I have sat through multiple webinars and created my own webinar to prepare our clients and one thing seems to be consistent. No one really knows what’s going to happen once collateral underwriter is launched. There appears to be two schools of thought on collateral underwriter.
First Group: The Sky is Falling
They think the mortgage industry is going to be turned upside down forever once collateral underwriter is introduced. The fear is there will be a large percentage of appraisals rejected, lowered values and longer turn times which can kill your deal! Appraisers will have to constantly defend their appraisals and many will be black listed and out of work.
Second Group: Rose-Colored Glasses
They think this is a great tool that will help all of us improve the appraisal valuation process. Collateral underwriter will have no impact on the industry and will be good for everyone. Appraisers will comply with the new rules, much like they always have. It will be business as usual.
The reality is that appraisers will not be happy if lenders constantly challenge their appraisals and they will push back. Lenders will need time to figure the best ways to implement collateral underwriter into their process. Borrowers will again suffer from longer turn times and higher costs. I can still remember going from A-Z on a mortgage loan in two weeks. Soon you may be lucky just to have your appraisal pass thru quality control in two weeks. I asked a representative at Fannie Mae about the risk score and what would happen if a lender just stayed the course and did nothing with collateral underwriter? The Fannie Mae rep's response, "With a higher risk score, there is a higher probability of that file being pulled for an audit." Meaning, if you do nothing and the file is audited you risk a repurchase demand from Fannie. These demands from Fannie and Freddie in recent years are what have caused lenders to tighten and increase efforts to verify everything! Including those items that we all feel are ridiculous.
I repeat, no one really knows what is going to happen, but we can look to the past to help predict the future. What we do know is when the GSE’s went into conservatorship they had to get their house in order. The wild, wild west was over and they could no longer feed the beast. They were forced to be proactive instead of reactive when reviewing files for loan buybacks. The number one reason for buybacks was and is the appraisal. Next, we saw numerous laws and regulations introduced which propelled the AMC industry overnight and forced lenders to change their appraisal process. Changes were occurring rapidly and the big boys were equipped to keep up, but the small community banks and credit unions struggled. The industry was turned upside down over and over again, but everyone adapted and became good at change.
The same thing will happen with collateral underwriter. Initially, we will experience some major changes in the appraisal process, which will create problems for lenders, appraisers, AMC’s, realtors and borrowers. There will be some deals that fall apart as a result of collateral underwriter and there will be plenty that don’t. There will be pushback from appraisers and lenders will need to adapt to the changing environment. The industry will become accustomed to this new technology and, in time, this will become business as usual. I recall appraisals that used to be around 20 pages. Now it is not uncommon to see them over 40 pages. Collateral underwriter will become the new norm.
My feeling is that you will see a bigger initial reactions from the national lenders than you will see from the smaller community lenders like credit unions.
What Lenders need to know!
Collateral underwriter is a tool to be used in your review process. It does not replace your established review process. You have a human reviewing the appraisal to decipher what technology cannot. So, do not send a list of every message that collateral underwriter creates and ask the appraiser to address them. If you manage your own panel, you will soon have no one to manage. They need to determine what needs to be addressed by the appraiser and what does not. It is not necessary to address every message to try and manipulate the risk score lower. Lastly, do not set rules in place that you will reject all risk level 5 appraisals. Fannie has clearly stated this is not a pass/fail and that an appraisal with a level 5 risk score may be correct in its approach.
If used properly collateral underwriter can improve the overall quality of appraisals and help lenders manage risk. If not used correctly you will loose borrowers, relationships and money.
If anyone has implemented a process around collateral underwriter and appraisal review please share your ideas in the comment section below!
Todd Campfield has nearly two decades of lending experience working on both the sales and operations side of the business. He held the vice president of lending and collections position with a credit union in Virginia that serviced the International Mission Board and had members all over the world. Todd relocated to Ohio in 2007, and began originating mortgage loans for community financial institutions, including a credit union based out of Cincinnati. He also worked for one of the largest mortgage companies in the country as an underwriter. Recently, Todd made the move to work for CU Appraisal Services as the partner relations manager. He has a unique set of skills with experience with originations, underwriting and managing the loan portfolio of a credit union.