MBA Premier Member Q&A: Cotality’s Shawn Telford on Collateral-Related Loan Defects

At the end of last year, Fannie Mae warned lenders about collateral-related loan defects that should have been detected in appraisal reviews. MBA NewsLink sat down with Shawn Telford, chief valuation officer at Cotality, to discuss the GSE’s concerns and what the industry should be doing to address them.

MBA NewsLink: What specifically triggered this warning, Shawn?

Shawn Telford: Fannie Mae has indicated that nearly half of all the discretional loan review defects that it’s finding are collateral related. As a result, it devoted the December issue of its Quality Insider report to reminding lenders of the importance of “Controlling for Collateral Defects.”

The report singled out ineligible property, inaccurate physical feature ratings, and inadequate comparable adjustments as some of the most common, detectable defects.

When lender appraisal reviews miss visible defects such as roof damage, water intrusion, foundation cracks, and other similar issues, it can lead to “Ineligible Property” flags during post-purchase reviews.

We have observed this is frequently the result when reviewers simply stare and compare, rather than rely on available advanced technology solutions that can automatically identify visible issues.

MBA NewsLink: What was the concern about quality ratings and comparables?

Shawn Telford: Fannie Mae wants appraisals to deliver holistic views on conditions that reflect the entirety of properties. The agency is also concerned about what it sees as ratings inflation.

The report warned against giving too much weight to individual upgrades at the expense of the entire property. As an example, it cited a new kitchen renovation with new appliances and fixtures, saying that this might suggest a high-level condition and quality rating: maybe C3 and Q3 ratings. But if the rest of the house hasn’t been upgraded in 15 years, the HVAC system is on its last leg, and the roof is nearing the end of its functional life, the property rating shouldn’t be in the C3 or Q3 range solely because the kitchen upgrade warranted those ratings.

Rating inflation—for example, assigning a C3 rating on a property that more closely aligns with the definition of a C4 rating—also calls into question the accuracy of the appraisers’ comparable selection. If the comparables and the associated adjustments are inaccurate, this could increase the likelihood of unsupported values and post-delivery findings, according to the report.

MBA NewsLink: So, what should lenders be doing now?

Shawn Telford: First of all, prioritize these concerns because you now know Fannie Mae will be taking a hard look at collateral.

The good news is that there are tools and best practices that can catch these defects. The adage of an ounce of prevention is worth a pound of cure certainly applies here.

Take ineligible properties, for example. Cotality’s Image Analytics is an integrated tool that uses AI to scan appraisal photos for red flag conditions, such tarped roofs, water-stained basement walls, foundation cracks, etc., flagging the appraisal for further review. Other rule-based review tools, such as Collateral Investigate®, GAAR®, and Realview®, can also help detect defects. The key is to run these tools on every file.

These same tools can compare an appraiser’s conditions and quality ratings against historical property data and local market standards to automatically identify inconsistencies in Condition and Quality ratings, so the potential issue is addressed before submission.

Similarly, these tools use rule-based validation to determine if adjustments for square footage, age, and condition align with neighborhood trends. This second look validates that the appraiser’s comparable selections and adjustments are data-based and market-supported, and the tools can help reviewers find additional data on sales and listings.

MBA NewsLink: Other than tech, what are some of the best practices that lenders should adopt?

Shawn Telford: As I’ve mentioned, integrating automated photo screening and image analytics into the front-end of their review process and running them on every loan file is hugely beneficial. In the Cotality collateral management platforms, CMS and Mercury Network, if an issue is identified, the system can automatically request commentary corrections from the appraiser.

Also, lenders should adopt a risk-based review workflow. The best practice is to use automated tools to review every appraisal, flag the high-risk valuations for additional attention, and ensure all reviewers and underwriters looking at appraisals receive consistent, reliable results across your enterprise. Fannie Mae also provides lender collateral review tools in their system, which can be helpful for loans being sold to them.

Finally, lenders should regularly monitor the performance of their appraiser panel and AMCs to identify appraisal providers who might need coaching or other action.

Ultimately, Fannie Mae’s warnings should be viewed as a clear call to action for lenders to tighten collateral review processes before defects become costly post-purchase findings. By combining disciplined best practices with automated tools, condition and quality validation, and rule-based comparable reviews, lenders can reduce risk, strengthen loan quality, and ensure appraisals deliver the accurate, market-supported valuations expected.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)