I know some day soon our days as BPO specialist will end, this could be the start of our demise.  This article refers to appraisers however the software in use today will soon make us all pretty much obsolete.    Any comments?

Does the mortgage industry still need Appraisal Management Companies?

Not with Fannie Mae's Collateral Underwriter

January 29, 2015

On January 26th, Fannie Mae rolled out its Collateral Underwriter, and Freddie Mac will roll the same program out in March. Veterans Affairs already uses a Core Logic AVM to review appraisals and it’s almost guaranteed that Federal Housing Administration will follow suit.

For those of you that are not familiar with the Collateral Underwriter program, it is a computer generated appraisal review using data that has been provided to Fannie Mae by the appraisers since 2010. To date, they claim to have 40 million sales in their database with 40,000 added monthly. The purpose of the program is to review every appraisal submitted for accuracy, consistency, the use of the “proper” comparable s and possible overvaluations and undervaluation's.

The appraisal will be reviewed before the loan is submitted and will receive a score from 1 to 5 with 5 being “high risk”. Contained in the program will be a series of “hard stops” that will automatically reject the appraisal and also generate a list of 20 “low risk” comparables that the loan underwriter may use to query the appraiser with, thus extending the time of the appraisal process.

The Collateral Underwriter program is a very sophisticated automated valuation program that will select what it determines to be the “best comparisons” using their database which defines a neighborhood by its Census Tract(s), therefore it infers that the appraiser should use Census Tracts for comparable searches.

Gone are the days of comps within one mile; no more than a 10% “line item”, or 15% net and 25% gross adjustments and comparables may be used with sales dates up to one year old. The lowest risk comps will be those with the most similar characteristics such as size, bedroom and bath count, age, lot size and amenity features. Condition and quality are determined by the appraiser imputed “condition and quality” rating which is subjective, at best, but considered “absolute” by CU.

Another issue is the mandated use of Fannie’s Market Conditions analysis form, which is basically flawed, in that, it will take from 3-6 months for the analysis form to recognize a trend, albeit positive or negative. In an increasing and/or decreasing market, time/market conditions adjustments will not be supported, thus not used, further repressing values in an up-trending market. Because of CU, every adjustment to a comparison that an appraiser makes must be supported by facts using “paired data” analysis and/or regression analysis.

Every appraisal will be filed to the appraiser's license number and if there is a pattern of “high risk” appraisals attributable to an appraiser, he/she will receive a “warning letter” and if, in the opinion of Fannie Mae, appraisal quality does not improve, the appraiser will be placed on the 100% review and/or do not use list, which will result in loss of profession, and all of this without explanation from Fannie Mae if or what recourse the appraiser has to defend his/her appraisal(s).

The “senior” and experienced appraiser that properly uses the scope of work and has knowledge of “paired data” and “regression and market trend analysis” will have no issues with CU. It’s the lesser experienced appraiser that “cuts corners” that will run into major issues with CU. It is the latter that are doing the vast majority of the lender work through appraisal management companies that pay “cram down” fees, forcing the appraiser to “cut corners” and produce an inferior product. If the truth be known, the AMC’s are to blame for the inferior quality work, in spite of their insistence that they thoroughly review the appraisal and guarantee it to the client in exchange for 35% to 50% of the appraiser’s “customary and reasonable” fee that was to be codified by Dodd-Frank. I have too many examples of “cram down” fee offers, but let me share just one. One of the “big five” banks has their own AMC. Their fee schedule to the appraiser is $305, yet they charge the customer $550 and the difference becomes a “profit center” for the bank. 

Now that the GSE’s have the ability to instantly review every appraisal submitted to them and will advise the lender of its accuracy, it occurs to me that Appraisal Management Companies are no longer needed.

The individual lender need only to maintain their own independent fee appraiser panel and insure the orders are randomly assigned. Fannie will take care of the “bad appraisals/appraisers” and appraisers can once again earn a wage commensurate with their education, background and experience.

I am very disappointed that Fannie did not take the time to properly educate the appraisers about CU. When they announced the 1004 Market Conditions form, they had special online and classroom education, but with CU, nothing.

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  • Did a stop by. The owner asked what I was doing with an iphone camera. I told them I was doing an inspection. The wife says why don't just stay at home using Google earth?  The day will be near when one demands an instant Google photo using a satellite camera.

  • Great information.  thanks

  • As far as the comments in the article about AMC's cram down fees being responsible for lower quality I'd agree and say it's the same thing in the BPO end. 15 years ago I'd rarely see drive by fees of less than $50 and we had at least 3 days to complete (sometimes as much as 7 days). They required less photos and market data too. Now I often see orders for $30-35 due in 48 hours or less. I can sometimes get them up to $60-65 if no one takes them, but not that often which tells me they are being accepted at those fees. At the same time they've gotten crazy on some of the QC and most companies will not allow us to estimate subject data (New Mexico does not have GLA and room counts in public records so if there's no MLS history you're out of luck). They've really gotten to where they don't trust the broker's expertise and will kick them back for often really dumb reasons. This, in my opinion, comes from poor quality due to lower fees. The agents that will do them for these low fees either aren't very good or have to rush and cut corners to complete enough volume to make it worthwhile.

  • Thanks Ron. This all looks like they are getting back into the mess that led to the great bust after the great boom!  A lack of common sense in the market place. I think the need for BPO's will be around for some time to come.

  • I don't think the industry is going anywhere, although I agree there are changes being made.  That's typical for any industry.  The one thing we learned from 2008 is that what the banks want the banks will get.  BPO's are simply a money saver.  Knowing the condition and quality of the assets today is very important and there's just no practical way to quantify that into data.  Perhaps in 20 or 30 years they will have improved image recognition software which could spot the water stained roof from the discoloration of pixels.  Perhaps in 10-20 years they will have drones as small as flies on the open market to take your BPO photos without ever leaving your house.  Many changes could make or break the industry but from my experience in the past 5 years, nothing much has changed except for the dried up REO market.  The financial cycle is nothing but a wave function so we will see a repeat of 2008, it's just a matter of time.  Does the mortgage industry still need AMC's or have they become obsolete?  We will find out!

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