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WHAT IS COLLATERAL UNDERWRITER AND WHAT DOES IT DO? 2/22/2019 11:15:23 AM

Collateral Underwriter is an appraisal risk assessment application for lenders. Previously it was used in-house by Fannie Mae manage risk. It Now, it has been released to lenders.

CU will take the comparable sales selected by the appraiser into consideration, analyze them and offer alternative.

CU is able to do this because Fannie Mae has over 12 years of data that has come through the UCDP, which allows them to compare previous data to any new appraisals that come through. Not only do they have comps other appraisers have used, but also adjustments completed by other appraisers.

CU can analyze the conditions of one report to another, and it will pay special attention to comp selection, adjustments, and the final reconciliation of value.

Appraiser-provided comparable sales are analyzed by CU and ranked against a pool of available sales based on physical characteristics, location, and sale date. The sale prices of these comparable sales are not a factor in the ranking.

High CU risk scores may be due to potential under-valuation, as well as potential over-valuation, or other factors. CU does not take a “lower is better” approach.

CU does not treat new construction any differently than existing properties. Appraiser-provided comparable sales are ranked against a pool of alternative sales identified by the model based on a combination of physical features, location, and date of sale.

The significance of each property characteristic is model-derived and market-specific. If other nearby new construction sales is available, they will be considered for inclusion in the comparable pool, but CU does not show alternative sales simply because they are new construction. The model also analyzes location, date of sale, and physical features such as square footage, lot size, bathrooms, quality, view, etc.

How to lower the CU score?

Fannie Mae will purchase a loan regardless of the CU score. If the CU score is 2.5 or lower, Fannie Mae has indicated they will not issue a re-purchase demand due to valuation issues.  Lenders are now looking at CU scores as a way to reduce risk.  Since we don’t know exactly how the model works, there is no full-proof way to lower the CU score. The lenders expect CU scores to be as low as possible. However, CU score of more than 2.5 does not indicate that there are flaws in the report. Many a time, we found that the CU generated comparable sales are not comparable than the one in the report. At times the appraiser will be provided CU generated comparable sales for consideration, hoping that by having them included in the sales grid it might lower the CU score.  Another way to reduce risk is to write up the comparables the same way every time.

What does Collateral Underwriter do?

  • CU performs an automated risk assessment on appraisals geared toward Fannie Mae and returns a risk score, flags, and messages to the submitting lender. CU will provide a risk score for the appraisal of 1-5 (1 being the lowest risk and 5 being the highest).
  • CU will analyze comparable sales selected by the appraiser and recommend additional alternatives within the report.
  • CU will compare adjustments the appraiser has given with what other appraisers have done in the same area (Fannie Mae has been mining data from over millions and millions of appraisals since 2011, so they definitely have some data at their disposal).
  • CU will us census tracts to analyze market trends.
  • CU will review specific information in each appraisal such as the sales price, lot size, bathroom count, bedroom count, age, location, size of the basement, condition, quality of construction, view, and GLA (gross living area).
  • CU will analyze if the appraiser is not consistent their reporting of the facts of comparables they have used in other reports.  The analyze of the comparable must be absolute and not how the comparable relates to the subject.

Things to know about Fannie Mae’s Collateral Underwriter:

  1. Fannie loans only: CU is only used for loans geared toward Fannie Mae, and not for divorce appraisals or any other private appraisals. CU is also not used on 2-4 unit properties or “drive-by” appraisals.
  2. Not FHA/VA: CU is not used for FHA and VA loans
  3. Commentary: The CU tool does not read any of the commentary by the appraiser, which can be a key to understanding comp selection, adjustments, and the final value.
  4. Neighborhood boundaries: CU uses census block groups for data analysis instead of specific neighborhood boundaries that may be readily understood in the market. Pulling data from the right neighborhood can make a HUGE difference in a valuation, don’t you think?
  5. Adjustments & comps: Fannie Mae has heaps of data to compare to any new appraisals that come into the system. Not only do they know about sales in the neighborhood, but they also know which comps other appraisers have used, and even value adjustments given by other appraisers. CU knows if an appraiser says a comp is in good condition (C3) in one report, but then says it is in fair condition (C5) in a different report. CU will pay special attention to comp selection, adjustments, and the final reconciliation of value.
  6. CU will rank the appraiser’s comp and rank 20 other potential comps in the market.
  1. CU now supplies up to 20 comparable that are ranked by risk to the lender.

What are the challenges of CU?

Because CU performs an automated risk assessment on appraisals and returns a risk score, flags and messages to the lender, Collateral Underwriter is able to provide a risk score for the appraisal of anywhere between 1 – 5. Where 1 is the lowest risk score, and 5 is the highest risk score.

Since CU can’t read and interpret commentary, it will not be able to understand nuances in the market nor read how adjustments were supported.  That is why the intended users should read the entire report so that risk can been mitigated. 

CU will compare adjustments the appraiser has given with what other appraisers have done in the same area.  It also uses complex models to validate market-based adjustments.

 When it comes to defining neighborhood boundaries, CU uses census tracts for data analysis instead of specific neighborhood boundaries outlined in the appraisal.   These census tracts are can only change once every 10 years. Therefore, offer consistent data points.  The census tracts do not always align well with actual neighborhood boundaries. These are used to help calculate Market Conditions and trends. This means that there is potential for distinct difference between census tracts based trends and neighborhood trends defined by the appraiser. 

Appraisers can easily use websites understand census tracts and it could be used if need to defend an appraisal.   This is a typical website appraiser use to obtain info on census tracts

Appraisers will need to respond to any “value reconsideration” requests, and respond to client supplied CU risk rated comparable sales.

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