Written by Brian Trotier
Fannie Mae Form 2075 (aka the “Desktop Underwriter Property Inspection Report”) seems innocuous enough when you pick it up and look at it. After all, it’s only a single page with just one-half page of instructions.
It allegedly applies only to low risk loans and the form has been around and in use for a long time. The instructions even clearly state it “is not an appraisal report”. The instructions go on to say this report may be used without an estimate of fair market value of the property because the Desktop Underwriter has determined the only valuation necessary can be obtained from the proprietary automated valuation model (AVM). Once this determination has been made, the lender needs only to obtain an exterior-only property inspection.
So, why the sudden concern with Form 2075?
Well, in the past 4-5 years, Fannie Mae (in addition to Freddie Mac) has been going through old defaulted loan files with a fine-toothed comb searching for ways to “put” the loan and/or loan losses back to the original lender.
Typically, the lender will get a letter questioning whether the loan ever met the applicable sale guidelines. If it did not, it wasn’t eligible for sale to Fannie or Freddie and therefore, Fannie and Freddie can “put’ the loan back even now, years later.
Once the lender gets one of these “put back” letters from Fannie or Freddie, they start looking around for someone to blame for their own failure to follow the guidelines. Recent history tells us this search often ends up focusing on the appraiser, especially if the appraiser is still in business and carries E&O insurance.
The biggest problem with this form is that the property inspection in question is to be done by a licensed appraiser who has not been trained to do a property inspection.
The instructions even state the appraiser can do the property inspection “from the street” and need only attach (1) a street map confirming location and (2) a single photograph showing the front of the subject property.
At FREA, we know a little bit about property inspections and if one of our insured inspectors tried to do what is essentially a drive-by and pass it off as an inspection, we’d blow a gasket…or two!
Here are the questions the appraiser must answer during his/her drive-by:
Does the property conform to zoning regulations? How would you determine that from your car while driving by to take one photograph?
Are there any apparent adverse site conditions (easements, encroachments, special assessments, slide areas, etc.)? How can you “see” an easement or a special assessment while driving by? It’s not like they are painted yellow so you can see them.
Are there any apparent physical deficiencies or conditions that would affect the soundness or structural integrity of the improvements…? What the…? Only an engineer can even come close to answering a question like this and even an engineer would have to get out of the car.
Are there any apparent adverse environmental conditions…? Really? You’ve got to be kidding. How can an appraiser be asked to even read this question, let alone answer it?
Now, let’s assume you are an appraiser and filled out Form 2075 back in 2007 when a “low risk” loan funded and was then sold to Fannie or Freddie. Later, in 2010, the borrower defaulted. Fannie/Freddie then foreclosed, and when the property came back as REO, Fannie/Freddie found out there was a hidden easement in the rear yard, obstructed by a large bush, which blocked the view of a severe slope where the foundation had started to slide revealing a few buried plastic barrels of PCBs.
This led to Fannie/Freddie sending a “put back” letter to the original lender asking to be made whole for the loss. After receiving this letter, the original lender pulls its copy of the file and reviews everything, including the Form 2075 which you signed.
Do you really think the lender is going to ignore your answers to the above list of questions, your certifications, your license, and your E&O insurance?
Of course not; the odds are the lender will sue you because they cannot sue the desktop underwriter who decided to use Form 2075 in the first place.
Then the real problem may be when your E&O carrier says that you are only covered for appraisal services and not for inspection services and what you did when you filled out and signed Form 2075 was an inspection, not an appraisal. As weight for this position, your E&O carrier points to the instructions where (remember) it says Form 2075 “is not an appraisal report”.
This is what we call a Catch-22 situation where nobody wins except the lawyers. This is why you should be afraid -- very afraid -- of FNMA Form 2075.
Brian L. Trotier, JD, is the Executive Vice President and Chief Operating Officer of FREA and a former practicing attorney with more than 30 years experience in real estate and risk management.