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OMG! UCDP and UAD! HVCC! WTF?

We live in a world of acronyms. We did even before Twitter and Facebook, text messages and IM. Sometimes they seem like an ongoing inside joke, a kind of argot to keep outsiders from knowing the real meaning.

In the world of real estate and mortgage finance, there are two new acronyms to be aware of: UCDP and UAD. They stand for Uniform Collateral Data Portal and Uniform Appraisal Dataset, respectively.

In the wake of the Meltdown, politicians and regulators (almost the same thing) have had a field day, pointing fingers, assigning blame and creating hundreds of new regulations. While these are ostensibly intended to “protect” the consumer (I have my own opinion about that), the effect has been to cost consumers (and those of us who serve them) a great deal of money.

Here’s how UCDP and UAD work, and why you should know about them. Under the new crop of regulations, lenders are no longer allowed to select an appraiser, or even to speak to an appraiser. Appraisals must be ordered “blind” through a third party, typically an Appraisal Management Company. In many cases, appraisers are only marginally qualified (even though licensed by the state), and often from far outside the subject property’s market area. Although there is a process to dispute an appraiser’s findings, most challenges are unsuccessful. Appraisers (and the AMCs who hire them) are reluctant to admit that they made errors.

In the olden days, pre-crash, we had the ability to bite the bullet and pay for a new appraisal, hoping for a higher value. We could disregard the first report as though it had never existed.

Those days are gone, I’m sorry to say. Under the new rules, appraisals for loans that will be purchased by Fannie Mae or Freddie Mac will be uploaded to a central database (that’s the UCDP), where they are kept for a period of three years. If a lender—any lender—receives a new appraisal for that borrower and that property, they will discover when they check the database that there was an earlier, lower appraisal. That buyer and that appraisal are tied together for four months.

However, if the transaction falls apart and a new buyer enters into contract for that property, the new appraisal will be the one the lender uses. The stated purpose of this rule is to prevent borrowers and lenders from “shopping for a value.”

It is possible that the comparable sales for a particular property don’t support the contract price, even when the negotiated price is completely reasonable. In my company, we have recently run into just such a situation. The property appraised for $30,000 below the agreed price, even though there were pending sales that would more than support it. The unfortunate reality is that appraisers must use closed sales in their reports, not pending sales or active listings. In this case, the pending sales closed at higher values within mere days of the “Effective Date” of the appraisal. The appraiser cannot use any comparable sales closing after that Effective Date; it is carved in stone.

What does all this mean to you, as the Realtor or homebuyer, especially when you are working in a market whose values are increasing rapidly? First, you should be very aware of comparable closed sales the appraiser will use in his or her report. You should also be mindful of the adjustments the appraiser will apply to those comparables. A sold comp 200 square feet larger than the subject property will be adjusted by some $13,000, so a $300,000 sale becomes the equivalent of $287,000.

Second, when you help your buyer make an offer, it will be very helpful if you have some idea of when a pending sale is going to close. Remember: that pending sale will do you no good until it has closed. If you have any concerns about the appraised value, you may want to wait until that pending sale has closed before getting the appraisal.

We all have to deal with these kinds of roadblocks every single day. Being familiar with them and knowing how to deal with them in advance can make all the difference for you—and your clients.

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