Fannie's New CU System

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Life After the New CU System                
by Isaac Peck, Associate Editor

On January 26, 2015, Fannie Mae’s new Collateral Underwriter (CU) tool was made available to lenders, an event that was highly anticipated by the appraiser community.

While Fannie Mae has been using CU to analyze appraisals since 2013, this latest move grants lenders doing business with Fannie Mae the ability to use the tool. This essentially gives lenders access to the same appraisal analytics currently being used in Fannie Mae’s quality control process and Appraiser Quality Monitoring (AQM).

With lenders now having such a powerful analytical tool directly at their disposal, the big questions for appraisers are how this is going to change the appraisal process, what kind of additional work will be required, and ultimately, how this is going to change the appraisal profession going forward.

How CU Works
In simple terms, CU is a risk management tool that neither rejects nor accepts appraisals, but simply provides “trouble codes” and a risk score to lenders and Fannie Mae regarding potential issues with an appraisal. CU uses complex algorithms to rank an appraiser’s comps against a pool of comps and provides a ranking of how the appraiser’s comparables and adjustments compare with those generated by the model.

Early feedback from appraisers indicates that the CU report generates 20 “comparable” sales and ranks the appraiser’s comps within the list. Some argue that if appraisers have done their due diligence and explained their analysis, they should not worry about CU’s additional sales data. On the other hand, some appraisers feel that CU is an incredible overreach that puts pressure on the appraiser and prevents them from doing their work independently. (See Collateral Underwriter: First Feedback for more.)

Just like other automated valuation models, CU analyzes comparables by looking at the proximity to the subject property, physical similarities, date of sale, and a number of other factors in determining which comparables the model prioritizes.

CU also thoroughly analyzes an appraiser’s adjustments, using regression analysis and analytical models, as well as comparing the appraiser’s adjustments with adjustments reported by other local appraisers. Fannie Mae’s Director of Property Valuation and Eligibility, Robert Murphy, has said that in many cases there is no statistical significance to appraisers’ square footage adjustments, with many using generic rules-of-thumb, such as $40 a square foot, and that CU is clearly intended to address this issue.

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CU also looks at Quality and Condition (Q&C) ratings, and will flag an appraiser’s rating if it differs from the prescribed definitions supplied by Fannie Mae and/or those of their peers.

What’s Changed?
It’s important for appraisers to note that this is not a complete change to the status quo, as Fannie has been using CU to flag appraisals and asking lenders go back to appraisers for additional clarification, since it first began development of CU in 2011. Some appraisers have already faced inquiries and “hard-stops” from lenders based on CU’s analysis. The difference is that instead of Fannie Mae passing the information to the lender, the lender now is able to analyze the appraisal with CU before it is ever delivered to Fannie Mae.

Additionally, according to a report issued by Mercury Network, of the 95 CU messages that affect appraisers, more than half address very simple issues that appraisers are already accustomed to dealing with regularly. However, many appraisers believe that CU will increase the number of inquiries and comp reconsiderations that appraisers field from AMCs and lenders- with the added time per report putting more pressure on the already shrinking bottom lines of many.

Please Explain
The problem for many appraisers is that explaining these additional inquiries requires more time per report. Here are some example messages from CU that appraisers are being asked to provide additional data on:
• The GLA adjustment for comparable #2 is smaller than peer and model adjustments.

• The GLA adjustment for comparable #3 is smaller than peer and model adjustments.

• The reported total below-grade area for comparable #4 is materially different than what has been reported by other appraisers.

• The view adjustment for comparable #4 is materially different from peer and model adjustments.

• The appraiser’s net adjustments for the comparable sales are materially different from the model net adjustment.

• The quality rating for comparable #2 is materially different than what has been reported by other appraisers. Please provide supporting commentary for your data on this condition.

