Collateral Underwriting Impacts Mortgage Appraisals

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Appraising a home for a mortgage lender has changed, again.  In January 2015, regulators rewired how Conventional loan appraised values are verified.  Fannie Mae and Freddie Mace now require Collateral Underwriting (“CU”) on all Conventional appraisals.

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What is Collateral Underwriting (“CU”)?

In short, Collateral Underwriting  adds another robot to the lending process.  Seems like one more automated system created to “safeguard” mortgage lending.  This time, the robot judges an appraiser’s value of a subject property.   Fannie Mae and Freddie Mac need additional confidence in the appraised value for every property they fund.

The Value of Collateral Underwriting

Especially relevant is the fact that Collateral Underwriting (“CU”) is not new.  In fact, both Fannie and Freddie have used the CU software for years.  The system gives an extra level of comfort regarding an appraiser’s value.  Essentially, Fannie and Freddie “Zillow” the subject property.  However, they use their own software – not Zillow.

Up until January 2015, CU only analyzed appraisals post loan closing.  A little late in the game right?  Going forward, things start to make more sense.

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CU – Changing the Order of Things

Going forward, mortgage lenders will use CU to review appraisals before closing a loan.  Due to this change,  lenders will spot value issues early and be able to address them.  The way CU works is based on a risk score from 1-5,  A higher score means it’s a bigger risk to accept the appraiser’s value.  Amazing how a computer knows so much without even visiting the home!

CU’s implementation or re-ordering comes with both ups and downs.  For example:

  • Lenders hedge the risk of repurchase ahead of time – this leads to improved variances and pricing on Conventional home loans
  • Increased sugar coating with appraisers – “it’s not you, it’s them” when CU rips their appraisal apart
  • Cause possible time delays in loan process
  • Inaccurate assessments/valuations based automated data not a physical inspection of subject property

Fannie and Freddie Mortgage Spinsters

According to Fannie Mae, “Collateral Underwriter will help lenders build their business safely and strongly.”  In addition, Fannie asserts that “Collateral Underwriter leverages Fannie’s market data to perform an assessment of each subject property.”

By Jeremy House

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