Appraising News

Commentary on the the U.S. Appraisal Market – Change is Coming

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John Mathis June 13, 2018

This article was first published in the Harbor View Advisors.

About John Martins

John is a Partner and Co-Founder of Harbor View Advisors. He brings over 20 years of experience as an investment banker, investor, equity research analyst and management consultant. John leads Harbor View’s Catalyst for Corporate Development practice where he helps clients fuel growth through acquired innovation. Prior to founding Harbor View, John was a Vice President in the Technology Research Group at Goldman, Sachs & Co. in New York. As a publishing analyst, John’s research spanned companies with a total market capitalization of $100 billion across five industries including payment processing, financial services, travel services, business process outsourcing and business intelligence. Companies under coverage included Accenture, Amdocs, Automatic Data Processing, ChoicePoint, EDS, First Data Corp, Fiserv, Hewitt Associates and Sabre. John’s experience also extends to the “buy-side” as a Partner at Camelot Capital, a hedge fund with targeted investments in public and private software and services companies. John led the investment decisions involving 80 companies in ten industries including business and financial services, payment processing, telecom services and security. Prior to joining Goldman, John worked as Principal for A.T. Kearney in Chicago where he managed global consulting engagements in the U.S., Australia, Brazil, Denmark, Sweden and the United Kingdom. John’s practice expertise included international supply chain, global sourcing, process reengineering and strategic planning. John was active in helping A.T. Kearney establish new offices in Australia and Brazil and facilitated the integration of a consulting firm acquisition in Denmark. A sample of his client engagements includes Visa, Sears, Rolls Royce and General Motors. John received a Bachelor of Arts degree from DePauw University and a Master of Business Administration (MBA) from The University of Chicago. Outside of Harbor View, John is an Ironman, part-time triathlete and a father of three.

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The Appraisal world is under intensifying pressure that will likely accelerate the pace of M&A consolidation.  We see the new “registry” component of the Dodd Frank rollback as another potential catalyst for consolidation in the fragmented appraiser and Appraisal Management Company (“AMC”) arenas.  In this note we highlight where the market is pricing transactions given recent notable deals, including CoreLogic’s high water mark of 13.5X EBITDA. While the larger captive AMCs appear to have satiated their acquisition appetite for now, we see newcomers gaining ground, particularly those with private equity backing, including LenderLive and Class Appraisals or public companies like Altisource (NASDAQ: ASPS) and Real Matters (TSE: REAL).  Further, the savvy independents are sure to make a play at accelerating growth through acquisition including Clear Capital, Dart Appraisal, LRES, Pro Teck and The William Fall Group.

Appraisals Rising

Beware of “small” rule changes

An executive at a leading MortageTech company once told me, “Beware of a seemingly small rule change in a highly regulated market like mortgages.  The impact can be deadly.”  The Appraisal world is facing one of these changes.  We see the new “registry” component of the Dodd Frank rollback as a potentially massive catalyst for consolidation in the fragmented appraiser and Appraisal Management Company (“AMC”) worlds.  The forces bashing this industry have been relentless:

  • Appraiser population demographics leading to supply “shocks”
  • Low margins and limited pricing power has advantaged only the largest providers
  • Domineering government sponsored enterprise rule changes (GSEs – Fannie, Freddie)
  • A fundamental change from a form-driven industry to more data-driven value proposition
  • Looming disruptive technology innovations from drones to mobility

As every AMC tries to navigate these headwinds, along comes the “registry” change whereby an incremental fee is about to hit every AMC’s panel of appraisers.  The larger providers are better positioned to absorb these new requirements and fees, however, basic math for the smaller AMCs suggests a new expense burden with no direct beneficial offset.  Further, each state is likely to implement differently, potentially creating a complex, expensive and risky compliance environment for the AMC industry.

