Fannie Creates Appraiser Blacklist in Effort to Flag Problem Loans

In its ongoing effort to flag defective loans long before they default, Fannie Mae is taking aim at the home appraisal industry.

The government-sponsored enterprise is keeping a virtual blacklist of appraisers that it views as shady and is warning banks and mortgage lenders to be careful about doing business with them. All loans with work done by appraisers on the list will be subject to extra scrutiny before Fannie buys them from lenders and could be rejected outright, Fannie says.

The list is a small one, with just four names on it for now, but it is likely to grow as Fannie scours its appraisal database to identify appraisers who repeatedly submit shoddy work. Unacceptable appraisal practices include inflating the appraised value of a home, misstating the characteristics of a house, and failing to use the best comparable sales of physically similar properties.

Just as it created a formal program last year to eliminate overall loan defects, Fannie has moved toward a model in which appraisals are scrutinized early in the mortgage process before it even buys a loan from a lender. Instead of forcing costly buy backs for defective loans years after the fact, Fannie now will reject loans for egregious inconsistences made by appraisers.

Fannie's aim is to not just make sure that the loans it buys and bundles into mortgage-backed securities meet its standards, but also to collect consistent data on appraisals to ensure that property values are accurate and that borrowers have the ability to repay their loans over the long haul without defaulting.

Fannie has not made its blacklist public. The list, to be published monthly, is accessible only by lenders and will not be broadly distributed.

Observers say that the mere existence of a blacklist will likely deter banks and mortgage lenders from doing business with appraisers whose names appear on the list.

"Lenders are likely to beef up their oversight of appraisers so they don't fall into the trap of submitting loans that could end up being rejected," says Elizabeth Green, a principal consultant at Rel-e-vent Solutions, a Jacksonville, Fla., consulting firm. "This is another aspect of the same quality vigilance that lenders have to have in place. There's just too much risk if you don't manage for this."

Fannie has sent letters to the four appraisers that had egregious violations and to the lenders that use them warning of the consequences.

One such letter described how an appraiser had made four mistakes, indicating a pattern of errors, including inflating the assessed the value of a property by $62,500, which resulted in a loan-to-value ratio of 110%. The appraiser also selected comparable sales of homes that were not similar to the property being appraised and did not count the correct number of bathrooms in the home.

"Some of the specific violations they cite in the letters are not that uncommon," says Molly Dowdy, an executive vice president of marketing at Naples, Fla., appraisal software firm a la mode, which published redacted copies of two letters sent to lenders by Fannie.

Though banks, mortgage lenders and third-party appraisal management companies track all kinds of information on appraisers, they typically do not compare one appraiser to another. Because Fannie is collecting millions of appraisal reports, it can identify when an appraiser differs on basic measures compared to others.

Inflated appraisals were a contributing factor to the housing downturn. Loan officers sometimes pressured appraisers to inflate property values, driving up home prices and contributing to the housing bubble. Since then, new regulations require that appraisers are kept at an arms' length distance from loan officers.

Theoretically, appraisers on Fannie's blacklist have already been reported to state appraisal boards for violations of the Uniform Standards of Professional Appraisal Practice, considered the gold standard of appraisal requirements. Fannie has created a formal rebuttal process for appraisers and lenders.

Some longtime appraisal experts were surprised that so few bad apples made the list given that there are roughly 80,000 licensed appraisers on a national registry maintained by the Appraisal Subcommittee, which provides federal oversight of state appraiser programs.

"It is a bit disappointing to learn that there are only four appraisers on their 100% review list," says Joan Trice, the chief executive of Clearbox, a Salisbury, Md., appraisal compliance firm. Still, she adds that the list is a good first step toward cracking down on questionable appraisers.

"What it means to banks is that finally, at long last, Fannie Mae is taking responsibility for appraisal quality," she says.

The Federal Housing Finance Agency, which oversees Fannie and Freddie, sought to standardize the appraisal process in 2011 by mandating that the GSEs collect millions of appraisals submitted by lenders. The database of appraisal information now is being used to help the GSEs monitor and evaluate appraisers.

Fannie's "appraisal quality monitoring" list was published on Jan. 6. Freddie has maintained its own exclusionary appraisal list since the early 1990s.

"This is just the beginning," says Andrew Wilson, a spokesman for Fannie Mae. "We will continue to do these reviews and make additions to that list as we identify appraisers that we have concerns about."