Friday, July 2, 2010

Fannie Mae Changes Its Appraisal Policy

by Anna DeSimone

On June 30th, 2010, Fannie Mae issued Announcement SEL-2010-09 regarding appraisal-related policies.   The policy changes were based on Fannie Mae's post-purchase reviews of mortgage loan files where issues were identified with property appraisals.  This policy change is effective for all mortgage loan applications dated on and after September 1, 2010. The following article summarizes the sections changed in the Fannie Mae Selling Guide: 

  • Inclusion of interior photographs in the appraisal report
  • Lender changes to the appraised value and guidance on addressing appraisal deficiencies
  • Appraiser selection criteria
  • Sources of comparable market data
  • Selection of comparable sales
  • Communication under the HVCC
  • Seller concessions
  • Treatment of personal property
  • Market Conditions Addendum to the Appraisal Report (Form 1004MC)

Interior Design
A significant policy change is the requirement for interior photos of specific rooms and areas to be included in the appraisal report whenever an interior inspection is performed.  At a minimum, the photographs must include:
    • The kitchen
    • All bathrooms
    • Main living area
    • Examples of physical deterioration, if present
    • Examples of recent updates, such as restoration, remodeling and renovation, if present
Lender Changes to the Valuation
The updates address the practice of lenders changing the appraiser's opinion of market value and also to provide specific guidance when an appraisal is considered deficient.  In the past, Fannie Mae did not provide requirements concerning lenders making changes to the opinion of market value reflected in the appraisal report. 

Appraiser Selection Criteria
Lenders must ensure the appraiser has the appropriate knowledge of specific geographical markets, access to the appropriate data sources, and experience in appraising specific property types within those markets.  Although USPAP allows lenders to provide specific assignment instructions to appraisers with inadequate applicable experience, Fannie Mae requires that lenders only use appraisers who have the appropriate knowledge and experience, and does not allow the USPAP flexibility.  Additional revisions have been made to clarify that the lender is responsible for the appraiser's qualifications and quality of the work, and to provide guidance for determining an appraiser's qualifications. 

Lenders are ultimately responsible for representations and warranties related to the value, condition, and marketability of the subject property; and lenders must hold the AMC responsible for complying with Fannie Mae's requirements. The Selling Guide has also been updated with regard to the lender's use of third-party vendors, such as appraisal management companies (AMC), to clarify that neither the Home Valuation Code of Conduct (HVCC) nor Fannie Mae requires the use of a third-party vendor.

Sources of Comparable Market Data
Fannie Mae's appraisal report forms require that the appraiser list both data sources and verification sources with respect to comparable sales selected by the appraiser. This topic has been updated to provide examples of acceptable data and verification sources.  The appraiser is responsible for determining which comparables are most appropriate for the assignment at hand, including when an appraiser chooses to use either a foreclosure sale or a short sale as a comparable property.  Additional guidance is provided concerning the acceptability for an appraiser to view the HUD-1 for a new construction property in order to verify a recent sale that is not yet available through other data sources.

Requirements for Selecting Comparable Sales  [FNMA Seller Guide B4-1.4-16]
  • Influences that may affect value based on market evidence -- such as closed sales, contract sales, and offerings or listings of the most comparable properties for sale in the market area; market studies; etc. -- must be researched, analyzed, and considered in the appraisal report.
  • A minimum of three comparable sales must be reported as part of the sales comparison approach to value. More than three comparable sales may be submitted to support the opinion of market value provided at least three are actual settled or closed sales.
  • It is preferable for the appraiser to provide comparables from the subject's neighborhood, however, Fannie Mae does allow for the use of comparable sales that are located in competing neighborhoods, as these may simply be the best comparables available and the most appropriate for the appraiser's analysis. If this situation arises, the appraiser must not expand the neighborhood boundaries just to encompass the comparables selected. The appraiser must indicate the comparables are from a competing neighborhood and address any differences that exist. The appraiser must also provide an explanation as to why he or she used the specific comparable sales in the appraisal report and include a discussion of how a competing neighborhood is comparable to the subject neighborhood.
  • Comparable sales that have been settled or closed within the last 12 months should be used in the appraisal.  Older comparable sales that are the best indicator of value for the subject property can be used if appropriate.  Comparable sales that are more than six months old must be accompanied by an appraiser explanation for use.  For example, if the subject property is located in a rural area that has minimal sales activity, the appraiser may not be able to locate three truly comparable sales that sold in the last 12 months. In this case, the appraiser may use older comparable sales as long as he or she explains why they are being used.
  • The subject property can be used as a fourth comparable sale or as supporting data if it was previously sold and closed or settled.
  • Contract offerings and current listings can be used as supporting data if appropriate.