Merger activity is heating up

Expect continued consolidation within the AMC world, and given the permanent economic impact of “registry”, there may be further pressure on sellers to realize the valuation multiples of recent transactions.  A review of recent AMC acquisitions suggests the market is pricing these assets between 6X – 8X EBITDA, with the exception of CoreLogic’s transactions as they were considerably above this range, continuing to set the market high water mark.  In our client work, the key valuation drivers have been scale, diversity of services and technology leverage.  See the table below for recent transactions:

Forces are driving greater scale and technology innovations

U.S. real estate assets are marked to market through a unique mechanism – the appraisal.  While much has been written about the aging population and brain drain among the 40,000+ U.S. residential and commercial property appraisers, little attention has focused on the key node in the system, the AMC.   The AMCs include large captives of loan, title or data service providers and more independent, often regional, companies.

Scale and technology forces will continue to define the landscape of players.  We expect the strong AMCs to strengthen further while the middle market is more likely to consolidate the smaller players.  We also expect technology advancement in key areas like mobility and analytics.  The GSE’s are likely to drive accelerated adoption of these technologies and more efficient approaches – further accelerating industry consolidation.

Expect consolidation to pick up in the middle market

The larger captive AMCs appear to have satiated their acquisition appetite for now and we don’t expect to see much from CoreLogic, ServiceLink or First American in the near term.  However, we see newcomers gaining ground, particularly those with private equity backing, including LenderLive and Class Appraisals or public companies like Altisource (NASDAQ: ASPS) and Real Matters (TSE: REAL).  Further, the savvy independents are sure to make a play at accelerating growth through acquisition including Dart Appraisal, LRES, The William Fall Group and Pro Teck. We have summarized the AMC market segments below:

USPAP Compliance and Desktop Appraisals

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Many appraisers are worried that a so-called desktop appraisal will not be USPAP compliant if a third party to inspects and/or photographs the subject property.

USPAP does not make an issue of who inspects the property, nor who photographs it. USPAP does not require the appraiser to inspect the subject property. Nor does USPAP require the appraiser to photograph the subject property or the comparables. USPAP requires the appraiser to disclose the extent of the inspection of the subject property, which includes no inspection at all. Further, USPAP makes no mention of the need to include photographs of the subject as part of the formation of a credible value opinion. Both these requirements are a function of lender requirements, not USPAP.

Fannie Mae requires the appraiser to inspect the subject property, as well as to inspect the comparable property from at least the road in front of the it (assuming that’s possible). However, Fannie Mae has no requirements the appraiser take these photographs. In other words, a contractor the appraiser hires to take photographs could do this and the report would still be fully Fannie Mae, as well as USPAP, compliant.

An individual lender may require the appraiser to take the subject and comparable photographs him- or herself. If the appraiser agrees to this condition, then the appraiser has no choice but to do so. However, the key point here is that the appraiser personally taking the photographs of the subject and/or the comparables is a lender requirement, not a requirement of USPAP, and not necessarily a requirement of Fannie Mae.

Therefore, under certain conditions, an appraiser doing a desktop appraisal is perfectly USPAP compliant.  Providing photos is not significant appraisal assistance. The appraiser is under no ethical obligation to disclose the photographer’s name, nor the extent of his/her assistance.

Original Article Here

 

Voice of Appraisal E200 PARATRICE LOST?!?!

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One Real Appraisal and Six Ways to Support One Adjustment

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Full original article can be found hereAppraisers and real estate agents often ask what adjustments I use and/or how I support my adjustments.  The answer is that most properties require a different adjustment that is specific to its market (e.g. size, location, condition, etc.) and there are many different ways to support any individual adjustment.  No one method for supporting adjustments is perfect.  Appraisers should select the method or methods that will produce credible results for the given assignment and available data.

