Fannie Mae recently launched a program to give lenders freedom from representations and warranties on property value for many loans. With a qualifying risk score from Collateral Underwriter (CU) and a recommendation of Approve/Eligible from Desktop Underwriter (DU), appraised value can be accepted up front to give lenders freedom from representations and warranties.

DU also will issue property inspection waivers (PIWs) – an offer to waive the appraisal if other requirements are met. With an exercised PIW offer, lenders receive representation and warranty relief on property value, condition, and marketability.

According to Fannie Mae’s expectations, historical analysis of CU scores should show approximately 60 percent of appraisals will be eligible for value reps and warrant relief. 

“I think an interesting perspective, as far as that projected percentage from Fannie is, how will lenders, AMCs and appraisers manage to the other 40 percent?” R3 CEO Brent Jones said in an interview with Valuation Review. “In a perfect world, appraisers would be paid more to deliver product that comes in under that 2.5 score. They are delivering a superior product, so they should be getting paid, getting more work and getting preferred status on lists – all things that should happen. As an industry, we should be looking towards that other 40 percent.

“Lenders still have some responsibility in validating and making sure information is correct; however, if you deliver a file under 2.5, it’s been identified as having the least risk,” Jones added. “Lenders have no more repurchase risks from that appraisal part of the loan. As for values of reps and warrants from the lender perspective, it’s great. The AMC perspective is you’re creating a triage where your spending most of your time as part as the review process – The appraiser, it’s out of sight, out of mind, because as an appraiser, we don’t want to see that appraisal again, and that’s the 60 percent Fannie refers to.”

Fannie Mae wants lenders to focus more intensely on appraisals of higher risk and ones that require more attention, Collateral Policy/Strategy Director Zachary Dawson said.

“I think there will be an increased focus on appraisals with higher scores. In the pilot program, we saw increased usage of CU by our lenders on appraisals with higher scores,” Dawson told us. “We saw a small, but not a significant, uptick in the amount of resubmitted appraisals with higher scores. Overall, it’s not dramatic. I think there will be increased focus on higher risk appraisals, which we think is a good thing.”

Dawson said appraisals identified by CU with higher scores needed to be examined carefully – although not necessarily rejected.

“The higher risk appraisal scores require more attention for a variety of reasons such as quality issues, property being overvalued or undervalued, and all warranting further attention from an underwriter,” he said. “CU does not approve or decline appraisals, and lenders still have discretion to underwrite collateral as they always have. Value rep and warrant relied does not change that.”

One of the concerns from the industry is that lenders might push back against appraisals with higher scores, working to get them to a point where rep and warrant relief is applied. Dawson, though, said it doesn’t appear that will be the case.

“I can tell you that this is not what we’ve observed in the pilot, nor what we expect going forward,” Dawson said. “If we were giving rep and warrant relief on 90 percent of loans, I could anticipate an intense focus on that last 10 percent, perhaps. But I think if you’re talking a 60-40 or 65-35 split, I think it will be more business as usual regarding higher scores.

“Since the advent of CU, we see lenders are using CU as we hoped, and it’s used to streamline the process on low-risk appraisals so they can divert their time to appraisals requiring a little more attention.”

Dawson further stated that the pilot program showed evidence of net decreases in resubmissions.

On the other side, according to Jones, if appraisers really were tasked with managing to that level of risk and delivering files under 2.5 every time, and show the work product and methodologies used, that could be a powerful marketing tool for the appraiser.

“The appraiser could market himself as having the tools within the report to increase odds of an appraiser coming in under a 2.5,” he said. “While the appraiser can’t control everything that triggers the model, they can go a long way in mitigating repurchase risk for their lender clients by demonstrating their methodologies within the report.”

Borrowers are just another set of eyeballs, Jones says, and ultimately, a supported appraised value builds confidence in the optics of the overall mortgage process.

As long as appraisals keep getting put into the system, the models will get better and better. 

“Is there enough data in the world to make collateral decisions without appraisals? Yes, there is,” Jones said. “But you cannot tell property condition, which is a big driver in the valuation process. Do you really need an appraisal if you’ve got a 50 percent loan-to-value? I think probably not. I am hopeful the industry finds the right balance.”

As for the origin of the Day 1 Certainty idea, Jones says this could’ve been implemented sooner. However, it all comes down to business, and how one can look to generate more.

“It’s a race between Fannie and Freddie to see who can get the most business. It’s a business decision to lure lenders to selling their loans to them,” he said. “Fannie says we have Day 1 Certainty and Freddie says we have total appraisal waivers – where does it stop?

“Does it benefit appraisers? Well, when you’re not ordering appraisals, it does not benefit appraisers, end of story,” Jones added. “You can spin it however you want, but for every appraisal not ordered, that’s one fee an appraiser isn’t going to get.”

Dawson sees Day 1 Certainty as a method for appraisers to positively move forward regarding confidence and compliance.

“It is absolutely a good thing for appraisers – as well as our lender partners,” he said. “This allows the lender to confidently streamline their appraisal review and underwriting process on a significant portion of their loan production and focus their time and attention on files that need it. This brings time and cost savings to the loan origination process that benefits our customers as well as consumers.” 

For appraisers, Dawson says, this should mean fewer requests for corrections and clarification from underwriters. This will reduce the time spent per assignment for appraisers which is obviously a benefit to them. In context of growing concerns about appraisal costs and turn-times, everyone benefits if appraisers are allowed to focus their time and effort on completing new assignments instead of revisiting – often times unnecessarily – assignments that have already been completed.

Jones indicates that from an appraiser’s vantage point, this technological implementation probably “won’t even register on their radar.” For AMCs and lenders, though, it should become more important to manage in terms of asking whether appraisers can provide as much work as possible under 2.5 levels, so AMCs and lenders can mitigate risks for clients.

“That should be the conversation. If I’m a lender, I want to make sure the people tasked (with) my appraisal management and doing quality control have a clue as to how to train appraisers and give them tools to beat that number. Now we have a hard target – we’ve never had that before,” Jones said.

Dawson stressed lenders still need to focus on whether the property is eligible for delivery to Fannie Mae, making sure the data about subject property is accurate (square footage, bedroom, bathroom count, etc.) for models to produce credible results.

“Customers can save time in underwriting process with appraisals. I think it’s not just time they save in reviewing appraisals, but also they will be much less likely to go back to appraisers for clarification, corrections, additional comps, etc. I think this makes this a great benefit to appraisers,” Dawson said.