A residential appraisal report on property offered as collateral for a mortgage loan, including its condition, neighborhood, market, and value is generally considered to be critical to underwriting mortgage loans. As part of its role as conservator of Freddie Mac and Fannie Mae (the GSEs), the Federal Housing Finance Agency (FHFA) directed them in 2010 to improve the quality and risk management of their single family loans in part by jointly developing a uniform collateral data portal.
The GSEs' selling guides contain requirements for lenders to follow when contracting with appraisers. Lenders are responsible for selecting the appraiser, ordering the appraisal, and reviewing the appraisal to determine if the property provides adequate collateral for the loan. In addition, the GSEs have several requirements for appraisers such as being licensed or certified in the state where the property is located and following the GSEs' requirements and standards. However, before 2012, there was no uniform system for gathering, analyzing, and responding to standardized appraisal data to ensure loans sold to the GSEs met their requirements before purchase.
As of March 2012 the new portal was required to analyze all appraisals for single-family loans before they are purchased by the GSEs. If the checks within the system find signs that the appraisals violate the GSEs' requirements it alerts them and the lenders to the problems. This is intended to improve data quality, ensure compliance with the GSEs' loan eligibility guidelines, enhance loan reviews, and lower the number of loans that must ultimately be bought back by lenders for not meeting GSE standards. The portal was developed under a joint five-year contract valued at $52 million.
The GSE's developed and tested the portal from February 2010 through March 2012 then required all lenders to submit the data for their appraisals through it. During the development period the GSEs also worked to resolve inconsistencies with terminology, provide appraisers and lenders with a better understanding of their data requirements, implement electronic checks and analyses of the data to allow common and individual use of the information and develop checks and analyses to sift through the data and alert for potential problems.
FHFA's Office of Inspector General recently completed an evaluation of how well FHFA is overseeing the GSEs' use of appraisal data before they buy single-family mortgages. OIG's report was released on Thursday.
Appraisers fill out electronic forms with appraisal information and send them to the lender or the appraisal management company contracted by the lender which uploads the appraisal into the uniform data portal. The portal automatically analyzes and checks the data and can generate various types of messages. Where no message is generated requiring additional action the appraisal is classified as successful and allows the associated loan to be delivered for purchase by a GSE. Even when appraisals are deemed successful, lenders are not exempted from obligations under the GSEs' selling guide requirements.
As of Jun 2013 the portal can send any of 366 messages developed jointly and 166 messages developed by one or the other of the GSEs. Both types of messages communicate potential problems with the submitted appraisals. Most of the joint messages (94 percent) concern formatting issues such as the need for dollars to be expressed in whole numbers. OIG did not look at appraisals flagged with these messages. The remaining 21 messages address topics such as the appraiser's license status or the appraised value of the property. Fannie Mae owns the vast majority of the proprietary messages (157) and these as well as Freddie Mac's were developed in consideration of the company's respective business needs.
For its assessment OIG analyzed loans submitted to Fannie Mae between January 28 and June 15 2013 and found that lenders submitted data for over 747,000 appraisals performed by about 52,000 appraisers that resulted in Fannie Mae purchasing $167 billion in single family loans. For Freddie Mac the analysis covered 135,000 appraisals submitted between Jun 22 and September 30, 2013. Appraisals were done by 34,000 appraisers and Freddie Mac purchased $29 billion in loans. In each case the beginning of the analysis period coincided with the effective date of the GSE's proprietary warning messages.
OIG found that, while the GSEs have progressed in establishing the portal and collecting appraisal data, more needs to be done to use that data to minimize the risk of loss.
Specific Findings, Fannie Mae
From January 2013 through June 2013, Fannie Mae purchased over 56,000 loans which may have contained potential violations of underwriting requirements. Over 4,500 of these appraisals generated more than one warning message (up to 9 messages per appraisal). Despite these alerts, Fannie Mae purchased all of the loans for over $13 billion.