  1. Paired Sales – Paired sales are a cornerstone of textbook appraisals, but textbook cases of paired sales rarely occur in practice. In a common textbook scenario, paired sales are two sales that are the same in every way except the one factor for which the appraiser is trying to estimate an adjustment. For this reason, it is easy for appraisers to forget that a paired sale can have other differences (although it is important that the differences are minimal and that adjustments for the differences can be supported). In this assignment, my grid included four sales that had very little difference from one another except for GLA. After adjusting for a couple of minor factors, the paired sales all suggested an adjustment of $51 and $60 per square foot for GLA.
  2. Simple Linear Regression – I’ve blogged in the past about supporting adjustments, particularly GLA, using simple linear regression. Linear regression is basically analyzing trends in data.  For this assignment, simple linear regression suggests $53 per square foot when comparing sales price to GLA. Significant variation exists among the data of this sample, but the datum points are spread evenly along the entire regression line suggesting that the indicator is not being skewed by a small subset of outliers. It is okay if the properties in the sample have differences, however it is important to make sure to filter out differences that would skew toward one end of the range or the other. For example, if a larger site size also tends to include a larger home, then it would be important to make sure that the homes in the sample all have similar site sizes or the adjustment could be falsely overstated. Also, it is helpful to the outcome of the regression analysis that the subject property is in similar condition to the majority of the sales in the sample. The following chart shows the linear regression outcome in this appraisal.Simple Linear Regression Support Adjustment
  3. Grouped Data Analysis – This method is closely related to simple linear regression and is essentially many paired sales representing a fast way to estimate an adjustment simply by sorting comparable sales. This can be done using quick searches on the local multiple listing service or using data exported to a spreadsheet. But remember that the same factors that can skew linear regression will also skew grouped data analysis. For best results, it is important to sort out all of the features that might distort the results without sorting to the point where the sample sizes are small and wildly varied. For this assignment, I filtered out all ranch sales in the past two years with a lot size of 7,000 to 9,999 square feet, that feature two baths and three bedrooms, and that were built within ten years of the subject. Sales of homes meeting these criteria between 1,000 and 1,199 square feet have an average of 1,128 square feet and an average sale price of $212,637. Sales of homes meeting these criteria between 1,200 square feet and 1,299 square feet have an average of 1,253 square feet and an average sale price of $220,055. The difference between the average of these two sets is $7,418 and 125 square feet or $59 per square foot. The median could also be compared as well to provide another indicator that is less likely to be skewed by outliers.
  4. Depreciated Cost – The cost approach value in this assignment is consistent with values suggested by recent comparable sales. This suggests that the cost approach is likely valid and could be used as a way to test reasonableness or support adjustments. The subject’s original cost is estimated at $108 per square foot and the depreciated cost is estimated at $81 per square foot. A simple depreciated cost adjustment might not be a good adjustment to apply to comparable sales. This is because the depreciated cost is a straight-line measure from zero square feet all the way to the total area including the kitchen, bath, mechanical, and everything else in the house. For this adjustment, we are just looking for the value difference from a similar-sized comparable to the subject. To obtain this adjustment using the cost approach, I ran a cost estimate for the smallest comparable sale and another cost estimate for the largest comparable sale with no physical changes for anything other than living area (e.g. room count, garage, quality, and all other factors kept equal). The original cost difference between the low and the high came out to $79.53 per square foot. If this number is depreciated based on the cost approach in the appraisal, a reasonable adjustment of $60 per square foot of GLA is estimated.
  5. Income Approach – The income approach was not performed for this appraisal assignment, but if it had been, the income approach could have been used to support another indicator for the GLA adjustment. One way the income approach could be used to support a GLA adjustment is by taking the estimated loss or gain in rent from an additional square foot of living area (can be estimated using any of the above approaches except for cost) and apply a Gross Rent Multiplier (GRM). Critical to this approach is that the multiplier and rent estimates are market derived and that rent might be a consideration for the typical buyer.
  6. Sensitivity Analysis – This method is closely related to paired sales and I think it works best for secondary or tertiary support for an adjustment or helping to reconcile what adjustment is most effective. However, this method is not very useful if adjustments for other comparable sale differences are not accurate. Once all of the comparable sales have been placed side-by-side in a comparison grid and adjusted for all other factors using market derived adjustments, the appraiser can test different GLA adjustments to see what adjustment produces the tightest range of adjusted value indicators. If the appraiser is unsure by simply looking at the data, the Coefficient of Variation (CV) can be applied to each set of adjusted indicators to mathematically test what adjustment is producing the tightest range. The lower the CV, the better the adjustment is working within this sample of sales. Here is a link to a free CV calculator. Just enter your adjusted indicators separated by commas and press calculate. Then test another adjustment and repeat with the calculator. An appraiser could also set up a formula using the Worksheet function in a la mode Total to instantly provide the Coefficient of Variation. For this appraisal, sensitivity analysis helped me reconcile that the simple linear regression adjustment is most well-supported adjustment because it has the lowest CV as seen in the following table.

