It’s no
secret that appraisals have been a challenge in Denver’s scalding hot real
estate market. Last month, the heat got
kicked up even higher with the official launch of Fannie Mae’s Collateral
Underwriter system, a new database which contains property data from over 12
million appraisals which have been completed since 2011.
The purpose
of Collateral Underwriter, according to Fannie Mae, is to stop appraisal fraud
by creating a database with information on what may eventually be every
residential home in the country.
Under the new
system, all properties are rated on a scale of 1 to 5 in different
categories. Additionally, data is
gathered regarding value adjustments appraisers make for lot size, bed and bath
count, age, location, condition, views and gross living area.
Now, if an
appraiser uses 123 Main Street as a comparable, Fannie Mae can see what other
appraisers have said about the same property in different appraisals. If one appraiser makes a sizable price
adjustment for an extraordinary view and another appraiser gives the view no
value… appraiser number one can expect to be contacted by Fannie Mae asking them to
comment on why they gave so much value to the view when another appraiser
ignored it.
Can you see
where this is headed?
I’m not
saying Collateral Underwriter is good or bad.
I am saying that it has the effect of forcing appraisers to be conservative
with their adjustments, or they run the risk of having future appraisals
flagged for further evaluation before Fannie Mae will accept them.
The truth
is, not only does Collateral Underwriter evaluate real estate, it also
evaluates appraisers. And appraisers who
want to work with Fannie Mae-approved lenders (i.e. virtually everybody who
originates loans) are going to be influenced by this new program. Get flagged often enough for questionable
valuations or adjustments, and the appraiser could lose his or her Fannie Mae certification altogether.
One
appraiser I spoke with recently told me he is already rejecting over 50% of the
appraisal assignments he receives, in large part because he doesn't want to
touch deals that might cause friction with the Collateral Underwriter
system. He's looking for safe, clean, easy appraisals.
Which means
that many of the tougher appraisals (which usually means unique homes with non-conforming features or homes under contract
at prices above recent neighborhood sales) are going to start falling into the
hands of the least competent appraisers, or those most desperate for business, and there is going to be more
turbulence around them as Fannie Mae kicks appraisals back for additional
comment and review.
What it
probably means is this… it’s going to make appraisals take longer and be more
expensive. It is going to slow the loan
process and delay loan approvals. And it
is going to result in more conservative valuations, which really is the reason
Fannie Mae launched the program.
If you are
writing an offer that’s out of sync with neighborhood values, or if you are
listing a home that falls outside the parameter of recent sales, you can bank
on more scrutiny – and a bias toward lower valuations – with those
appraisals.
Collateral
Underwriter is intended to serve as a damp towel on top of rising real estate
values. It is designed to hold the
market in check and stop bubbles from forming.
It will make appraisers more conservative and occasionally kill
legitimate deals.
If you are a
listing agent, engaging with the appraiser upfront and providing everything you’ve got
in terms of comps, improvements and market demand is now more important than
ever.
