In January 2015, Fannie Mae will release Collateral
Underwriter (CU), a statistical tool for lenders that assesses an individual
appraisal’s risk and quality using the uniformly coded data (known to
appraisers as Uniform Appraisal Dataset (UAD)) from other appraisals. If the CU program works as intended, it could
make appraisers more accountable, improve appraisal quality, and help lenders access
loan risk more effectively.
Appraisers are put off by the pending change because the
trend has been that increased oversight usually results in more work and liability
for appraisers without increased compensation.
With CU, appraisers will be compared to their peers and to statistical
models on every assignment. Both comparisons
could be wrong, but either could lead to an appraiser being asked for numerous
clarification revisions, being listed as high risk appraiser, being placed on a
do not use list without due process, and ultimately result in a loss of
Here is an example output from Collateral Underwriter
obtained from Fannie Mae’s online Introduction
to Collateral Underwriter Course and four issues that cause
appraisers anxiety. (Please excuse the
poor visual quality of the example; it is the best resolution of a screen
capture that we can manage.)
Appraisers often spend hours researching and commenting on lists of AVM comparables, without any additional compensation, because responding to lender stipulations is required when accepting the assignments. Admittedly, CU should have better comparable data than most AVMs, because the data comes from actual appraisals and includes things like condition, quality, basement finish, and view. However, the typical appraiser has had bad experiences with past AVM data making them nervous about CU’s implementation.
All of the above issues touch on the anxiety that appraisers currently feel about the implementation of Fannie Mae’s CU. These examples are based around the fact that data is being used by Fannie Mae and lender clients to judge an appraiser’s work, without the appraiser having access to similar information during the appraisal process. If Fannie Mae truly wants to improve appraisal quality, the agency should work to find a way to provide CU information or warnings to appraisers during the appraisal process so that appraisers can work to improve the quality of their work before submitting a finished product, and/or address issues that the automated system will flag.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
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Fannie Mae launched the required 1004MC Market Conditions Addendum to the 1004 Appraisal Report, in April of 2009, as a way for real estate appraisers to better communicate and to support market condition conclusions within home appraisals. This form is now standard for almost all home lending appraisals in the United States, including FHA. At the time, many appraisers complained that the 1004MC form is additional work that does not result in a higher-quality appraisal. Five years later, I think most appraisers concur (Please comment and let me know if you agree.).
Contrary to the assumed majority, A Quality Appraisal believes that the 1004MC is an overall good thing for the appraisal profession. Prior to this form, few appraisers were doing much more of a market conditions analysis than merely citing an area report from the local multiple listing service (MLS) (See our past blog on problems with RMLS Area Report.). Now, many home appraisers commonly analyze detailed statistical data of the micro market surrounding the subject home. However, some appraisers continue to discount the 1004MC completely by only citing MLS or other data sources.
For many home appraisers, ignoring the 1004MC is made easier by its several flaws. The following lists ways that I think the 1004MC appraisal form could be improved:
1. Move the focus of the Market Conditions Addendum and the appraisal report away from neighborhood to competitive market area. Often, competitive market areas are larger than neighborhoods and include larger samples of data for the appraiser to analyze statistically. This is particularly helpful when working with complex or rural properties where buyers often search a large area; and where a market conditions search of only the neighborhood often results in very little comparable data for statistical analysis.
2. The 1004MC table should be composed of at least two years of data. This will help appraisers to identify if observed changes are a result of an overall trend change or just a seasonal swing.
3. Stop displaying data for two quarters and then a six month period on the 1004MC, because it is confusing to the reader. The following example shows a stable trend, but as displayed on the 1004MC form, it looks like the number of sales declined.
The above is a screenshot from an actual 1004MC appraisal form showing the Total # of Comparable Sales (Settled) row.
4. Include a price per square foot trend analysis. Price per square foot is often a stronger indicator of price trends than median sales price because changes in the size of homes can result in a change in median price trends, without a corresponding change in value.
5. Remove the Overall Trend check boxes for either Total # of Comparable Sales (Total Sales/Quarter) or Absorption Rate (Total Sales/Month). A trend check box for each suggests that these are two separate indicators of the market health when they are really the same (just quarterly vs. monthly). If both trends are checked as “Declining,” it appears to the appraisal reader that two areas of the market are suffering, rather than just one. The 1004MC should display both, but only have a check box for one.
The above is a screenshot from an actual 1004MC appraisal form showing Total # of Comparable Sales and Absorption Rate lines.
6. In addition to a table of numerical data, the 1004MC should feature some graphical displays. With today’s technology, it takes no additional effort by the appraiser to include a graphical display of data. Some appraisers already do this, but a standard set of graphs would make it easier for users of the data, and for appraisers to quickly determine if the market is healthy or changing. The following are the four charts that I suggest be included with the 1004MC (Note that all of the following charts display two years of data and not just one.):
Chart A shows the appraiser how median list prices and median sales prices are trending in relation to each other.
Chart B shows appraisers how price per square foot of living area is trending. This chart is particularly helpful as a way to check the results of Chart A. Sometimes the market can shift toward selling smaller homes, making Chart A decline while Chart B increases.
Chart C shows the appraiser a component breakdown of inventory (sales and listings) and gives the appraiser a better feel for what supply and demand is doing and at what time of the year.
Chart D shows the appraiser the overall trend in home inventory.
The appraisers at A Quality Appraisal already incorporate all of the above-proposed suggestions for improvement of the 1004MC on every appraisal (and not just appraisals for Fannie Mae or other lending). We use Microsoft Excel to produce the graphs, but free software called Total Solutions 1004MC is also available to appraisers, as are many other similar programs.
If you find this information interesting or useful, please subscribe to my blog. Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos. If you need Portland, OR area residential real estate appraisal services for any reason, please contact us. We will do everything possible to assist you.