much they need per assignment.”
Unless the compensation for Fannie assignments increases, it is expected that a segment of the industry will eschew that type of work for more lucrative assignments.
“The more seasoned appraisers, and probably the ones within vision of retiring, may make the economic decision to forego any residential mortgage work that involves Fannie Mae, which is probably a big chunk of business for a lot of these people,” Schwartz said. “They don’t want to spend additional time explaining why they didn’t use those seven other sales that CU says are more comparable than the six they used.”
The profession hardly can afford a falling-out stemming from CU’s implementation.
Recent data from the Appraisal Institute Research Department shows that as of June 30, 2014, there were 80,500 active real estate appraisers in the U.S. The total number of appraisers has fallen by an average rate of 2.6 percent over the past six years.
The appraisal population is expected to continue to drop over the next decade as more people retire without people in line to take their place. Fifty-one percent of appraisers are between the ages of 51 and 65, and fewer young people are stepping into the profession.
“You have to wonder, if we’re going to be losing the experienced people, what are we going to be left with?” Schwartz said. “We’re going to be left with the least experienced people, and is that what we really want for the appraisal industry? I don’t think so.”
Schwartz’s overarching concern is that a reduction of appraisers could create a chain reaction that further jeopardizes appraisers’ place in the industry.
“If we significantly whittle away at the number of appraisers, you’re going to be left with higher appraiser fees, or the GSEs or some other body is going to come up with another way to value the collateral,” Schwartz said.
Although the prospect of a profession in transition is sobering, there still is reason for optimism about the future.
The inherent truth that has made the profession essential in the past continues to ring true: Analytical tools can’t replicate a human being’s ability to evaluate subjective elements of housing.
“Appraisers are necessary, and they need to understand that,” Bennett said. “The caveat is that [that’s true] as long as the appraisers are providing information that is needed and necessary. The fact that Collateral Underwriter is not a system that does everything outside of the appraiser solidifies the fact that the appraiser is necessary.”
Bennett believes that even if there is initial friction with the introduction of CU, things will normalize over time as the industry adjusts and appraisers naturally transition into more of an analyst role in the age of Big Data.
“I do believe that we are in a turning point where appraisers actually are becoming more of an analyst, and becoming more necessary,” Bennett said. “The duty of the appraiser as the only collector of market data is becoming less of the job description. Using available data effectively by analyzing characteristics of a specific property within a market is more of the focus, and that is not something that this tool will do on its own without the human factor. … There is no reason to fear it, but instead embrace it, understand it, and work with it.”
Statements and opinions made within this article are the opinions of those who made them, and do not necessarily represent those of their employer.