A Condition Rating Question

[timd354]

I can understand why Fannie wants numerical codes and defined C and Q ratings. But if I rate a property C2 , or C3, either way it can be challenged if CU finds other appraisal or data model rates it differently.

That's no different than if appraisers still rated properties as being good, average, fair, poor, etc...i.e, if you rated a comparable property as "average" or "average -" and Fannie had bunch of other appraisals that rated the same comp as "good", then you would still have the same potential issues. The essence of your complaint is not really that the condition and quality ratings have been standardized, it is that Fannie & Freddie are collecting that data and are using that data to check up on the veracity of an appraiser's work.

Sorry, but that is just the new reality of residential appraising and is not going to change. By the way, Fannie's published CU guidance states that if they have multiple appraisals and 1 of those appraisals has a different C or Q rating for a particular property than all the other appraisals, that does not mean that the one appraisal is necessarily incorrect.

The bottom line is that appraisers need to include appropriate commentary regarding why they assigned a particular C & Q rating to the subject and to each of the comps. Of course this is something that they should have been doing all along anyhow.

 

[Terrel L. Shields]

check up on the veracity of an appraiser's work.

Veracity? So when we rate something that is a "truth" and not a subjective determination? Maybe we can all tell the difference between new and badly abused, but between "average" and "good" can be pretty subjective since (imho) most "average" houses tend to not have substantial defects and might be interpreted in "good" condition. But if one rates "average" as the "norm" or mean of all conditions, then "good' by definition would be above average and that implies "average" is not a range, rather it is a point...the mean of conditions.

 

[timd354]

Veracity? So when we rate something that is a "truth" and not a subjective determination? Maybe we can all tell the difference between new and badly abused, but between "average" and "good" can be pretty subjective since (imho) most "average" houses tend to not have substantial defects and might be interpreted in "good" condition. But if one rates "average" as the "norm" or mean of all conditions, then "good' by definition would be above average and that implies "average" is not a range, rather it is a point...the mean of condition
.

You may not like it, but the UAD and the UCDP were a direct result of many in the secondary market not trusting appraisers. Nobody is concerned about honest, and well supported subject judgments made by appraisers....after all making honest and well supported judgments and providing a well supported opinion of value is what appraisers are hired to do. However, we all know that there is a small yet significant minority of appraisers who will change the condition and quality ratings of the same comparable sales between multiple reports and who will simply flat out lie about the condition of the comparable sales. When I see an appraisal report that rates the comparable sales as C4 (vs. a C2 or C3 subject property) and the appraisal includes a large condition adjustment, then I find the MLS listing for the same exact sale that states that the property has just been completely rehabbed (and includes photos showing that the property is completely rehabbed), then that is not an issue of subjective interpretation....it is an issue of veracity. Sadly, that still happens more often than you might think.

 

[J Grant]

..i.e, if you rated a comparable property as "average" or "average -" and Fannie had bunch of other appraisals that rated the same comp as "good", then you would still have the same potential issues.

While I agree with much of your post, the above is not the same potential issues. If an appraiser in above rated avg and Fannie had 5 others with good, the appraiser who rated average could always explain what average meant to him/her in that particular market or type of house. Whereas if an appraiser rates a house C3 and others rated it C2, there is specific language in the C ratings of 3 and 2 the appraiser could be found to "violate", should someone want to pursue it. I agree with your assesment that Fannie will accept explanations for C2 vs C3 and accept the work, but later on, if there is a buyback or forensic review , they, or others can use the specific rating of C2 vs C3 against the appraiser .

RE why Fannie wanted the C ratings it is more than about not trusting appraisers, there are some untrustworthy appraisers who are use condition or upgrades to inflate value, but if that were the ONLY reason for the CU, it is punishing all appraisers for the misdeeds of the bad apples. CU is also about uniformity of appraisal codes for UW to understand condition or quality of properties WITHOUT narrative, ( even though appraiser provides additional narrative). The ratings clarify for UW what standard a property fits into . When loans are sold to investors with appraisals in file, a computer scan or auto reviews can note numerically quality or condition, so there are additional uses for the Fannie ratings besides appraiser trust. Of course honest can have have different personal thresholds of avg vs good so the C ratings standardize to compensate.

 

[Terrel L. Shields]

You may not like it, but the UAD and the UCDP were a direct result of many in the secondary market not trusting appraisers

The C and Q ratings are an effort at standardization, a standardization that is vague at best. And using G / A / P vs C2, C3, C4 is a variation but one that, though defined, isn't very descriptive. How can we argue that our values are within 5% or even 10% when the quality rates by their very definition, are closer to 20% per rating? Why not use P, F, A, G, X in lieu of C1 - C5? Can the computer not read the one and can the other? Neither system prevents an appraiser from "lying".