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Richard Hagar, SRA and nationally recognized educator, says that many of the requests that he and his staff have fielded so far are questions that are already addressed in the report. “Our responses so far have been, ‘That is explained on page three.’ However, we’ve had a few instances where we needed to go back and address something that CU flagged, or ‘curing a deficiency’ in appraisal terms. So there is value in this system,” says Hagar. As the lender and AMC processes improve, appraisers may find that the number of inquiries and call backs decrease. “Good lenders and AMCs should be stopping and reading the appraisal report before contacting the appraiser regarding a CU warning message, because if the appraiser is doing his or her job correctly, an explanation supporting that should usually be in the report,” says Hagar.

However, CU will still result in more work for appraisers, according to Hagar. But the bright side may be that sloppy appraisers will be weeded out (or forced to improve) and good appraisers can raise their rates. “A lot of the good banks and AMCs recognize what’s going on and they expect appraisers to raise their rates. Some might look at this as requiring additional work but the requirement for better work, analysis, accuracy, and explanations was always there,” said Hagar. “The CU is checking to see if it REALLY is in the appraisal or is someone trying to slip an appraisal through the system without doing their job right. CU does add another level of work and an extra amount of detail. As a busy appraiser myself, I expect many appraisers to increase their fees, especially those who currently are accepting low fees and are not including the correct analysis to begin with. It’s going to be a lot harder for appraisers to slap together a report and move on.”

“I’ve received two phone calls from appraisers since CU came out who are raising their rates by $100. One is overwhelmed with business because he does good work and the other is raising his rates because he’s been cutting corners and recently has been caught by the CU system- he needs more time to do proper reports. Fannie Mae has started asking him for proof of all of his adjustments, so he’s recognizing that he has to do more work to fill out the form,” says Hagar.

The bottom line, according to Hagar, is that CU will enforce the requirement that proper support and explanation be in an appraisal. “Appraisers will need to explain and defend everything they’ve done in the appraisal. It could have been a Q&C rating, an adjustment, why your upstairs square footage is materially different from your peers, and much more,” Hagar says.

Warning Messages
Appraisers have been eager to discuss how best to avoid CU warning messages or red flags, but experienced appraisers advise that the goal is not necessarily to avoid them, but to anticipate them and explain your methodology. If appraisers are to remain independent, they shouldn’t necessarily be using the same Q&C ratings as their peers, or even the same Gross Living Area (GLA). For instance, if many local appraisers use incorrect MLS data in their reports, or incorrectly agree on a particular quality rating, does that mean an appraiser should alter their opinion to avoid call backs? The solution, according to Hagar, is to stand your ground and explain why you’re right. Why the property is actually a Q4, why your GLA is correct, or why your adjustment is more appropriate. Of course, first you have to know that you are correct and that is why proper education and training are so important, according to Hagar. “If you didn’t have the correct training in the beginning, you better get it now.”

Appraiser Access to CU Data
A debate is raging why only lenders have access to CU. A Network of State Appraisal Organizations, which includes nearly 20 state appraisal coalitions, have sent a letter to FHFA Director Melvin Watt, urging him to give individual appraisers access to CU data. The Network argues that CU’s “identification of alternative property sales as possible better comparables for analysis will likely result in the rejection of reports and the requirement for appraisers to spend considerable additional time responding to questions as to why those other sales were not used.”

However, some appraisers, while agreeing with the potential concerns regarding CU, take a contrarian approach with regards to giving individual appraisers access to the CU data. (Click Here to sign the petition to allow appraisers access to the UAD data.) Mike Foil, an appraiser from Arizona, writes in an online forum that while he agrees with the concerns of the Network, he does not support their solution. “We are independent appraisers who are paid to render our expert opinion about the subject property and a value for the same. If I use a comparable that, based on observation and research, believe to be a ‘C4’ for UAD purposes, but then find out from running CU ahead of submission, that other appraisers used a ‘C3’ for the same property; should I then use what other, unknown appraisers have used just so my report has one less flag? My answer is no! I am not being paid to submit a report based on what other people think, I am being paid for my professional opinion,” argues Foil.

Foil says he absolutely does not want CU data when he performs his appraisals. “I want to do my job, to the best of my ability and then stand on that. Giving CU data to the appraiser is one more step toward taking the profession in the direction of becoming an automated, mechanical function of the loan process. If you are insecure and need CU to tell you how to do your job, then I believe you are part of the problem,” says Foil.