Paired Sales

Simple Linear Regression

Grouped Data

Depreciated Cost
Indicated GLA Adjustment

$51 or $60

$53

$59

$60
CV

0.00648 or 0.0082

0.00538

0.00734

\0.0082

None of the above methods for supporting an adjustment are without limitations and there are many more ways an appraiser could support an adjustment.  Although this is an example where data sets are particularly plentiful, the example shows that information does exist outside of textbooks for supporting adjustments; and when multiple approaches are combined and reconciled, a strong case for the appraiser’s conclusion can be made.  An appraiser won’t always need to go this far to support one adjustment, but if that one adjustment is crucial to the outcome of the appraisal or the appraiser believes they will be challenged on this adjustment, then the appraiser should expand and explore multiple methods for support.

By Gary F. Kristensen, SRA, IFA, AGA

Full original article can be found here

Appraisal Firms and “Hybrid” AMCs: Beware of the Dynamex Decision and Its Impact on Classifying Appraisers as Independent Contractors in California

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Classifying “staff appraisers” as independent contractors, rather than as employees, is a very common business practice among real estate appraisal firms. It also has become fairly common for appraisal management companies (AMCs) not only to manage the delivery of appraisals that are performed by independent contractor appraiser panel members but also to now employ staff appraisers, as employees, who perform some of the appraisals managed by the AMC — these AMCs are what I would call “hybrid” AMCs because they are functioning both as AMCs and appraisal firms.

Today, on April 30, 2018, the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court. The decision could have a big legal impact on both true appraisal firms with “1099” staff appraisers and on hybrid AMCs. In its opinion, the Court held that for purposes of California’s Industrial Wage Orders, which specify overtime requirements among other things, a firm classifying a worker as an independent contractor bears the burden of establishing that such a classification is proper under the so-called “A-B-C test” used in a few other states. To meet this burden, the firm must establish all three of the following factors to justify treating workers as independent contractors:

(A) that the worker is free from the control and direction of the hiring firm in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
(B) that the worker performs work that is outside the usual course of the firm’s business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

This is a significantly different and tougher test than has been applied under prior California precedent.

The underlying case in Dynamex involved a delivery driver named Charles Lee, who claimed that he and his fellow workers were misclassified as independent contractors. The California Supreme Court determined that the appropriate legal test to be used in California courts is the straightforward, simplistic A-B-C test, rather than more complicated tests considering and weighing a long list of factors. As such, the Supreme Court upheld the trial court’s certification of a class action against the defendant company. A copy of the opinion is available here (on my website).

While the full effect of the decision may take some time to settle in, and while the decision also doesn’t resolve employee/contractor determination for every purpose (such as reimbursement of expenses), I expect that we will soon see something of a wave of litigation against appraisal firms that treat staff appraisers as independent contractors in California. Firms should carefully look at their current practices and risk. Meeting any of the three parts of the test may be a challenge for many firms, but among the three factors, the hardest one that firms will have to grapple with may be part (B) relating to whether a staff appraiser’s work falls outside the regular course of business of the firm. When an appraisal firm’s business is providing appraisals under its own name, rather than acting as a true AMC that solely manages appraisals performed by third party vendor appraisers, it will be difficult for the firm to argue that the work of the appraiser wasn’t the regular business of the firm. Making it even harder, the Court clarified that unlike in some other states, part (B) of the A-B-C test can’t be satisfied by showing that the worker performs his or her work outside the firm’s regular place of business — that won’t fly in California.

