Announcement 08-30 November 14, 2008
Amends these Guides: Selling
Appraisal-Related Policy Changes and Clarifications
Due to current conditions in the real estate market, it is paramount that appraisers are provided with sufficient guidance to properly appraise and document the appraisal report. Fannie Mae recognizes the Uniform Standards of Professional Appraisal Practice as the minimum appraisal standards for the appraisal profession. In addition, Fannie Mae has established its own separate appraisal requirements to supplement the Uniform Standards. This Announcement addresses several new or updated appraisal-related requirements and clarifies several other existing policies to help underwriters make sound underwriting decisions when reviewing the appraisal report. The following topics are discussed:
New or Updated Policies
Implementation of the Market Conditions Addendum to the Appraisal Report (Form 1004MC)
Use of supervisory appraisers
Requirement to provide the sales contract to the appraiser
Requirement regarding the appraiser’s selection of comparable sales
Clarification of Existing Policies
Repair escrows for existing construction
Research and reporting of the current and prior listings of the subject property
Appraising the entire site of a property
Time adjustments on the appraisal report
Verification of a sales transaction
Neighborhood boundaries and the selection of comparable sales
Effective age of the subject property
Utilizing the cost approach to value for insurance purposes
Announcement 08-30 Page
Fannie Mae purchases or securitizes mortgages in all markets and under all market conditions. The current appraisal report forms require the appraiser to report on the primary indicators of market condition for properties in the subject neighborhood by noting the trend of property values (increasing, stable, or declining), the supply of properties in the subject neighborhood (shortage, in-balance, or over-supply), and the marketing time for properties (under three months, three to six months, or over six months) as of the effective date of the appraisal. Fannie Mae also expects the appraiser to provide their conclusions for the reasons a market is experiencing declining market values, an over-supply of properties, or marketing times over six months.
To further enhance the transparency of the conclusions made by the appraiser related to market trends and conditions, the Form 1004MC will be required for all mortgage loans delivered to Fannie Mae with appraisals of one- to four-unit properties with an effective date on or after April 1, 2009. A sample of the form is attached to this Announcement. In addition, the form is posted on eFannieMae.com.
Guidelines for Using Form 1004MC
The Form 1004MC is intended to provide the lender with a clear and accurate understanding of the market trends and conditions prevalent in the subject neighborhood. The form provides the appraiser with a structured format to report the data and to more easily identify current market trends and conditions. The appraiser’s conclusions are to be reported in the "Neighborhood" section of the appraisal report.
Fannie Mae recognizes that all of the requested data elements for analysis are not equally available in all markets. In some markets it may not be possible to retrieve the total number of comparable active listings from earlier periods. If this is the case, the appraiser must explain the attempt to obtain such information. Also, there may be markets in which the data is available in terms of an "average" as opposed to a "median." In this case, the appraiser needs to note that his or her analysis has been based on an "average" representation of the data. Regardless of whether all requested information is available, the appraiser must provide support for his or her conclusions regarding market trends and conditions.
Inventory Analysis Section
The "Inventory Analysis" section assists the appraiser in analyzing important supply and demand factors in order to reach a conclusion regarding housing trends and market conditions. When completing this section, the appraiser must include the comparable data
that reflects the total pool of comparable properties from which a buyer may select a property in order to analyze the sales activity and the local housing supply. One of the tools used to monitor these trends is the absorption rate. The absorption rate is the rate at which properties for sale have been or can be sold (marketed) within a given area. To determine the absorption rate, the appraiser divides the total number of settled sales by the time frame being analyzed. The months of housing supply is based on the total listings for the applicable period divided by the absorption rate.
Median Sale & List Price, DOM, List/Sale Ratio Section
The appraiser must analyze additional trends, including the changes in median prices and days on the market (DOM) for both sales and listings as well as a change in list-to-sales price ratios.
If the median comparable sale prices are $300,000, $295,000, and $305,000 for their respective time periods, the overall trend for the prior 12 months is relatively "stable."
Overall Trend Section
The "Overall Trend" section is designed to reflect potential positive trends, neutral trends, or negative trends in inventory, median sale and list price, days on market, list-to- sale price ratio, and seller concessions.
