oversight

FHFA's Oversight of the Enterprises' Use of Appraisal Data Before They Buy Single-Family Mortgages

Published by the Federal Housing Finance Agency, Office of Inspector General on 2014-02-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

            Federal Housing Finance Agency
                Office of Inspector General




 FHFA’s Oversight of the Enterprises’
Use of Appraisal Data Before They Buy
       Single-Family Mortgages




   Audit Report  AUD–2014–008  February 6, 2014
                   FHFA’s Oversight of the Enterprises’ Use of Appraisal
                   Data Before They Buy Single-Family Mortgages
                   Why OIG Did This Audit
                   Assessing the value of collateral securing mortgage loans is one of the pillars
                   in making sound underwriting decisions. Since September 2008, the Federal
                   Housing Finance Agency (FHFA) has operated Freddie Mac and Fannie Mae
Synopsis           (the Enterprises) in conservatorship, due to poor business decisions and risk
   ———             management that led to enormous losses. While in conservatorship, the
                   Enterprises have relied on Treasury’s financial support to operate in the
February 6, 2014   secondary mortgage market, buying loans in order to provide needed liquidity
                   to lenders. In 2010, FHFA directed the Enterprises to improve single-family
                   residential loan quality and risk management through, among other things,
                   developing a uniform collateral data portal (portal).
                   Before the associated loans are presented for the relevant Enterprise to buy,
                   appraisal and appraiser information is collected through the portal system. If its
                   checks find signs that the appraisals violate the Enterprises’ requirements, it
                   alerts them and the lenders to the problem(s). By using the portal, the Enterprises
                   are striving to improve data quality, ensure compliance with their loan eligibility
                   guidelines, enhance loan reviews, and lower the number of loans that must be
                   bought back by sellers (i.e., repurchased) for not meeting their standards.
                   As of March 2012, the portal must analyze all appraisals for single-family loans
                   before the Enterprises buy the loans. This is a significant undertaking since, in
                   2012 alone, the Enterprises collectively purchased and guaranteed approximately
                   6 million single-family residential mortgages, valued at $1.3 trillion. This joint
                   Enterprise effort to create a portal for submitting and analyzing appraisal data
                   represents a significant change in how they and the mortgage industry have
                   processed appraisal information.
                   The objective of the audit was to assess FHFA’s oversight of the Enterprises’ use
                   of appraisal data to minimize the risk of loss on single-family mortgages.

                   What OIG Found
                   While the Enterprises have progressed in establishing the portal and collecting
                   appraisal data, more remains to be done to use the portal’s data to minimize
                   the risk of loss. OIG concludes that increased FHFA oversight can enhance
                   Enterprise use of the portal’s appraisal data before they buy single-family
                   mortgages and can reduce collateral risk.
                   Specifically:
                          From January 2013 through June 2013, Fannie Mae spent $13 billion
                           buying over 56,000 loans even though the portal’s analysis of the
                           associated appraisals warned the Enterprise that the appraisals were
                           potentially in violation of its underwriting requirements.
                          From June 2013 through September 2013, Freddie Mac spent $6.7 billion
                           buying over 29,000 loans despite the portal warning the Enterprise that
                           either no property value could be provided or the value of the property
                           was in question.

Synopsis           The Enterprises had set such warning messages as automatic overrides allowing
                   lenders to disregard the problems signalled by the portal before selling the
   ———             associated loans to the Enterprises. The Enterprises established the messages as
                   automatic overrides for various reasons, to include their concern that they needed
February 6, 2014   more time to fine tune the portal messages before requiring lenders to address the
                   messages. Both Enterprises also expressed concern that they did not want to
                   burden lenders with having to respond to messages. Further, as of November
                   2013, 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.
                   This work is being performed under a joint five-year contract valued at $52
                   million. The portal is a vital tool to minimizing the risk of loss and should be
                   fully used to improve loan quality.
                   In addition, the Enterprises bought nearly $88 billion in loans when system logic
                   errors in the portal did not allow them to determine if the appraiser was properly
                   licensed to assess the value of the properties, which served as collateral for the
                   loans. Specifically, the portal alerted the Enterprises and lenders that some
                   appraisers were suspended; however, the Enterprises set the portal to
                   automatically override the messages and accepted the submitted appraisals.
                   Based on OIG’s work and the Enterprises’ responsive actions, 23 loans valued
                   at $3.4 million may be repurchased based on the “suspended” status of the
                   appraiser, which is a violation of requirements.
                   By improved use of the portal’s appraisal data, the Enterprises will be better
                   able to assess the value of the property securing the loans they buy to ensure
                   underwriting decisions are sound and are well supported and related risk is
                   properly managed. In turn, this will help protect the Enterprises’ and the
                   taxpayers’ investment in them.

                   What OIG Recommends
                   Overall, OIG made 14 recommendations to help the Enterprises use appraisal
                   data to improve loan quality and to reduce the risk of loss. In general, the
                   recommendations are geared to improve FHFA’s oversight of how the
                   Enterprises use the portal according to the Agency’s directive. OIG also
                   recommends that the Enterprises require lenders to resolve key warning messages
                   generated by the portal’s analyses of their submitted appraisal data before buying
                   the associated loans.
                   FHFA provided comments agreeing with the recommendations in this report.
                   FHFA will continue to work with the Enterprises as they develop and implement
                   the portal. Planned actions include ensuring that the Enterprises determine which
                   proprietary messages should be changed to manual override or fatal, which will
                   require lenders to address the appraisal-related messages.
Synopsis           FHFA will continue to work with the Appraisal Subcommitte in pursuit of
   ———             enhancements to the National Registry of Appraisers to include retention of
                   historical records and real-time reporting of appraiser license status. FHFA
February 6, 2014   agrees that, once the National Registry achieves retention of historial license
                   status information and real-time reporting, the Enterprises will pursue modifying
                   the portal to address system logic errors.
                   FHFA also agreed to ensure that both Enterprises seek appropriate remedies for
                   the loans delivered by the two suspended appraisers.
                   FHFA estimated the completion date for these actions, to include providing a
                   status report on activities related to implementation of the portal as intended by
                   its directive, to be January 31, 2015.
TABLE OF CONTENTS.................................................................

TABLE OF CONTENTS................................................................. ................................................5

ABBREVIATIONS .........................................................................................................................7

PREFACE ........................................................................................................................................8

BACKGROUND .............................................................................................................................9
      Property Appraisals’ Role in Mortgage Loan Transactions .....................................................9
      The Uniform Mortgage Data Program ...................................................................................10
      Developing the Uniform Collateral Data Portal .....................................................................10
              Submitting Appraisals into the Enterprises’ Uniform Collateral Data Portal ................12
              Joint and Proprietary Warning Messages About Submitted Appraisals .........................14
              Resolving Warning Messages To Successfully Submit Appraisals ...............................15

FINDINGS AND RECOMMENDATIONS..................................................................................16
      Finding 1: Fannie Mae Bought Loans Despite Warnings of Them Potentially Not
      Conforming to Its Appraisal Requirements ............................................................................16
      Recommendation for Finding 1: .............................................................................................18
      Finding 2: Freddie Mac Bought Loans Despite Questions about Their Appraised
      Value .......................................................................................................................................18
      Recommendations for Finding 2: ...........................................................................................19
      Finding 3: The Uniform Collateral Data Portal Can Better Identify Appraisers’
      License Status .........................................................................................................................20
      Recommendations for Finding 3: ...........................................................................................22

CONCLUSION ..............................................................................................................................24

OBJECTIVE, SCOPE, AND METHODOLOGY .........................................................................25

APPENDIX A ................................................................................................................................27
      FHFA’s Comments on OIG’s Findings and Recommendations ............................................27

APPENDIX B ................................................................................................................................31
      OIG’s Response to FHFA’s Comments .................................................................................31


                                                                                                                                                   5
APPENDIX C ................................................................................................................................33
      Summary of FHFA’s Comments on the Recommendations ..................................................33

APPENDIX D ................................................................................................................................36
      Fannie Mae’s 25 Proprietary Messages Related to Underwriting Requirements ...................36

