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Inside Access to Fannie Mae’s Complaint Process

by Isaac Peck, Publisher

For the last three years, there’s been plenty of rumors and anecdotal reporting about the flood of state board complaints filed against appraisers by Fannie Mae and Freddie Mac.

Finally, we have an inside look (and some hard numbers) at how Fannie’s complaint process works and how many complaints these Government Sponsored Enterprises (GSEs) are actually filing against appraisers.

In their September 2023 newsletter, Fannie Mae included a section titled “How State Tips Work,” which explains its reporting process. Instead of referring to them as state board complaints, Fannie calls them “tips,” writing that they “occasionally provide tips to state regulatory agencies” when they identify appraisals with “severe deficiencies.”

Fannie reports that it filed 1,083 state board tips (complaints) against appraisers associated with its 2022 loan production—for just one year. Although we don’t have the hard data from Freddie Mac, if we assume a similar proportion and procedure, this means the GSEs combined are filing in the neighborhood of 2,000 state board complaints against appraisers every year. (Freddie’s loan volume is roughly 90 percent of Fannie’s; $684 Billion in loan acquisitions for Fannie and $614 Billion for Freddie. In fairness to Freddie, perhaps they don’t complain about appraisers with the same fervor as Fannie.)

That’s a lot of state board complaints! Here are some of the key details about Fannie’s process and what it means for real estate appraisers.

Not Automated
Fannie indicates that it never files its tips in an automated fashion and (1) every complaint is reviewed manually, and (2) every complaint is issued as part of a loan buyback demand with the lender.

This is new information for many industry stakeholders who have been watching this issue closely. It has long been assumed that Fannie’s Collateral Underwriter® (CU®) system was filing complaints in an automated manner (due to the large volume of complaints).

Fannie explicitly makes this point: “LQC [Loan Quality Center] 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 the context of a comprehensive database of property characteristics and market transactions,” writes Fannie.

Buybacks First
One of the illuminating things about Fannie’s explanation is that it indicates Fannie is pushing a significant number of buyback demands on lenders relating to appraisal deficiencies. In other words, every state “tip” Fannie is sending has been preceded by a buyback of the loan in question. This means that Fannie must have forced a buyback of a minimum of 1,083 loans specifically for appraisal deficiencies (for 2022 alone). (Appraisers who are closer to the AMC/lender review process tell Working RE that this number is actually on the low end in terms of buybacks due to appraisals.)

A “buyback” in this context is when Fannie Mae or Freddie Mac force the lender to buy back the loan because of a deficiency noted in the appraisal. Buybacks also occur due to errors in underwriting, borrower income or credit, and so on. However, for the purposes of this analysis, Fannie is specifically telegraphing that it pushed 1,083 loan buybacks specifically because of appraisal deficiencies, and then filed a state board complaint.

In the GSEs’ buyback process, the lender is typically given three chances to rebut the GSEs’ critique of the appraisal. Oftentimes, the appraiser is looped into the discussion and offered the opportunity to defend their work, but not always.

“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 writes.

If you are an appraiser and one of your lender or AMC clients reaches out to you regarding a GSE buyback resolution request, take it seriously. Appraisers are advised to work closely with their client’s appraisal review team (if they have one) as well as consult with an experienced local appraiser or USPAP expert when writing their rebuttal.

Common Deficiencies
In the work we do with appraisers, we serve over 10,000 appraisers and we see a board complaint filed by the GSEs against one of OREP’s appraisers almost every week.

Here is a short list of the most common issues identified by Fannie Mae as justification for buyback demands and subsequently reported to state regulators:

• Failure to Adjust Comparables
• Inadequate Comparable Adjustment(s)
• Adjusted Value of Comparable Sale(s) Failed to Support Appraised Value
• Inappropriate Comparable Sale(s) Selection – Dated Comparable Sale(s)
• Inappropriate Comparable Sale(s) – Selection Due to Location
• Use of Physically Dissimilar Comparable Sale(s) – Gross Living Area
• Use of Dissimilar Comparable Sale(s) Due to Site Characteristics
• Use of Physically Dissimilar Comparable Sale(s) – Physical Features Reported Inaccurately
• Subject Physical Features Reported Inaccurately – Condition/Quality of Construction
• Comparable Sale(s) – Gross Living Area

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State Responses Vary
How individual state appraisal boards or regulatory agencies choose to respond to the GSEs’ tsunami of appraisal complaints varies widely by state. “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. We have seen many cases where the state required the appraiser to obtain additional education or mentorship as a result of the investigation,” writes Fannie.

Some states require a complainant to sign the complaint. When Fannie was still developing its complaint process a few years ago, it was customary not to have an individual employee at Fannie sign the complaint. Even today, letters that Fannie sends are traditionally signed “Sincerely, Loan Quality Center Fannie Mae.”

In some states, like California, this technicality meant that, at least in the early days of Fannie’s complaint reporting, some of Fannie’s complaints were categorically dismissed and not pursued further.