But why would Fannie, et al, not focus upon the central issue of comp selection? In an urban area, how could you NOT find 3 comps for a typical home? Why would you EVER need to make a quality or condition adjustment? If you have confined your search area to be so restricted that you have eliminated everything but the three closest sales, then certainly one is likely to be an outlier.

Eliminate the appraisal entirely if you cannot trust your appraiser to be truthful enough to use the best sales and not be told that you have to vet every sale within a mile, or three miles, whatever - etc etc. And frankly, Fannie Mae, FHA etc are to blame for the situation by attempting to shoehorn restrictions upon appraisers that result in a Pavlovian response of attempting to tell you (Fannie) what they think you want to hear. Their manuals are not guidelines in a modern mobile society, they are guidelines designed for the 1950s and redlining. They create imaginary boundaries out of whole cloth then wonders why appraisers are confused.

I can't think of 1 in 10 people who bought a house in a particular "neighborhood". They looked at numerous neighborhoods. In parts of the south they cannot even base their choice on school districts due to forced bussing. When two working parties, most families seek the optimum distance between where each work and where their kids go to school. And often have to sacrifice one or the other. One of my nephews has a child subject to life-threatening seizures and they chose a home near a medical unit, secondary importance to their teaching jobs, as he teaches in one school and she in a totally different town 10 miles away. Another family member lives within 3 miles of her hospital because she has to be within 10 minutes of the hospital when on call. Another works 25 miles away from his wife's place of work and thus they live in yet a third town. The idea that "By Gawd, we'll live here or else we won't buy..." is nuts, and if nuts, then why is it an issue, and why does the choice of comps become influenced by proximity which limits the appraiser to a few "fannie selected" comps from a given distance from the subject - an artificial paradigm created entirely out of whole cloth by Fannie (and FHA).

So in many places the very notion of "neighborhood" is ridiculous on the face of it, but as an arcane artifact of the past, appraisers are sometimes conflicted by satisfying Fannie and FHA while being put in the box of using an inappropriate comp due to the lack of sales in a too confined neighborhood, or facing a slew of computer generated "stips" for failing to match the "fannie box".

 

[J Grant]

The best comps would not need condition or quality ratings, but for various reasons sometimes good comps do vary in condition or quality...ideal is when they are the same or similar of course. As far as area and location...that is a whole other topic; of course location and subdivision when relevant is an important factor in comp selection.

 

[timd354]

..i.e, if you rated a comparable property as "average" or "average -" and Fannie had bunch of other appraisals that rated the same comp as "good", then you would still have the same potential issues.

While I agree with much of your post, the above is not the same potential issues. If an appraiser in above rated avg and Fannie had 5 others with good, the appraiser who rated average could always explain what average meant to him/her in that particular market or type of house. Whereas if an appraiser rates a house C3 and others rated it C2, there is specific language in the C ratings of 3 and 2 the appraiser could be found to "violate", should someone want to pursue it. I agree with your assesment that Fannie will accept explanations for C2 vs C3 and accept the work, but later on, if there is a buyback or forensic review , they, or others can use the specific rating of C2 vs C3 against the appraiser .
Entities using a review appraisal to hold errors against the appraiser is nothing new and is not a UAD issue. They are not going to care if a review appraisal states that something was rated a C3 instead of a C4 or C2....what they care about is if the review appraisal shows that the original appraisal inflated the value substantially. No loan repurchase demand has ever been made based solely on an appraisal using an incorrect UAD condition or quality rating.
RE why Fannie wanted the C ratings it is more than about not trusting appraisers, there are some untrustworthy appraisers who are use condition or upgrades to inflate value, but if that were the ONLY reason for the CU, it is punishing all appraisers for the misdeeds of the bad apples. CU is also about uniformity of appraisal codes for UW to understand condition or quality of properties WITHOUT narrative, ( even though appraiser provides additional narrative). The ratings clarify for UW what standard a property fits into . When loans are sold to investors with appraisals in file, a computer scan or auto reviews can note numerically quality or condition, so there are additional uses for the Fannie ratings besides appraiser trust. Of course honest can have have different personal thresholds of avg vs good so the C ratings standardize to compensate.

