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Editor’s Note: Everyone is talking about Fannie Mae’s Collateral Underwriter but as the cover story of Working RE’s latest print magazine (issue 37) reports, the agency’s Appraiser Quality Monitoring initiative is gaining momentum and promises to directly affect the livelihoods of many more appraisers. (Are you a Working RE Subscriber?)
Fannie Mae Warning Letters On the Rise
by Isaac Peck, Associate Editor
Fannie Mae’s new Appraiser Quality Monitoring (AQM) list is the latest threat to the livelihood of residential appraisers. The AQM is a list of appraisers, provided to all approved lenders and servicers of Fannie Mae, whose work is subject to 100 percent review or is no longer accepted by Fannie Mae. With the AQM system now fully operational, many appraisers fear that placement on such a list can be a career death sentence, since lenders will be wary of using an appraiser whose work has been flagged by Fannie.
Just as Fannie Mae promised in their July 2014 AQM FAQ, appraisers are beginning to receive warning letters that their appraisals contain inconsistencies, inaccuracies, or data anomalies that may warrant “further action” should such behavior continue. Fannie Mae says that the intent of these communications is for “training and educational purposes” and to provide appraisers with an opportunity to improve their work before Fannie places them on the AQM (do not use) list.
Appraisers across the country are receiving such letters from Fannie currently. In many cases, the letter describes this infraction: use of the same property as a comparable in multiple appraisal reports but with inconsistent Quality and Condition (Q&C) ratings for that property between the reports. Appraisers are quickly learning that, according to Fannie Mae, Q&C ratings for a property are absolute and NOT relative to the subject, as many appraisers were trained.
Sarah Wilson, speaking to Working RE under an alias to protect her identity, says she recently received such a warning letter from Fannie Mae indicating she used inconsistent Q&C ratings for a comparable property in multiple appraisal reports. Initially, Wilson says the letter made her afraid of being forced out of business. “When I first received the letter, I was panic-stricken that I was going to lose my livelihood because if Fannie blacklists you, no one is going to accept your appraisals. I spoke to some other appraisers and they are worried, too, because they know they’ve also used different Q&C ratings on a comparable in the past,” says Wilson.
Since receiving the letter, Wilson says she has taken steps to ensure that she doesn’t make the same mistakes again. “I started using new appraisal software that allows me to easily pull up previous comps by address and make sure I am using the same Q&C ratings that I’ve used previously. I also attended an OREP/Working RE webinar, Fannie’s AQM: Understanding Quality and Condition Ratings, by Richard Hagar, SRA which really gave me a better understanding of the Q&C ratings I should be using for different property types,” says Wilson. “I also had a conversation with Mr. Hagar and he helped me calm down and not feel like the FBI was going to break down my door. He recommended that I respond to Fannie Mae stating that I received their correspondence and I am taking steps to improve. I took his advice and I wrote them a letter stating that I am being very proactive about the situation.”
Wilson sees Fannie’s latest requirements and AQM system as a form of scope creep that adds additional work for appraisers. “It’s taking me longer to do reports because I have to look up every possible comparable to see what the rating was then to compare it to now. It’s not just Q&Cs; Fannie now wants all kinds of additional information, which translates into additional work that we don’t get compensated for,” says Wilson.
Wilson is particularly concerned about what she interprets as a lack of transparency and due process in Fannie Mae’s AQM. “From what I understand, there is no due process for appraisers like me if Fannie is to place me on a 100 percent review or blacklist. I can’t call them up and explain why I did this or that, or that I was confused about which rating to use. They want me to fit into a box and if I don’t fit then they don’t know how to deal with me. The whole process is very vague and I don’t think Fannie has done a good job explaining how it is going to work,” says Wilson.
