Collateral Underwriting (CU) Made Simple

I have received a fair number of requests from appraisers across the country asking me to address the upcoming Collateral Underwriting (CU) from Fannie Mae.  After all, it all begins in just a few weeks.  Are you ready?  Are you like most appraisers in that you still have a lot of questions?  We hit this hard on my All Star Team webmeeting this week, but only paid subscribers have access to that information.  I saw an article from Richard Heyn, SRA and Dawn Molitor-Gennrich, SRA on the ACI Blog a few weeks back that, with permission from ACI, have reprinted below.  I thought this article answered a lot of the questions that we appraisers have.  This article originally appeared on the ACI Blog HERE.

Collateral Underwriter and Chicken Little

DECEMBER 18, 2014

By RICHARD HEYN, SRA and DAWN MOLITOR-GENNRICH, SRA”My oh my, the sky is falling. I must run and tell the others,” said Chicken Little.

Apparently, a recent announcement by Fannie Mae has some appraisers thinking like Chicken Little. In October of this year Fannie Mae announced the release of Collateral Underwriter, a “proprietary appraisal risk assessment application developed by Fannie Mae to support proactive management of appraisal quality.” Essentially, Collateral Underwriter (CU) is a software tool that will allow lenders to evaluate appraisal reports using the same analytics used by Fannie Mae. CU will make its debut on January 26, 2015.

When the Uniform Appraisal Dataset (UAD) and Uniform Collateral Data Portal (UCDP) were instituted in late 2011, Fannie Mae began aggregating data from millions of appraisal reports processed through the UCDP. As a result of this initiative, the data is harvested and used to fuel analytical tools that can “score” a report and assign a risk factor.

Initially, the UCDP was “rules-based” in that it simply compared the report data against a set of rules and identified omissions and inconsistencies within the appraisal report. Over time and as the amount of data grew, FannieAppraiserCU Mae was able to develop a “model-based” analysis that evaluates the reports for, in their words “data integrity, comparable selection, adjustments, and reconciliation.”

So there is no really big news here so far. Fannie Mae is doing just what they said they intended to do when they developed the UAD and UCDP – use technology to improve the quality of appraisal reports submitted to them. The big news here is that Fannie Mae will be sharing this technology with their lender clients, allowing them to submit reports to CU for evaluation and risk scoring. Appraisers will not be given access to CU.

So you are probably wondering what this all means to you. The short answer is that it’s simply too early to tell, and that anything you hear other than what’s been published by Fannie Mae, is speculation. If CU flags issues in a report, it seems likely that at least in some cases, the appraiser will be contacted and asked to resolve the flagged items. However, that’s not a given. Other than 21 defined “fatal edits,” CU messages do not have to “pass” before Fannie Mae will purchase the loan. As stated by Fannie Mae, CU messages are designed to “simply highlight aspects of the appraisal that may require further attention.” That’s Fannie Mae’s way of saying, “lender – please read the appraisal report in those sections flagged to ensure comments or explanations are provided by the appraiser per the standards in our Selling Guide.”

There is a substantial amount of information about CU on Fannie Mae’s website, which we would encourage you to review and get the right information rather than relying on hearsay or speculation.

As you go through the information, keep in mind this information is written for lenders and that there is quite a bit of verbiage that does not apply to appraisers. There are also two on-demand e-learning courses that we highly encourage you to take.

While CU does have the potential of generating increased callbacks and “stips,” especially when first introduced, these should decline over time. And yes, your data and adjustments will be compared against what other appraisers (including you) used on prior reports. Fannie plans to initially focus on adjustments and material differences for key property characteristics and ratings for Quality, Condition, View and Location. Focus on what you need to do to provide a credible and compliant appraisal reports that demonstrate logic, reasoning and evidence for your opinions and conclusions.