This again speaks to the issue of whether appraisers should go along with what other appraisers are reporting as Q&C ratings, adjustments, or GLA in order to stay under the radar, or if the appraiser should do their own independent research and analysis, and stand by their opinions.

Either way, appraisers should be prepared to support and defend their methodology and conclusions.

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Fannie Mae has identified 18 major concerns, or “deadly sins,” related to appraisals including failures related to Quality and Condition. Understanding the issues will help appraisers avoid being blacklisted by lenders and Fannie Mae. In this webinar, Hagar takes appraisers, step by step, through the issues and shows how to properly classify Quality and Condition ratings. Each attendee will receive a copy of the “deadly sins” plus photographic examples of homes in each of the different Quality and Condition ratings.

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Updated and expanded, Hagar shows you how to properly support your adjustments- the foundation of good appraising! 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, 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 or (888) 347-5273.

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Comments (12)


    Just in case anyone needs to fill out a Uniform Residential Appraisal Form, I found a blank form in this site PDFfiller. This site also has several related forms that you might find useful.

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  2. by

    CU is a violation of the ethics rule of USPAP (Page U-7). “An appraiser must be impartial, objective and independent”. Where has my independence gone when I am told my quality ratings for a particular property did not match eight other appraisers?
    Now, I am told to clarify, explain or revise……..why aren’t the USPAP lovers yelling at the top of their lungs about this?

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  3. Well we’ll see where it all goes. FNMA gives the opportunity to the industry to make the lending industry very liquid. Banks can originate loans and them sell them later to FNMA if they choose, which in turn frees up more of their capital to originate more loans. Banks have shifted from making money on interest to making money on origination fees, while letting FNMA and their investors make money on the interest. Frankly its a beautiful thing for everyone when you think it over. Though it creates challenges. Huge organizations like FNMA have a need for uniformity and consistency. The URAR says it in its title, Uniform Residential Appraisal Report. This allows a reviewer/underwriter – whoever – in CA to review an appraisal from FL and know what they are looking at. Again a great idea, but again comes with challenges. The biggest flaw in the design, in my opinion (LOL), is that the only methodology that the URAR allows for (or at least that FNMA will accept as credible support) is the itemized sales grid method, where an appraiser can support their reconciliation of value from the probable range down to the probable single point of value. Its a neat method and when it works, it works pretty good. The problem is that way too often it doesn’t work. Good appraisers will develop the method whether or not it is “working” or not (just like they might develop the Cost Approach when they know it isn’t going to be relied upon), but in their final reconciliation or “weighting” may not rely on the method to form their final conclusion. Bad appraisers don’t even recognize the itemized sales grid method has its limitations. In my opinion, so long as the powers that be continue to insist that the squares be forced into the circles, which is how I would characterize what I know of the CU so far, nothing will improve for the better. Now if FNMA wants to say “Hey appraisers, lenders, AMCs, consumers, the only method we accept as proof of collateral is a supportable itemized sales grid method and if you cant do that then we don’t want the loan. Period.” Then fine. And really, that does seem to be what they are saying. Though if that really is true, if that really is the only way they will buy a loan in confidence, and if the CU is a step towards that goal, then not only appraisers, but the entire lending industry and consumers are in for the shock of a lifetime because much ado is going to go on for nothing, or in other words, loans aint going to happen. So my question would be does FNMA really want to purchase less loans or do they simply want better support for the value of the collateral? If its the latter, their going about it in the wrong way, in my opinion. I would suggest to retire the 1004 as-is and develop a form that could offer credible support in other ways. I would think a form and method could be developed that not only would provide more credible support, would take much less time for appraisers to deliver. Call me FNMA if you want the details or blacklist me when I tell you your method doesn’t always work and I aint gonna lie about it.