The prospect of being placed on a 100 percent review list or being removed from Fannie’s roster has Wilson, and many other appraisers, worried that they are now on a short list to be put out of business. “If I get placed on a review list, it’s likely that I’ll get blacklisted by all my clients. If an AMC gets a letter from Fannie saying that one of their appraisers is submitting inconsistent reports and that Fannie will be watching them, do you think the AMC is going to keep that appraiser on the list? If you’re on a 100 percent review list, technically you’re not blackballed, but no one will want to use you,” says Wilson.
What’s a C3?
Wilson points out that Fannie’s own Q&C rating system can be interpreted differently by different appraisers, which is a point that many seasoned appraisers agree with. “Fannie’s own rating system is not very clear, and I don’t think what they’re trying to do is going to work. Sometimes I feel like the people who designed this have never been appraisers,” says Wilson. The ramifications of being placed on Fannie’s list, she says, make it more important than ever for Fannie to provide due process and a better explanation for appraisers about how the system works and more guidance on how to meet Fannie’s standards.
Wilson says that she’s talked to many different appraisers and sought guidance online but the explanations of Q&C ratings, and what appraisers define as a C4 or C3, seem to vary widely. “I’ve even heard an appraiser say that for everything he appraises, he uses Q3 and C3 because he doesn’t want to be stuck in the situation I’m in, where his ratings differ. That way, according to him, he never has to deal with this issue,” says Wilson.
Pamela Wyant, Certified Residential and appraising 19 years, agrees that there remains a fair level of disagreement as to what constitutes a C3 or C4, for example, even among experienced appraisers. “Fannie’s definitions are not clear cut and I think that’s causing problems for appraisers. There is not much difference between a C3 and a C4, particularly if you factor in the age of the property. If you get into houses that are 80 years old, you are looking at a whole different level of items to determine quality and condition, and particularly condition of a property, because some of the things in the house will be updated and some won’t be. At that point, I think the difference between a C3 and C4, for example, requires an appraiser’s professional judgment,” says Wyant.
Another problem, according to Wyant, is that Fannie’s approach of trying to make everything fit into six distinct categories makes it much more difficult to compare and adjust between properties. “Is a 40-year-old home that is well maintained, with a newer roof, water heater, furnace, and one renovated bath, equivalent in condition to one in which the kitchen has also been renovated? I don’t think so. What if the one with the renovated kitchen had carpet that was trashed? While adjustments can be made and explained, it will involve a battle with AMCs and underwriters that isn’t necessary if condition ratings were comparative rather than absolute,” says Wyant. “Even worse is that what is adverse for one location or price range can certainly be neutral in another price range or location. Somehow Fannie Mae seems to have forgotten that we are doing a sales COMPARISON approach.”
Fannie Mae Mum
Working RE reached out to Robert Murphy, Fannie Mae Director of Property Valuation and Eligibility, for specifics on questions the agency has avoided answering until now. When asked which mistakes might get someone a cautionary warning letter, instead of inclusion on Fannie’s 100 percent review or (heaven forbid) “do not use” list, Murphy mostly restated Fannie’s FAQ indicating that the warning letters are sent to “appraisers whose reports exhibit a pattern of minor inconsistencies, inaccuracies, or data anomalies” and the 100 percent review and “do not use” lists are reserved for appraisers whose reports exhibit egregious issues. (Click here to read a partial transcript of the email interview from the print edition.)
When asked what constitutes an “egregious” appraisal issue—what criteria is used and who makes that decision—Murphy simply restated the only specific example offered by Fannie to date as being “egregious”: an appraiser who appraises with his or her license revoked or suspended. This leaves appraisers with little guidance on what exactly will cause them to be placed on Fannie’s 100 percent review or “do not use” list. Murphy indicated that licensed or certified appraisers are involved in the process of identifying “potential issues,” but failed to specifically address whether Fannie Mae’s review appraisers are licensed in the states where they are performing reviews and have local competency.