Here are 6 things to make sure you are doing as a best practice:

  • Review and stick to appraisal fundamentals; brush up on your techniques.
  • Derive supportable adjustments from market data rather than using a list handed down to you from your grandfather who was an appraiser 50 years ago.
  • Develop and explain how you derived your GLA adjustments; don’t use the same $35/sf adjustment for your $50,000 properties and your $500,000 properties, unless you can truly support it with market evidence. Yes, they check all of your reports for patterns like that.
  • Double check your subject and comparable data and if it differs from MLS, public records data, or any other data source on which you relied, provide an explanation from your research.
  • Be consistent between reports with ratings for quality, condition, view, location. If you have good reason to change a rating from one report to another, document it properly in the appraisal report. If you have reason to believe your information is better and that your opinion may differ from that of other appraisers be prepared to support it.
  • Be cognizant of your adjustment factors and include support for your opinions and conclusions as they might differ from other appraisers or an automated valuation model.

Finally, don’t worry about things that may not happen. Fear-mongering and doomsday predictions seem to accompany many major announcements from Fannie Mae. Appraisers have been predicting the demise of the profession and dire consequences for all of the years that we have been appraising. If you are doing work that is credible you’ll live through this event as you have the others.

As an object lesson, do you remember what happened to Chicken Little and her doomsayer friends? They got eaten by the Fox.

For information on what ACI is doing in response to CU, click here.

Rich Heyn, SRA and Dawn Molitor-Gennrich, SRA are co-owners of Heyn, Molitor-Gennrich, LLC.  Both are AQB certified USPAP instructors and experienced appraisal education developers with extensive speaking and teaching experience.  Dawn is a former member of the Appraisal Standards Board; and both Rich and Dawn are Certified Distance Education Instructors.


My thanks to Rich, Dawn, and ACI for allowing me the reprint of this excellent article.  What do the rest of you think about CU?  Please comment below.


Dustin Harris, Providing ‘Value’ for Real Estate Appraisers

27 thoughts on “Collateral Underwriting (CU) Made Simple”

  1. It will be interesting to see how much more time gets spent pointing out where the comments are in the report. For example, when I am analyzing a comparable and the view states “greenbelt” or “lake front”, I always check the aerial map with the plat layer because 9 out of 10 times the listing agent is making the property more desirable than it is. I enter the actual view and describe in the report the listing agents description was not accurate, the site backs to farmland, not greenbelt, backs to a wet-weather creek, not lakefront, etc. It seems to me if whomever reads the appraisal report would actually “read” the appraisal report, none of this would be necessary. At the end of the day, it is what it is. Change the things we can change, accept the things we can’t, and hope to have the wisdom to know the difference.

  2. I read this article a several days ago. It is good back ground data but I think thier conclusions that ‘ this is much ado about nothing’ are all wrong. These upcoming changes deserve a little public attention. They should not be quietly swept under the rug with silly ‘Chicken Little” references. I have written three posts on this topic. All are aimed at Realtors, not appraisers, because I wanted NAR to pay attention to what was happening as they have clout. I cover several points they may not have considered:

    Dave Biggers recent comments area fairly comprehensive and more on point than the article written by the two ostriches above:…/collateral-underwriter-what-to-do

  3. Ken MacDonough SRA

    I have been a residential real estate appraiser for over 30 years. From time to time, I do some review work. Many of the reports that cross my desk are not well written. One item that I see repeatedly is NO location adjustment for the comparable sales. Lot size adjustments are few and far between too. Hopefully, the CU will force appraisers to think about what they are doing in terms of adjustments. Dollar adjustments for Gross Living Area is another matter entirely.

    1. I have a BIG problem with this one:

      “If you have reason to believe your information is better and that your opinion may differ from that of other appraisers be prepared to support it”.

      Mt appraisal report stands on its own and I have no interest in providing an opinion on another appraiser’s work unless I am being paid to review it.

  4. Be ready to increase the prices of your reports based on the time consuming questions that will be coming from many little or unskilled underwriters.
    I am thinking of converting my practice to a retainer basis like lawyers.
    You do the work until the per hour fee expires and then you ask for more or you do not do anymore work until the money is paid.
    If you complete a report, which takes minimum of 12 hours from start to finish, (tract built) with inspections and time on the road, research typing etc; you could be well into 15-20 hours analyzing data from other reports or whatever they choose to give you. That will stop the Data Insanity and let the appraiser do his job.
    Fannie came up with this data base to compare reports and comparables. It should only be utilized by appraisers to aid them in their day to day research. NOT by giving it to unskilled people that are not appraisers and still have not figured out the basic appraisal report.
    Again more scrutiny for appraisers, without their input.

