All right, well, we're so excited to have an opportunity to sit down with Jake Williamson, Senior Vice President, Single Family, Collateral Risk, Loan Quality, and Operational Risk at Fannie Mae.Jake, thank you for chatting with me.
Can you start by telling our audience a little bit about your history in the industry?
Yeah, so it's funny.I actually started work at a mortgage servicing operations, and my very first job was cash accounting.So my job was to post mortgage payments for our servicer.
And I moved into analytics and reporting right after that, cut my teeth on learning Oracle SQL and doing some SAS programming, and then joined Fannie Mae about four years into my career.And I've been at Fannie Mae for 18 years now.
And it's kind of run the gamut of all kinds of different activities. Mainly started in REO and default and then moved into servicing and then now overseeing some origination functions as well.
So now I've kind of sort of that full end-to-end property risk management, which has been a great sort of connection for me.
Absolutely.Well, there's a lot of changes coming for the appraisal world with some of the new technology in our industry.What can appraisers expect to change in the coming months and years?
Yeah, look, I think technology has been a huge aid for the appraisal process.And as you know, we've been on a journey to modernize the valuation process through a number of facets.You know, you can go walk like a ValExpo conference or
you know, the floor of today here at the MBA conference and see some of the tools that appraisers are using.And the three that really stand out for me that are super impressive is the way we measure houses.You know, that has fundamentally changed.
That has really improved the accuracy and consistency in the way that gross living area is captured for a property.And so that's really raised the game in property measurement.
Some of these appraisal systems that have been built, they've been focused on providing the appraiser a wider set of data to consider, for example, when you select comparables.
So it sort of makes the appraisal process more robust, right, when you have sort of that wider data set to look at, to evaluate.
And then the third aspect that these appraisal systems have really brought to light is providing that great analytical support when you have to adjust a comparable.
So now you have calculators and tools that sort of help appraisers do that more robustly.
But one area that Fannie Mae is particularly excited about that I think will be a game changer from a technology and data perspective that appraisers should be aware of is the launch of the new UAD, the Uniform Appraisal Data Standard.
I think we're calling it UAD 3.6, the technical name.And really what that's about is taking a process that was built in 2010 that was very paper form driven, even though we did it digitally, it was still basically paper forms in digital format.
And converting that into more of a data standard that's flexible and enumerated in a way that it's almost like a drop down set of choices that makes it super efficient to do the appraisal process.And so we're excited about that change.
And if you think about when that standard was first created in 2010. It really was designed in a way to be entered by typewriters.I mean, that's how old the forms are.And so we're going to be going live with the new UAD next year.
Early testers, early adopters will be able to take advantage of that. And then it's not going to be mandated until 2026.
I think appraisers, you know, taking the time to really familiarize themselves with that new UAD, it will change the way they collect data on a property.
It will change the way that they do the valuation portion of the analysis or the appraisal product. There's a lot of new features that we're particularly excited about.There's some new climate risk features that will now be captured in the data.
There's a new sales comparison grid that will actually provide better analytical support for that portion of the appraisal product.
And so I think it's going to create a much more robust data standard that appraisers will be able to lean into, taking a lot of maybe some of that unstructured data that would typically exist in narrative fields and moving them into more
data standards and enumerations that we can analyze.And so we're excited about that future.
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Yeah, and as this change comes to the UAD, I know it's going to be a lot for appraisers in the beginning, but the whole goal is it's going to streamline the process, it's going to improve their time, it's going to make everything go a little bit faster and speed up the process, right?
Yeah, I completely agree.I mean, that's the design.The design was really to get rid of this back and forth, what form number am I supposed to be using by property type?
one universal data standard that we can leverage across all property types and then be able to let the drop downs drive the data that's collected.So it will provide a more efficient experience for the appraiser.
The other thing I would share is we put out a lot of content about UAD on our website.
If appraisers haven't bookmarked that, I would encourage them to do that because we're trying to add material to that on a regular basis so that UAD doesn't hit them all at once.It's more about them learning as these things are getting pushed out.
And I think a challenge for an appraiser that they're going to have to navigate is they'll be doing kind of two sets of processes for a little while until we until we move to the mandated state.
So being able to navigate between those two states is going to be important as they do their work.
Yeah.So speaking of the two processes.So I know in the past a lot of them would go doing the inspection and then come home. and then start typing up the report.
