OIG Finds GSEs Ignored Warnings about Appraisal Deficiencies

A residential appraisal report on property offeredrnas collateral for a mortgage loan, including its condition, neighborhood,rnmarket, and value is generally considered to be critical to underwritingrnmortgage loans.  As part of its role asrnconservator of Freddie Mac and Fannie Mae (the GSEs), the Federal HousingrnFinance Agency (FHFA) directed them in 2010 to improve the quality and riskrnmanagement of their single family loans in part by jointly developing a uniformrncollateral data portal.  </p

The GSEs’ selling guides contain requirements for lendersrnto follow when contracting with appraisers.  Lenders are responsible for selecting thernappraiser, ordering the appraisal, and reviewing the appraisal to determine if thernproperty provides adequate collateral for the loan.  In addition, the GSEs have several requirementsrnfor appraisers such as being licensed or certified in the state where the propertyrnis located and following the GSEs’ requirements and standards.  However, before 2012, there was no uniform systemrnfor gathering, analyzing, and responding to standardized appraisal data to ensurernloans sold to the GSEs met their requirements before purchase.</p

As of March 2012 the new portal was required tornanalyze all appraisals for single-family loans before they are purchased by thernGSEs.  If the checks within the systemrnfind signs that the appraisals violate the GSEs’ requirements it alerts themrnand the lenders to the problems.  This isrnintended to improve data quality, ensure compliance with the GSEs’ loanrneligibility guidelines, enhance loan reviews, and lower the number of loansrnthat must ultimately be bought back by lenders for not meeting GSErnstandards.  The portal was developed underrna joint five-year contract valued at $52 million.  </p

The GSE’s developed and tested the portal fromrnFebruary 2010 through March 2012 then required all lenders to submit the datarnfor their appraisals through it.  Duringrnthe development period the GSEs also worked to resolve inconsistencies withrnterminology, provide appraisers and lenders with a better understanding ofrntheir data requirements, implement electronic checks and analyses of the data tornallow common and individual use of the information and develop checks and analysesrnto sift through the data and alert for potential problems. </p

FHFA’s Office of Inspector General recentlyrncompleted an evaluation of how well FHFA is overseeing the GSEs’ use ofrnappraisal data before they buy single-family mortgages.  OIG’s report was released on Thursday.</p

Appraisers fill out electronic forms with appraisalrninformation and send them to the lender or the appraisal management companyrncontracted by the lender which uploads the appraisal into the uniform datarnportal.  The portal automaticallyrnanalyzes and checks the data and can generate various types of messages.  Where no message is generated requiringrnadditional action the appraisal is classified as successful and allows thernassociated loan to be delivered for purchase by a GSE.  Even when appraisals are deemed successful,rnlenders are not exempted from obligations under the GSEs’ selling guidernrequirements. </p

As of Jun 2013 the portal can send any of 366rnmessages developed jointly and 166 messages developed by one or the other ofrnthe GSEs.  Both types of messagesrncommunicate potential problems with the submitted appraisals.  Most of the joint messages (94 percent)rnconcern formatting issues such as the need for dollars to be expressed in wholernnumbers.  OIG did not look at appraisalsrnflagged with these messages.  Thernremaining 21 messages address topics such as the appraiser’s license status orrnthe appraised value of the property. rnFannie Mae owns the vast majority of the proprietary messages (157) andrnthese as well as Freddie Mac’s were developed in consideration of the company’srnrespective business needs.</p

For itsrnassessment OIG analyzed loans submitted to Fannie Mae between January 28 andrnJune 15 2013 and found that lenders submitted data for over 747,000 appraisalsrnperformed by about 52,000 appraisers that resulted in Fannie Mae purchasingrn$167 billion in single family loans.  ForrnFreddie Mac the analysis covered 135,000 appraisals submitted between Jun 22rnand September 30, 2013.  Appraisals wererndone by 34,000 appraisers and Freddie Mac purchased $29 billion in loans.  In each case the beginning of the analysisrnperiod coincided with the effective date of the GSE’s proprietary warningrnmessages.  </p

OIG found that,rnwhile the GSEs have progressed in establishing the portal and collectingrnappraisal data, more needs to be done to use that data to minimize the risk ofrnloss.  </p

Specific Findings, Fannie Mae</p

From January 2013 through Junern2013, Fannie Mae purchased over 56,000rnloans which may have containedrnpotential violations of underwriting requirements.  Overrn4,500 of these appraisals generated more than onernwarning message (up to 9 messagesrnper appraisal). Despite these alerts,rnFannie Mae purchased all of the loansrnforrnover $13 billion.</p

The triggering issue variedrnfrom technical appraisal documentation requirements to unauthorized use of single-family loan funds.   The warningrnmessages sharedrnwith lenders were coded as “automatic overrides” in the uniform collateral data portal.rnThat is, Fannie Mae did not require lendersrnto explain or resolvernpotential problemsrnranging from formatting issues to violations of its underwriting requirements.</p

Instead, Fannie Mae focused its effortsrnon reviewing the loans forrnconformance with its requirements after it bought them, informing  OIG that theirrnplan was to determine how effectivernthe warning messagesrnwere by analyzing actualrnappraisals to determine the rate of false positives generated by the portal’srnautomated analyses and checks of appraisalrndata. </p

Specific Finding, Freddie Mac</p

During a three-month period of time,rnfrom June 22, 2013 throughrnSeptember 30, 2013,rnover 29,000 out of 135,000rnappraisals uploaded into the portal generated one of Freddie Mac’s proprietary warning messages alerting that either no property value could be providedrnor the value of the property was inrnquestion.  Despite these alerts,rnFreddie Mac purchasedrnall of the loans for approximately $6.7 billion.</p

Freddie Mac’s proprietary messages were limitedrnto only onernaspect of its property underwriting requirements, the property’s value which the GSErnaccomplished by feeding the portal’srnappraisal data through the GSE’s model for estimating property value.  However, the model could not estimate a value for around 25,000 appraisals totalingrn$5.6 billion.  Reasons for this ranged from the system not being available at the time to not being able to verifyrnthat the address existed.rn For over 4,000 other appraisals, valued at $1.1 billion, the model warned that the appraisals should be reviewedrnfor accuracy becausernthe estimated value may be excessive for the local market.</p

Indeed, Freddie Mac does not requirernlenders to address any of its proprietary messages before buyingrntheir loans. Instead, the warning messages were coded as automatic overrides, so the portalrnaccepted the appraisal, giving it a successful status, without lenders explaining or resolving the questionable or absent property valuesrnand relies on post-purchase review to catch problems.  However the review does not begin with thernappraisals that generated the alert but rather selects files based on datarnpoints which may or may not include problematic appraisals.</p

Other Specific Findings</p

OIGrnalso found that between June 2012 and June 2013 there were 414,000 appraisals</bfor properties totaling nearly $88 billion which were flagged because thernappraiser’s license was unverified.  Overrnthe same period the portal alerted that 25 appraisers who had conducted 805rnappraisals were suspended.  The GSEsrnsubsequently purchased loans valued at almost $88 billion when they could not determinernis the appraisers were licensed to do the work. OIG found that the warningrnmessages received were either indeterminate or inaccurate and ultimatelyrnidentified only two appraisers who were indeed suspended. </p