Since I was at Freddie and worked on the UAD at the time it was devised and adopted, I think that I have a pretty good idea about why it was created and adopted. Again, the UAD was created and adopted because they did not trust appraisers and wanted to be able to collect the appraisal data pre-close. The standardization of the Condition and Quality codes and other parts of the appraisal were not the goal, but were the method used to collect the data. Clarifying information for underwriters was not one of the reasons that UAD was adopted. By the way, the UAD is not about punishing anyone, it is about collecting data and the UAD really should not cause anymore work for an appraiser than he or she did before. Once an appraiser learns and understands the ratings, using and applying those ratings is no more difficult than usings "good, vag, fair, poor", etc, and the appraiser should have been explaining why each property fits a particular rating (whether it is C1, C2 or good, avg, fair, etc) prior to the UAD anyhow.

 

[timd354]

ed.

I can't think of 1 in 10 people who bought a house in a particular "neighborhood". They looked at numerous neighborhoods. In parts of the south they cannot even base their choice on school districts due to forced bussing. When two working parties, most families seek the optimum distance between where each work and where their kids go to school. And often have to sacrifice one or the other. One of my nephews has a child subject to life-threatening seizures and they chose a home near a medical unit, secondary importance to their teaching jobs, as he teaches in one school and she in a totally different town 10 miles away. Another family member lives within 3 miles of her hospital because she has to be within 10 minutes of the hospital when on call. Another works 25 miles away from his wife's place of work and thus they live in yet a third town. The idea that "By Gawd, we'll live here or else we won't buy..." is nuts, and if nuts, then why is it an issue, and why does the choice of comps become influenced by proximity which limits the appraiser to a few "fannie selected" comps from a given distance from the subject - an artificial paradigm created entirely out of whole cloth by Fannie (and FHA).

So in many places the very notion of "neighborhood" is ridiculous on the face of it, but as an arcane artifact of the past, appraisers are sometimes conflicted by satisfying Fannie and FHA while being put in the box of using an inappropriate comp due to the lack of sales in a too confined neighborhood, or facing a slew of computer generated "stips" for failing to match the "fannie box".

I have no doubt that in many rural and outer suburban areas, people don't shop for houses in one particular neighborhood, but in many urban and suburban areas, they do, and in many areas, the school zone is the number one driving factor for where many people will look to purchase a house. I know that I bought a home 4 months ago after about 18 months of looking for a home in one particular school zone where buying a home is very competitive due to the desirability of the school district. I also know that when I was younger and lived in Baltimore, I bought a house based 100% on the neighborhood and so did most people around me in that neighborhood. I also know that when I appraised in a suburban Maryland county right outside of DC, I appraised a lot of homes in one particular neighborhood through which a high school zone boundary passed (one of the high schools was perceived to be excellent, the other not very good) and can tell you that which side of the boundary the home was located on made about a 20% difference in market value. Also, there is a small city in Maryland which the county line used to pass through (with one county having excellent public schools and the other county having crappy public schools as all school districts in MD are countywide). There used to be a huge difference in values in that city depending on which county/school district the home was located in. After the state legislature passed a law allowing for a referendum whereby citizens of that city could choose to keep the status quo or have the county line redrawn to consolidate the city in either county, 90% of the voters voted to have county lines redrawn so the entire city would be included in the county with the good schools... you can probably guess what happened to property values in the section of the city that used to be in the county with the crappy schools.

 

[J Grant]

If "they" don't' trust appraisers (based on the bad actors esp during the boom), the feeling is mutual, since appraisers for don't trust a number of clients...the historic track record of lenders who push for value, drop appraisers (even now) for not making value, select number hitters, allow RE agents to block appraiser access and now are also choosing by which appraisers allow them to keep enough in house profit when they run their own panel or saving money by using an AMC.

Which does not address the untrustworthy record of lenders who packaged C and D paper with A and B paper in mortgage securities. I don't know what role secondary market Fannie/Freddie played in that, but how clean were their hands?

During the boom lenders used mtge brokers to do their dirty work , and a number of appraisers signed petitions trying to change the crooked practices prevalent at the time . That's a matter of record.

Data collection and trust of appraisers seem to be on two separate tracks. I can understand C ratings as a review tool and for data collection and for standardization. While CU might find glaring evidence of blatant mis representation of quality of condition, it does not address anything else about trust worthiness, which starts with appraiser selection.

 

[J Grant]

I do agree in large part with TMC's analysis of neighborhood importance...even if buyers might consider several subdivisions, they eventually choose a house in one of the subdivisions, and since that was their final choice, one assumes comps similar to subject in that same subdivison reprsent closest alternate choice. Of course there are many instances when the competing subdivisions offer good comps and if they are over a mile away simply explain. And in some assignments, a strong component of a property such as ocean view or large acreage etc makes it less about geo neighborhood and more about finding a property with similar attribute, in which case appriser explains.

I have very rarely gotten push back from clients or Fannie about using comps over a mile or older when need by, just provide the rational explanation.