So now they're going to have to start doing it on site as they're going through and selecting the dropdowns, right?
That's right.Yeah, and most appraisers use an appraisal workflow system, digital online system.And so it should just naturally sort of take the place of that data capture.
And then as they're doing that, it's filling out the form in a very efficient way.
The other thing we're going to be focused on is getting rid of the addenda, which is, you know, there's a lot of stuff that sort of shows up there as a catch-all, and really trying to say what are the important data elements that we need to capture, capture that in a drop-down, so that the appraiser's not having to write a really long narrative to try to cover all the bases.
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Well, we're excited for that.Let's talk a little bit about Fannie Mae's updated reconsideration of value policy and its expected impact on appraisers.
Yeah, look, we rolled this policy out in May of this year, so it's a fairly new policy framework.It's actually going live next week, Halloween, October 31st.
And I think the great thing about this is this is a policy framework that both Fannie, Freddie, and HUD have all aligned on.
And I think historically what you saw with ROVs is lenders may have had different policies or procedures that appraisers would have to follow when they got an ROV request.
And what's great about this policy framework is it's one standard, one consistent process for those three agency appraisal products.So I think that's one benefit.
The other thing that we tried to do within this policy framework is really articulate what is the lender responsibilities, what's the borrower's responsibilities, and then what is the appraiser responsibilities.
And in that last set of responsibilities, it's really doubling down on appraiser independence.Just because the ROV process is becoming a policy framework, it doesn't negate the fact that we want appraisers to have independence, right?
We don't want them to be influenced to just hit a mark, right?So in the lender responsibilities, part of their job is to do their own validation before they kick the ROV to an appraiser.
So there's some expectations in the policy framework that they need to do their own analysis.And when they provide that to the appraiser,
They're supposed to list out a standard set of data elements so the appraiser can hit the ground running when they get that type of ROV request.
On the borrower's side, it's really being specific about what we anticipate should be in that ROV request.Do your due diligence, do your homework.
We've limited it to five comparables that the borrower would provide, just because we don't want 100 comparables being provided and the appraiser has to respond to all of those.That creates a lot of inefficiencies in the process.
And then on the appraiser responsibilities, it's really reminding appraisers to sometimes the best product is when you articulate the data that you didn't consider.
And so really the point is when you get that ROV request, take that data under consideration, update the appraiser report, and even if the value doesn't change, articulate why or why not those pieces of information weren't considered in the appraiser report.
So we've provided some clarity around how that process should be executed. And then again, we limit the ROV one per appraisal.Borrow responsibilities is up to five comparables, so we try to keep it tight.
And so we're doing that in a way to try to make this as efficient as possible.
And what I'm really excited about, and I know Fannie Mae is excited about, is we now will have a standardized way to track these requests and really understand what's driving the ROVs.
Well, I know there's a lot of concern from the appraisers, but this sounds like something that's gonna benefit ultimately them the most.The fact that there's only gonna be one, they can't keep coming back and saying, well, what about this?
What about this?It's in a form, it sounds like it's gonna be a great policy for everyone.
That's the idea, and we did try to balance all those different perspectives.The lender, the borrower, the appraiser, and tried to square the needle on how do we do this in a way that satisfies all of those. stakeholders in the process.
And then again, I think the alignment between the GSEs and HUD is going to strengthen that process.
That sounds great.So Fannie Mae has also been emphasizing the elimination of subjective or prohibited language in appraisal reports.How has the industry responded and what are some of the key improvements that we're seeing?
Yeah, this is a spot where I think the appraiser community can take a lot of credit because it has been a really transformative result.I think most folks are aware that we started tech scanning appraisals in 2021.
When we did that across a fairly large two years worth of appraisal data set, the hit rate that we found of subjective problematic phrasing was around 15 bibs, which is really a low rate.
But there was a high frequency of repetitive phrases used, right?Good neighborhood, desirable location. These are components that aren't objective in nature.And so we really wanted to course correct that.
So we issued about 1,500 letters in 2021 that had appraisers that had two or more findings, repeat findings of that issue.And then when we reran it again in 2022, 79% of those folks did not have a repeat finding.
So they really took the training under advisement and really course corrected the narrative work. And then in 2023, that number on 2022 findings actually was 91%.So 91% of the appraisers who had a finding in 22 did not have a finding in 23.
So it's really helping the industry to kind of look out for those opportunities.It's creating a good conversation about what should be considered in the appraisal process.
