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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2014

Weed Out Problem Loans With Appraisal QC

Appraisers are now subject to tighter quality-control standards from Fannie Mae

This past year, Fannie Mae implemented new guidelines for every residential property appraisal to undergo a more stringent and documented quality-control (QC) process. It is essential for mortgage originators to understand and comply with these tougher new guidelines, which are part of Fannie Mae’s ongoing efforts to prevent bad loans by tightening up QC.

In its July 2013 Selling Guide Announcement, Fannie Mae stated that every appraisal must have any and all defects categorized by severity and required that these findings be reported to a company’s senior management. Backup data and documents must be included to ensure that underwriters have all information necessary to make accurate lending decisions.

Fannie Mae’s goal with these new QC guidelines is to help identify and weed out bad loans before they turn into repurchase requests. With these guidelines, Fannie Mae is asking lenders to do much of their own weeding during the appraisal process, with a “zero-defect” expectation.

"Even in instances when a lender chooses to use an appraisal-management company (AMC), it’s clear that lenders will be held liable for their AMC’s quality-assurance strategies."

In conjunction with adding a new Appraiser Quality Monitoring (AQM) section to its website, Fannie Mae also recently sent a letter to lenders detailing its specific quality concerns regarding appraisal reports. These defined concerns are valuable to the mortgage industry because the examples provided give a clear picture of Fannie’s revised quality-assurance expectations.

These recent letters were a wake-up call for many lenders. Even in instances when a lender chooses to use an appraisal-management company (AMC), it’s clear that lenders will be held liable for their AMC’s quality-assurance strategies. The letters also coincided with quality-control messages being returned to lenders in Fannie Mae’s Uniform Collateral Data Portal (UCDP). Although these QC messages do not yet cause hard stops in UCDP appraisal-data submissions, many analysts expect that they eventually will.

The letters and the UCDP messages are among the continuing QC steps Fannie Mae has implemented since the beginning of the financial crisis in 2008. Because many investors and the other government-sponsored enterprises are also requiring a prefunding quality-assurance strategy, many lenders and AMCs are searching for the most effective and efficient route to comply with these new guidelines.

Vetting appraisers, or being involved in your AMC’s vetting process, has thus become more important than ever. Ensuring that appraisers are consistent is almost as important as ensuring that they are thorough. Fannie Mae’s AQM feature will not only compare appraisers against each other, but will also compare them against their own previous reports. This means that lenders should be as stringent in their reviews of each appraisal and appraiser as the AQM feature and investors will be.

Egregious errors repeatedly identified by the AQM feature will require that either 100 percent of the loans submitted with appraisals from the identified appraiser be reviewed by Fannie Mae, or Fannie Mae will no longer accept loans with appraisals made by that appraiser. Lenders have access to a monthly AQM list of appraisers that fall into either category.

Although the distribution of the actual AQM list by lenders is prohibited, Fannie Mae allows and encourages lenders to inform their AMCs of the presence or absence of specific appraisers on it. Therefore, checking the list regularly is an important part of any mortgage professional’s appraisal QC system.

"When it comes to compliance, it’s better to exceed expectations than to fall short. "

Mortgage companies also should know that investors at all levels have noticed the aforementioned changes and will likely implement similar QC examinations in the future, if they haven’t already. Whether a loan will be sold to Fannie Mae or another organization, due diligence and QC must be documented, and that documentation must be available through the life of a loan.

Each new level of scrutiny forces lenders to ask themselves if they have implemented an appraisal quality-assurance strategy that fulfills all of Fannie Mae’s requirements and consider if the system will continue to be effective as further regulations are implemented.

Because different organizations may have different levels of appraisal QC requirements, it is important that lenders strive for the highest level of quality assurance possible. Audits are possible at any level, and should be expected. When it comes to compliance, it’s better to exceed expectations than to fall short. The difficulties that often result from noncompliance are problems that mortgage professionals simply cannot afford.

Therefore, mortgage originators and lenders should ask themselves several key questions: Are our quality-assurance standards high enough? Are we thinking ahead to the next level of scrutiny? Are we doing enough?

To satisfactorily answer these questions, it is imperative that mortgage professionals develop a quality- assurance strategy that continually monitors appraisal reports, is capable of flexibility as guidelines change and will continually stay ahead of the regulations. If you haven’t previously been concerned with appraisal QC, now is the time to start.  


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