An increase in the absorption rate is generally viewed as a positive trend, whereas a decrease in the absorption rate may be viewed as a negative trend. Furthermore, a decrease in the number of days on the market, either sales or listings, more than likely represents an overall positive trend.
Form 1004MC also provides a section for comments on the prevalence of seller concessions and the trend in seller concessions for the past 12 months. The change in seller concessions within the market provides the lender with additional insight into current market conditions. The appraiser should consider and report on seller-paid (or third-party) costs. Examples of these items include, but are not limited to mortgage
payments, points and fees, and in condominium or cooperative projects, items such as homeowners’ association fees and guaranteed rental programs. Seller concessions must be carefully analyzed by the appraiser since excessive concessions often lead to inflated property values.
There are a number of markets across the country where, due to current conditions, there has been an increase in the prevalence of seller concessions. The following excerpt from the
"The need to make negative dollar adjustments for sales and financing concessions and the amount of the adjustments to the comparable sales are not based on how typical the concessions might be for a segment of the market area—large sales concessions can be relatively typical in a particular segment of the market and still result in sale prices that reflect more than the value of the real estate. Adjustments based on dollar-for-dollar deductions that are equal to the cost of the concessions to the seller (as a strict cash equivalency approach would dictate) are not appropriate. We recognize that the effect of the sales concessions on sales prices can vary with the amount of the concessions and differences in various markets. The adjustments must reflect the difference between what the comparables actually sold for with the sales concessions and what they would have sold for without the concessions so that the dollar amount of the adjustments will approximate the reaction of the market to the concessions."
For further information regarding seller concessions in the appraisal, refer to the
Foreclosure Sales and Summary/Analysis of Data
The presence and extent of foreclosure/REO sales is worthy of comment when analyzing market data and must be reported on the form. The form also allows for the appraiser to summarize the data and provide other data analysis or additional information, such as analysis of pending sales, which over time can show a market trend.
Use of Supervisory Appraisers
Fannie Mae defines the appraiser as the individual who personally inspected the property being appraised, inspected the exterior of the comparables, performed the analysis, and prepared and signed the appraisal report as the appraiser. Fannie Mae allows an unlicensed or uncertified appraiser who works as an employee or subcontractor of a licensed or certified appraiser to perform a significant amount of the appraisal (or the entire appraisal if he or she is qualified to do so)—as long as the appraisal report is signed by a licensed or certified supervisory or review appraiser and is acceptable under state law. This policy is updated to now require that if a supervisory appraiser signs the
appraisal report as the appraiser, the supervisory appraiser must have performed the inspection of the subject property.
Requirement to Provide the Sales Contract to the Appraiser
Fannie Mae requires the lender to ensure that it provides the appraiser with all appropriate financing data and sales concessions for the subject property that will be, or have been, granted by anyone associated with the transaction. Typically this information is contained in the sales contract; however, Fannie Mae currently does not require that the lender provide the appraiser with the sales contract. Fannie Mae is adding the requirement that lenders must provide the appraiser with the sales contract and all addenda, therefore ensuring that the appraiser has been given the opportunity to consider the financing and sales concessions in the transaction and their effect on value. If the sales contract is amended during the process, the lender must provide the updated contract to the appraiser.
Requirement Regarding the Appraiser’s Selection of Comparable Sales
If the appraiser utilizes comparable sales outside of the subject’s neighborhood when closer comparable sales appear to be available, Fannie Mae is adding a requirement that the appraiser provide an explanation as to why he or she used the specific comparable sales in the appraisal report. This will add transparency to the appraiser’s selection of comparable sales and may assist the lender in underwriting the appraisal.
Refer to the "Neighborhood Boundaries and the Selection of Comparable Sales" section of this Announcement for an additional clarification of this section of the
Repair Escrows for Existing Construction
The following clarifications apply to both of the above referenced sections of the
stating that completion or repair escrows are permitted under certain circumstances for existing properties.