And we like it from a compliance perspective to make sure we're being responsible for those narratives that could expose us to fair lending risk. The other thing I would share is that in 2021, the rate was about 15 bps.
In our most recent run, it's 3 bps.Wow.So the industry has really done a great job at responding to the feedback and really getting to a place where these narratives are more objective in nature.And that's what we all want.
Absolutely. Well, one of the things for us that's been a little bit harder, because we had a lot of content around short-term rentals.We had a lot of podcasts, webinars about it.And you guys have kind of fixed that.
You've done some clarification on using the form 1007 for short-term rental evaluations.What advice would you give to appraisers handling these cases?
Well, first of all, shout out to you guys, because the podcast that you did on this a couple of months ago when the policy came out, I thought was really crisp and articulated some very strong points about what appraisers need to consider.
There's really three things I would highlight at a high level.One is the valuation process should be on real property.
And when you have short-term rentals or business income where you're taking income from the fixtures in the room or furnishings, that's not real property.So number one, keep the valuation process pure and focus just on the real property.Number two,
appraisers should really ascertain what is the lender using the income for.So if they're wanting to use it for business income, we have selling guide provisions that articulate how to do that.And it doesn't require the 1007 form.
So once you sort of understand it's for business income, it shouldn't require the 1007 form.But if they're wanting to use it as income to qualify the borrower, then they'd need to fill out the 1007 form.
So that's the second component is understand how the income is being used.
And then the third component is when you actually fill out the 1007 form, a lot of times what may happen is because it's a short-term rental, I might grab a bunch of short-term rental comparables, figure out what the daily rate is, and multiply it times 30 and say, I'm good.
That's actually the wrong way to use that form in that process.That form is really focused on monthly.
And if you just go to VRBO or Airbnb and you look at the daily rates that you're quoting, if you multiply that times 30, that would be way different than what you would see for a monthly market rent.
And so really, the appraisers are doing their due diligence in the right way to grab comparables that are leased properties that you can get a calculated monthly rent, provide that to the lender so that they can use that in the income qualification process.
So again, keep the valuation process pure, understand how the income is being leveraged, and then when you fill out the 1007 form, focus on the monthly rental comparables.
All right, well, last question.I really appreciate your time.Fannie Mae has stressed the importance of data-supported appraisals to avoid deficiencies.
What specific data points or analysis techniques should appraisers prioritize to ensure compliance with this guidance?
Yeah, look, and I think this goes without saying, but I'm going to say it anyway.The appraisal is a super important part of the process, the mortgage ecosystem process. We use it to define LTV, right, and to set pricing in the secondary market.
But it is an opinion of value.And so whenever you get an opinion of value, that has to be backed by factual analysis, especially when it comes to adjusting comparables to the subject property.
So this is the area that we see that pops up the most when you look at deficiencies. And so there's a couple of examples that I'll give.We did a study in 2023 where we looked at site adjustments.
When you grab a comparable that has a larger site size compared to the subject property.
And what we found is in markets where it was high density markets, so the site size was confined to 4,000 square foot or less, what we found is appraisers were only recognizing site differences about 50% of the time when the size difference was three times as big.
And so it really pointed to, wait a second, there's an inconsistency here.And then when the adjustment did happen, the appraiser was only adjusting it by about 3%.
And what we would see in the analytical tools that are out there in the industry, plus what we see in the collateral underwriter, it should be like 15% to 20%.
So really in site size adjustments, if you think about if I'm in a 4,000 square foot site size versus 1,000, I should have some features.Outdoor space.These things add value and could be accretive to the value.
So the appraiser should be doing adjustments in that kind of way. And then the second area that I think is a really big opportunity is time adjustments.
And because supply has been so scarce, the number of sales out in the marketplace, the thinness of that data, has been challenging for appraisers.
And so if you grab a sale from six months ago, 12 months ago, you have to consider what has happened in that market in the last six to 12 months.
We have home price indices that give you a perspective down to a zip code level of what's been happening in that market. But doing the research to validate, should I adjust?Should I not?What's the magnitude of that adjustment?
To me, that's an example of where if you do that right, you'll avoid sort of those deficiencies.
Well, Jay, we really appreciate your time today.We're really looking forward to seeing what comes from Fannie Mae and UAD coming up in the future.So thank you very much.
Yeah, thanks, Jim.Appreciate it.
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