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The Exchange: Overcoming Risk Management Obstacles

Jacob Williamson, SVP, Single-Family, Head of Collateral Risk Management, Fannie Mae

This piece originally appeared in the October 2022 edition of DS News magazine, online now.

Jacob Williamson is responsible for oversight and management of all end-to-end collateral capabilities, loan quality, and operational risk management for Fannie Mae’s Single-Family business.

These duties include front-end collateral policy design, loan quality control activities for both credit and collateral, condo standards, property valuations and valuation modernization, real estate liquidation options, and operational risk oversight. In the real estate space, Williamson is responsible for various foreclosure and REO functions, including short sales, foreclosure sale strategy, eviction/redemption oversight, mortgage release/rental operations, property preservation/inspections, repairs, closing/title, HOA/tax management, REO sales, REO auctions, and vendor management. He is also a member of the Five Star Editorial Advisory Board, helping consult regarding content direction for DS News and MReport magazines.

Where is the housing finance industry headed with valuation modernization? How is Fannie Mae helping support this effort?
Although the industry has been on a journey to modernize the valuation process over the past few years, the risk and ongoing discussion of appraisal bias has injected renewed energy into this important work. In the past, determining a property’s value at origination was really limited to two options—a full traditional appraisal or an appraisal waiver informed by data and modeling—with no in-between choices. New technological capabilities and process innovation have emerged, allowing the industry to manage collateral risks with more dynamic and targeted solutions, similar to how other mortgage risks are managed. Each valuation option is tailored to match the risk of the collateral and loan transaction, and these newer options have an emphasis on decreasing the risk of appraisal bias.

As one key step toward implementing a more modern valuation spectrum, Fannie Mae has been testing two alternatives, inspection-based appraisal waivers and hybrid appraisals, since 2018. This Appraisal Modernization Pilot anchors on a Property Data Collection (PDC) process that leverages emerging technologies during a full interior and exterior inspection to capture property information, a floor plan, and images. The collection process is performed by a trained and vetted third party in a single visit and supports an inspection-based appraisal waiver or a hybrid appraisal. In some cases, this approach has shortened the appraisal process by five to 10 business days and, based on internal risk reviews and analytics, demonstrates similar valuation quality to that of a traditional appraisal. As part of the pilot process, we have developed a supporting infrastructure including a property data standard and API (application programming interface) to collect data and images consistently.

We have heard anecdotes of a shortage of appraisers in some markets, resulting in longer wait times and higher costs for borrowers. Where an appraisal product is needed, hybrid appraisals and desktop appraisals enabled by technology allow appraisers to be more productive—they do not have to schedule appointments or visit properties but can still access comprehensive property information to confidently fulfill valuation requests, helping to alleviate capacity constraints. These approaches also reduce interactions between the appraiser and the homeowner or buyer, in turn, reducing the likelihood of valuations being affected by personal or unconscious biases.

We understand that Fannie Mae recently launched an undervaluation risk flag in Collateral Underwriter (CU)? Can you talk about how this works and what you hope it will accomplish?
We added the undervaluation risk flag to complement the existing overvaluation risk flag and give lenders an additional tool to help them identify and investigate potential misvaluation.

This helps to address findings in our appraisal bias working paper, “Appraising the Appraisal.” The undervaluation risk flag uses statistical modeling to identify appraisals with a higher probability of undervaluation, much the way an overvaluation flag identifies risk of overvaluation. This risk flag builds on existing safeguards to detect valuation errors, and CU provides a statistically based reason for the undervaluation so the lender can pinpoint the root cause of the undervaluation risk. This risk flag is another step in our continuous improvement journey to ensure the integrity of collateral valuation in the housing finance market and fulfill our commitment to implement solutions toward a more effective and fair home valuation process.

What feedback has Fannie Mae gotten from the industry when it comes to desktop appraisals that went into your Selling Guide earlier this year?
The valuation procurement process at origination is a complicated ecosystem supported by several layers of technology.

To deliver a seamless experience for the homeowner, lenders need certainty around the valuation fulfillment process, so they can more effectively build capabilities to manage the ordering and tracking of desktop appraisals.

Some of their biggest challenges shared has been the integration of the desktop appraisal orders into existing loan origination systems as well as sourcing the information and exhibits such as photos and floor plans needed by appraisers to conduct the appraisal process when the information is not included in the property’s MLS listing.

We see the adoption being a gradual process. Lenders will need to work with suppliers to ensure they can provide all the documentation an appraiser needs to complete the desktop appraisal, and, as property listings become more consistent in the data and information provided, this will only help expedite the adoption and efficiency of the desktop appraisal.

What are your thoughts about the PAVE action plan published earlier this year, and specifically its recommendations on sharing of GSE appraisal data?
Fannie Mae supports the objectives of the PAVE Task Force and their action plan. We were excited to see PAVE reference and highlight critical efforts like valuation modernization and the initiatives that aim to foster diversity in the appraiser profession through programs such as the Appraiser Diversity Initiative program.

Regarding publicly sharing of historical GSE appraisal data, there are both benefits and risks that should be considered when thinking through this potential action.

Without aggregating or obfuscating the data in some fashion, publicly sharing appraisal data could lead to loss of homeowner privacy and other unintended risks to homeowners.

As an example, property valuation activities encouraged by this more robust data could lead to higher values determined by taxing authorities and insurances companies resulting in higher taxes and insurance costs for homeowners. Secondly, this data could be leveraged by institutional investors and sophisticated real estate property management firms which could disadvantage owner-occupant purchasers and first-time buyers as they compete on precious affordable supply. Lastly, we could see legal activities increase for breach of contract, privacy violations, or misappropriation of work product claims.

Fannie Mae continues to support fostering diversity in the mortgage industry with programs such as Future Housing Leaders and the Appraiser Diversity Initiative. What role do you see the Appraiser Diversity Initiative playing in the broader context of valuation modernization?
Appraisers are essential to the mortgage origination process. But the future of the profession may be strained by inconsistent coverage and a lack of diversity among its practitioners. This is why we and other industry participants continue to support and invest in programs such as ADI to attract and train the next generation of appraisers.

In 2018, we collaborated with the National Urban League to launch ADI, and now, the program has a multitude of partners and supporters including the Appraisal Institute and Freddie Mac. The initiative is designed to attract new entrants to the residential appraisal field by helping them navigate education, training, and experience requirements. We are proud to say that the ADI is successfully attracting diverse, aspiring appraisers, awarding them education scholarships, and seeing them launch their careers. Jessica Brown and Marcus Knight, two ADI scholarship winners, represent a new generation of appraisers.

These new appraiser trainees not only contribute to their supervisors’ firms by providing high-quality reports, but we also observe that trainees bring fresh insights and skills such as innovative business practices, technologies, or analytical tools to the appraisal process and profession.

We continue to encourage the housing industry to better reflect the diversity of the nation and communities we serve through ongoing efforts such as ADI and Future Housing Leaders.

About Author: David Wharton

David Wharton, Editor-in-Chief at the Five Star Institute, is a graduate of the University of Texas at Arlington, where he received his B.A. in English and minored in Journalism. Wharton has nearly 20 years' experience in journalism and previously worked at Thomson Reuters, a multinational mass media and information firm, as Associate Content Editor, focusing on producing media content related to tax and accounting principles and government rules and regulations for accounting professionals. Wharton has an extensive and diversified portfolio of freelance material, with published contributions in both online and print media publications. He can be reached at [email protected]
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