APPENDIX E ................................................................................................................................39
      Freddie Mac’s Nine Proprietary Messages Related to its Automated Valuation Model ........39

ADDITIONAL INFORMATION AND COPIES .........................................................................41




                                                                                                                                            6
ABBREVIATIONS .......................................................................

Enterprises           Fannie Mae and Freddie Mac

Fannie Mae            Federal National Mortgage Association

FHFA or Agency        Federal Housing Finance Agency

Freddie Mac           Federal Home Loan Mortgage Corporation

HVE                   Home Value Explorer

LTV                   Loan-to-Value

OIG                   Office of the Inspector General

Portal                Uniform Collateral Data Portal




                                                                                    7
PREFACE ...................................................................................

A series of reports by OIG has assessed FHFA’s oversight of the Enterprises and their related
loan quality and risk management. For example, OIG has identified that FHFA can strengthen
its oversight of Fannie Mae’s underwriting standards for single-family mortgage loans.1

This report continues OIG’s work by assessing FHFA’s oversight of the Enterprises’ use of
appraisal data to improve loan quality and to reduce the risk of loss associated with single-
family mortgages they buy. Specifically, OIG reviewed the Enterprises’ use of appraisal data
generated by the uniform collateral data portal. OIG determined that, through better FHFA
supervision, the Enterprises can improve their use of appraisal data before they buy
mortgages, which will help reduce the risk of loss and improve loan quality.

OIG is authorized to conduct audits, evaluations, investigations, and other law enforcement
activities pertaining to FHFA’s programs and operations. As a result of OIG’s work, it may
recommend policies that promote economy and efficiency in administering FHFA’s programs
and operations, or that prevent and detect fraud and abuse in them. OIG believes that the
recommendations contained in this report, along with those in prior reports, will increase
FHFA’s assurance that the Enterprises are operating safely and soundly, and that their assets
are preserved and conserved.

OIG appreciates the cooperation of all those who contributed to this audit, which was led by
Tara Lewis, Audit Director, who was assisted by Andrew W. Smith, Audit Manager, Terese
Blanchard, Auditor-in-Charge, and Katie Hollings, Auditor.

This report has been distributed to Congress, the Office of Management and Budget, and
others, and will be posted on OIG’s website at www.fhfaoig.gov



Russell A. Rau
Deputy Inspector General for Audits




1
 OIG, FHFA’s Oversight of Fannie Mae’s Single-Family Underwriting Standards (AUD-2012-003, March 22,
2012). Accessed November 20, 2013, at http://fhfaoig.gov/Content/Files/AUD-2012-003_0.pdf.




                                                                                                       8
BACKGROUND ..........................................................................

Property Appraisals’ Role in Mortgage Loan Transactions

A residential appraisal reports on the property offered as collateral for a mortgage loan,
including its condition, neighborhood, market, and value. As noted by Freddie Mac (and
echoed by Fannie Mae),2 this appraisal is critical to underwriting mortgage loans:

        The appraisal report is one of the most important documents in a loan file
        because it supports the underwriter’s determination of whether there is
        sufficient and appropriate collateral to back the mortgage transaction.3

Underwriting assesses a borrower’s ability to repay
a loan and the collateral’s value that may be used to              What is Loan-to-Value (LTV)?
offset losses if the borrower defaults. Critical to this           LTV is how much you owe on a
assessment, appraisals estimate the value of collateral.           property compared to its
                                                                   worth. For example, if you owe
In addition, appraisals help lenders meet underwriting
                                                                   $150,000 on a home worth
requirements such as those related to loan-to-value
                                                                   $300,000, your LTV is 50%.
(LTV).

The Enterprises’ selling guides contain requirements for lenders to follow when contracting
with appraisers. The lenders are responsible for ordering the appraisal, selecting the appraiser,
and reviewing the appraisal to determine if the property is adequate collateral for the
mortgage loan. In addition, the Enterprises have several requirements for appraisers such
as being licensed or certified in the state where the property is located and following the
Enterprises’ requirements and standards.

However, before 2012, there was no uniform system for gathering, analyzing, and responding
to standardized appraisal data to ensure loans sold to the Enterprises met their requirements
before purchase.




2
 Source: Fannie Mae’s Single-Family webpage on Appraisers, accessed November 22, 2013, at
https://www.fanniemae.com/singlefamily/appraisers?from=hp.
3
 Source: Freddie Mac Publication Number 83: Reviewing Appraisals in Today’s Mortgage Market, accessed
November 22, 2013, at:
http://www.freddiemac.com/singlefamily/uw/docs/PLNAQ_series_Reviewing_Appraisals_in_Todays_Mtg_M
kt_Fact_Sheet_838.pdf.




                                                                                                        9
The Uniform Mortgage Data Program

After being appointed as the Enterprises’ conservator following 2008’s housing crisis, FHFA
introduced initiatives to enhance oversight of them and help them better manage their risk.
Among the Agency’s efforts, the uniform mortgage data program focused on developing
consistent and useful data related to mortgage finance.

In February 2010, FHFA announced the program’s goals, which included improving the
Enterprises’ risk management and data quality. To achieve these goals, FHFA directed
the Enterprises to work together while operating as separate businesses and exercising
independent business judgment on their use of loan data.

As of April 2013, FHFA’s uniform mortgage data program initiative had five components that
correspond to key parts of the mortgage loan-making (appraisal data standardization,
appraisal data collection, and closing) and loan-selling (loan delivery, servicing) business.
This audit focused on one area, the uniform collateral data portal, which included appraisal
data collection.

                         FIGURE 1. THE UNIFORM MORTGAGE DATA PROGRAM4



                                         Uniform Mortgage
                                           Data Program



 Appraisal Data      Appraisal Data
                                               Closing            Loan Delivery           Servicing
Standardization        Collection


Developing the Uniform Collateral Data Portal

Under the uniform mortgage data program, the Enterprises began to develop consistent data
definitions and formats for appraisals, and a uniform collateral data portal for lenders to
submit the information.



4
 Source: OIG analysis of FHFA Uniform Mortgage Data Program Directives in conjunction with Fannie Mae
and Freddie Mac’s Uniform Mortgage Data Program Overview, accessed February 4, 2014:
https://www.fanniemae.com/singlefamily/uniform-mortgage-data-program and
http://www.freddiemac.com/learn/umdp/.




                                                                                                        10
As shown below, the Enterprises developed and tested the portal for over two years (February
2010 through March 2012) before requiring all lenders to submit the data for their appraisals
according to standardized data definitions and formats. During the three years following
FHFA’s directive to develop the portal, the Enterprises implemented the electronic checks and
analyses of the data that will allow them to make both common and individual use of the
information relative to their underwriting requirements and business models.

    FIGURE 2. DEVELOPMENT AND IMPLEMENTATION OF THE UNIFORM COLLATERAL DATA PORTAL5




As they developed the portal, the Enterprises also defined and standardized the appraisal data
that feeds into it in order to:
       Manage and mitigate valuation risk by resolving inconsistencies with appraisal data,
        including formatting, terminology, and use of specific descriptions;
       Provide lenders and the Enterprises with greater confidence in loan quality by offering
        better data quality; and,
       Create efficiency and consistency in appraisal reviews by offering appraisers
        and lenders an improved view and understanding of Enterprise appraisal data
        requirements.

Meanwhile, the Enterprises also worked from 2010 to develop checks and analyses that could
sift through appraisal data submitted to the portal and alert them of potential problems, such
as incorrectly entered data and appraisals that may contain incorrect valuations of the
collateral properties.

The Enterprises had agreed upon a set of joint messages that the portal would send about
appraisals—these common alerts dealt mainly with data entry format issues, such as using

5
 Source: OIG analysis of Uniform Collateral Data Portal information provided by FHFA, Fannie Mae and
Freddie Mac.




                                                                                                       11
whole dollars, but some warned about more serious issues such as an appraiser’s license
status. By 2013 (January for Fannie Mae and June for Freddie Mac), each enterprise
developed proprietary messages that warned about potential problems specific to its particular
business model. Fannie Mae, for example, designed a message to alert if fewer than three
comparable sales were used when appraising a property’s value.