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      Check this site PDFfiller where you can find blank and fillable uniform residential form. It allows you to save, print, fax, mail or send to sign the form directly from the site. Here is the link to the blank form

      - Reply
  4. From what I’ve seen, I do NOT like CU. The implementation mechanics and so called “peer” comments are inappropriate. Having said that, I have to admit in one case it was a complete waste of the appraisers time (a 2.0 score resulted in a need for him to respond that his comps were the best, and why others were not). BUT, in the other case a slightly low value resulted out of a report that was egregiously deficient. So, n that instance CU did its job- though it as not possible to communicate that to the appraiser without also doing a review.

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  5. The CU system as set up by FNMA cannot give you the data; nor is the data even communicated back to the AMC or submitting lender. Only the score and a minimal message which is not allowed to be communicated to the appraiser without further human “review” (REALLY ambiguous) intervention.

    Ethical appraisers and ethical AMCs CAN work in this environment-we just need to figure out how. Owner of AMC I know, is NOT going to send unsupported ratings out to appraisers. Means he either does a cursory review OR he sends appraisal out for desk or field review so that the “data” becomes less relevant than the report itself. If the report is good; then MAYBE the comp selection could be enhanced by use of one or more of FNMA suggested comps ( I don’t know because the two score messages I’ve seen did NOT offer alternate comps); OR maybe it is logical for a third party to ask about why the house next door was not used- and maybe the appraiser simply forgot to explain it was not an arms length transaction.

    DAMN! As I was writing this I read a lender letter to an AMC. Looks like THEY are passing the burden on to the AMC which in turn rolls downhill to you know where! There are 17 out of 21 proprietary messages that CU can generate. NONE of these proprietary messages are allowed to be communicated to the appraiser under the FNMA license agreement for the use of CU yet 17 of them require action on an appraisers part!!! (Figure that one out).

    These messages prevent a successful SSR from being given to the lender. A successful SSR is a requirement of their ‘accepting’ the appraisal (note they have ALREADY accepted it and submitted it for CU, but they are playing games here by pushing the burden back on the AMC). Even then- after a successful SSR there is no guarantee that a 1-2 CU or a 3 to 5 cu will be automatically rated for further review OR as being acceptable! (Note the range has changed from earlier post this morning-then the threshold was a 3.5, but now it appears ANY score with a proprietary message has to be addressed, which brings us full circle to unnecessary work for appraisers again!

    THAT is NOT what FNMA’s Lender Letter -2 says!

    Back to the drawing board and research mode.

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  6. I’ve had a chance to review two CU messages. (1) rated 2.0 (acceptable)-msg was adjustments exceed matrix and peers. No other info and no other comps. Appraiser did a good job.

    (2) Score of 3.9 (3.0 can lead to poor performance consideration-marginal; a 3.5 is a deal killer unless the score can be lowered in some manner. FNMA Lender Letter -2 of 2/4/15 FORBIDS the CU info from being communicated to the appraiser until there has been some human intervention demonstrating that the credibility or results may be materially affected. NO appraiser is going to listen to anyone except another appraisers opinion as to whether there are material impacts. No one else is qualified. Certainly the AMC acting as an AMC (even if appraiser owned) can’t do it.

    Solution: Do a desk review, but who pays for it? Its not the borrowers fault that the LENDERS AMC picked an appraiser whose score is poor. Nor is it necessarily the appraisers fault for getting a bad score, for all the reasons that have been posted here, in forums and elsewhere. CU simply is a poorly designed system. In the case I am referring to the AMC paid for the desk review which in turn resulted in the property being reappraised, and if the appraiser does not at least respond to the DR for her lousy work, then it may be sent to the State for review (report was terrible, REALLY bad; value was within 5% to 7.6% reconciled to extreme low end of range indicated by poor comp selection and non market, rote adjustments).

    Appraisers ego got in way of fixing the report (even if value was left the same, the report needed serious work). Appraiser asked AMC if getting paid depended on her response or responding? AMC told her no; that their policy is that appraiser is to be paid regardless (they really do pay at this AMC, even when it cuts into their pocket due to bad work that has to be reordered elsewhere). Appraisers license ego and pmt is intact…though license is now at risk due to unwillingness to fix egregious errors pointed out in the DR.

