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Perspectives Blog

How We Manage Appraisal Quality

April 18, 2023
Jake Williamson
Jake Williamson

Senior Vice President, Single-Family Collateral Risk Management

As a secondary market investor, Fannie Mae proactively oversees the loan manufacturing process to drive loan quality to help ensure that the mortgages we purchase meet our requirements. We hold the participants in that process – including ourselves – to high standards and continuously evaluate and refine our monitoring and controls to uphold our standards of excellence.

Residential appraisers are an important part of the mortgage origination process. Our lender partners engage appraisers, following the requirements of the Fannie Mae Selling Guide for appraisers and appraisals. Implementation of the Uniform Appraisal Dataset in 2010 – developed by Fannie Mae and Freddie Mac with the Federal Housing Finance Agency – enabled digitization of appraisal reports. Receipt of standardized data then made it possible for Fannie Mae to monitor appraisals and appraisers and provide oversight similar to other steps in the process of originating loans sold to us.

Appraiser Quality Monitoring
We introduced Appraiser Quality Monitoring (AQM) in 2015 to provide appraisers and industry partners with actionable feedback to improve consistency, manage risk, and increase confidence in the appraisal process. The goal of AQM is to improve appraisal quality and strengthen the appraiser profession by identifying patterns of issues in appraisal reports and providing feedback directly to individual appraisers.

The AQM process identifies appraisers whose appraisal reports exhibit a pattern of inconsistencies, inaccuracies, or data anomalies. The intent and expectation of communicating these issues to appraisers is for training and educational purposes, as well as to provide them with an opportunity to improve their work.

Occasionally, the AQM process identifies appraisers whose appraisal reports exhibit a pattern of more egregious issues. In those cases, Fannie Mae contacts the appraiser and our lending partners informing them that either 100% of the loans submitted with appraisals from the identified appraiser will be reviewed in our post-acquisition file review process or that Fannie Mae will no longer accept loans with appraisals completed by the specific appraiser.

State Referrals
Based on our AQM reviews, we occasionally provide tips to state appraiser regulatory boards about appraisals with severe deficiencies. The goal is to provide the states with actionable information to help improve the quality of appraisers and appraisals in their states. While it is possible that a tip may lead the state to investigate and determine that a disciplinary action is needed, we have seen many cases where the investigation instead resulted in mentorship, additional instruction, or continuing education.

Text Scanning
Standards of professional appraisal practice and Fannie Mae's Selling Guide require appraisers to perform their assignments without bias. While appraisers may not intentionally factor race, gender, or other protected class information in the valuation, some words or phrases can undermine the credibility of the appraisal by implying that demographics influenced the outcome.

Fannie Mae's introduction of the groundbreaking appraisal text scanning review process has led the way in appraisal compliance through scanning millions of appraisals for subjective terminology and terms specifically related to race, ethnicity, or religion in appraisal report commentary sections. We began the appraisal text scanning process to identify the presence of subjective terminology, including, but not limited to, the terms found in Selling Guide B4-1.1-04, Unacceptable Appraisal Practices.

As a result of our first text scanning in 2021, we sent 1,553 AQM letters to appraisers with multiple findings reminding them that the use of the subjective phrases or terms may be evidence of a non-objective valuation process and indicate the possibility of discriminatory bias in determining a property's value. Following up with further appraisal text scanning in 2022, we found significant performance improvements compared to the 2021 results, including:

  • The overall rate of appraisal reports with findings decreased from 0.15% (2021 review) to 0.11% (2022 review).
  • 78.6% of the appraisers who received a letter in 2021 had no new text findings on appraisals submitted after the letter date.
  • The number of appraisers with findings declined from 3,193 (2021) to 1,557 (2022).

Based on the results of the 2022 appraisal text scanning review, Fannie Mae sent more than 400 new AQM letters to appraisers with multiple findings. The most common findings were the use of the phrases "desirable location," "desirable neighborhood," and "good neighborhood." We also sent 20 referral letters to state regulatory agencies based on the identification of egregious appraisal issues. Examples include racial and ethnic descriptions of the population in a specific area.

We will continue to enhance the appraisal text scanning review process, including establishing a regular cadence of scanning, to help further minimize appraisal bias.

Appraisal Undervaluation and Overvaluation Risk Flags
Collateral Underwriter® (CU®) is a free web-based application that helps lenders manage collateral risk as part of their underwriting and quality control processes. In June 2022, we added an undervaluation risk flag with 16 risk reason codes to complement the existing overvaluation risk flag and reason codes.

Between July and December 2022, the undervaluation risk flag fired on approximately 4% of appraisal submissions while the overvaluation risk flag fired on slightly more than 15%. These flags can help lenders allocate finite appraisal review resources to proactively identify and correct cases of mis-valuation. We see that appraisers are much more likely to revise their opinions of value in cases where the flags fired. This ultimately benefits homeowners and borrowers by providing them with more accurate information about the value of their homes, supports lenders in making prudent lending decisions, and strengthens Fannie Mae's safety and soundness.

Digitization of most appraisal data just over a decade ago has enabled Fannie Mae to strengthen our oversight of appraisals on loans sold to us. We are on a quest to use data and technology to drive continuous improvement in the valuation space. We also engage with appraisers regularly, publishing a quarterly Appraiser Update newsletter, attending appraisal organization conferences, and providing a way for appraisers to contact us directly with any questions about our policies through our Appraisers webpage. We will continue our appraiser engagement and oversight as part of our commitment to fostering an effective, efficient, and impartial home valuation process for homebuyers and homeowners in America.