After an extensive, nearly four-year development, testing, and implementation phase, the
major elements of the Enterprises’ uniform collateral data portal—data standardization,
submission, and analysis—are currently online and receiving appraisals from lenders who
wish to sell their mortgage loans to Fannie Mae and Freddie Mac.

   Submitting Appraisals into the Enterprises’ Uniform Collateral Data Portal

As shown in Figure 3 below, appraisers fill out electronic forms with appraisal information
and send the resulting data file to a lender or an appraisal management company acting on the
lender’s behalf. The lender or appraisal management company then uploads the appraisal into
the uniform collateral data portal. The submission can go to one or both Enterprises, but in
either case they recommend that the appraisal be submitted early so lenders can address any
messages the portal generates.

Once submitted, the portal automatically analyzes and checks the data, which can result in
various types of messages. Appraisals that do not receive messages requiring additional action
by the lender are identified as successful, which allows the associated loan to be delivered for
purchase by one of the Enterprises. However, it is important to note that appraisals that are
deemed successful do not relieve lenders of their obligations to adhere to the Enterprises’
selling guide requirements.




                                                                                                   12
                                   FIGURE 3. APPRAISAL DATA FILE FLOW6




OIG analyzed loans delivered to the Enterprises between June 15, 2012 and June 15, 2013, to
illustrate the use of the portal. OIG found there were 4.1 million appraisals submitted into the
portal that were associated with loans delivered to the Enterprises, valued at $940.2 billion.

For Fannie Mae, OIG analyzed loans delivered between January 28, 2013 (when Fannie
Mae’s proprietary warning messages went into effect) and June 15, 2013, where the
associated appraisal was also submitted during this time-frame. OIG found that lenders
submitted data for over 747,000 appraisals performed by nearly 52,000 appraisers, which
resulted in Fannie Mae’s purchase of about $167 billion in single-family loans.7

For Freddie Mac, OIG analyzed loans delivered between June 22, 2013 (when Freddie Mac’s
proprietary warning messages went into effect) and September 30, 2013, where the associated
appraisal was also submitted during this time-frame. OIG found lenders submitted data for




6
 Source: OIG analyses of appraisal data file flow beginning with the appraisal and ending with information
generated by the uniform collateral data portal.
7
  The number of appraisers was determined by counting the appraisal license numbers contained in the uniform
collateral data portal for loans purchased by Fannie Mae for the applicable time period. Appraisers may be
licensed in multiple states and therefore could be counted more than once. Blank appraiser license fields were
not included in the count.




                                                                                                                 13
almost 135,000 appraisals performed by 34,000 appraisers, which resulted in Freddie Mac
buying over $29 billion in single-family loans.8,9

     Joint and Proprietary Warning Messages About Submitted Appraisals

As of June 2013, the uniform collateral data portal analyzes submitted appraisal data and,
when appropriate, can send any of 366 messages developed jointly by the Enterprises and 166
proprietary messages (total) developed by each. Both categories communicate potential red
flags about submitted appraisals.

     Joint Warning Messages

Almost all of the joint messages, 345 of 366 (94%), address formatting issues; therefore, OIG
did not analyze these messages. For example, some of the appraisal fields must be presented
in whole dollars and date fields have prescribed formats. However, the remaining 21 joint
messages address topics such as the status of the appraiser’s license, the appraised value of
the property, etc. If, for example, the appraiser’s license number shows up as suspended when
the portal checks it against data maintained in the National Registry of Appraisers, then the
portal will send a warning message to the lender and the Enterprise(s) indicating the apparent
suspension.10

     Proprietary Warning Messages

Of the 166 proprietary messages, 157 are Fannie Mae’s while the other 9 are Freddie Mac’s.
Each Enterprise developed its messages in consideration of its own business needs and
requirements. For example, 25 of Fannie Mae’s proprietary messages tie to its selling guide

8
  Freddie Mac officials informed OIG in November 2013 that they identified an error related to the electronic
transmission of appraisal data from its contractor. The error occurred when a lender initially selected Fannie
Mae as the investor of the subject loan, but subsequently selected Freddie Mac as the investor of the loan. In
these isolated instances, some of the appraisal data was not transmitted to Freddie Mac. This error impacted 47
appraisals, representing less than 1% of the loans delivered during the three-month period. This error also
occurred for the appraisal data submitted during the June 15, 2012 to June 15, 2013 period; however, officials
did not have an estimate of the number of appraisals that may have been omitted. Further, in November 2013,
OIG determined that three appraisals were not included in the initial portal information provided by Freddie
Mac, covering June 15, 2012 to June 15, 2013. Freddie Mac responded that additional analyses would be
required to determine the cause of the omission and that assembling portal information was challenging
because they had not completed data analysis yet and there were limited controls around some of the data.
9
  The number of appraisers was determined by counting the appraisal license numbers contained in the uniform
collateral data portal for loans purchased by Freddie Mac for the applicable time-period. Appraisers may be
licensed in multiple states and therefore could be counted more than once. Blank appraiser license fields were
not included in the count.
10
  The National Registry of Appraisers is maintained by the Appraisal Subcommittee, see https://www.asc.gov
for a complete description of its mission.




                                                                                                                  14
requirements for underwriting property, such as one noting if the appraiser did not comment
on market trends (which can identify declining property values) even though there were
indications of negative market trends. (See Appendix D for a listing of Fannie Mae’s 25
messages related to underwriting requirements.) In contrast, four of Freddie Mac’s proprietary
messages tie to one aspect of its property underwriting requirements, the property’s value.
Specifically, Freddie Mac’s proprietary messages relate directly to its automated model for
valuing properties. For example, the portal will send a message if the automated model cannot
estimate a value based on the information uploaded for an appraisal. (See Appendix E for a
listing of Freddie Mac’s nine messages related to its automated valuation model).

Officials informed OIG that beginning in January 2014, Freddie Mac’s proprietary messages
will be suspended. Specifically, the Consumer Financial Protection Bureau announced new
disclosure requirements for property valuation information effective January 18, 2014. To
address these new requirements, Freddie Mac will revise its proprietary messages and will
resume proprietary analyses of appraisals during the summer of 2014.

   Resolving Warning Messages To Successfully Submit Appraisals

For their appraisal submission to be successful, lenders do not have to do anything to resolve
most warning messages they receive about the appraisals they submit. Specifically, as of June
2013, the Enterprises have set the portal to automatically override all of the Enterprises’
proprietary messages (166) and most of their joint messages (334 of 366). For two other joint
messages, the lender may manually override the warning by selecting a reason for the
problem from a dropdown menu. The remaining 30 joint messages are “fatal,” which require
the lender to take action to resolve the issue identified by the message. For example, the
lender may have to fill in missing information, reformat data, or convert the file and will then
resubmit the appraisal before receiving a successful status, thus allowing delivery of the loan.




                                                                                                   15
FINDINGS AND RECOMMENDATIONS .......................................

Finding 1: Fannie Mae Bought Loans Despite Warnings of Them Potentially Not
   Conforming to Its Appraisal Requirements

During a five-month period of time, from the
end of January 2013 through June 2013, over        Fannie Mae purchased over 56,000
56,000 appraisals uploaded into the portal         loans, valued at $13 billion, which
generated at least one of the 25 warning           may have contained potential
                                                   violations of underwriting
messages about potential violations of Fannie
                                                   requirements.
Mae’s underwriting requirements. Over 4,500
of these appraisals generated more than one
warning message (up to 9 messages per appraisal). Despite these alerts, Fannie Mae
purchased all of the loans for over $13 billion.

The triggering issue varied from technical appraisal documentation requirements (e.g.,
confirming that the lender had obtained a certification of completion of repairs) to
unauthorized use of single-family loan funds (e.g., buying hotels/motels, or properties that
were over 20% commercial). The warning messages shared with lenders were coded as
“automatic overrides” in the uniform collateral data portal. That is, Fannie Mae did not
require lenders to explain or resolve potential problems ranging from formatting issues to
violations of its underwriting requirements.

