Fannie Mae, in its September Newsletter, provided tips to state regulatory agencies when it finds appraisals with severe deficiencies. Fannie Mae’s goal is to give states actionable information to help improve the quality of appraisers and appraisals.

But how does the process work? Spoiler alert: state tips are never auto generated and always require extensive manual research.

“Fannie Mae’s Loan Quality Center (LQC) completes full-file reviews on loans selected as part of a random sample or based on detection of potential anomalies,” Fannie Mae stated in the newsletter. “Appraisal is just one aspect of our reviews, which also encompass credit underwriting and other Selling Guide requirements.

“Collateral Underwriter (CU) risk analysis is one of the inputs into the selection logic,” Fannie added. “LQC reviews are not automated. Our expert analysts validate the appraisal results by asking questions like ‘Do the comparable sale selections make sense?’, ‘Is the data accurate?’, ‘Did the appraiser make appropriate adjustments?’, and ‘Are we getting the most probable value?’ in context of a comprehensive database of property characteristics and market transactions.”

Fannie Mae goes on to say that if the analyst finds significant defects, the appraisal goes to an internal QC review. In some cases, the QC review is followed by a management review. Citations that survive internal checks are communicated to the lender.

Lenders then have a rebuttal period followed by an appeals process.

“If the lender is unable to resolve the concern by providing additional evidence in support of the appraisal, they ultimately remedy the situation either through a loan repurchase or a repurchase alternative, and only then do we notify the state of our concern,” Fannie stated. “State regulators have complete discretion on what to do with our tips. A tip may lead the state to investigate and can result in disciplinary action.”

Fannie Mae noted it has seen many cases where the state required the appraiser to obtain additional education or mentorship as a result of the investigation.

Additionally, the newsletter points out, too often the competitive pressures on appraisers focus on turn time or price. With state tips, Fannie Mae hopes to incentivize competition for superior quality.

Fannie also shared this note about the number of appraisers whose appraisals are reported as state tip.

Generally, the number of tips the agency provides is proportionate to the state population. Ohio, for instance, was the seventh most populous state in 2022, and also had the seventh largest number of state tips that year at 46. The Appraisal Subcommittee’s Appraiser Registry currently lists 2,781 active appraisal licenses in Ohio. If each tip was for a unique appraiser, that amounts to 1.2 percent of the state’s appraisers.

Texas received the highest number of tips (86) in 2022, consistent with its rank as the second most populous state, impacting about 1.5 percent of its 5,781 active appraisal licenses. For 2022, about 0.05 percent of appraisals for loans acquired by Fannie Mae resulted in state tips.