Collateral Underwriter (CU) is a program developed by Fannie Mae to assess risk. It launched at the beginning of 2015. The CU program helps lenders assess the risk factors associated with a particular appraisal for a subject property by providing detailed information about potential appraisal quality or property eligibility issues.

    As part of the CU program, Fannie Mae generates a CU report for each appraisal that is uploaded to the Uniform Collateral Data Portal (UCDP). The CU report includes a risk score, which is a numerical rating that reflects the quality and risk of the collateral property. It is based on an analysis of the property’s characteristics and features, such as the location, type of construction, age, and condition.

    The CU score is intended to provide lenders with a reliable and objective measure of the risk associated with the property for a home loan, which can help them make informed decisions on how to proceed with the appraisal process. The CU report is meant for the lender’s eyes only and is not shared with buyers and sellers, not even with the appraiser.

    In the time leading up to the launch, many in the real estate industry were worried about how the Collateral Underwriter would impact appraisals, the home buying process, and the loan process as a whole. Appraisers were concerned about getting more conditions from lenders because of the automated system. And lenders were concerned about higher fees and more conservative valuations because professional appraisers knew they were being closely watched by Fannie.

    However, now that mortgage lenders have been using the CU program for several years with no major issues, it looks like the initial concerns were largely overblown.

    How is the CU Score Assessed?

    The Collateral Underwriter tool relies upon a database of real estate market data, property records, past appraisals, and proprietary analytical models to look at appraisals.

    To generate a CU report, Fannie Mae does three things:

    • Analyzes the appraisal report itself and looks for potential issues
      • Is the appraisal report “Subject to” repairs?
      • Is the appraised value by the sale prices of the comparables?
      • Can this property be financed by Fannie Mae?
    • Compares the subject and comparable sales property information to past appraisal scores done on those properties
      • Are there any significant differences compared to past appraisals in Fannie’s archives?
      • Do the appraiser’s adjustments make sense in the context of past appraisals and Fannie’s analytical model?
    • Compares the comps used in the appraisal report to Fannie’s model comps (up to 20)
      • Could the appraiser have chosen better comps?
      • Is the appraiser selecting worse comps to try to push the appraised value higher than it should be?

    In addition to the CU risk score, the CU report also provides risk flags to address factors that lead to the score. For example, there might be a risk flag stating that the view rating for one of the comps conflicts with what it was on a past appraisal or that the appraiser’s lot size adjustment is different from Fannie’s model.

    What Does a High “CU Score” Mean?

    CU scores range between 1 and 5. There is also a score of 999 if Fannie Mae is unable to assess the property. A score of 999 is very rare, but it can happen, for example, in certain rural areas where Fannie Mae has not gathered enough data to give the property a CU score.

    A CU score of “1” indicates the lowest risk. A CU score of “5” indicates the highest risk. Underwriters more heavily scrutinize appraisal reports with CU scores of 4 or higher and are more likely to ask for clarification from the appraiser, as well as potentially require a desk review.

    However, it is important to remember that a CU score of “5” does not necessarily mean that an appraisal report is of bad quality or that the appraised value is wrong. The Fannie Mae CU program is a completely automated process, whereas property appraising needs a human touch!

    The majority of high-risk scores are due to quality issues. But there are also some cases where an appraisal gets a high CU score through no fault of the appraiser. The property could be in a rural area where Fannie Mae doesn’t have very much data. Maybe there’s something unusual about the property that Fannie Mae’s model isn’t capturing. The CU score is based on past appraisals and Fannie Mae model data. Fannie’s model is very good, but it can’t be perfect, and the more funky or rural a property is, the more likely the model won’t be able to fully capture the situation, resulting in a high CU score.

    That’s why underwriters don’t just automatically throw out appraisals with high CU scores or condition an appraiser on every risk flag they see. It’s important for lenders to figure out why the Collateral Underwriter is marking the appraisal as high risk and determine what the actual concerns are if any.

    Wait, This Appraisal Doesn’t Have a CU Score!

    Don’t panic! A Fannie Mae CU score is only generated for certain property and loan types. There will be a CU score for single-family homes, condos, and townhomes with conventional loans. But no risk score is provided for other types of properties, such as multifamily or manufactured homes.

    A CU score is also not provided for loan types other than conventional loans. For VA loans, the VA has its own special panel of appraisers as well as trained appraisal reviewers, called SARs (Staff Appraisal Reviewers), to mitigate quality issues. And FHA loans have their own portal, separate from Fannie Mae and Freddie Mac’s Uniform Collateral Data Portal. FHA appraisals are run through this separate portal to be logged with the Federal Housing Administration.

    The Fannie Mae CU Score is just another tool at a lender’s disposal to suss out the quality and risk of an appraisal report.

    But there are limits to an automated process, so it’s still important to have human eyes reviewing human-written appraisals, too!

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