Instead, Fannie Mae focused its efforts on reviewing the loans for conformance with its
requirements after it bought them. Enterprise officials informed OIG that their plan was
to determine how effective the warning messages were by analyzing some of the actual
appraisals to see if they should have triggered the alert; that is, to determine the rate of false
positives generated by the portal’s automated analyses and checks of appraisal data. With that
information, the Enterprise plans to fine tune the warning messages; for example, determining
if some automatic overrides should require lender action before resubmitting the appraisal
(i.e., be “fatal” to the submission).

OIG acknowledges Fannie Mae’s plans for testing as a positive step, but the concern is that
the Enterprise should already have a level of readiness to require lender action in response to
warning messages. Specifically, prior to deploying its messages to all lenders in 2013, Fannie
Mae performed over 23,500 tests to determine if rules were acting as intended. In addition to
this testing, in June 2012, Fannie Mae conducted a pilot for six months before deployment,
where the Enterprise internally analyzed messages that would have been sent to three lenders.
Finally, in January 2013, these messages reached a certain level of readiness and were



                                                                                                     16
released to all lenders. Therefore, since June 2012, Fannie Mae has had over 18 months to test
the warning messages that indicate appraisals may not meet its underwriting requirements.

In addition, Fannie Mae’s plan to review the appraisals after purchase will test only a subset
of the alerts. Specifically, the portal’s messages feed into Fannie Mae’s tool to select post-
purchase review samples, which is also guided by specific points of data (e.g. loan-to-value)
rather than pulling from the entire universe. Prior to 2013, Fannie Mae reviewed a small
fraction of the loans it purchased each year. Officials informed OIG that in 2013, Fannie Mae
redesigned its post-purchase review process to electronically screen loans purchased and to
perform a manual review of approximately 3% to 5% of these purchases. With the portal,
however, the Enterprise has the entire universe of data at its disposal. Finally, Fannie Mae’s
selection of warning messages is limited to high-risk messages, which may restrict its view to
the breadth of a problem for low-risk but pervasive problems.

Overall, Fannie Mae’s approach to manage such risks after buying the loans is also contrary
to the goals of its own loan quality initiative, which works to enhance loan quality and lower
valuation risk by ensuring loans meet standards before, not after, purchase.

As of November 2013, FHFA had not performed any supervisory review or conducted any
examination work related to Fannie Mae’s use of proprietary messages to reduce the risk of
loss. While per FHFA’s overall uniform mortgage data program, the Enterprise should
continue to exercise its independent business judgment to evaluate, adopt, and maintain its
separate business terms, credit policies, and analytics, the program also states that FHFA will
oversee this work.

As a result of Fannie Mae not fully using the information provided by the portal related to
some of its key warning messages, valuation risk was not fully minimized as intended by the
uniform mortgage data program and the Enterprise’s own loan quality initiative. Ultimately,
FHFA created the uniform mortgage data program to improve data quality and risk
management. However, Fannie Mae has yet to fulfill an important aspect of its plans to
implement the program: specifically, use of loan data pre-purchase to better the loan quality
and reduce representation and warranty risk. Fannie Mae officials believed, however, that
they have made progress in the loan quality initiative and informed OIG that they have
worked with lenders throughout 2013 relating to loans receiving proprietary messages. As a
result, Fannie Mae reported to OIG that there has been a slight decrease in loans receiving
proprietary messages they deemed as critical from January to July 2013.




                                                                                                  17
Recommendation for Finding 1:

To improve Fannie Mae’s use of appraisal information generated by the uniform collateral
data portal related to the 25 proprietary messages, FHFA should perform supervisory review
and follow-up to ensure that Fannie Mae takes action to:

   1. Change the portal message type from automatic override to manual override or fatal
      for the 25 proprietary messages related to underwriting requirements, which will
      require lenders to take action to address the appraisal-related messages warning of
      potential underwriting violations prior to delivering the loans.

Finding 2: Freddie Mac Bought Loans Despite Questions about Their Appraised Value

During a three-month period of time, from
June 22, 2013 through September 30, 2013,           Freddie Mac purchased over 4,000
over 29,000 out of 135,000 appraisals               loans, valued at approximately $1.1
uploaded into the portal generated one of           billion, despite indications that the
Freddie Mac’s proprietary warning messages          appraised values may be excessive
alerting that either no property value could be     for the local market.
provided or the value of the property was in
question. Despite these alerts, Freddie Mac purchased all of the loans for approximately $6.7
billion.

Unlike Fannie Mae, Freddie Mac’s proprietary messages were limited to only one aspect of its
property underwriting requirements, the property’s value. Specifically, Freddie Mac
accomplished this by feeding the portal’s appraisal data through the Enterprise’s model for
estimating property value (Home Value Explorer). However, the model could not estimate a
value for around 25,000 appraisals totaling $5.6 billion for reasons ranging from the system
not being available at the time to not being able to verify that the address existed. For over
4,000 other appraisals, valued at $1.1 billion, the model warned that the appraisals should be
reviewed for accuracy because the estimated value may be excessive for the local market.

Indeed, Freddie Mac does not require lenders to address any of its proprietary messages
before buying their loans. Instead, the warning messages were coded as automatic overrides,
so the portal accepted the appraisal, giving it a successful status, without lenders explaining or
resolving the questionable or absent property values.

Like Fannie Mae, rather than requiring the warning messages to be addressed beforehand,
Freddie Mac relies on post-purchase review to catch problems. However, the Enterprise’s
review does not begin with the appraisals that generated the alerts, but instead selects files to
review based on data points (e.g., an appraised value exceeds the market value by at least
10%), which may or may not include problematic appraisals. In addition, Freddie Mac’s

                                                                                                     18
reviews generally only look at a small sample of the loans bought by the Enterprise—in 2012
Freddie Mac purchased approximately 2 million loans; however, it only selected about
254,000 loans for review that year. Therefore, requiring lenders to address messages
generated by the portal, prior to purchase of the loans, will provide more thorough
identification of problems with loans rather than reviewing a portion of them as part of the
post-purchase review.

In December 2013, Freddie Mac officials informed OIG that post-purchase review sampling
will leverage appraisal data by February 2014. Specifically, Freddie Mac informed OIG that
it has built capacity to perform a full underwrite on 500 loans targeted by its appraisal
samples each month.

OIG noted that Freddie Mac could expand its proprietary messages to tie to additional
property requirements in its selling guide, and the Enterprise could further develop its use of
the data available in the uniform collateral data portal to help it manage risk. The Enterprise
agreed that these were important elements in its use of the portal, and assured OIG that plans
to do both were underway—primarily through a contract awarded in September 2013.

In general, the contract’s goals are to:

      Evaluate appraisal data received through the portal,
      Provide pre-funding feedback to Freddie Mac lenders regarding the quality of the
       appraisal data, the valuation assessment, and appraiser compliance to standards; and,
      Make timely and appropriate funding decisions based on high quality appraisal reports
       that have been scored and validated based on the best information available.

The results of the contractor’s validation service will be returned through the portal messages
to the user submitting the appraisal and will be available for Freddie Mac inquiry and
download. Further, Freddie Mac officials stated the contract will also include a review of the
collateral’s value, condition, and marketability, which are part of the lender’s responsibilities.

As it proceeds to develop its use of the portal, Freddie Mac should ensure that it minimizes
valuation risk—a key goal of FHFA’s overall uniform mortgage data program—by further
developing proprietary warning messages related to additional underwriting requirements, and
using these warnings to manage risk upfront.

Recommendations for Finding 2:

To improve Freddie Mac’s risk management related to the use of proprietary messages, FHFA
should perform supervisory review and follow-up to ensure that Freddie Mac takes action to:




                                                                                                     19
       2. Develop and implement additional proprietary messages related to its property
          underwriting requirements.
       3. Establish the additional proprietary messages related to property underwriting
          requirements as manual override or fatal, which will require the lenders to take action
          to address the messages prior to delivering the loans.
       4. Review the type of message related to the existing nine proprietary messages for
          consideration of converting the type of message from automatic override to manual
          override or fatal, which will require the lenders to take action to address the messages
          prior to delivering the loans.