The triggering issue varied from technical appraisal documentation requirements to unauthorized use of single-family loan funds. The warning messages shared with lenders were coded as "automatic overrides" in the uniform collateral data portal. That is, Fannie Mae did not require lenders to explain or resolve potential problems ranging from formatting issues to violations of its underwriting requirements.
Instead, Fannie Mae focused its efforts on reviewing the loans for conformance with its requirements after it bought them, informing OIG that their plan was to determine how effective the warning messages were by analyzing actual appraisals to determine the rate of false positives generated by the portal's automated analyses and checks of appraisal data.
Specific Finding, Freddie Mac
During a three-month period of time, from June 22, 2013 through September 30, 2013, over 29,000 out of 135,000 appraisals uploaded into the portal generated one of Freddie Mac's proprietary warning messages alerting that either no property value could be provided or the value of the property was in question. Despite these alerts, Freddie Mac purchased all of the loans for approximately $6.7 billion.
Freddie Mac's proprietary messages were limited to only one aspect of its property underwriting requirements, the property's value which the GSE accomplished by feeding the portal's appraisal data through the GSE's model for estimating property value. However, the model could not estimate a value for around 25,000 appraisals totaling $5.6 billion. Reasons for this ranged from the system not being available at the time to not being able to verify that the address existed. For over 4,000 other appraisals, valued at $1.1 billion, the model warned that the appraisals should be reviewed for accuracy because the estimated value may be excessive for the local market.
Indeed, Freddie Mac does not require lenders to address any of its proprietary messages before buying their loans. Instead, the warning messages were coded as automatic overrides, so the portal accepted the appraisal, giving it a successful status, without lenders explaining or resolving the questionable or absent property values and relies on post-purchase review to catch problems. However the review does not begin with the appraisals that generated the alert but rather selects files based on data points which may or may not include problematic appraisals.
Other Specific Findings
OIG also found that between June 2012 and June 2013 there were 414,000 appraisals for properties totaling nearly $88 billion which were flagged because the appraiser's license was unverified. Over the same period the portal alerted that 25 appraisers who had conducted 805 appraisals were suspended. The GSEs subsequently purchased loans valued at almost $88 billion when they could not determine is the appraisers were licensed to do the work. OIG found that the warning messages received were either indeterminate or inaccurate and ultimately identified only two appraisers who were indeed suspended.
Conclusions and Recommendations
OIG concludes that increased FHFA oversight can enhance the GSEs' use of the portal's appraisal data before they buy single-family mortgages and can reduce collateral risk. Overall, OIG made 14 recommendations to help the GSEs use appraisal data to improve loan quality and to reduce the risk of loss. The three key recommendations based on the findings above were:
improve Fannie Mae's use of appraisal
information generated by the uniform collateral data portal related to the 25 proprietary messages
FHFA should perform
supervisory review and follow-up to ensure that Fannie Mae takes action
to change the portal
message type from automatic override
to manual override
or fatal for the 25 proprietary messages related to underwriting requirements. This will require lenders
to take action
to address the appraisal-related
messages warning of potential underwriting violations prior to delivering the loans.
improve Freddie Mac's risk management related to the use of proprietary messages,
FHFA should perform supervisory review and follow-up to ensure that Freddie Mac
takes action to develop and implement additional
proprietary messages related to its property underwriting requirements, establish
the additional proprietary messages related to property underwriting requirements
as manual override or fatal requiring lenders to take action to address the messages
prior to delivering the loans, and review the type of message related to the existing
nine proprietary messages for consideration of converting the type of message from
automatic override to manual
override or fatal,
which will require
the lenders to take action to address the messages
prior to delivering the loans.
- To enhance use of joint messages related to the status of an appraiser's license, FHFA should perform supervisory review of both GSEs to ensure the warning messages distinguish between inactive appraisers and unverified appraisers; ensure that the portal tests whether appraisers are licensed and active at the time the appraisal is performed; change the message type to one requiring lenders to take action prior to delivering the loan. OIG also recommends that the GSEs seek remedy for the 23 loans, valued at $3.4 million, delivered by the two suspended appraisers in violation of underwriting requirements.