    1. I have enjoy the freedom of being a self employed appraiser for about (15) years. As requirements have increased so has my fee. As the requirement for technology increased, so has my fee. This occupation is still a lot of fun when you charge the client for what they are asking for. So I have already increased my fees for 2015 20%. The days of doing a standard appraisal for $375 are long gone.

      1. Yes, I too have over 15 years experience as a self employed appraiser/broker/builder and I set my fees according to the complexity (cost of the improvements tends to relate to size which relates to more time and higher fees.) I have not done a 375 appraisal report in over 25 years. Most are near the 500 range. Guys and gals bite the bullet and demand a reason fee. My gross has increased each year while my appraisal production has remained rather stead. All jumbos as tied to FNMA criteria are over that range. Good luck!

  5. I wrote a blog post about CU and my big concern is that the program could flag the best appraisers: Since there is transparent process in place so that appraisers know about black lists, when they’re on one, why they’re on one, or how to get off, we have a problem. If most of the appraisers are just throwing comps in the grid with the data that DataMaster tells them to use and no hand verification, the appraisers who are talking to agents and finding big errors could look to a computer that they are the ones with the problem. Fannie says they will read the comments, but do they have time to do that? Also, how do we know to comment if we don’t know that we’re different from our peers?

  6. It will be interesting to see how this plays out. I for one am happy to see FNMA push the due diligence envelope further. I predict some potentially ugly growing pains, though everyone (most importantly the public), should be in a better place at the end. We are already in a better place after a single year of the HVCC. Originating lenders have found out in recent times just exactly what the FNMA Selling Guide means, and probably in many cases what it says!!! It appears this new tool is provided by FNMA for the use of their lenders who sell them loans in order to help perform their due diligence better.

    I would like to state a few things I think about and also think other appraisers should be thinking about, IMO – LOL.

    #1 The FNMA Selling Guide is essentially the written contract between FNMA and the originating loan brokers who sell FNMA loans. It is NOT a contract between FNMA and appraisers.

    #2 The FNMA Selling Guide has a section (I would reference it, though I believe it a good exercise for all appraisers to dig through and find it) that itemizes a list of specific “Unacceptable Appraisal Practices”. Again, this is the contract between the originating lender and FNMA, not the appraiser, and the basis from which FNMA would cite a breach of contract in a court of law that may result in a repurchase. The concept to keep in mind here is that it is the originating lenders responsibility to ensure that they submit an appraisal to FNMA free of any unacceptable appraisal practice, not the appraisers responsibility (LOL, though they sure make us feel that way sometimes don’t they).

    #3 For those of you who are unfamiliar with the Unacceptable Appraisal Practices defined in the Selling Guide, you may be shocked to find out they may not be what you think they are. For instance, no where in the Selling Guide does it say that it is an unacceptable appraisal practice to use a comparable sale that is over a year old, or located over a mile from the subject or that is similar in GLA by no more than 25%. You may also be shocked to find out that many of the “best” appraisers in the country, in terms developing and reporting a credible opinion of value, violate the Selling Guide on a regular basis (or more accurately subject their clients to risk because an appraiser can not violate a contract they are not a part of).

    #4 I have framed the first three like I have because therein lies where the vast majority of all involved (both the appraisers and lenders) get off on the wrong foot. This misdirection has gone on so long that in some cases myth has become truth. This has gone on so long, and is misinterpreted by so many, that under USPAP we may be obligated to comply to things that were previously never intended to be any concern of ours, or down right wrong and even in some cases unethical, simply because everyone has always done it that way.

    #5 I am finding I could post a lecture about this for days and still not cover it all and so for that reason, will stop right there. That frankly has always been the problem, we have always been too busy trying to put roofs over heads that we have not really had the time to sit down and hash all of this out.