Finding 3: The Uniform Collateral Data Portal Can Better Identify Appraisers’ License
   Status

From June 2012 to June 2013, there were 414,000
appraisals that received messages from the portal for loans                      The Enterprises’ purchased
totaling nearly $88 billion warning that the appraiser’s                         loans valued at almost $88
                                                                                 billion when, contrary to their
license was unverified.11,12 Over the same period, the portal
                                                                                 own requirements, they could
alerted that 25 appraisers (associated with 805 appraisals)                      not determine if the appraiser
were suspended, and so, according to both Enterprises’                           was licensed to perform the
guidelines, could not be used by lenders for mortgages sold                      work.
to the Enterprises.

In both cases of the portal alerting of the appraisers’ licenses being unverified or suspended,
OIG’s analysis showed that the warning messages were either indeterminate or inaccurate.
Specifically, the “unverified” message was comprised of either (1) the appraisers’ licenses
were inactive and so their appraisals could not be used for property sold to the Enterprises, or
(2) the portal simply could not find the appraisers’ license numbers in the National Registry of
Appraisers it searched through. In this second case, the appraisers’ licenses may well have
been valid, but the Enterprises did not know. Of the 25 appraisers identified as suspended,
OIG found that only two appraisers were indeed suspended at the time the appraisal was
completed.




11
  In total, this represents about 10% of appraisals uploaded into the portal during this period (414,000 of 4.1
million), and about 9% of their total value ($88 billion of $940 billion). Specifically, for Fannie Mae, the portal
generated this message approximately 280,000 times for which Fannie Mae purchased loans valued at over $59
billion. Likewise, for Freddie Mac, the portal generated this message about 134,000 times when loans were
purchased for nearly $29 billion.
12
     See footnote 8 regarding a qualification relating to the appraisal data.




                                                                                                                      20
However, since the Enterprises set the portal to automatically override both messages and
accept the submitted appraisal, they lost opportunities to ensure that appraisals were being
performed by appraisers who met their qualifications. For example, the two appraisers who
were accurately identified by OIG as suspended had 13 appraisals supporting nearly
$2 million in loans that the Enterprises bought. In reviewing the reasons for their suspensions,
OIG found that one of the appraisers had completed misleading appraisals and the other
appraiser engaged in gross misconduct.

OIG alerted Enterprise officials of the findings, who
swiftly reviewed the portal for additional appraisals        Based on OIG’s work and the
performed by the two appraisers and found an                 Enterprises’ responsive actions,
additional 10 loans valued at approximately $1.4             23 loans valued at $3.4 million
million. The Enterprises’ acted aggressively to refer        may be repurchased due to
                                                             violations of underwriting
the 23 total loans, valued at $3.4 million, to their
                                                             standards.
respective post-purchase review groups and fraud
departments. OIG’s Office of Investigations has also
been advised of these findings.

The portal identified appraisers’ suspension status inaccurately because it compared the
appraisers’ status when the appraisals were uploaded (irrelevant to their eligibility to appraise
for the Enterprises), not when the appraisals were performed (required to have an active,
unsuspended license when the work was done). Since an appraisal may be uploaded
more than four months after the appraiser does the work, this leaves a lot of room for
misidentifying their status at the time of the appraisal. That is, the appraiser could have been
active at the time but suspended since; or, suspended at the time, but off suspension since.
Either way, the Enterprises do not have assurance that the portal has correctly identified the
appraisers’ status on the effective date of the appraisals.

The problem of determining appraisers’ status when they performed their appraisals is made
worse by the fact that historical records were not maintained in the National Registry of
Appraisers (the record of those who are licensed and certified by each state). However, since
the status can be updated and the registry does not keep a record of their historical status (e.g.,
if they were suspended at a given time), it does not provide any certainty that appraisers were,
in fact, allowed to perform their appraisals when they did. They may have, for example, been
suspended then, but active now without the portal knowing.

Further, the registry does not necessarily reflect the appraisers’ current status since update
submissions vary by state – some states and U.S. territories (states) update in real-time and
some do not. In 2010, the registry was updated to allow states to submit data directly from
their tracking applications – thereby facilitating “real-time” updates to the registry. However,
states are only required to update the registry related to licensing information on a monthly


                                                                                                      21
basis. As of August 2013, 25% of the states are reporting appraiser data in real-time. If states
convert to a real-time update, it can reduce costs, increase efficiency, and allow states the
opportunity to provide almost immediate updates to the registry, making it a more effective
tool for users. As a result of all states not fully utilizing the real-time submission capability,
the Enterprises are not fully able to use the registry to identify the status of appraisers’
licenses.

Until August 2013, the Enterprises did not have internal control policies or procedures in
place to address portal messages related to the status of an appraiser’s license. Freddie Mac
officials informed OIG that they did not have any policies or procedures in place to follow up
and take action when the portal generated messages related to an appraiser’s license status. To
their credit, as previously discussed, Freddie Mac officials took immediate action to address
the instances identified by OIG’s audit where loans were purchased when the appraisals were
performed by a suspended appraiser.

For their part, Fannie Mae officials informed OIG that they developed new suspended
appraiser procedures, with an effective date of September 2013. The new procedures include
various tests designed to minimize Fannie Mae’s risk involving loans delivered with an
appraisal completed by an appraiser whose license or certification has been suspended,
revoked, or surrendered. Results of this new procedure will assist, using the portal’s
information, in referring loans to Fannie Mae’s fraud department and post-purchase review
group.

As of November 2013, FHFA has not performed any examination work associated with the
Enterprises’ compliance with the Agency’s uniform mortgage data program directive, related
implementation, and the Enterprises’ use of the portal to minimize the risk of loss. However,
FHFA officials stated that, over time, it would be scoped into the ongoing monitoring
program as the Agency becomes more knowledgeable about various program operations at
the Enterprises.

Without better oversight, the Enterprises may not fully use the portal to minimize the risk of
buying loans supported by inactive or unlicensed appraisers. FHFA developed the uniform
mortgage data program as part of an effort to enhance risk management and to reduce
representation and warranty risk through up-front monitoring of loan quality. To facilitate
these goals, a reliable uniform collateral data portal is necessary for the Enterprises to have
access to electronic appraisal data prior to purchasing the loans.

Recommendations for Finding 3:

To enhance both Enterprises’ use of joint messages related to the status of an appraiser’s
license, FHFA should perform supervisory review of both Enterprises to:



                                                                                                     22
       5. Ensure the portal warning messages distinguish between inactive appraisers and
          unverified appraisers, as of the date the appraisal is performed.
       6. Ensure that the portal tests whether appraisers are licensed and active at the time the
          appraisal is performed.
       7. Change the message type, for messages relating to appraiser license status, from
          automatic override to manual override or fatal, which will require lenders to take
          action to address the message prior to delivering the loan. This action can be taken
          once the system logic is fixed and the historical records are available to determine the
          status of an appraiser’s license at the time the appraisal work is performed, and the
          states are updating in real- time.13
       8. Seek remedy for the 23 loans, valued at $3.4 million, delivered to the Enterprises by
          the two suspended appraisers in violation of underwriting requirements.

To improve Freddie Mac’s use of joint messages related to the status of an appraiser’s license,
FHFA should perform supervisory review and follow-up to ensure that Freddie Mac takes
action to:

       9. Implement an internal control policy and related procedures to follow up on appraisal
          license status messages generated by the portal.
       10. Review loans purchased since the portal’s inception that generated messages related to
           the appraiser’s license status.
       11. Use the results of the review to repurchase the loans that contained appraisals that
           were performed by unlicensed appraisers, as appropriate.

To improve its oversight, FHFA should:

       12. Pursue retention of historical records of the status of appraisers’ licenses in the
           National Registry of Appraisers sufficient to determine the status of appraisers’
           licenses at the time the appraisal work is performed.
       13. Pursue having the National Registry of Appraisers updated to reflect the status of state
           certified and licensed appraisers on a real-time basis.
       14. Perform supervisory review and follow-up to ensure that the Enterprises develop and
           implement the portal as intended by FHFA’s uniform mortgage data program
           directive.