Joe Lynch, an appraiser in California, says his understanding of the Bureau of Real Estate Appraisers (BREA) complaint process in California is that there needs to be an individual’s name associated with the complaint. The REA 4001 California Complaint form requests a Certification Statement at the bottom of the form that reads: “(Must be signed and dated to validate the complaint.)”

However, Fannie has lately been taking a more rigorous approach to state board complaints. Instead of simply sending an email signed by the “Loan Quality Center,” in many cases, a Fannie Mae employee is filling out the complaint form and signing it individually. (In some states, the state board will redact the Fannie employee’s name before forwarding it to the appraiser.)

Why?
One question that comes to mind is, why are the GSEs filing so many complaints against appraisers?

Fannie takes this question head on. “Through this process, we aim to be responsible members of society, helping protect the public trust by giving appraisers and regulators feedback about deficient appraisals impacting the secondary mortgage market. Too often the competitive pressures on appraisers focus on turn time or price. With state tips, we hope to incentivize competition for superior quality,” Fannie writes.

Here, Fannie openly acknowledges the fee and turn-time pressure that appraisers are facing and makes an argument for quality. In other words, appraisers that are just focusing on doing quick work, or on competing for the lowest fees, still have to produce quality work—or face the wrath of the GSEs and the state board. Or so Fannie seems to suggest.

In this respect, Fannie seems to position itself as an equalizer—their quality review and “tips” will force competition around quality, not just fees and turn-time. This is welcome news to appraisers who are being undercut on fees by their competitors, but likely provides no comfort to appraisers who are on the receiving end of a GSE “tip”—whether justified or not.

Claim Exposure
There is longer-tail, larger claim potential here that goes beyond the filing of a state board complaint by a GSE. If Fannie or Freddie successfully forces a buyback of a loan due to an appraisal deficiency, the lender may then need to hold that loan on its own books until maturity or it might sell the loan for a discount on the secondary market.

Either way, the lender might then bring a claim against the appraiser to recover any losses associated with the loan buyback. These types of claims do not occur on every buyback, but they do happen. The demands for these claims typically center around $50,000-$60,000 but can exceed $100,000.

The percentage of buybacks that turn into lawsuits or demands is relatively small, according to our internal numbers—but some do.

What’s an Appraiser To Do?
From a risk management perspective, there are a number of steps appraisers can take to protect themselves and minimize their exposure to these issues.

1. Take Note of GSE Requirements
   To their credit, the GSEs actively engage with appraisers at both state and national conferences. Lyle Radke, Senior Director of  Collateral Policy, and Scott Reuter, Chief Appraiser and Director of Valuation at Freddie Mac frequently give presentations live at appraisal conferences and via online webinars on the most common red flags they see and what to do instead. If you’re an appraiser who is doing residential mortgage work, it pays to understand what the GSEs are looking for. Making appropriate adjustments, providing support for those adjustments, and selecting appropriate comparables appear to be high-priority issues for the GSEs. Focusing on professional development and taking classes centered on these particular topics may be a good way to ensure your protection.
2. Ensure Coverage for Disciplinary Proceedings:
   Not all E&O insurance carriers provide coverage for disciplinary proceedings. A number of “insurtech” and generalist appraiser E&O providers are offering policies without key coverages that appraisers need (like Discrimination Claim Coverage!). This can be a costly mistake. It’s not uncommon for appraisers to realize their policy doesn’t cover regulatory or disciplinary proceedings until they receive a letter from their state board and reach out to their E&O provider. It pays to make sure your policy covers board complaints and other regulatory investigations.
3. Get Professional Support:
   Too often, appraisers tend to go it alone. If you do end up facing a buyback inquiry from your lender client or you’re defending against a state board complaint, it pays to get professional support and representation. Even if you are an expert writer and hands-down the best appraiser in your area, it pays to have a second set of eyes on your response. You want to consult with folks who are intricately familiar with the high-stakes process you are likely experiencing for the first time. Working with another experienced appraiser, USPAP expert, and/or an attorney (depending on the circumstances) is the best way to protect your reputation and your business. OREP offers a free one-hour consultation with trial attorney Craig Capilla for all OREP Members facing regulatory complaints, as well as a free consultation with either Bob Keith, Former Executive Director of the Oregon Appraisal Board or Joshua Walitt of Walitt Solutions if the state board comes knocking.

Stay safe out there!

About the Author
Isaac Peck is the Publisher of Working RE magazine and the President of OREP, a leading provider of E&O insurance for real estate professionals. OREP serves over 10,000 appraisers with comprehensive E&O coverage, competitive rates, and 14 hours of free CE for OREP Members (CE not approved in IL, MN, GA). Visit www.OREP.org to learn more. Reach Isaac at isaac@orep.org or (888) 347-5273. CA License #4116465.

OREP Insurance Services, LLC. Calif. License #0K99465