Murphy offered little about how the appeal process works or what appraisers can expect if they find themselves charged with an “egregious” issue. Instead of a clear roadmap about what to expect, Murphy said instructions on how to proceed with an appeal are contained within the letter the appraiser receives from Fannie Mae. Murphy notes that Fannie will “consider removing an appraiser from the 100 percent review list once he or she demonstrates an improvement in appraisal quality,” and that lenders are frequently updated regarding the list. When asked about the concern of many appraisers that placement on a 100 percent review list will effectively put them out of business, Murphy said that an appraiser’s placement on the list does not indicate “a refusal by Fannie Mae to accept the appraisal.”
If an appraiser seeks to appeal his or her placement on Fannie’s list, Murphy indicates that a “management committee” will render a decision on the appeal, but declined to specify who is on the management committee or what criteria is used to evaluate the appeal, saying only that “the committee will include appraisers.” There is also no word on whether Fannie Mae has the staffing required to deal in a timely and judicious manner with what might be an avalanche of appeals. For an “innocent” appraiser who can’t work until his or her appeal is resolved, this issue seems vital.
Contrary to the approach that the Federal Housing Authority (FHA) and even private lenders have taken with appraisers who make errors in their appraisals—prescribing continuing education to remain in good standing with the agency—Murphy has indicated that Fannie Mae will not be offering continuing education to appraisers as a means for them to remain in good standing or to be removed from Fannie’s 100 percent review list.
Regarding how the AQM system interprets appraisers who change their Q&C ratings for the same property as the property changes, or as the appraiser receives additional information or education, Murphy reiterated that the AQM is not a fully automated process and that an appraiser’s comments regarding changes in Q&C ratings are taken into account. “We have multiple eyes on the issues, including licensed or certified appraisers from within Fannie Mae, before sending any letters to appraisers. This helps to ensure that appraisers’ comments are taken into consideration,” says Murphy.
Murphy confirms that Fannie Mae does not have a phone number that appraisers can call for guidance but advises them to ask their lender or client if they have questions regarding Fannie Mae’s requirements or are seeking additional information.
Murphy does acknowledge that Fannie Mae is able to track photos in each appraisal, a practice many appraisers have long suspected, which means that Fannie Mae is able to detect when appraisers reuse comparable photos in different appraisals and flag appraisals which contain outdated photos as deficient.
Read the entire story in the current print edition of Working RE.
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Part 1: Keeping Off Fannie Mae’s New Appraiser “Blacklist”
February 5th, 10 – 11:30 a.m. PST
Part 2: Fannie Mae’s AQM and How to Stay Out of Trouble
February 10th, 10 – 11:30 a.m. PST
Hagar covers Fannie Mae’s new requirements showing you how to appraise better and avoid trouble. Hagar unravels Fannie Mae’s new AQM system and the new Collateral Underwriter requirements. The two classes will explain the 18 “deadly sins” you must avoid plus issues related to Quality and Condition classifications. The classes are designed to help appraisers avoid being blacklisted by lenders and Fannie Mae, while supplying superior appraisals for a higher fee. These are the hot topics impacting all residential appraisers.
How to Support and Prove Your Adjustments
Part 1: March 5th, 10 – 12 p.m. PST
Part 2: March 12th, 10 – 12 p.m. PST
Updated and expanded, Hagar shows you how to properly support your adjustments- the most important topic of 2015! Regulations state that appraisal adjustments cannot be based upon an appraiser’s opinion. Failure to provide proper proof and analysis to support your adjustments means a rough road ahead: state board complaints, panel removal, lawsuits, even license revocation. Fannie Mae cites “the use of adjustments that do not reflect market reaction” as the number one reason an appraiser can be “blacklisted.” This training is critical in helping appraisers avoid catastrophic appraisal failures.
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About the Author
Isaac Peck is the Associate Editor of Working RE magazine and the Director of Marketing at OREP.org, a leading provider of E&O insurance for appraisers, inspectors and other real estate professionals in 49 states. He received his Master’s Degree in Accounting at San Diego State University. He can be contacted at Isaac@orep.org or (888) 347-5273.
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