    Anyway-point is that CU CAN result in more review work for all of us since the specifics of a CU including the score cant even be communicated without a human intervention review.

    AMC hired me to write a new section to their service level agreements. We’re thinking of two options; (A) Human intervention that doe snot require more than 2 to 5 minutes-like CU score 3.49 and below “Adjustments outside matrix & peers”. Solution simple response back to FNMA or in SSR system that peer and matrix is assumed to be in error since appraisers selection of comparables and adjustments are (appear to be?) appropriate. Option (B) $200 additional fee for desk review billed back to lender; Complete a desk review and IF it appears the CU info has merit send it on to the appraiser. IF it appears the CU info is wrong, send the DR back through the system as a response to the CU message.

    My contention is that no one except the lender can appropriately be billed for the desk review. Whether they pass that on as a settlement / escrow cost is another matter.

    Impact on consumer-At best added time delays; worst-more money and no loan anyway. Qustions remaining: When a new appraisal is ordered is it legal / ethical to forward copies of original appraisal and DR to new appraiser (by the AMC as lender agent-NOT by reviewer of course)? Reason: Appraiser should consider ALL available information. Also puts them on notice that half-arsed work has already triggered CU kick out, and to use extra caution (as we all should anyway). Lastly, We are supposed to consider ALL available market data and information. If comps have been developed and analyzed in another appraisal and review as well as CU then it seems that having an appraiser having that info benefits an appraiser, lender and borrower.

    Other thoughts or opinions? Remember objective is to deal with the CU system effectively, and ethically…and NOT do more work for free.

    - Reply
  7. by

    DEMAND TO SEE THE DATA! They are giving you the results of the data. Ask to see
    the formulas, calculations and analysis performed by the appraisers giving it another label. It is your right under USPAP.

    - Reply
  8. by Jo Ann Meyer Stratton, IFA, SRA

    Great comments by Mike Foil. I am 100% in agreement with him. I don’t want the CU data because it is riddled with errors. Assessor’s records quite frequently are in error. MLS listings are written to make the property appealing to buyers, accuracy is not important. Information from appraisals could be wrong because the appraiser did not do the appropriate research and verification. The only information an appraiser can rely on is their own research and verification and based on our knowledge of the applicable market, we develop OUR opinion of value. Then we explain how, what, why we came up with that opinion. The cardinal rule as long as I have became a fee appraiser in 1982 has been explain, explain, explain.

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  9. CU can also detect when an appraisal is under appraised as well as over appraised.

    If you are asked to review more comparables or even ones the ones you have already considered, which is often the case, you should be charging for a review.

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  10. Mr. Foil is right…… CU is going to take the independence out of appraising.
    If your told that your condition and quality rating doesn’t match your
    peers, where is the independence? Aren’t the mandates of USPAP suppose to
    independent, objective and impartial? I think the jury is rigged.

    - Reply
  11. 100% agree with Foil….The only reason I would like to have CU up front is to explain why I did NOT use the comps or Quality & Condition ratings that CU generates. Totally Agree with Hagar Stand your ground and PROVE why YOU are right!

    Having CU ahead of time will save time back and forth explaining yourself. Appraises absolutely should explain why they chose the comps they did and their adjustments however to have to go back and explain why they did NOT use the comps that CU generates is a waste of time. I state on page #3 that as part of the appraisal process many comps are reviewed and it is our job to weed out the less comparable properties from the best ones and use only the best in my reports.

    Years of experience allows me to make the appropriate comp selections and adjustments are based upon real world market indicators. Makes me very angry that after years of experience in this profession lenders, Fannie Mae and AMC’s (Thank God I do not have to work for many of those) continually question every move we make and our expertise is worthless to them.

    As for increasing your fees, most lenders will not allow this. They have plenty who will do it for less. I DO however, intend to charge for every extra comp they ask me to review in detail as this takes alot of time and they have to pay for it. My Charge will be $25.00 per comp review. We will see how that goes over!!!

    - Reply

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