13
     Recommendations 5, 6, and 7 are dependent on the implementation of recommendation 12.




                                                                                                      23
CONCLUSION ............................................................................

FHFA directed the uniform mortgage data program initiative to enhance oversight, reform and
rebuild aspects of the mortgage industry, and improve risk management. The related uniform
collateral data portal is intended to improve appraisal data quality and risk management for
the Enterprises by collecting appraisal data to help them make informed decisions about the
loans they buy. Further, the uniform mortgage data program and the uniform collateral data
portal are essential tools for the Enterprises to use to continue making progress toward
reducing loan defects because they provide a means whereby the Enterprises can identify
potential “red flags” on loans they may purchase. However, as demonstrated by the results of
this audit, these goals are at risk of not being achieved.

As a result of this audit, 23 loans valued at $3.4 million are being considered for repurchase
by the Enterprises because the appraisers were suspended at the time the appraisals were
performed, which is a violation of underwriting requirements.

While the Enterprises have made great strides by standardizing appraisal data and establishing
a single system to capture it, more remains to be done to ensure that the Enterprises fully use
their portal to improve loan quality and reduce the risk of loss.




                                                                                                  24
OBJECTIVE, SCOPE, AND METHODOLOGY .................................

The objective of this performance audit was to assess FHFA’s oversight of the Enterprises’
use of appraisal data to reduce the risk of loss on single-family mortgages. The scope of this
audit included a review of joint and proprietary messages and related appraisal data generated
from the uniform collateral data portal. Specifically, OIG reviewed:

      Joint messages and related appraisal data related to loans delivered to the Enterprises
       from June 15, 2012 to June 15, 2013;
      Fannie Mae’s proprietary messages and related appraisal data related to loans and
       appraisals delivered from January 28, 2013 to June 15, 2013; and,
      Freddie Mac’s proprietary messages and related appraisal data related to loans and
       appraisals delivered from June 22, 2013 to September 30, 2013.

OIG performed this audit from April 2013 through December 2013. OIG conducted this audit
at FHFA’s and Fannie Mae’s offices in Washington, D.C., and Freddie Mac’s office in
McLean, Virginia. OIG interviewed FHFA, Fannie Mae, and Freddie Mac personnel, the
Enterprises’ portal’s third-party contractor, members of the Appraisal Subcommittee, and
officials from selected states responsible for appraisers’ licensing. The scope of the audit
related specifically to the Enterprises’ use of appraisal data contained in the portal.

OIG relied on computer-processed and hardcopy data from Fannie Mae and Freddie Mac to
accomplish the audit objective. The computer-processed data included electronic appraisal
data generated by the portal that was transmitted to Fannie Mae and Freddie Mac’s separate
internal central repositories by a contractor responsible for the development of the portal. OIG
assessed the reliability of the data by performing electronic/manual logic testing for missing
and accurate data. OIG relied on Enterprise officials to provide data generated by the portal,
which was analyzed to support the conclusions. As described in finding 3 of this report, the
portal can better identify appraisers’ license status. Specifically, the portal alerted of
appraisers’ licenses being unverified or suspended, but OIG’s analyses showed that the
warning messages were either indeterminate or inaccurate. Accordingly, OIG determined that
the computer-generated data, specific to unverified and suspended appraisers, was not
sufficiently reliable since it was not always complete and accurate. OIG made
recommendations designed to enhance the reliability of the portal generated data related to
unverified and suspended appraisers. Also, as described in footnote 8, Freddie Mac had not
performed full data analysis and there were limited controls around some of the data, which
resulted in some omissions of data provided to OIG. Officials were working to understand and
address the omissions of data during the audit.




                                                                                                   25
To achieve the audit objective, OIG:

      Judgmentally selected and tested the joint and proprietary messages generated by the
       portal;
      Interviewed Fannie Mae’s and Freddie Mac’s business unit personnel on the
       development, implementation, and future plans for the portal as well as how the
       Enterprises are using the data generated from the portal;
      Interviewed FHFA officials on policies and examination work related to the
       implementation of the uniform mortgage data program directive and the portal;
      Interviewed the third-party contractor who hosts the portal used by Fannie Mae and
       Freddie Mac to gain an understanding of how the portal was developed and how it
       operates; and,
      Interviewed officials from selected states responsible for appraiser licensing for
       determining the status of appraisers’ licenses for selected points in time.

OIG also assessed the internal controls related to the audit objective. Internal controls are an
integral component of an organization’s management that provides reasonable assurance that
the following objectives are achieved:

      Effectiveness and efficiency of operations;
      Reliability of financial reporting; and,
      Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives, and include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for
measuring, reporting, and monitoring program performance. Based on the work completed on
this performance audit, OIG considers weaknesses in FHFA’s supervisory oversight of Fannie
Mae’s and Freddie Mac’s controls over use of appraisal data to be significant in the context of
the audit’s objective.

OIG performed fieldwork for this audit from April 2013 through December 2013 in
accordance with generally accepted government auditing standards. Those standards require
that audits be planned and performed to obtain sufficient, appropriate evidence to provide a
reasonable basis for the findings and conclusions based on the audit objective. OIG believes
that the evidence obtained provides a reasonable basis for the findings and conclusions
included herein, based on the audit objective.




                                                                                                   26
APPENDIX A .............................................................................

FHFA’s Comments on OIG’s Findings and Recommendations




                                                                                       27
28
29
30
APPENDIX B..............................................................................

OIG’s Response to FHFA’s Comments

On January 27, 2014, FHFA provided comments to a draft of this report, agreeing with the
recommendations and identifying FHFA actions to address them.

Specifically, for recommendations 1 through 4, FHFA agreed to ensure that Fannie Mae takes
action to determine which of the 25 proprietary messages should be changed to manual
override or fatal and implement the changes in the portal. In addition, FHFA will ensure that
Freddie Mac develops and implements proprietary messages related to property underwriting
requirements. Freddie Mac will also select messages for conversion to manual override or
fatal, which will require lenders to take action to address the messages prior to delivering the
loans.

For recommendations 8 through 11, FHFA will ensure that both Enterprises seek appropriate
remedies for the loans delivered by the two suspended appraisers. In addition, FHFA will
require Freddie Mac to develop internal control policy and related procedures regarding
follow-up on license status messages, review loans that generate messages related to the
appraisers’ licenses status, and use the results of the review to seek remedies for loans that
contain appraisals performed by unlicensed appraisers.

With respect to recommendations 5 through 7, 12, and 13, FHFA stated it will continue to
work with the Appraisal Subcommittee in pursuit of enhancements to the National Registry of
Appraisers to include retention of historical status records and real-time reporting of appraiser
license status. Further, FHFA stated that once the National Registry of Appraisers achieves
retention of historical license status information and real-time reporting, the Enterprises will
pursue modifying the portal to perform recommendations 5, 6, and 7. FHFA will continue the
dialogue in support of these changes with the Appraisal Subcommittee.

OIG considers FHFA’s planned actions to recommendations 5 through 7, 12, and 13 to be
potentially responsive to the recommendations. Specifically, depending on the response from
the Appraisal Subcommittee, FHFA may need to pursue additional actions to address the
recommendations. As communicated during OIG’s audit, one such option is for the
Enterprises to retain the Appraisal Subcommittee’s daily file. Currently, the Enterprises,
through the portal contractor, download a daily file from the Appraisal Subcommittee that
includes among other fields, the appraiser’s name, license number, and license status. By
retaining this file daily, the Enterprises could begin building a historical database of the status
of appraisers’ licenses. Retaining this historical data along with states fully utilizing real-time
submission capability would allow the Enterprises to determine whether an appraiser was


                                                                                                      31
licensed at the time the appraisal was performed, resulting in the successful implementation
of recommendations 12 and 13, which would allow the Enterprises to implement
recommendations 5, 6, and 7. While the real-time updates will further enhance the
information contained in the National Registry of Appraisers (recommendation 13), retention
of historical records (recommendation 12) in and of itself would be a significant step towards
improving the accuracy of the warning messages generated by the portal (recommendations 5,
6, and 7).

Regarding recommendation 14, FHFA stated it plans to continue working with the Enterprises
as they develop and implement the portal, and will provide a status report on activities related
to implementation of the portal in accordance with the directive.

OIG considers FHFA’s response to be sufficient to resolve the recommendations, which will
remain open until OIG determines that the agreed upon corrective actions are completed and
responsive to the recommendations.

