Friday, October 21, 2016
Thursday, October 20, 2016
Will Fannie's "Tool" Sink Your Home Sale?
Getting to closing in an appreciating market, when the buyer needs a
loan (which means the bank requires an appraisal) has always been a
challenge as it can be difficult for the appraiser to find adequate sold
comparables to justify the sale price if values are going up rapidly.
Well things may have gotten exponentially more difficult with the addition of Fannie Mae's "tool", Collateral Underwriter.
Collateral Underwriter is a software program which is supposed to be a "risk management tool" that lenders can use to have a "constructive dialogue with the appraiser to resolve specific appraisal questions or concerns".
The reality is that, despite Fannie Mae's protests to the contrary, the program is basically a juiced up Automated Valuation Model (AVM) - think Zestimate on steroids. The problem with Zestimates and all AVMs, including Fannie's new tool, is that they lack the ability to differentiate between geographic locations and we all know the first tenet of real estate is location, location, location! (They also lack the ability to tell which house had 30 cats and a cigar smoker living there but that's a whole other issue.) They all take every sale within a proscribed radius and average the sale price.
I personally had a very telling experience with two of my listings and their Zestimates. One listing was an updated and upgraded townhouse in a very desirable and well maintained development. The development is small and units don't become available there too often but when they do, they sell well. The other listing was a small, basement level, garden style condo (think converted brick apartment building). The listings are in two different towns.
The interesting thing here is that the Zestimate for the townhouse came in about $25,000 lower than where it sold because the development it is in is within a certain number of miles from another much larger, more congested and less well maintained development where properties sell for less. Zillow can't tell the difference.
On the other hand, my little basement condo received a Zestimate that was easily $100K more than it would EVER sell for because of it's proximity to another more desirable development that has much larger townhouses (as opposed to the subject property's apartment-like units) and is much more well maintained. Apples to oranges! A newbie real estate agent with the ink still wet on their license would know that, despite geographic proximity, you cannot compare the two developments...but Zillow doesn't know that...and neither does Fannie Mae's tool.
And that, my friends, is the problem. This tool will potentially generate numerous erroneous comps which will raise flags (interestingly, Fannie admits that comps that come in above the appraisers value WILL NOT raise a flag but comps that come in below WILL raise a flag) which will cause appraisers to either spend a lot of time justifying the comps they did use and justifying why they did not use the comps that CU comes up with OR they will have to go with the lower comps.
Will this sink your sale? The National Association of Realtors has
reported an uptick in the number of contracts that have fallen through because of appraisal issues and The Mortgage
News Daily published an article which indicated that there has
been an increase in appraisals reflecting market values well below
what has been expected. Mortgage News Daily queried their members
about this phenomenon and Fannie's tool was mentioned more than
frequently.
Fannie Mae responded by reissuing instructions clarifying what constitutes the appropriate use of the tool. In particular that CU is not meant to be used in place of the lender's own due diligence in performing an appraisal review and that it's license prohibits a lender from using it in a manner that interferes with the independent judgment of the appraiser.
However, as recently as last month there were reports of lenders actually rejecting appraisals that came in at contract price but were flagged as "over value" and/or pressuring appraisers to ditch certain comps and use others to bring the value in line with the value produced by Fannie's "tool".
What can you do as a seller? The first thing is to just be aware that this is going on so that you can make realistic and informed decisions about the sale of your home and your next purchase and the second is to realize that listing your home for a price that is beyond the most recent (truly) comparable sold comps is probably not going to end well.
For a realistic evaluation of your home's value, you can contact me at 603-490-5344.
Well things may have gotten exponentially more difficult with the addition of Fannie Mae's "tool", Collateral Underwriter.
Collateral Underwriter is a software program which is supposed to be a "risk management tool" that lenders can use to have a "constructive dialogue with the appraiser to resolve specific appraisal questions or concerns".
The reality is that, despite Fannie Mae's protests to the contrary, the program is basically a juiced up Automated Valuation Model (AVM) - think Zestimate on steroids. The problem with Zestimates and all AVMs, including Fannie's new tool, is that they lack the ability to differentiate between geographic locations and we all know the first tenet of real estate is location, location, location! (They also lack the ability to tell which house had 30 cats and a cigar smoker living there but that's a whole other issue.) They all take every sale within a proscribed radius and average the sale price.
I personally had a very telling experience with two of my listings and their Zestimates. One listing was an updated and upgraded townhouse in a very desirable and well maintained development. The development is small and units don't become available there too often but when they do, they sell well. The other listing was a small, basement level, garden style condo (think converted brick apartment building). The listings are in two different towns.
The interesting thing here is that the Zestimate for the townhouse came in about $25,000 lower than where it sold because the development it is in is within a certain number of miles from another much larger, more congested and less well maintained development where properties sell for less. Zillow can't tell the difference.
On the other hand, my little basement condo received a Zestimate that was easily $100K more than it would EVER sell for because of it's proximity to another more desirable development that has much larger townhouses (as opposed to the subject property's apartment-like units) and is much more well maintained. Apples to oranges! A newbie real estate agent with the ink still wet on their license would know that, despite geographic proximity, you cannot compare the two developments...but Zillow doesn't know that...and neither does Fannie Mae's tool.
And that, my friends, is the problem. This tool will potentially generate numerous erroneous comps which will raise flags (interestingly, Fannie admits that comps that come in above the appraisers value WILL NOT raise a flag but comps that come in below WILL raise a flag) which will cause appraisers to either spend a lot of time justifying the comps they did use and justifying why they did not use the comps that CU comes up with OR they will have to go with the lower comps.
Fannie Mae responded by reissuing instructions clarifying what constitutes the appropriate use of the tool. In particular that CU is not meant to be used in place of the lender's own due diligence in performing an appraisal review and that it's license prohibits a lender from using it in a manner that interferes with the independent judgment of the appraiser.
However, as recently as last month there were reports of lenders actually rejecting appraisals that came in at contract price but were flagged as "over value" and/or pressuring appraisers to ditch certain comps and use others to bring the value in line with the value produced by Fannie's "tool".
What can you do as a seller? The first thing is to just be aware that this is going on so that you can make realistic and informed decisions about the sale of your home and your next purchase and the second is to realize that listing your home for a price that is beyond the most recent (truly) comparable sold comps is probably not going to end well.
For a realistic evaluation of your home's value, you can contact me at 603-490-5344.
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