Communication under the HVCC
Fannie Mae has determined that some lenders do not allow communication with appraisers and other parties to the transaction as an effort to comply with the Home Valuation Code of Conduct (HVCC). Fannie Mae has determined that appropriate communication under the HVCC is permitted, and that Section 1-C of the HVCC does not prohibit any employee of the lender or an authorized third party from requesting that an appraiser provide additional information or explanation about the basis for a valuation or from correcting objective factual errors in an appraisal report.

Anyone who is in loan production, compensated on a commission basis or reports to any officer not independent of the loan production staff and process is prohibited from communicating with the appraiser or AMC under HVCC.  Other employees of the lender or an authorized third party can contact the appraiser to discuss the appraisal. The appraiser needs to address any concerns the lender has, including any errors that may have been found in the report. It is incorrect for the appraiser to indicate that the HVCC does not allow for this type of communication with his or her client or an authorized representative.

Seller Concessions
Fannie Mae's definition of market value is intended to ensure that appraisals reflect an opinion of market value after adjustments for any special or creative financing or sales concessions have been made, such as interest rate buydowns or payment of condo or homeowners' association fees.  The updated policy addresses Fannie Mae's concern that excessive sales concessions can artificially inflate the sales price of a property.

Treatment of Personal Property
The law of the jurisdiction where the property is located generally determines whether an item is real estate or personal property.  Personal property, including (but not limited to) furniture, vehicles, boats, floating boat docks, and art work, may not be included as additional security for any mortgage on a one-unit property unless otherwise specified by Fannie Mae.  Personal property is permitted on a 2-4 unit property to the extent it is pledged by the 1-4 Family Rider.

Market Conditions Addendum to the Appraisal Report (Form 1004MC)
Fannie Mae has provided the following guidance regarding Form 1004MC.  In order to provide the most accurate depiction of the "Months of Housing Supply" as of the effective date of the appraisal, the "Total # of Comparable Active Listings" should be based on a specific point in time. For example, when completing the "Current - 3 Months" column for "Total # of Comparable Active Listings," the number should reflect the listings on the most recent date in the 3-month period (which is also the effective date of the appraisal), and not the cumulative number of listings for the entire 3-month time period. Then, when completing the "Months of Housing Supply," the number for the "Total # of Comparable Active Listings" is divided by the absorption rate, which provides an accurate depiction of the existing housing stock as of the effective date of the appraisal. For more detailed information, refer to Announcement SEL-2010-09 dated June 30, 2010.

Compliance Monitoring
Bankers Advisory Audit Services

Bankers Advisory provides comprehensive audit services to monitor compliance to state and federal regulations.   Services may be completed in tandem with post-funding quality control.  All compliance reviews are completed by one of our four Staff Attorneys.   Summarized are the key regulations covered:

Permissible Fees, Loan Terms, Amortization, Initial Consumer Disclosures, Decision steps and forms; signatures and documents required at settlement.

RESPA, Truth-in-Lending, ECOA, E-Sign, FACTA, FCRA, FHAct Flood, GLB Privacy, HPA, HOEPA,  HPML, Red Flags, RESPA, SAFE Licensing, Truth-in-Lending, USA Patriot Act.

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