OIG has attached FHFA’s full response (see Appendix A), which was considered in
finalizing this report. Appendix C provides a summary of management’s comments on the
recommendations and the status of agreed-to corrective actions.




                                                                                                   32
APPENDIX C ..............................................................................

Summary of FHFA’s Comments on the Recommendations

This table presents management’s response to the recommendations in OIG’s report and the
status of the recommendations as of when the report was issued.


                                                       Expected
                                                      Completion   Monetary   Resolveda   Open or
 Rec. No.      Corrective Action: Taken or Planned       Date      Benefits   Yes or No   Closedb
    1         FHFA agrees with this                    1/31/15       $0          Yes       Open
              recommendation and will ensure
              that Fannie Mae takes action to
              determine which of the 25
              proprietary messages should be
              changed to manual override or fatal
              and implement the changes. Fannie
              Mae has already begun to identify
              the messages that are clearly tied
              to underwriting and eligibility
              requirements that do not yield
              a significant number of false
              positives, with plans to change the
              messaging to manual override.
              Evidence to close this
              recommendation will consist of
              documentation of message changes
              in the portal, along with the logic
              for selection of the messages.
2 through 4   FHFA agrees with these                   1/31/15       $0         Yes        Open
              recommendations and will follow
              up with Freddie Mac to assure it
              completes and implements its
              Appraisal Data Validation Service
              (ADVS) Plan, which includes
              development and implementation
              of proprietary messages related to
              property underwriting
              requirements. As OIG notes in the
              report, the existing nine proprietary
              messages will be revised and
              reactivated later in 2014. They,
              along with other potential



                                                                                               33
                                                       Expected
                                                      Completion   Monetary   Resolveda   Open or
  Rec. No.      Corrective Action: Taken or Planned      Date      Benefits   Yes or No   Closedb
               messages, will be considered as
               part of the ADVS Plan. Evidence to
               close this recommendation will
               consist of documentation of
               implementation of messages
               developed and selected for manual
               override or fatal.
     8         FHFA agrees with this                   1/31/15       $0         Yes        Open
               recommendation and will ensure
               that both Enterprises seek
               appropriate remedies for the loans
               delivered by the two suspended
               appraisers. Evidence to close
               this recommendation will be
               documentation of Enterprise
               actions and outcomes related to
               the loans.
9 through 11   FHFA agrees with these                  1/31/15       $0         Yes        Open
               recommendations and will require
               Freddie Mac to provide a copy of
               internal control policy and related
               procedures regarding follow-up on
               license status messages, review
               loans that generated messages
               related to the appraiser's license
               status, and use the results of the
               review to seek remedies for loans
               containing appraisals performed
               by unlicensed appraisers, as
               appropriate. Evidence to close this
               recommendation will consist of a
               copy of Freddie Mac's internal
               control procedures, evidence of
               loan reviews, and any resulting
               actions.
5 through 7,   FHFA agrees with                        1/31/15       $0         Yes        Open
 12, and 13    recommendations 12 and 13, and
               will continue to work with the
               Appraisal Subcommittee in pursuit
               of enhancements to the National
               Registry of Appraisers to include
               retention of historical status


                                                                                               34
                                                            Expected
                                                           Completion       Monetary      Resolveda      Open or
    Rec. No.    Corrective Action: Taken or Planned           Date          Benefits      Yes or No      Closedb
               records and real-time reporting
               of appraiser license status. While
               some progress has been made
               toward real-time reporting, there
               is not yet sufficient reliable
               information for the Enterprises
               to modify the portal to perform
               recommendations 5, 6, and 7. FHFA
               agrees that once the National
               Registry achieves retention of
               historical license status information
               and real-time reporting, the
               Enterprises will pursue modifying
               the portal to address these issues.
               FHFA will continue the dialogue
               in support of these changes with
               the ASC. Evidence to close these
               recommendations will be a written
               communication to the Appraisal
               Subcommittee encouraging them
               to pursue retention of historical
               appraiser status records and
               updating the National Registry
               on a real-time basis.
      14       FHFA agrees with this                         1/31/15            $0           Yes            Open
               recommendation and will continue
               to work with the Enterprises as
               they develop and implement the
               portal. Because this is a multiyear
               project, FHFA will provide a status
               report on activities related to
               implementation as evidence to
               close this recommendation.

a
  Resolved means: (1) Management concurs with the recommendation, and the planned, ongoing, and
completed corrective action is consistent with the recommendation; (2) Management does not concur with the
recommendation, but alternative action meets the intent of the recommendation; or (3) Management agrees to
the OIG monetary benefits, a different amount, or no amount ($0). Monetary benefits are considered resolved
as long as management provides an amount.
b
  Once OIG determines that the agreed upon corrective actions have been completed and are responsive, the
recommendations can be closed.




                                                                                                               35
APPENDIX D .............................................................................

Fannie Mae’s 25 Proprietary Messages Related to Underwriting Requirements14


                   Message                                 Description of the Underwriting Requirement
                                                  Unacceptable Appraisal Practices: Failure to adequately
                                                  analyze and report any current contract of sale, option,
The sales contract was not analyzed.
                                                  offering, or listing of the subject property and the prior sales of
                                                  the subject property and the comparable sales.
There was no comment on market conditions,
                                                  The appraiser must provide his/her conclusions for the reasons
even though one or more negative housing
                                                  a market is experiencing declining property values, an over-
trends were indicated (declining, over supply,
                                                  supply of properties, or marketing times over six months.
over six months).
Less than three settled sales were used as        A minimum of three comparable sales must be reported as
comparables.                                      part of the sales comparison approach to value.
                                                  The Uniform Standards of Professional Appraisal Practice
Residential Property: Research of prior sale      (USPAP) requires appraisers to report a minimum three-year
was not performed.                                prior sales history for the subject property. The appraiser must
                                                  comply with the minimum requirements of USPAP.
                                                  The USPAP requires appraisers to report a minimum three-
Condominium Unit: Research of prior sale was
                                                  year prior sales history for the subject property. The appraiser
not performed.
                                                  must comply with the minimum requirements of USPAP.
Concession adjustment for comparable
property is greater than zero. Fannie Mae         Positive adjustments for sales or financing concessions are not
policy does not permit positive sales or          acceptable.
financing concession adjustments.
Indicated value by sales comparison approach      The lender is responsible for ensuring that the appraiser uses
is not contained within the range of adjusted     sound reasoning and provides evidence to support the
comparable property values.                       methodology used for developing the value opinion.
Residential Property: Final estimated value is    In the final reconciliation, appraisers must reconcile the
outside the bounds of the approaches to value     reasonableness and reliability of each applicable approach to
used in the appraisal.                            value.
Condominium Unit: Final estimated value is        In the final reconciliation, appraisers must reconcile the
outside the bounds of the approaches to value     reasonableness and reliability of each applicable approach to
used in the appraisal.                            value.


14
  Uniform Collateral Data Portal User Guide for Fannie Mae Messaging, accessed publicly on November 27,
2013, at
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CCkQFjAA&url=htt
ps%3A%2F%2Fwww.fanniemae.com%2Fcontent%2Fuser_guide%2Fucdp-user-guide-fannie-mae-
messaging.pdf&ei=A1yWUt-
GHdPQkQeQ54CoBQ&usg=AFQjCNFalldaHLOkKwvLtEfBBZW8grWKjg&bvm=bv.57155469,d.eW0.




