Fannie Mae recently updated appraisal matters in its Lender Letter (LL-2021-01) to all Fannie Mae single-family sellers. Several categories were addressed including risk management policy reminders and resources pertaining to appraisals.

In recent months, low interest rates and other market factors have triggered record numbers of loan originations. Housing demand is high, supply is limited, and home prices have been accelerating – in some markets, dramatically. While market conditions come and go, the current environment highlights the importance of vigilance in managing appraisal risk, according to Fannie Mae’s update.

There are lenders responsibilities for appraisal review pertaining to the recognition that the appraisal review process is an essential part of originating a loan for sale to Fannie Mae.

“The lender is responsible for ensuring that the subject property provides adequate collateral for the mortgage,” the Selling Guide states.

Unless an appraisal waiver is offered and accepted, confirming the adequacy of the collateral means the lender must obtain and review an appraisal to confirm it accurately reflects the market value, condition, and marketability of the property. The Selling Guide further states: “A lender must continually evaluate the quality of the appraiser’s work through the normal review process of all appraisal reports.”

As a reminder, with a collateral underwriter (CU) risk score of 2.5 or lower, the lender is not responsible for the following requirements in Selling Guide B4-1, Appraisal Requirements:

• Underwriting the appraisal report to determine whether the subject property presents adequate collateral for the mortgage;
• Ensuring the appraisal accurately reflects the market value of the property;
• Ensuring the appraiser used sound reasoning and provided evidence to support the methodology chosen to develop the opinion of value; and
• Analyzing the comparable sales used in the appraisal report, including the description, selection, adjustments, and reconciliation of the comparables.

Importantly, Fannie Mae emphasizes the lender remains responsible for the description of the subject property, ensuring the subject property meets property eligibility requirements, and the accuracy and completeness of all data on the appraisal that pertains to the property and project (if applicable), other than the appraised value. This includes the subject property’s condition and quality ratings (Selling Guide B4-1.3-06, Property Condition and Quality of Construction of the Improvements).

Every lender must have a process in place to ensure the appraisal content is reviewed for accuracy and not just for value. Common examples of inaccurate data include the dwelling size, dwelling condition, unobserved encroachments, and undisclosed external influences. Inaccurate data leads to misinformed analysis that can cause the lender to make faulty underwriting decisions impacting the sustainability and the eligibility of the loan.

“The purpose of AIR is to ensure that lenders do not interfere in the professional judgement of the appraiser. Appraisers are not responsible for AIR compliance – in fact, lenders are the responsible party for AIR compliance. AIR should protect the appraiser from pressure from the lender,” the letter states.

Lenders must have the appropriate guardrails in place to foster appraiser independence and prohibit influence in the development, reporting, result, or review of an appraisal, not just the ordering of an appraisal. Lender policies and procedures must ensure people who are directly compensated or motivated by the outcome of the appraisal are not involved in the fulfillment process.

Some lenders misinterpret AIR regarding appraisal fulfillment, particularly around the selection of an appraiser or appraisal management company.

Retail or correspondent mortgage production staff or wholesale mortgage brokers are allowed under AIR to request an appraisal from a lender-designated appraiser or appraisal management company provided they have no opportunity to choose from a list of multiple appraisers or appraisal management companies.

“Appraiser independence has many components, not just fulfillment. Influencing the appraiser to misidentify, remove, or modify anything in their report to conceal facts dealing with eligibility is also out of compliance with AIR (for example, misidentifying a condotel or changing a condition rating). Lenders must ensure that appropriate firewalls are in place for the appraiser to report what they know and find, without feeling any overt or subtle pressure in the process. Lenders make better decisions when they are accurately informed and must not abuse the appraisal process to obscure uncomfortable facts,” Fannie Mae said.

While CU can be a tremendous asset to lenders in reviewing appraisals, the letter stated, users should understand the limitations of automated analysis. Fannie Mae expects lenders to use the CU feedback in combination with human due diligence, and consideration of other validation data sources may also be prudent in some cases.