The monetary risk, however, may be much bigger for “hybrid” AMCs. Some of them may be targets for potential class actions. Such firms need to look closely at their litigation risk when they are delivering appraisals that are performed both by independent contractor panelists and staff appraisers. These firms tend to be larger and most often actually do treat their true “staff appraisers” as employees, but they still have potential risk. Since they are now combining staff employee appraisal services with offering appraisals managed from third party vendor appraisers, their risk is that the independent contractors on their panels could be reclassified as employees — since those independent contractors are now performing work that is within the regular course of the hybrid AMC’s business.

The risk to hybrid AMCs is not far fetched. In a case that went to trial in California last summer, a “field services” vendor management firm (which happened to be affiliated with an AMC under ownership of Assurant) was found liable to field service workers it had classified as independent contractors. The case is Bowerman v. Field Asset Services. The federal district court found that Field Asset Services should have treated these workers as employees and that it was now liable to them for unpaid overtime and unpaid business expenses. The decision is available here.

I recapped the Bowerman case in a longer article entitled “Independent Minded” in the 4th Quarter edition of the Appraisal Institute’s Valuation magazine, covering the appraiser/contractor issue on the broader national level. The following summary paraphrases that recap:

To prove the key point that the company’s vendor panelists should be classified as employees, rather than contractors, plaintiff’s counsel offered evidence that the company “tells vendors where to go, when to go, what to do, when to get it done and how much and when they will be paid for their efforts.” The evidence included:

  • As part of being approved for Field Asset Service’ panel, vendors signed an agreement which, although referring to vendors as independent contractors, set forth detailed requirements for accepting assignments, scheduling property access, timely performance, photo requirements, status updating and quality control.
  • Panelists were not given a meaningful opportunity to negotiate the agreement.
  • Panelists authorized Field Asset Services to perform background checks.
  • Field Asset Services offered assignments to panelists through its proprietary software platform and panelists were required to use this platform to upload their status reports, photos and invoices.
  • Panelists were required to respond to assignment requests within 24 hours and complete assignments within a stated time period, sometimes just three days.
  • Declining too many assignments or cherry picking the best could result in fewer assignments being offered.
  • Field Asset Services “score carded” panelists on their acceptance/declination of assignments, status communications, timeliness of completion and quality. A low rating could result in a warning, reduction of work or ineligibility.
  • Field Asset Services tracked its panelists’ performance and recorded warnings, counseling and eligibility suspensions in “vendor profiles.”
  • At trial, Field Asset Services’ panelists testified that they worked long hours, often 10 hours per day six days a week. And, of course, since the panelists were classified as independent contractors, they did not receive overtime. Nor did Field Asset Services reimburse them for expenses such as mileage, insurance, equipment, cell phones, internet use or computers.

What happened? After four years of litigation, the court ruled on summary judgment that any vendor who derived more than 70% of his or her income from Field Asset Services should be classified as an employee and was thus entitled to overtime and payment of expenses. The essential reasoning was that Field Asset Services had the right to so closely control the work of its contractors (and also exercised that right) and the contractors were so dependent on Field Asset Services that the contractors were employees under California law.

With liability established, the issue was then how much did Field Asset Services owe its reclassified contractors? Last summer, the damages claimed by the named plaintiff and 10 class members went to trial. The jury awarded a total of $2,060,237 to those 11 individuals for unpaid overtime, unpaid expenses, penalties and interest. The award to the named plaintiff was a striking example: the jury determined that he worked 4,845 hours of overtime from 2010 through 2016 for which he should recover $98,615 in overtime payments (on top of the payments he actually received for doing the work) and that he should be awarded $168,746 for his unpaid expenses ($95,247 for mileage alone). It’s estimated that there are 100+ remaining class members potentially entitled to the same types of damages.

