Appraisal "re-form" and the mortgage industryMichael C. CoyleReal estate appraisals
As you may already know, the appraisal industry has changed.
What you may not know is that these changes will impact the way
that the mortgage industry conducts business, as well.
Effective Nov. 1 and Jan. 1, Fannie Mae and Freddie Mac,
respectively, have changed the way appraisers do business. As of
these dates, Fannie Mae and Freddie Mac will only accept their
newly designed appraisal report forms when purchasing mortgages in
the secondary market.
To further confuse the issue, the old forms are still permitted
for use for loans not being sold to Fannie or Freddie. However, the
U.S. Department of Housing and Urban Development and the Federal
Housing Administration project that they, too, will require the new
forms, as of Jan. 1. In all, more than 12 appraisal forms were
revised and/or added ... and some forms were removed altogether.
For instance, the 2055 may now only be used for exterior
appraisals, which means that there will be no more 2055
interior/exterior inspections. All residential single-family
properties will have to be appraised using the 1004. The changes to
the forms and their formats represent the first major alterations
of the appraisal forms since 1993. These forms will undoubtedly
create a ripple effect through the real estate and lending
communities. This article's objective is to shed light on some of
the major changes with the forms (focusing on the 1004 and 2055
forms), as well as to offer some suggestions of how mortgage
professionals might proactively prepare themselves and their
clients. As with anything, the more information you have regarding
a situation, the better equipped you will be to handle any issues
that may occur.
Some major changes to the forms
From the point of view of an appraiser, there are a number of
significant changes that affect us that may be transparent to the
mortgage industry. The Scope of Work has been broadened and details
the minimum standards that an appraiser must meet in order to
correctly complete an appraisal assignment. The Assumptions and
Limiting Conditions section has been reduced from 10 to six items.
The Appraiser Certifications section has been expanded from nine to
25 items. For the most part, these changes will have a limited
effect on mortgage professionals. However, other changes in the
forms and reporting will definitely catch the attention of the
In an effort to reduce flipping, the forms now require the
appraiser to conduct more specific research and analysis of the
prior sales/transactions history for a given property. The
appraiser is to comment on recent sales and listing activity for a
property. It asks that the Owner of Public Record be identified.
This means that sellers who are equitable owners may find it more
difficult to flip properties. In cases where the tax records are
not current enough to reflect proper ownership, the borrower should
try to obtain documentation indicating the transfer of ownership,
such as the HUD-1 Settlement Sheet.
Appraisers are required to review and analyze all Agreements of
Sale and report any financial assistance, concessions or other
consideration received by the buyer. Specifically, was any of the
down payment borrowed? Who provided the gift or financial
assistance? Also, an analysis of the effect on value of such
concessions is required of the appraiser. This means that sales
concessions must be supported by the market and may prove to make
creative deals more difficult. It also means that more appraisers
will be requesting a copy of the agreement along with the appraisal
Answers regarding zoning have been qualified. Appraisers are to
determine if the present use is a legal use, a legal non-conforming
use or an illegal use. This could prove to be a sticking point in
some transactions. Situations where a variance has been obtained by
a property owner or where a grandfather clause applies can be
streamlined if the property owner has valid documentation for the
With the issuance of the new forms, the Cost Approach is no
longer required by Fannie Mae. If your investor/lender requires the
Cost Approach, be sure to indicate it clearly on the appraisal
order and be prepared to possibly pay more for this additional
service. Some, not all, appraisers may charge more to complete the
Cost Approach since it is not mandatory.
Flood zone data was clarified to indicate that if any portion of
the subject property (not just the house) is located in a flood
zone, it must be identified as being in a flood zone area. As a
result, a lender may require flood insurance, which, in turn, may
increase closing costs for your client.
Perhaps one of the most significant changes is that appraisers
are now required to report any physical deficiencies or adverse
conditions that will affect the livability, soundness or structural
integrity of the property with a yes or no answer. If the answer is
yes, they are to expand on their findings. Examples given by Fannie
include (but are not limited to): cracks or settlement in the
foundation, water seepage, active roof leaks, curled or cupped roof
shingles, inadequate electrical service or plumbing fixtures, etc.
Deferred maintenance will also be the subject of comments by
appraisers. Additional inspections by qualified experts are likely
to be inserted into the selling process as a result of the
Working with the changes
Perhaps the most important step that you, as a mortgage
professional, can take in dealing with the new appraisal forms is
to be proactive in educating yourself and making your client aware
of any potential issues that may arise. Information is the key.
There are a number of appraisal industry sites that have plenty of
available information (www.appraisalinstitute.org,
includes getting accurate information from your client regarding
his property. Ask yourself simple questions during the application
process, such as: What's the condition of the applicant's home? Are
any renovations or rehabilitations currently taking place at the
property? Is the property a multi-family or a single-family unit?
Are there any commercial or farm usages associated with the
property? Simple questions like these will provide you with an idea
of potential issues that may arise when the property is being
inspected. Knowing this information may also aid you in placing the
loan with the correct program from the outset, rather than learning
it as a result of the appraisal inspection.
Be prepared for delays. Appraisal inspections and reporting
will, without a doubt, take longer. Appraisals will be more
detailed and contain more narrative analysis. This, coupled with
the additional reporting requirements, means that the appraiser
will most likely need additional time to complete an assignment.
However, these delays should diminish over time as appraisers and
underwriters become accustomed to the new forms and all that they
entail. Given the new requirements for reporting physical
deficiencies or adverse conditions, appraisers may call for or
recommend inspections and/or certifications by qualified
professionals for concerns or repair issues that are beyond the
expertise of the appraiser. Situations that present themselves may
add additional costs and prolong the appraisal and loan processes.
Knowing about potential issues up front will help mortgage
professionals and clients to deal with them more quickly and
efficiently should they arise.
Appraisal fees and loan-related costs may increase as a result
of the new forms. The added time and research necessary to complete
the forms has prompted many appraisers across the country to raise
their fees. Some appraisal industry chat groups indicate that some
appraisers have raised or intend to raise their fees anywhere from
$25 to $100 per assignment. Ultimately, the market will respond to
the fee situation and dictate what is acceptable pricing within a
Other things can be done to streamline the appraisal process. Be
sure that your client is aware of the need for an appraisal. Let
him know that an appraiser will be contacting him to schedule a
visit and will need to see the entire property, including
basements, attics, garages, outbuildings, accessory units and
rental units. If payment is due at the time of inspection, be sure
that the client has the funds ready to pay the appraiser. If the
client can be flexible in terms of scheduling the inspection, it
will also aid in the ultimate goal of closing the loan.
Hopefully, you were able to gain insight into the changes that
are occurring in the appraisal industry. As professionals, if we
all work together and communicate with one another, these changes
will be easier to confront and everyone will benefit. In the end,
those who are better informed will help to ease any added stress
that may be created and keep transactions moving forward
Michael C. Coyle is a partner and senior appraiser with
Erdenheim, Pa.-based Higgins & Associates LLC, a residential
and commercial appraisal firm. He is a certified residential
appraiser in Pennsylvania and New Jersey. He may be reached at
(215) 247-5900 ext. 107 or e-mail [email protected]