Overlooking valuation risk – why it matters and what you can do

Mortgage lenders spend millions annually to identify and mitigate compliance risk. When it comes to valuation risk, the same level of diligence is often not applied. Lenders take on valuation risk on loans with CU Scores over 2.5. Considering 40% of loans submitted to Fannie Mae® fall into this category, lenders anticipate valuation risk the same way they do compliance risk.

What this means for lenders originating $1 billion in loans on an annual basis is that they could have over $400 million in exposure annually. So why haven’t more mortgage lenders questioned the lack of urgency to decrease their exposure? It can be tricky mitigating valuation risk when there aren’t many tools on the market that identify and remediate the risk while lowering the CU Score.

CU® Score, what is it?

When it comes to identifying high-risk appraisal reports, lenders have access to Collateral Underwriter®, an application developed by Fannie Mae to identify the risk of possible data misrepresentation and/or overvaluation.

Based on a 1-5 scale, the CU Score reflects an automated risk assessment of the appraisal report. The data is pulled from current and previous appraisals completed by the appraiser, previous appraisals using the same comparable sales in other reports, comparable in the area, and multiple internal algorithms that have been tested and developed by leading economists, appraisers, and developers.

To ascertain certain benefits from Fannie Mae, lenders are looking to get the CU Scores down to 2.5 or lower. Any file with a CU Score of 2.5 or below provides Day 1 Certainty®, rep and warrant relief to that lender creating a peace of mind and freedom from representations and warranties years down the road.

If an appraisal comes back with a CU Score of 2.5 or higher, it doesn’t necessarily mean it’s a bad report. This is where the lender and appraisal management companies’ due diligence are necessary for reviewing the report and reasoning for the high score. Not understanding the error messages expose lenders to valuation risk, but it also creates operational issues if the errors aren’t being corrected efficiently.

SSR Messages and Setting Universal Valuation Standards

The valuation industry is no stranger to the lack of visibility impacting the efficiency of certain processes. Today, appraisal management companies, appraisal reviewers, and underwriters who are reviewing Successful Submission Reports (SSRs) have truly no way of knowing what to instruct the appraiser to do as far as correcting the report. Each SSR contains a summary of the appraisal submission for a particular loan, any CU messages that have fired due to possible data/over valuation issues, the status of the submission, and a Document File Identifier (Doc File ID).

Currently only the lender and AMC, per Fannie Mae guidelines, are allowed to view the SSR data. With the limited training Fannie Mae can provide for CU, many organizations will waste time and money reviewing the CU data that they do not fully understand. If a set of instructional messages were available to the appraiser, it would be possible to set universal valuation standards empowering a collective understanding of Collateral Underwriter.

Understanding the findings and realigning lenders and AMCs in an aggregated way will allow the appraiser to decrease the CU Score before it ever gets back to the lender. At the end of the day, lenders want more reports with CU Scores below 2.5, and visibility into SSR messages can mitigate overvaluation risk as well as addressing quality related issues.

Influence from a Fannie Mae® Subject Matter Expert

Jacob Eland, AppraisalVision’s Chief Product Officer, has an extensive valuation background after 23 years in the industry. Starting as a residential real estate appraiser in Michigan, Eland then moved to Charlotte, NC, where he started working in the Foreclosure Department for Wells Fargo as their Senior Supervising Appraiser and lead VA Staff Appraisal Reviewer.

In 2012, he started his 8-year career at Fannie Mae working exclusively on Collateral Underwriter. Deemed a CU Subject Matter Expert, his responsibilities included extensive testing of CU, training internal employees, and working with software development.

The AppraisalVision Difference

If lenders and AMCs are struggling to understand the CU Score results, they normally wouldn’t have anyone to call. With Eland’s expertise, our team has created a feature within SMARTReview that provides a detailed description and instruction for each CU message as they relate to individual reports. Leveraging Fannie Mae’s appraisal API integrates these CU messages with traditional QC and lender specific underwriting requirements.

Our goal is to simplify CU, making it easier for our clients to understand how to use the valuation product through directive messaging. Fannie Mae offers CU trainings, yet they’re missing the manpower to give their clientsthe one-on-one experience we can provide.

The AppraisalVision network is now able to show appraisers the messages we created and are fired by our system, detailing the possible errors within the report’s data; addressing the CU messages would potentially decrease the score. Whether you’re a lender looking to cut collateral risk or you’re an AMC looking to add transparency and stability for your current customers, that value can be found by using the AppraisalVision platform with CU functionality.