Because of the high stakes, the potential risk for hybrid AMCs needs to be considered very carefully by such companies.

Written by Peter Christensen

 

ProxyPics

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Chicago, IL —ProxyPics, Inc—A new mobile app has been launched that allows anyone to request on-demand photos of anywhere, quickly and affordably.

In the real estate industry, there has always been a huge demand for timely photos of properties. Deals can be held up by the simple need for an up-to-date photo of a home. With ProxyPics new app anyone with a mobile phone can take a picture of anything you need immediately.

ProxyPics is a life changer for those requesting and taking pictures. ProxyPics is part of the gig economy revolution, allowing everyone to make money on their own schedule. Once you have the app, you will also be notified of available jobs in your area. You can earn extra money while walking to the coffee shop.

ProxyPics is a platform designed to make region-specific photography available to all. ProxyPics leverages GPS and digital payment technologies to match photo requests to the photo takers on a global scale. It is also set to disrupt entire industries, by making time-sensitive, affordable photos available on a grand scale. Real Estate, insurance, merchandising audits, and news media outlets are all areas that can greatly benefit from immediate photos of specific locations and subjects.

ProxyPics is available for both iOS and Android devices. Download it today and start making money with a click of a button. Visit www.proxypics.com/download to get started.

About ProxyPics
ProxyPics is the first-of-its-kind on-demand system for getting the location-specific media you need from wherever you are. Our simple-to-use platform creates an online marketplace, matching users needing geographic-based content with users near to the location ready to take your photo. Never before has it been quicker, cheaper, or simpler to get timely images and video from anywhere around the world.

Contact
Name: Luke Tomaszewski
Phone: 773.524.8468
Email: Luke@proxypics.com

Reposted from Appraisal Buzz; original post here

Will the home appraisal industry be replaced by technology?

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Automation haunts many discussions about the future of work, employment, and the economy. But technological advances may soon hit homes in an unexpected way: could real estate appraisers be replaced by robots?

That’s the conclusion of a recent article in Bloomberg, which discusses how advances in big data and computing are helping automate this knowledge-based job, perhaps a harbinger of how advances in machine learning mean an ever-widening circle of professions are at risk.

The future of the profession has become a topic due to a recent decision by Fannie Mae and Freddie Mac, two institutions that facilitate the flow of funding for home loans nationwide. In the past, both of these entities have occasionally allowed appraisal waivers when evaluating low-cost loans. But recently, they’ve changed their stance, starting up a program earlier this year that would waive the new appraisal requirement for homes where the loan-to-value ratio is low. Instead, they’ll accept any appraisals on file from the last five years. In June, Freddie Mac said it would start accepting automated valuations for some refinancing loans.

This decision will reduce the number of appraisals being requested, says Appraisal Institute President Jim Amorin, and implicitly suggests that a model with less human participation is just as good.

 

“There’s no replacement for an appraisal in most cases,” Amorin tells Curbed. “Many of the computer models use public information that hasn’t been verified. Even Zillow will tell you it’s an estimate, not an appraisal.”

A profession already feeling pressure

These policy shifts come during an unfortunate time for a profession watching its workforce slowly shrink. Today, there are currently 78,000 licensed appraisers in the U.S., says Amorin, whose organization represents roughly 20,000 of them. That is a steep drop from the 120,000 that performed the job five years ago.

Part of the decline is due to appraisers requiring extensive training and apprenticeships to become licensed, and part is due to diminishing fees, a result of the growth of appraisal management companies that work with lenders and take a portion of the final fee. The median age of an appraiser is roughly 52-55, says Amorin, suggesting the workforce is aging, retiring, and not being replenished.

“If numbers continue the way they are, there may not be enough appraisers to meet the needs of the marketplace,” says Amorin. “We worry about how the automated models will serve the needs of consumers.”

