How Appraisers Can Avoid Getting That Dreaded Fannie Letter: An Insider View

The mere mention of Fannie’s Appraiser Quality Management initiative evokes strong emotions. Whether or not you’ve personally received an AQM letter, the mere thought of finding one in your mailbox can evoke palpable dread. That said, there are a few things you can do to reduce your chance of receiving this miserable missive or being the subject of a state “tip.” A little background information on how the AQM is structured, combined with some common sense, will help.

The AQM initiative is designed to uphold and enhance the quality of appraisals by monitoring submissions and communicating with appraisers about the accuracy and professionalism of their reports. Here’s a detailed look at how the AQM works from someone who was involved in building it:

Monitoring

The AQM system identifies appraisers whose reports consistently show inaccuracies, contradictions, or a failure to follow professional standards. Fannie Mae then sends letters to these appraisers, which can vary in severity depending on the issues detected. The primary goal of these letters is not punitive but educational, aiming to inform and guide appraisers on how to enhance their work.

The AQM identifies problematic appraisals using two main methods: the Tao process, which selects suspicious reports for review, and the AQM Letter Code, targeting ongoing issues in appraisers’ product. Most appraisers are flagged by the latter. If they have been flagged because of too many repurchases, they likely are already deeply involved in the repurchase process and know they are in trouble.

Examples of AQM Letter Code:

The AQM has likely changed since I left Fannie Mae in 2021—and the review process itself was taken over by a different team. However, before we discuss the letter types (and I cannot claim this is a comprehensive list), readers should be aware of two principles that undergirded the letter-writing process. All appraisers flagged by the letter code had 100% of their work reviewed from the last three to six months to verify that the code was accurately highlighting an issue and all letters relied on peer consensus, not just Collateral Underwriter based analytics.   

Here are some of the pieces of letter code that I have first-hand knowledge of, either because I wrote the code myself or because the letter type is mentioned in an Appraiser Update Newsletter. That said, my memory may not be perfect, and the exact parameters used may have changed, but the logic below should give appraisers a good feeling for how the system worked when I was there.

C3 Overuse

This code required the appraiser to use C3 on over 75% of their comparables and that peers disagreed with them at least 80% of the time. Furthermore, the code had to generate at least 30 examples of C3 overuse. 

Contradictory Use of Comps

The appraiser in question repeatedly uses the same comparables with different C or Q ratings in a relatively short period. In short, you are penalized for consistent self-contradiction. 

Subject Appraisal Discrepancy

This letter would flag cases where the appraiser performed the subject appraisal and then subsequently used that property as a comparable but with notably different characteristics. These letters always had a “fudge factor” associated with them, meaning that the discrepancy had to be quite considerable in the case of something like square footage—though total consistency was required concerning the C and Q ratings.

Language

This is a new one, but I am relatively certain Fannie Mae has written code using regular expressions, special computer programming constructs that do pattern matching with text that behave like more advanced versions of a word processor’s “find” function, and/or an LLM, like ChatGPT, to track down uses of biased language. In this case, avoiding the published sets of forbidden phrases and limiting yourself to factual statements should be enough to prevent a letter.

Volume

We discussed this letter while I was still working at Fannie. It flags appraisers whose volume of work seems implausibly high. In addition to looking at the simple number of submissions, it also considers the distance between the various subject properties and the times the property was inspected. You can avoid this letter by properly acknowledging any help you received in performing the report. Fannie Mae’s Newsletter, September 2021

Incorrectly Identifying the AMC

This is likely being done because Fannie Mae wants to monitor which AMCs are properly reviewing appraisals and, more fundamentally, answer the question regarding whether AMCs improve appraisal quality. They cannot perform this research if they cannot determine whether an AMC was used.

Time Adjustment Letter

This letter is issued to appraisers who overlooked the necessity of making time adjustments in their appraisal reports, particularly in scenarios where market conditions were reported as improving. It stresses the importance of using current market trend data to make more accurate and justifiable time adjustments, thus encouraging appraisers to align their evaluations with real-time market dynamics. Appraiser Update, March 2023

Q1/Q2 Overuse Letter

This letter addresses the issue of appraisers assigning inappropriately high-quality ratings to properties, such as Q1 and Q2 when a lower rating would have been more fitting. It criticizes the practice of using quality ratings comparatively, based on neighborhood standards, rather than applying them as absolute values according to predefined criteria. The letter also clarifies that properties within the same quality rating can differ and adjustments may be warranted for comparables sharing the subject’s rating, provided there is adequate documentation in the report.

