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Time to add to your goals for 2006

Jun 26, 2006

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 mortgage industry. 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 order. 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 appraiser. 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 appraisal inspection. 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 (,, This 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 given region. 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 smoothly. 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].
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