                                                                                                             36
                   Message                                 Description of the Underwriting Requirement
                                                  Lenders must use appraisers who: are state-licensed or state-
State certification is not provided on            certified in accordance with the provisions of Title XI of the
transaction amount over $1 million.               Financial Institutions Reform, Recovery and Enforcement Act
                                                  of 1989 (FIRREA).
Appraiser license state does not match subject    Lenders must use appraisers who: are state-licensed or state-
property state.                                   certified in accordance with the provisions of Title XI of FIRREA.
Supervisor license state does not match           Lenders must use appraisers who: are state-licensed or state-
subject property state.                           certified in accordance with the provisions of Title XI of FIRREA.
                                                  Lenders must confirm and document in the mortgage file that
Seller is not indicated as owner of public        the property seller in a purchase money transaction or the
record.                                           borrower in a refinance transaction is the owner of the subject
                                                  property when a new appraisal is required.
Residential Property: Illegal zoning compliance
                                                  Fannie Mae does not purchase or securitize mortgage loans
has been indicated in appraisal. Review
                                                  on properties if the improvements do not constitute a legally
description to verify if the property may be
                                                  permissible use of the land.
eligible per the selling guide.
Condominium Unit: Illegal zoning compliance
                                                  Fannie Mae does not purchase or securitize mortgage loans
has been indicated in appraisal. Review
                                                  on properties if the improvements do not constitute a legally
description to verify if the property may be
                                                  permissible use of the land.
eligible per the selling guide.
                                                  If the current improvements clearly do not represent the
                                                  highest and best use of the site as an improved site, the
Residential Property: Present use is indicated
                                                  appraiser must so indicate on the appraisal report. Fannie
as not highest and best use.
                                                  Mae will not purchase or securitize a mortgage that does not
                                                  represent the highest and best use of the site.
                                                  If the current improvements clearly do not represent the
                                                  highest and best use of the site as an improved site, the
Condominium Unit: Present use is indicated as
                                                  appraiser must so indicate on the appraisal report. Fannie Mae
not highest and best use.
                                                  will not purchase or securitize a mortgage that does not
                                                  represent the highest and best use of the site.
                                                  A certification of completion must be obtained to verify the
                                                  work was completed and must:
At least one of the “subject to” boxes is
                                                  • be completed by the appraiser,
checked. The lender must obtain a certificate
                                                  • state that the improvements were completed in accordance
of completion, stating the nature of the
                                                  with the requirements and conditions in the original appraisal
“subject to” issue has been resolved before
                                                  report, and
loan delivery.
                                                  • be accompanied by photographs of the completed
                                                  improvements.
                                                  Ineligible Project Types: Projects that are managed and
The subject property may be a hotel/motel or
                                                  operated as a hotel or motel, even though the units are
condotel.
                                                  individually owned.




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                   Message                                 Description of the Underwriting Requirement
                                                  Ineligible Project Types: Fannie Mae will not purchase or
The subject property is in a condominium
                                                  securitize mortgages that are secured by units in certain
project that may be ineligible for delivery to
                                                  types of planned unit development (PUD), condos, or co-op
Fannie Mae.
                                                  projects, regardless of the characteristics of the unit mortgage.
                                                  New project:
The developer/builder is in control of the HOA.   • fewer than 90% of the total units in the project have been
Determine the project review type. Fannie         conveyed to the unit purchasers;
Mae eligibility requires a full project review    • the project is not fully completed, such as proposed
on properties that are not established, except    construction, new construction, or the proposed or incomplete
for detached subject properties on which a        conversion of an existing building to a condo;
limited project review is permitted.              • the project is newly converted; or
                                                  • the project is subject to additional phasing or annexation.
A single entity owns more than 10% of the
project units. Projects where a single entity
                                                  Ineligible Project Types: Projects where a single entity (the
(other than the developer during the initial
                                                  same individual, investor group, partnership, or corporation)
marketing period) owns more than 10% of the
                                                  owns more than 10% of the total units in the project.
total units are ineligible under Fannie Mae
policy.
                                                  The project, or the subject legal phase, must be “substantially
Some part of the condominium project has not      complete.” This means that:
been completed (including planned                 • a certificate of occupancy or other substantially similar
rehabilitation). Confirm that the project, or     document has been issued by the applicable governmental
subject legal phase, meets the applicable         agency for the project or subject phase; and,
completion standard as described in the           • all the units in the building in which the unit securing the
Fannie Mae Selling Guide.                         mortgage is located are complete, subject to the installation of
                                                  buyer selection items, such as appliances.
More than 20% of the overall space in the
                                                  No more than 20% of the total square footage of the project
project is commercial use. Property is
                                                  can be used for commercial purposes.
ineligible for delivery per the selling guide.
Comparable property may be a hotel/motel or       The following are examples of unacceptable appraisal practice:
condotel.                                         selection and use of inappropriate comparable sales.




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APPENDIX E ..............................................................................

Freddie Mac’s Nine Proprietary Messages Related to its Automated Valuation Model 15

As part of these analyses, OIG classified Freddie Mac’s proprietary messages related to its
automated valuation model, Home Value Explorer (HVE), into two categories:

     1. Unable to Provide HVE Feedback – five of the nine messages indicate Freddie Mac’s
        HVE tool cannot provide an estimated value of the property that can be used to
        determine the accuracy of the appraisal. Specifically, these five messages and
        descriptions are:
               HVE is currently unavailable. This message indicates “the HVE model
                cannot be accessed at this time.” The lender should try resubmitting the
                appraisal at a later time.
               HVE value not available. This message indicates an appraisal form, other
                than one of the acceptable uniform appraisal dataset forms, was submitted. The
                message states “this appraisal form cannot be submitted to HVE.”
               HVE value not available. An invalid appraised value cannot be submitted
                to HVE. This message indicates that the market value of the subject property
                from the reconciliation section of the appraisal report is not a valid number.
                For example, the value is less than or equal to zero or was not included.
               Unable to return the HVE point value for property address. This message
                indicates that HVE is unable to provide a valuation for the submitted property
                address. For example, the property may be a newly constructed home and
                information on the property is not yet available to HVE, or the property may be
                located in an area where HVE does not have enough data to generate a value.
               HVE value not available. The subject address cannot be validated in HVE.
                This message indicates that the submitted property address could not be
                verified by HVE.

        2. HVE Feedback Provided – The remaining four messages relate to Freddie Mac’s
           estimated value of the property to determine the accuracy of the appraisal. The

15
  Freddie Mac’s Uniform Collateral Data Portal Proprietary Valuation Messages, accessed publicly on
November 27, 2013, at
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=2&cad=rja&ved=0CC8QFjAB
&url=http%3A%2F%2Fwww.freddiemac.com%2Flearn%2Fpdfs%2Fuw%2FUCDP_Prop_Results.pdf&ei=2l
2WUom6OsyNkAf43IEw&usg=AFQjCNFBCBdHHD5xIB5JGs-K7MNH0tFD7w.




                                                                                                      39
first message, which indicates if the estimated value of the property may be
excessive, is generated based on the results of the remaining three messages.
Specifically, these four messages are:

   Review for Accuracy: The estimated value of property for this transaction
    may be excessive for the local market. The appraisal should be carefully
    reviewed for this transaction. The message is referred to as the “Excessive
    Value Message” and indicates an increased probability that the appraised value
    may be inflated. Depending on the results of the following three messages, the
    excessive value message will be generated:
          HVE point value estimate for property address. The HVE point
           value estimate returned does not indicate Freddie Mac’s
           acceptance of the appraised value entered for the subject property.
           The lender will continue to be responsible for the property
           appraisal, as well as representation and warranties of the
           appraisal, regardless of the HVE market value. This message
           indicates an estimate of value based on a Freddie Mac statistical model
           that assumes average marketability and condition for the property.
          The percentage difference between the estimated/appraised value
           and the HVE point value estimate of the subject property. This
           message indicates the calculation result of the percentage difference
           between the appraised value and the HVE Point Value Estimate.
          The HVE confidence level of the HVE point value estimate of the
           subject property the HVE forecast standard deviation of the HVE
           point value estimate of the subject property. This message indicates
           the confidence level which is summarized within High, Medium, and
           Low value ranges.




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ADDITIONAL INFORMATION AND COPIES .................................


For additional copies of this report:

      Call: 202–730–0880
      Fax: 202–318–0239
      Visit: www.fhfaoig.gov



To report potential fraud, waste, abuse, mismanagement, or any other kind of criminal or
noncriminal misconduct relative to FHFA’s programs or operations:

      Call: 1–800–793–7724
      Fax: 202–318–0358
      Visit: www.fhfaoig.gov/ReportFraud
      Write:
                   FHFA Office of Inspector General
                   Attn: Office of Investigation – Hotline
                   400 Seventh Street, S.W.
                   Washington, DC 20024




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