Solar Panel Letter

Aimed at appraisers who fail to acknowledge the presence of solar panels on properties, this letter mandates the inclusion of such features in the appraisal reports. Appraisers are required to not only note the existence of solar panels but also to specify the ownership type and evaluate the impact these features have on the property’s value. This ensures that all significant property attributes are accurately represented and assessed in the appraisal.

Of course, the above list is not necessarily exhaustive. In the early days of the AQM, the motivation behind the appraisal letters was primarily to clean up the data—first and foremost—in order to allow Collateral Underwriter to work. Over time, the purpose morphed into stopping behavior that was against USPAP. Now, it appears, that FHFA has taken over the AQM process and is using it increasingly to address matters that are of concern to them. Several of the letters appear to be trying to clean up the data to facilitate reporting to FHFA about topics like the value of solar panels.

Some general advice about avoiding AQM Letters

A) Keep records

Keep each comp you use in a database or spreadsheet and record ratings and features you associated with it. Make sure to use the exact same values in every subsequent use of the comparable. If you are forced to change your values, note the reason and the source you used.

B) Follow USPAP

Do your job the way you are supposed to do it. Obvious, but it bears repeating.

C) Use 3^rd Party Software to Derive Your Adjustments

If you can cite a respectable piece of software you used to derive your adjustments, or better yet run a regression yourself, you can turn the argument about adjustments into a data fight Fannie will not want to have. Generally, make sure your square footage adjustment has some sort of relationship with the actual price per square foot in that market.

D) Read the Appraisal Update Newsletter

While Fannie intentionally refuses to list all its letters publicly, it does announce new letter types in the appraisal update. Reading the updates and keeping track of what issues Fannie is currently tracking can help you avoid getting flagged.  

Types of Letters: 

There are generally two types of AQM letters sent to appraisers:

Instructional Letters

These are meant to provide feedback on less severe issues, offering guidance and highlighting areas where the appraiser can improve. These letters suggest that while the problems identified do not currently warrant severe actions, there is room for enhancement to prevent future complications.

Warning Letters

These are sent for more serious deficiencies that require immediate attention. These letters will often detail specific faults in the appraiser’s reports, such as misreporting physical characteristics of properties or selecting inappropriate comparables that may inflate property values. Appraisers are required to respond to these letters, typically within 30 days, to explain or outline their improvement plan. 

Opportunity for Improvement

AQM letters provide appraisers with a chance to correct their course before more severe measures are taken. It is quite rare for Fannie to send a warning letter without sending several instructional letters first. Sending a warning letter also requires additional review by the review appraiser’s manager. It was only after a failure to improve upon receiving a warning letter, or having been suspected of committing a criminal act, that the process of adding someone to either the “100% review” or the “do not use” list began. If you end up on either of these lists, you did not just mess up: You either committed fraud or engaged in egregious misconduct and refused to improve. Several high-ranking Fannie Mae executives were likely familiar with your misbehavior by name. In short, you had to be notorious. The list of people on these respective lists was short enough that I knew all the individuals by name.   

Reporting to State Boards

Fannie Mae provides “tips” to state boards regarding appraisals with “severe deficiencies.” Fannie claims this collaboration helps improve the overall quality of appraisals at the state level and can lead to mentorship or additional education for appraisers. Fannie Mae maintains the right to report fraud directly to law enforcement and its own internal fraud investigations team, however. 

Fannie seems to have gone too far with these “tips” though. Rumors suggest that Fannie no longer insists as much as it once did on identifying patterns of behavior before notifying state boards. In my view, this is a mistake on Fannie’s part. It is very likely that these tips are simply being thrown into the “circular file.” This subjects appraisers to needless harassment and makes tips concerning real fraud less effective: In short, Fannie Mae is crying wolf. Let’s hope that they give up on this and return to focusing on patterns of misconduct. 

Understanding the evolving nature of the Appraiser Quality Monitoring (AQM) initiative is essential for appraisers who wish to remain in good standing with lenders. While FHFA’s increasing influence may shift the focus of AQM letters, the core purpose remains clear: to enhance the integrity and accuracy of appraisals across the industry. Whether it’s navigating the complexities of solar panel evaluations or adhering to rigorous appraisal standards, the knowledge you gain from staying informed and compliant can help maintain your professional standing and effectiveness. While the AQM has made some missteps recently, its overall effect on the industry has been positive. 

Franklin Carroll

Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.

Published June 3, 2024