If the appraiser reports the existence of minor conditions or deferred maintenance items that do not affect the livability, soundness, or structural integrity of the property, the appraiser may complete the appraisal "as is" and these items must be reflected in the appraiser’s opinion of value. The lender is not required to ensure that the borrower has had this work completed prior to delivery of the loan to Fannie Mae.
If there are minor conditions or deferred maintenance items to be remedied or completed after closing, the lender may escrow for these items at their own discretion and still deliver the loan to Fannie Mae prior to the release of the escrow as long as the lender can ensure that these items do not affect the livability, soundness, or structural integrity of the property. Minor conditions and deferred maintenance items include, but are not limited to, worn floor finishes or carpet, minor plumbing leaks, holes in window screens, or cracked window glass. Minor conditions and deferred maintenance are typically due to normal wear and tear from the aging process and the occupancy of the property.
When there are incomplete items or conditions that do affect the livability, soundness, or structural integrity, the property must be appraised subject to completion of the specific alterations or repairs. These items include, a partially completed addition or renovation, or physical deficiencies that could affect the soundness or structural integrity of the improvements including but not limited to cracks or settlement in the foundation, water seepage, active roof leaks, curled or cupped roof shingles, or inadequate electrical service or plumbing fixtures. In such cases, the lender must obtain a certificate of completion from the appraiser before it delivers the mortgage to Fannie Mae.
Research and Reporting of the Current and Prior Listings of the Subject Property
Fannie Mae’s appraisal report forms require the appraiser to research and comment on whether the subject property is currently for sale or if it has been listed for sale within 12 months prior to the effective date of the appraisal. To clarify, the appraiser must report on
Appraising the Entire Site of a Property
The property site should be of a size, shape, and topography that is generally conforming and acceptable in the market area. It also must have comparable utilities, street improvements, adequate vehicular access, and other amenities. Fannie Mae is clarifying
that the appraisal must include the actual size of the site and not a hypothetical portion of the site. For example, the appraiser may not appraise only 5 acres of an unsubdivided 40-acre parcel. The appraised value must reflect the entire 40-acre parcel.
Effective Age of the Subject Property
The effective age can be a good indication of the condition of the subject property. Fannie Mae is clarifying that when adjustments are made to the appraisal for the effective age, the appraiser must provide an explanation for the adjustments and the condition of the property.
Verification of a Sales Transaction
It is important for the appraiser to ensure that the data he or she is providing in the appraisal report is accurate. When the appraiser is provided with comparable sales data by a party that has a financial interest in either the sale or financing of the subject property, the above section of the
Neighborhood Boundaries and the Selection of Comparable Sales
The appraiser must perform a neighborhood analysis in order to identify the area that is subject to the same influences as the property being appraised (based on the actions of typical buyers in the market area). The results of a neighborhood analysis enable the appraiser not only to identify the factors that influence the value of properties in the market area, but also to define the area from which to select the market data needed to perform a sales comparison analysis. As a reminder, although it is preferable for the appraiser to provide comparables from the subject’s neighborhood, 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.
Time Adjustments on the Appraisal Report
The following is being added to Section 406.05D of the
If in the analysis and completion of the sales comparison approach the appraiser determines that time adjustments are required, the adjustments may be either positive or negative. The adjustments, however, must reflect the difference in market conditions between the date of sale of the comparable and the effective date of appraisal for the subject property.
Utilizing the Cost Approach to Value for Insurance Purposes
If a lender requires the cost approach to be completed in order to obtain a replacement cost estimate for the purpose of determining the level of hazard insurance coverage required for a one-unit property, the lender may rely on the appraiser’s estimate of the replacement cost of the improvements. This is reported as the "Total Estimate of Cost New" on the appraisal forms. This estimate does not include any form of depreciation or obsolescence for the property. It is not appropriate for the lender simply to subtract the reported site or land value from the appraised value of the property to make the determination because the result is an estimate of the depreciated value of the improvements, not an estimate of their replacement cost.
The new Form 1004MC is required on all appraisals with an effective date
Lenders who have questions about Announcement 08-30 should contact their Customer Account Team for additional information.
Michael A. Quinn
Senior Vice President