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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2017

Navigating Red Flags

Understanding Collateral Underwriter messages can improve your appraisal process

Navigating Red Flags

The valuation industry will always involve a human element. Whether it is an experienced appraiser taking note of the physical condition of a roof or a mortgage originator diving into the materiality of risk before making a call on a loan, the human aspect will always be central to the process.

This is why technology like Fannie Mae’s Collateral Underwriter program is so valuable to members of the valuation industry. CU is not intended to replace the human element, but rather to be used as a supplemental tool to human judgment and manual review. Think of it as a navigator that helps guide mortgage companies through areas of potential risk within an appraisal.

Collateral Underwriter works in conjunction with Fannie Mae’s Day 1 Certainty initiative to give lenders freedom from representation and warranties on loans that receive a CU appraisal risk score of 2.5 or lower. On appraisals that come back with risk scores of three or higher, CU can be used to identify the source of the risk, which can then be resolved by working closely with an appraisal management company (AMC).

Thus, CU can help lenders and mortgage companies proactively manage appraisal quality and originate mortgages with increased certainty and efficiency. The program allows users to easily identify areas of potential risk with appraisals, and gives loan originators and processors the tools they need to address these issues.

CU marks areas of risk with detailed flags that align with each step of the valuation process. These flags identify potential issues leading to a high-risk score and can equate to both overvaluation and undervaluation. Many appraisal issues can be resolved using insight into what triggers a CU flag in the first place. There are three flags users will see in a CU analysis:

  • Flag 1: Proprietary Eligibility and Policy Compliance;
  • Flag 2: Overvaluation Risk; and
  • Flag 3: Appraisal Quality.

When you see Flag 1 inside a CU analysis, it can be accompanied by two different messages. The first is a Critical Proprietary message, which leads to a hard stop in your valuation process. Fortunately, very few appraisals receive this flagged message, but if it is not resolved, the loan cannot be sold to Fannie Mae. The second message type is the Fatal UAD Edits message, which signals that the appraisal has incomplete Uniform Application Data or that the data is not in compliance with the set standards. 

The overvaluation risk flag (Flag 2) denotes exactly what it claims — a risk of overvaluation. This flag does not trigger a specific message but rather is a straightforward yes or no on the property being a higher risk versus having little to no risk.

Many appraisal issues can be resolved using insight into what triggers a Collateral Underwriter flag in the first place.

Flag 3 analyzes the quality of key appraisal components, which makes this flag one of the most workable and valuable alerts available to originators. It is driven by four categories of messages: Data Integrity, Comp Selection, Adjustments and Reconciliation. These messages help originators pinpoint specific aspects of the appraisal that need further attention. Let’s take a look at each of these message areas in more detail.

Flag 3 message areas

The first set of messages originators might encounter under Flag 3 point out issues with data integrity, which is the foundation of any appraisal. CU is designed to help identify risk associated with data issues and examines if the physical attributes and transaction terms of a property are accurately reported. Data-integrity messages appear if there is any data discrepancy, whether from issues with public records, mortgage information, incorrect tax-assessment details, or others. 

Comp Selection messages are triggered by analytics that address issues with the comps selected by the appraiser. These messages help originators identify if the selected comps are truly representative of the property. Every comp selection should be unique and based on the local market.

Using CU, originators can easily rank the appraiser’s comps against other known sales and available data in the area. Keep in mind, the flag only indicates that other potential sales exist. The originator or loan processor should review other comps to determine if they might be appropriate and, if so, present them to the appraiser.

Adjustments messages are generated when there is an issue with how the comps have been adjusted for market reaction. Instead of relying on approximations, CU performs regression analysis using millions of property transactions to produce statistically derived and market-specific adjustments for time, physical attributes and location.

Adjustments on a property that are significantly different than the CU models are flagged. This flag doesn’t necessarily mean there is an issue for concern. It simply means that certain “nontrackable” items, such as the emotional factor or blanket appraisals, should be considered. The originator or processor should review the appraiser’s adjustments and determine if they are supportable. 

Finally, the Reconciliation message is a quick way to check if the value of the property is within the sales-price range of nearby comps. 

Identifying risk

The CU flags and messages serve as alerts to potential issues and provide originators and loan processors with points of intelligence to drive actions and decisions on how to manage risk. Apart from the Critical Proprietary message, which is a hard stop, the CU flags, messages and even the overall risk score do not impact a loan’s submission status.

AMCs can help mortgage professionals understand what they can or cannot do to eliminate risk concerns.

Information from the CU analysis can help get the risk score to a level that is comfortable for the lender. Use this five-step process within CU to determine if red flags should be validated, verified or dismissed.

  1. Leverage flagged messages. Determine what the flags indicate about the risk. What aspects of the appraisal do the messages draw attention to?
  2. Explore property records. Look for inconsistencies in property records between appraiser listings on the same property. Focus on the appraiser’s description of the property. Is it accurate and consistent with other sources?
  3. Use map imagery. Use the CU map interface to explore the characteristics of the property and any surroundings that could impact eligibility, marketability or value. Use satellite and skyview on the map to pinpoint the property’s location and neighborhood in relation to major highways or high-voltage power lines. Ultimately, check if the imagery seen in CU is consistent with the description of the property provided by the appraisal.
  4. Check sales history. Evaluate the property’s three-year sales history in CU to determine if it matches the appraiser report.
  5. Sort data appraisal. CU provides several options for sorting data. Sorting the data-points column provides a snapshot of how the property fits into the neighborhood and surrounding comps. This can help determine where the subject property fits within the market data.

Using these internal steps and analytics in CU, along with personal expertise or market knowledge, can help originators and loan processors make informed decisions about risk. If your originators and processors lack experience, or your company needs help strategizing on risk concerns, you can escalate the process by speaking with your appraisal management company (AMC).

Maximizing appraisal management

CU flags and messages are meant to be used by lenders and mortgage companies. They were not created to be actionable by AMCs or appraisers. AMCs can help mortgage professionals understand what they can or cannot do to eliminate risk concerns, however. A strong signal it is time to reach out to your AMC for help is when you experience bottlenecks that delay closings, or if your current loan volume is being limited by delayed appraisals, bad service, or slow turn times. 

When you have problematic CU reports, it can help to get extra input from the AMC. Ask for feedback on general risk questions so they can be presented to the appraiser in an understandable manner that could produce the answers you need to lower your risk score.

Don’t hastily send CU flags to the appraiser and ask them to fix those for you, however. This will only cause confusion, which wastes valuable time and costs. Plus, it’s a good idea to formulate questions in such a way that if changes are not necessary to the report, the answer will ultimately help you mitigate potential risk.

Be specific when speaking with the appraiser or AMC. Don’t make vague requests. Instead, ask questions that are based on facts. Use data obtained from factual sources such as CU to inform the appraiser about the request you are making.

Finally, avoid requesting comments from an appraiser about CU flags or messages. Concerns about a gross living area, or GLA, adjustment rate, for example, cannot be resolved simply with a comment. Instead ask appraisers to provide verifiable data, such as the derivation of the adjustment rate. Then, if a revision is justified, ask the appraiser to revise the report and resubmit it.

•  •  •

Collateral Underwriter is a robust tool that provides lenders and mortgage companies with dynamic functionality and the necessary context to examine appraisal reports and act on findings appropriately. Don’t be discouraged when an appraisal comes back with flags. Instead, leverage the program’s data insights alongside your own professional judgment to improve loan quality and process efficiency across the board. 


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