Friday, May 22, 2015

Materially Different - Uh, oh!

Just as real estate agents and property sellers were lining up to get a second drink at the crazy party that is the current real estate market, a giant turd surfaced in the punchbowl. We have known the turd was in there since January but thought that maybe it wouldn't matter. It does.

First off, I am not an appraiser nor have I played one on TV. I am merely observing activity in my market, Cocoa Beach and Cape Canaveral, and speculating about possible causes from a curious participant's perspective.

In 2014 mortgage originators sold $434 billion of mortgages to Fannie Mae. By selling a new mortgage to Fannie the lender can then put that capital right back to work in another mortgage. Rinse, repeat, get fat year-end bonus. In order to qualify for sale to Fannie, a loan must meet Fannie's guidelines. I'm told that even if a loan isn't intended to be sold it can be prudent to still underwrite to Fannie's standards. Fannie has long used a desktop underwriting system to make it easier for lenders to make sure they are making qualifying loans. Fannie can require a repurchase of a mortgage that doesn't conform.

In January this year Fannie Mae implemented an additional tool, an automated risk assessment system for appraisals submitted to Fannie Mae called Collateral Underwriter. CU reviews appraisals by looking at specific information in the appraisal such as sales price, comparables, size, condition, room counts, quality of construction, etc. and compares it with appraisals of similar nearby properties among the millions of appraisals in its files. It looks for inconsistencies and generates a risk score and can suggest as many as 20 alternative comparable properties or it can issue a hard stop calling for correction. The system will notice that, for instance, a $15,000 adjustment for a garage is not in line with what other appraisals in the area have used or that it has no data to support an $18,000 adjustment for a boat slip. It may notice that the appraiser has been inconsistent with the condition grade of a comparable. When it finds an inconsistency CU will kick out an error message (flag) that requires action. While Fannie claims that "CU does not take a “lower is better” approach" it apparently does not flag low risk or low value but does flag several categories of items with "materially different" notes that suggest it is more strict with items that indicate "over-valued". I would love to hear from local appraisers on this. Several recent appraisals that I am aware of suggest to me that Fannie's post-purchase infrastructure shift "to a focus on increasing certainty through defect prevention" has had a side effect of lower appraised values. I am aware of five appraisals in the last three weeks in our market coming in from 10% to a whopping 30% below contract price. Coincidence? Maybe. Or maybe it's the fear of receiving the dreaded CU message # 0195 "Fannie Mae will not accept appraisals from this appraiser." Being black-listed by Fannie is a virtual pink slip.

Our take-away: For sellers, it makes sense to prepare in advance for a low appraisal and to decide what reaction will be productive. Buyers should always attempt to renegotiate down to a low appraisal number but shouldn't let a good property at a fair contract price get away because Nigel from Scared of Losing My Job Appraisals may have been practicing self-preservation. That is, of course, finances permitting. Cash buyers, your crowns are sparkling.

"A lot of people are afraid of heights. Not me. I'm afraid of widths."  __Stephen Wright