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Secondary-market quality-control appraisal review: Will yours stand up to investor scrutiny?

Mar 21, 2022

By Ann Marie Picha, consultant

A trending topic in many post-closing quality control (QC) review discussions is the occurrence of appraisal review findings. QC reviewers and your investors want to know whether you are adequately assessing the collateral risk of the loan.

While employment and credit history tell the story of the borrower’s ability to repay the new mortgage loan, the appraisal tells the story of the property (the collateral for the loan). Because it is one of the fundamentals of secondary market real estate underwriting, it’s important to get your review of the appraisal right to offset potential loss in the unlikely event of a foreclosure.

This may sound like common sense. However, with volume bursting at the seams, effective appraisal reviews at the time of origination may not be happening as expected and, possibly, not meeting investor expectations.

In 2018, Fannie Mae (FNMA) and Freddie Mac (FHLMC) began a multi-year effort to update the Uniform Appraisal Dataset (UAD) and the Uniform Residential Appraisal Report (URAR). The aggregated data in the Uniform Collateral Data Portal (UCDP) is intended to be used to verify the data integrity in newly delivered appraisal reports. 

A closer look

More recently, in March 2021, FHLMC removed the required field review for post-closing QC reviews, and FNMA followed in May. Even though reviewing appraisals and appropriately assessing the risk of the collateral have always been a fundamental part of mortgage underwriting, FNMA and FHLMC are now taking a closer look at the lender’s appraisal review and determining whether it was completed by a qualified individual and meets Selling Guide(s). 

A thorough review of the appraisal should include addressing and/or clearing the warnings provided on the UCDP Submission Summary Report (SSR). 

In addition to meeting the investor’s enhanced appraisal review requirements, your institution should be using pre- and post-closing QC results to measure how your mortgage operations are managing appraisal quality.

Impact of appraisal defects

Did you know that appraisal defects can affect your representations and warranty relief — even with a collateral risk score of 2.5 or lower? According to FNMA's May 2021 Quality Insider, the most frequent appraisal quality defects are appraisal data integrity, selection of comparables and appraisal adjustments.

It’s often difficult to ascertain whether the appraisal was reviewed in accordance with the Selling Guide(s) because there is no evidence of this critical assessment of the collateral risk. The appraisal review should be more than “Yes, it’s good” or “No, it’s not.”

Why make the reviewer or your investor guess? You certainly don’t want your investors to have to try to piece together the story of the subject property; they won’t spend much time on that. Lenders using a robust checklist, completed and retained in the loan file, are better managing and mitigating risk.

Here are links to a couple of post-closing appraisal review checklists you might find helpful: FNMA Form 1033 and FHLMC Form 1033.

Although use of the checklist is not a requirement, the checklist is a good tool to help walk the reviewer through each section of the appraisal. The reviewer should comment on any areas of concern and note how they were cleared.

Whether you use a robust checklist or prepare a written analysis, it’s important to provide evidence that the appraisal has been reviewed in accordance with the Selling Guide(s).  Clear and address all areas of concern, and include documentation to support that the UCDP SSR warnings have been analyzed and handled.

How Wipfli can help

When you outsource secondary-market quality-control services to Wipfli’s team, you gain the peace of mind that comes with knowing your QC is completely independent and performed by professionals with the necessary underwriting background and knowledge to get it right.

If you prefer to keep your QC process in-house, Wipfli can assist your staff with the development of policies, testing procedures and training to help them become more proficient and ensure consistency with investor guidelines. We can also help you stay current on investor requirements and best practices to further strengthen your secondary-market quality-control program.

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Wipfli Editorial Team