The Federal Housing Administration will require lenders to submit full electronic appraisals for the mortgages it insures — a risk management practice Fannie Mae and Freddie Mac adopted two years ago.
The agency, part of the Department of Housing and Urban Development, is developing a Web portal for lenders and their appraisal management companies to meet the new requirement beginning next year. The project will benefit from the heavy lifting Fannie and Freddie have already done.
Currently, the FHA reviews the underlying appraisal reports that support property valuations only in rare circumstances, such as when a loan file is selected for post-endorsement technical review or as part of the FHA's appraiser review process. The new policy should help the agency spot dubious property valuations before it agrees to guarantee a mortgage.
"Right now, the FHA is only getting a few numbers out of the appraisal. With this, they'll be able to better understand the value of the property and get to the comps to understand if the value is what it should be," says Bill Rayburn, CEO of FNC, a collateral valuations technology developer in Oxford, Miss. "That should help their losses and provide better visibility into the exposure they have because they'll understand the real LTV of their loans."
When it's deployed in 2015, the FHA's Electronic Appraisal Delivery portal will be a sister platform to the Uniform Collateral Data Portal, which the government-sponsored enterprises launched in December 2011 to collect appraisal reports. The EAD will accept the same Uniform Appraisal Dataset form that appraisers are already using for both GSE and FHA mortgages. And like the UCDP, the EAD is being built by Veros, a valuations and analytics technology developer in Santa Ana, Calif.
"We're building it all off the UAD to make it align as closely as possible to what lenders are used to using today," Patricia McClung, FHA senior single-family housing policy advisor, said during at the Mortgage Bankers Association's annual technology conference in Los Angeles this month.
The UCDP and UAD are the appraisal components of the Uniform Mortgage Data Program, an umbrella initiative of data standardization and delivery projects that Fannie and Freddie have undertaken at the direction of their conservator, the Federal Housing Finance Agency.
"Our goal is to draft off of that work and make it easier for us to work together," said McClung, who spent more than 20 years as a technology product developer at Freddie before joining HUD last summer.
The FHA's desire to collect appraisal reports was first revealed in 2012 in the annual GSE Scorecard, where the FHFA required Fannie and Freddie to "cooperate with FHA implementation of portal to accept electronic appraisals," and tied the effort to GSE executives' compensation.
At the time of the 2012 scorecard's release, FHA, GSE and FHFA officials would not talk about their plans; a HUD spokesperson said the negotiations between the FHA and FHFA were a "closed-door" matter. And the project only received a passing mention during an agency technology session at the 2013 MBA technology conference.
Now it appears the FHA's appraisal delivery plans are finally taking shape. Following McClung's comments at the MBA conference, the FHA also updated mortgagees about the project via email.
"When fully implemented, the portal will offer mortgagees a new and easy-to-use technology system to submit electronic appraisal data to FHA. The portal is one part of a larger FHA business transformation effort," the FHA told lenders.
Other areas that the FHA has focused on in its technology modernization efforts include the adoption of electronic signatures on most loan documents earlier this year; the upcoming adoption of e-signed promissory notes in December; and development of an electronic case binder to replace paper-based files.
Another target for improvement is the Computerized Home Underwriting Management System, or CHUMS, which has served as the FHA's insurance endorsement system of record for more than 30 years. It was recently migrated a new Oracle database management system and McClung says the FHA plans to replace CHUMS "in pieces and parts."
"We're not only looking to replace technology, but add capabilities," she told lenders at the MBA conference. "Our goal is to improve operational efficiencies not just on our end, but on your end, too."
While Fannie and Freddie use exclusionary lists to keep bad appraisers from providing property valuations, the FHA maintains a roster of approximately 50,000 appraisers who are approved to evaluate the properties backing mortgages it insures. It has historically required those appraisers to complete their reports with GSE-created forms, so when Fannie and Freddie replaced their appraisal form with the UAD, FHA followed suit.
The UAD is both a set of definitions for the responses that appraisers can use to complete the valuation report, as well a type of XML file format that was built using Mortgage Industry Standards Maintenance Organization standards.
But without a portal of its own to accept the files, FHA has "no mechanism to check, collect or enforce" its requirements, says Veros CEO Darius Bozorgi.
Unlike the PDF-based reports that appraisers previously submitted to lenders and AMCs, the individual data points in an XML file can be mined for storage in databases and analysis. And the UAD file has the added benefit of including an embedded PDF that provides a graphical representation of the report.
"The standardized dataset contains the underlying data points that are rendered on the screen in the shape of an appraisal form," Rayburn explains.
As part of the EAD implementation, there will be some differences between the FHA and GSE versions of the UAD form. The FHA's form will add data points for the CHUMS number that matches the appraisal with its loan, and the appraiser's user identification number to validate and track that reports are completed by appraisers on the FHA's roster.
The embedded PDF of the report won't display these data points (eliminating the need to redesign the form's layout), but they will be included in the file's raw data. Still, appraisal forms vendors will need to add those points into their workflows.
When an appraisal is submitted to the GSE portal, it undergoes a number of automated checks before it's accepted. Certain types of errors produce a warning, but the appraisal is still accepted. More serious errors prompt so-called hard stops that prevent delivery. The FHA may set different guidelines for warnings and hard stops in its delivery portal.
"When you earn a return, you have to take certain risks. The question is what risks are you going to take?" Rayburn says. "Fannie and Freddie can determine which rules they're going to let go through and which they're not, and I'd imagine FHA would have the same flexibility."
The GSEs' appraisal delivery initiative faced a series of setbacks during its development, resulting in numerous delays, going back to when the earliest efforts began in 2009. At first, Fannie and Freddie were each building their own portals with Veros before the FHFA intervened and halted the separate projects in favor of a joint effort.
In addition, appraisers would complete valuation reports inconsistently. An oft-cited example is the "condition" field. Appraisers would fill in anything from the subjective description "good" to the non sequitur "brick." This required the GSEs to create the UAD format with standardized answers that can be compared across appraisals.
The UCDP was also the focus of a recent FHFA Office of Inspector General audit, which found that the GSEs bought loans despite warnings about their compliance with appraisal requirements and questions about their appraised value.
The audit identified the potentially problematic loans by reviewing error messages that resulted in warnings, but didn't stop the appraisals' delivery or loans' purchase. Such an examination would have been virtually impossible to conduct prior to GSEs' use of the UCDP.
Fannie and Freddie's joint, five-year contract with Veros is valued at $52 million, according to the audit, and the OIG contends "the Enterprises have had an extensive (nearly four year) development, testing, and implementation phase to reach the level of readiness such that the Enterprises should be able to require lenders to respond to warning messages."
With most of the UCDP's growing pains behind the GSEs, Veros and the rest of the mortgage industry, it would stand to reason that getting the EAD portal up and running will be less onerous for FHA. Appraisers have been trained and are now accustomed to completing valuation reports in the UAD format, and lenders and AMCs have incorporated appraisal portal delivery into their operations.
"Every software deployment has its own risks and rewards. I don't know if it will be easier or not, but we've certainly learned some things and there will probably be some new challenges as we roll this out in the industry," Rayburn says. "But since UCDP and UAD have already been done, I don't think this is going to be a heavy burden. It's just going to be another compliance thing."