Future-Proofing Appraisals: Leveraging technology to eliminate costly defects

By Shawn Telford, Chief Valuation Officer

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While the GSEs under the current Administration have shifted their focus in some areas, they have stepped up their scrutiny in others. In December, for example, Fannie Mae’s Quality Insider report focused on "Controlling for Collateral Defects", reminding lenders of their responsibility to identify and address issues before delivering loans to the GSE.

The data is telling. In the report, Fannie Mae noted that nearly 50% of discretionary loan review defects were property (collateral) related. The primary defects identified in the report included ineligible property (safety, soundness and structural integrity), inaccurate physical feature ratings (condition/quality), inadequate comparable adjustments, and other compliance and documentation gaps.

While this challenge can feel complex, the good news is that lenders already have a range of tools that can automate detection on every appraisal and help eliminate these risks during loan origination, manufacturing, and before loan delivery.

Ineligible properties: catching visible risk early

Fannie Mae noted that lender appraisal reviews frequently miss visible defects such as roof damage, water intrusion and foundation cracks, leading to "Ineligible Property" flags during post-purchase reviews.

Cotality has several solutions that can help underwriters and collateral reviewers catch these defects long before they become salability issues. For example, our Image Analytics™ tool provides an AI-driven analysis that automatically scans appraisal photos for "red flag" conditions (e.g., tarped roofs, damp basement walls, debris) flagging the file for further review.  When lenders use our appraisal review tools on every loan, this removes the reliance on manual human review for every photo, ensuring 100% of appraisals are screened and exception-pulled-out for human review.

By consistently running the collateral review tools on every loan, rather than ad hoc, lenders gain consistent and early insight into property eligibility and potential warning indicators for ineligible property conditions, allowing them to proactively address delivery issues before they arise.

Property condition and quality: addressing rate inflation

Because inaccurate condition and quality ratings can directly influence the GSE’s collateral risk assessment, not to mention the collateral value, the agency reminded lenders that their appraisals need to provide a holistic view of properties.  

“Ratings must… be reflective of the entire property, not just isolated upgrades,” the report said. “For example, a completely renovated kitchen with new appliances and fixtures may suggest C3 and Q3 ratings. However, if other areas of the property (such as the bathrooms), are 15 years old, the HVAC system is outdated, and the roof is nearing the end of its functional life, the property ratings would likely not be accurate as C3 or Q3 ratings solely because of the kitchen component.” 

The agency also highlighted persistent “rating inflation,” particularly where properties are assigned a C3 rating and whose condition more accurately aligns to the definition of a C4 rating. When this occurs, comparable property selection and the associated adjustments may be inaccurate, increasing the likelihood of unsupported values and post-delivery findings, the report said.

Automating reviews to catch defects before delivery

Cotality collateral review tools – GAAR®, RealView® and our new state of the art UAD 3.6 review tool Collateral Investigate™ – are purpose-built to address these risks systemically and are seamlessly integrated into our collateral management platforms as the foundation for a risk-based-review workflow.  The tools compare appraiser-reported conditions and quality ratings against trusted property data, neighborhood trends and local market norms, flagging inconsistencies that warrant further review.  

These tools provide rule-based validation to identify if appraiser provided data, adjustments for square footage, age and condition align with neighborhood trends. They act as a "comprehensive look" to validate that the appraiser's conclusions are supported with data and backed with market support and provide data to support the conclusion.

A smarter path to lower risk

Collateral based loan defects remains one of the most preventable sources of unexpected financial risk and repurchase exposure for lenders. By embedding automated analytics, data validation and workflow controls into everyday appraisal review processes, lenders can shift from reactive defect management to proactive risk prevention.

The result is not only fewer findings and buybacks, but greater quality in the collateral portion of loan manufacturing, confidence in appraisal quality, faster cycle times for clean files, and a review process aligned with how today’s GSEs evaluate risk. In an environment of heightened scrutiny, leveraging the technology already at hand on every loan is no longer optional—it’s a strategic advantage.