    #6 And PS because I am an old windbag – My unsolicited peer advice to all is to start thinking about your line item adjustments to sales. How did you get them is one question. Though in my opinion the more important question is are they reliable and should we be making them in the first place? How many of us write summaries in our reports that inform the clients of the reliability of line item adjustments? Do people really buy property that way? Can the data really be sorted out in such a way with any credibility? Or have we been doing it all along because the form requires it, essentially allowing the client to tell us how to develop our opinions? Just because a method is recognized, or required, doesn’t mean it is credible. Remember the Cost Approach? When was the last time you wrote a report that developed the Cost Approach, then wrote that you did not rely on it to reconcile the final value opinion and the client should not rely on it either? I worry that instead of appraisers inciting the conversation about the reliability of line item adjustments, that instead they will capitulate the lenders desires and simply continue to smash the square block through the circle hole, so to speak.

  7. The only time I was accused of using the wrong square footage adjustment was about a year after the crash. It was about 2010, the subject was about 4,000 sq ft and the values were around 1 million. As values were declining people were not looking at additional living area as an investment. I think I used $10 a square foot. Of course, declining values were new at that point, so everyone decided that I was wrong, in spite of 5 comps that said otherwise. I probably spend and additional 8 hours with additional underwriting demands and insults. Killing a million dollar loan is like kicking a hornets nest, but that is why they have appraisers. We are not here to make people happy and in a changing market using statistics to attack the appraisers is a concern I would have.

  8. A rarely do lending appraisals nowadays but still have some thoughts on this. First of all, Fannie’s scope of work on their analysis exceeds that of the original appraisers by a long shot. Think about it– they have invested millions of dollars in their data acquisition and analysis that involved hundreds, if not thousands, of employees and they are expecting a $300 appraisal to derive similar results. This is the biggest issue I have with this whole situation.

    Secondly, the above article glosses over one of the huge problems with this whole situation, and that’s the support for any GLA adjustments. it’s easy to say “be sure your adjustments are supported”, but quite another thing to actually know what Fannie is looking for insofar as support. They’re using statistical analysis based upon a multi-million dollar dataset and they expect appraisers to be able to support a GLA adjustment using much less data, and without the financing resources that they have.

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    1. The main problem I can foresee is that in more rural locations, not “suburban” or tract built homes, the evaluations on everything from acreage value, utilities, outbuildings, construction quality all vary. It is not a fair assessment to group these properties into a system that has less overall similarity than suburban locations. This could be a problem.

  10. CU is probably not good news for appraisers, at least ones concerned with value accuracy. It seems likely there will be a tendency for appraisers to avoid call backs by trying to guess (eventually more-or-less successfully) what the conventional wisdom is on the adjustments (common practice and statistical models) and just go with that. Proving your information is better than conventional wisdom is just another example of scope creep, and as pointed out by another comment above, may not even be possible on an individual assignment basis.

    The most interesting aspect of CU, however, is whether it will be a precursor to some type of expert system that will eliminate large numbers of appraisers entirely. If I had that as a goal, I think I might design CU as an interim step before the “final solution”. It is widely predicted that these types of systems will eventually revolutionize many professional fields, leading to many fewer professionals being needed. The sky may not be falling immediately, but it could in the not too distant future.

  11. Why do appraisers put up with this crap.Of course they Fannie and Freddie are mining the data you send them.At some point they will have info on nearly every property in the USA. To get some changes in this
    government ran organization we as appraisers need to stand up ans say enough is enough..But the software companies,various speakers and course providers will make plenty of money off the situation.