Computer estimates are closing the gap

At the same time, the technology now being cast as competition for appraisers is getting better and better. According to a Zillow engineer, the company’s Zestimate tool uses algorothms, machine learning, public records, MLS data, and information from brokers and users to create increasingly accurate value estimates. The models are continuously being trained on a daily basis to become more sophisticated; some are examining external imagesto better determine the “curb appeal” of a home Zillow even launched a $1 million Zillow Prize in May, similar to the Netflix Prize, to entice data scientists and researchers to improve the company’s algorithm and devise a more accurate method of estimating home values.

Zillow representatives noted multiple times they believe appraisals are valuable and in no way seek to replace the need for an appraisal.

Amorin believes that automated appraisals still focus too heavily on public data and often miss the little details and true picture of a property that creates an accurate value estimate. He believes you get what you pay for with automated models, and the work of an impartial appraiser is key to a functioning, transparent market.

But that doesn’t make him anti-technology. Amorin believes the future is in a marriage of man and machine, where humans and computer models combine for more accurate estimates. Appraisers get data that saves them time, while their estimates can be fed back into the algorithms and machine learning systems to make the estimates more accurate.

“If appraisers believe they can move forward doing what they’ve always done, they’ll go the way of the one-hour photo shop,” he says. “We have to adapt.”

By Patrick Sisson

Original article is here

Confused about Collateral Underwriter?

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CU images

What is really happening with CU? How does it affect you?

My Appraisal Today FREE email newsletter can help.
I report the facts, plus my opinions on what it means for you.

CU Facts:
– Not all loans go to Fannie Mae – Freddie, VA, FHA, jumbo, etc. do not.
– Lenders are not required to use CU.
– Fannie guidelines, including CU, are the minimum. Lenders can add their own.
– Gradual implementation of CU’s web based interface, which has the list of the “20 comps” suggested by CU. This information is not available to AMCs or appraisers.
– Some appraisers get few or no appraisal warning message and some get on a lot of them, depending on their clients.
– A new Fannie Letter (dated 2-2-15) specifically tells lenders to manually review the appraisal warnings before sending any to appraisers.
– CU sends out warning messages for adjustments on only 6 factors: GLA, lot size, view, condition, quality, and location. For example: GLA adjustment for (comp x) is smaller than peer and model adjustment.
– CU warning messages for “data consistency”: the 6 factors above. Plus, CU also looks at consistency, not adjustments, for 6 additional characteristics: quality rating, condition rating, total below grade areas, finished basement areas, above grade bedroom count, and above grade bathroom count. For example: “The condition rating for (comp x) is materially different than what has been reported by other appraisers.”
– Per Fannie, there is no direct relationship between AQM and CU. However, Fannie uses data analytics like those seen in CU to find patterns of behavior. AQM decisions are not based on automated results. Humans are required.

Original Article Here

Fannie Mae’s “Collateral Underwriter” Is Now Open For Business

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Fannie Mae’s “Collateral Underwriter” Is Now Open For Business

As this newsletter is completed Monday p.m. at the start of the 2015 blizzard, “Collateral Underwriter” (CU) has taken effect. Here is a summary of some of the key points that appraisers need to know about Fannie Mae’s newly implemented “proprietary appraisal risk assessment application” which is intended to “support proactive management of appraisal quality”.

~The Uniform Appraisal Dataset (UAD) has collected data from over 12 million appraisals and 20 million transactions since 2011. Uniform Collateral Data Portal (UCDP) users, including lenders and appraisal management companies, who submit appraisals to Fannie Mae will have access to the various CU goodies such as risk scores, flags and messages.

~CU provides a risk score of from 1.0 to 5.0 with the so-called riskier appraisals receiving the higher grade and those deemed safer lower grades. Fannie Mae calculates that 97% of submitted appraisals can be so scored with geocoding limitations precluding 3%.

~CU will look at comparable sales used by appraisers and offer alternative choices. It will also utilize census blocks to analyze market conditions and review specific fields in an appraisal (i.e. condition rating) for consistency from one appraisal to the next.

