The appraiser has just delivered the appraisal to the lender, and you learn that the reported value came in for at least the sales price. The appraisal hurdle has been crossed, right? Not necessarily. Here is what’s going on with the appraisal process and when lenders are underwriting the collateral…
To improve the quality and consistency of appraisal data for loans delivered to Fannie Mae and Freddie Mac (GSE’s), at the direction of the Federal Housing Finance Agency, they developed the Uniform Appraisal Dataset (UAD), which defines all fields required for an appraisal. And all appraisal data is required to be submitted electronically to Fannie or Freddie before they will purchase the loan. The bottom line is, they are collecting data on every property securing every loan they purchase. And the GSE’s purchase approximately 85% of all home loans.
So how is this affecting those of us financing real estate, and those selling it?
All lenders for Conventional and Govt loans, use either Fannie Mae’s or Freddie Mac’s underwriting engine. Using the electronic property data the GSE’s have been collecting, these respective underwriting engines will report back an “opinion” of the value for the particular property address being considered. Freddie Mac calls this the HVE point value (Home Value Explorer). If the HVE varies too greatly from the actual purchase price negotiated between buyer and seller, an underwriter is required to obtain significant overwhelming evidence that the appraiser is “more correct” than the HVE. In these instances, the appraiser is asked to provide additional comps or additional comments and data to support the value reported. This can be very problematic in cases where comparable sales are limited. Underwriters may also obtain their own independent AVM (Automated Valuation Model). In short, we’re seeing the AVM’s and HVE’s being given more weight than the appraiser who actually visited the house, and knows the area. In some rare cases, an underwriter who feels he/she has not received sufficient evidence may consider “the value not supported”. Scary! It appears that “Big Brother” is attempting to take the collateral valuation process out of the hands of experienced trained appraisers, to instead rely upon electronic formulas; much like credit scores now decide credit quality rather than an experienced underwriter looking at the full credit report and making a decision about someone’s creditworthiness.
Meanwhile, a couple of other things are going on behind the scenes. Lenders, after receiving the appraisal, obtain SSR’s (Submission Summary Report). This report analyzes the appraisal, and gives opinions about each comparable sale used, and whether it is considered acceptable. If there is too much of a difference in square footage, etc., the report will give an error warning. These “errors” must be addressed before the appraisal and SSR are uploaded to Fannie or Freddie. Again, more requests for additional information or changes by the appraiser.
Lastly, as I started with above, UAD standardizes all appraisals. The condition and quality of the subject property and comparable sales are given condition and quality ratings between C1 and C6, or Q1 and Q6 respectively. If you’re buying or selling a “fixer upper”, be aware. Lenders cannot approve loans on properties with a C5, C6, or Q6 rating. Ratings in this range mean that the property has significant deferred maintenance and/or repairs required, or represent safety and soundness issues.
The bottom line to all this is, the appraisal is not officially “acceptable” until it has been reviewed and approved by the lender’s underwriter. The appraiser “hitting the number” is only the first step in what has recently been (and still evolving into) a burdensome process. Fortunately, I’m only seeing issues with a handful of appraisals. But in all of those cases, the first comment is always “but I don’t understand, the house appraised for the sales price”. Hopefully this information will help you understand there is more than just the appraiser’s opinion being considered.