  12. Continuous improvement is always a good thing. Reports with supportable statistical analysis for adjustments can only make the report better for everybody. Problem is how to develop and provide it in an economical way. Try asking a contractor to build you a 2500 SF house for $100K. He can probably get a slab poured, some framing and maybe even a roof on. But the house will have no drywall, electrical/plumbing or anything else. If the contractor can’t make a profit, he can’t build the house. This is where most appraisers are today. Every major change in the industry in the past 10 years has negatively impacted appraisers ability to remain profitable. More and more required work for the same or substantially less fees. The “regression analysis” software being offered by the software companies are promising the usual. To help us provide reports that will grease through CU. This software will provide the “supportable statistical analysis” charts, etc. that will support our adjustments made. I’m actually not opposed to this on face value. The devil here for appraisers is simply the business arithmetic. I took a look at a recent report I did in a $1.4 mil value range. I had 5 comps with a total of 15 adjustments for condition, GLA, site, location, views and hardscape. If it takes me 15 minutes (for each adjustment) to generate and import into the report this “statistical supportable analysis” that will support my adjustments, I just added 3.75 hour to the report. Guess what, 3.75 more hours per report and the business arithmetic doesn’t work. This is the heart of the matter for appraisers. Fact is we won’t be able to pass along major fee increases to cover this new added expense at least for now. This is business 101 and it’s simple. You either made enough money to keep the lights on or you didn’t. For me and the small handful of appraisers I communicate with, this CU/statistical analysis supporting adjustments made is “no-go”. Not because we don’t believe in it philosophically, but because it’s the last nail in being able to keep the lights on.

  13. Kimberly O'Donnell

    Today a letter went out to LENDERS from FNMA to clarify issues. It’s a 9 page letter. Here is just one paragraph….
    Fannie Mae does not instruct or suggest to lenders that they ask the appraiser to address all or any of the 20 comparables that are provided by CU for most appraisals. It is also not Fannie Mae’s expectation that appraisals should contain only CU’s top-ranked comparable sales. In the majority of cases, there may be no material difference between comparable sales utilized by the appraiser and those identified by CU. Before asking the appraiser to consider any alternative sales, it is imperative that the lender analyze the relevance of the sale and determine if the use of such sale would result in any material change to the appraisal report. If the lender determines that there would be no material change, then they should not ask the appraiser to make revisions.

    How do ya like them apples?

    Who knows, this may work. If you do your job and support your work, buy into paying for their regression “insight”, then maybe they can’t through us under the bus. Someone correct me if I am wrong but if an underwriter wants to put an end to us for one reason or another isn’t FNMA the final decider? I think they are saying in the letter that there is a misconception that it is “fully automated”.
    An underwriter can put our work up for review….but reviewed buy WHO? That is my question. Is it FNMA? Because if it is and the underwriter is not justified in their reasoning wouldn’t it be them who is looked at?

  14. Dear Dustin & indirectly, Dawn & Rich: FNMA Lender Letter-2 02/04/2015 among other things reports that the reason they eliminated the 15% / 25% guidelines is that over a very long period they noted very little change in adjustment amounts where one would logically have expected them. This lead them to the knowledge that “some” (read nearly all; or at least “most”) appraisers were tempering their market perceived adjustments in order to fit within FNMA guidelines.

    Given that, then THEIR ENTIRE DATABASE IS FLAWED! Everyone of the 17 appraiser related CU messages out of the 21 that exist are based on the premise that their database is correct, or so close that any anomalies would be minimized due to numerical volume. That ceases to be the case when the MAJORITY of data is flawed!

    Do not ask me for an explanation as to why my proper adjustments may not fall within the ‘model’ or so called weighted averages of “peer” adjustments when your own letters indicate the foundation of the new system is fatally flawed.

    I have SEEN communications from FNMA via a friendly amc. What is explained in lender letters is not what is happening.

  15. I appraise in small rural communities almost every day. Mostly under 2,000 people. There simply is a lack of sales data with maybe 6-7 total sales with 2-3 “comparable” and/or “competing” sales available at any given time of year. It is a challenge every day to locate comparable sales in these communities, you may have to travel to another similar town 20-30 miles away for a similar comp sale. How do we show and support adjustments in this instance with a total lack of sales data. Most appraisers I know that also appraise in this market simply rely on their overall experience and judgment. There are underwriters now requiring you to analyze comp sales that the CU Underwriter suggests? is this a way of persuading value? or am I lost here? Appraisers are required to be objective and unbiased, with the lender and/or client relying on us to give our estimated opinion of market value.

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