Regulatory compliance outlook: Fannie Mae's new appraisal guidelines
On June 30, 2010, Fannie Mae issued additional guidance on appraisal-related policies, along with a number of other miscellaneous changes to its Selling Guide: Fannie Mae Single Family.1 Fannie's new policy requirements and clarifications concerning existing lender requirements are being added to a number of appraisal sections of the Selling Guide, with respect to post-purchase reviews of mortgage loan files.
Policies and clarifications
►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 Home Valuation Code of Conduct (HVCC)
►Treatment of personal property
►Market Conditions Addendum to the Appraisal Report (Form 1004MC)
Inclusion of interior photographs in the appraisal report
♦B4-1.2-06: Appraisal Forms and Report Exhibits2
Effective: All applications dated on/after Sept. 1, 2010
Fannie Mae is requiring that interior photographs of specific rooms and areas be included in appraisal reports whenever an interior inspection is performed.
Lender changes to the appraised value and guidance on addressing appraisal deficiencies
♦B4-1.4-21: Appraisal Report Review: Valuation Analysis and Final Reconciliation
Effective: All applications dated on/after Sept. 1, 2010
Previously, Fannie Mae did not provide requirements concerning lenders making changes to the opinion of market value reflected in the appraisal report. Fannie Mae has updated its appraisal policies to 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.
Appraiser selection criteria
♦B4-1.1-03, Appraiser Selection
Effective: June 30, 2010
The use of an appraiser who has the appropriate knowledge of specific geographical markets, access to the appropriate data sources, and experience in appraising specific property types within the relevant geographic markets ensures that valuations are accurate and that appraisal practices are appropriate. Fannie Mae requires that lenders only use appraisers who have the appropriate knowledge and experience, and does not allow the flexibility of the USPAP (Uniform Standards of Professional Appraisal Practice), which permits an appraiser who does not have the appropriate knowledge and experience to accept an appraisal assignment by providing procedures with which the appraiser can complete the assignment. The Selling Guide has been updated to state that appraisers who lack the requisite knowledge, experience, and access to appropriate data must not be utilized.
►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.
►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 HVCC nor Fannie Mae requires the use of a third-party vendor;
►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.
Selection and use of comparable sales
♦B4-1.4-16: Appraisal Report Review: Sales Comparison Approach
Effective: June 30, 2010
Data and verification sources
Fannie Mae’s appraisal forms require that the appraiser list both data sources and verification sources with respect to comparable sales selected by the appraiser. This subject has been updated to provide examples of acceptable data and verification sources.
Use of foreclosures, short sales and builder sales as comparable properties
►The appraiser is responsible for determining which comparables are most appropriate for the assignment. Fannie Mae updated the guidelines required to be implemented whenever 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.
Miscellaneous appraisal-related guidance
Effective: The following clarifications are effective on June 30, 2010, except for the calculations related to Form 1004MC; however, appraisers will be required to use the specified calculations for all mortgage loan applications dated on and after Sept. 1, 2010.
Communication under the 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.
Section III-B of the HVCC, however, does prohibit anyone in loan production, or who is compensated on a commission basis upon the successful completion of a loan, or who reports ultimately to any officer of the lender not independent of the loan production staff and process, from having any substantive communication with an appraiser or AMC relating to or having an impact on valuation.
Excessive sales concessions can artificially inflate the sales price of a property, which can then lead to an inflated market value. Attention should be given to unusual sales or financing concessions to ensure that they are properly accounted for in the appraisal report. Appraisals must 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.
Treatment of personal property
Personal property 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 as part of the security for a loan on a two- to-four-unit property to the extent it is pledged by the 1-4 Family Rider (i.e., Form 3170). Whether an item is real or personal property is generally determined by the law of the jurisdiction where the property is located. A professional appraiser who has the knowledge, experience, and geographical competence to complete the appraisal assignment must also possess the expertise to identify personal property items in the appraisal.
Market conditions addendum to the appraisal report (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 three-month period (which is also the effective date of the appraisal), and not the cumulative number of listings for the entire three-month time period.
If data is available for the previous time periods, such as “Prior 4-6 Months” and “Prior 7-12 Months,” the “Total # of Comparable Active Listings” should be based on the most recent day in each of those time periods. For example, in the “Prior 4-6 Months” column, the “Total # of Comparable Active Listings” should reflect the listings on the last (most recent) day in that time period. Likewise, in the “Prior 7-12 Months,” the “Total # of Comparable Active Listings” should reflect the listings on the last (most recent) day in that time period.
Jonathan Foxx, former chief compliance officer for two of the country’s top publicly-traded residential mortgage loan originators, is the president and managing director of Lenders Compliance Group, a mortgage risk management firm devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted at (516) 442-3456 or by e-mail at email@example.com.
1—Selling Guide Updates and Additional Guidance on Appraisal-Related Policies, Announcement SEL-2010-09 June 30, 2010.
2—All citations refer to the updated Selling Guide, June 30, 2010.
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