~CU analyzes appraisals submitted in UAD format on Fannie Mae forms 1004 (Uniform Residential Appraisal Report) and 1073 (Individual Condominium Unit Appraisal Report). Other forms such as the 2055 (Exterior Only Inspection Residential Appraisal Report) and the 1025 (Small Residential Income Property Appraisal Report) are excluded.

~At this time, CU applies to Fannie Mae only not to Freddie Mac or FHA. It does not, of course, apply to private appraisal assignments nor to commercial appraisals.

“Explain, explain, explain”. Appraisal 101 teaches appraisers the importance of explaining their findings to the report readers in order to avoid misunderstanding. It would appears as though one of the unintended consequences of CU will be to increase the scope of work as appraisers try to anticipate the various “flags” that might be raised in a particular appraisal and address them proactively. While this may sound like a positive point to non-appraisers, experienced appraisers might find it difficult to justify taking the time to “explain away” non-selected comps, for instance. Will this lead to a rejection of mortgage appraisal work by experienced appraisers, leaving those less experienced appraisers performing a larger share? It is also anticipated that appraisals of more unique properties will by their very nature end up with riskier scores than those “cookie cutter” type appraisals, all else being equal, making these assignments even less attractive to many appraisers (particularly when offered by AMCs that don’t acknowledge-or offer reasonable compensation-with appraisal assignments requiring greater time and/or expertise).

On January 21st, FNC’s Steve Costello writing in the AppraisalPort Daily stated that “The first thing to understand is that there is no need to panic. There are lots of rumors floating around that CU will be the end of appraising as we know it. In reality, if you haven’t already been getting a lot of returns for corrections, you probably won’t notice much difference when this change takes place”.

This has been a common refrain whenever changes designed to improve appraisal quality (and add-often unnecessarily- to the scope of work) are implemented: that good appraisers won’t notice any difference. The only problem with this logic, however, is that good appraisers may be bolting for greener pastures.

Will the last appraiser to leave please turn out the lights?

A link to Fannie Mae’s “Collateral Underwriter (CU) FAQs” is found here: Original

The Appraisal Institute

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The Appraisal Institute has published guidance to help appraisers learn what evaluations are, when they are used and who can prepare them. The Appraisal Institute’s “Guide Note 13: Performing Evaluations of Real Property Collateral for Lenders” addresses how appraisers should prepare an evaluation for a lender and comply with the Uniform Standards of Professional Appraisal Practice (USPAP).crea, complete rea, completerea, stamford ct

The Guide Note states, “Federally insured lending institutions in the United States are subject to regulations regarding real estate appraisals. For lending transactions involving real estate, a lender must obtain an appraisal from a state licensed or certified appraiser. There are 12 exemptions from this requirement. For three of these exemptions, in lieu of an appraisal by a licensed or certified appraiser the lender may obtain an evaluation.”

Evaluations, per the Interagency Appraisal and Evaluation Guidelines, are market value opinions that may be provided by individuals who are not state licensed or certified appraisers. However, state licensed and certified appraisers may provide them, according to the Appraisal Institute’s Guide Note. The interagency guidelines also state that an evaluation must be based on a valuation method that is appropriate for a transaction rather than the method that renders the highest value, lowest cost or fastest turnaround time.

The Appraisal Institute’s Guide Note states that USPAP allows an appraiser to adjust the scope of work for a valuation assignment as long as the resultant value opinion is credible, given the intended use. When preparing an evaluation, the appraiser may consider narrowing the scope of work as appropriate.

According to the interagency guidelines, a lender may obtain an evaluation in lieu of an appraisal when the loan transaction: Has a transaction value equal to or less than $250,000; is a business loan with a transaction value equal to or less than the business loan threshold of $1 million, and is not dependent on the sale of, or rental income derived from, real estate and the primary source of repayment; or involves an existing extension of credit at the lending institution, provided that there has been no obvious and material change in market conditions or physical aspects of the property that threaten the adequacy of the institution’s real estate collateral protection after the transaction, even with the advancement of new monies; or there is no advancement of new monies other than funds necessary to cover reasonable closing costs.

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