I received a notice this morning from Peter Gailitis, VP, Chief Appraiser eAppraiseIT, LLC saying,
"Recently Fannie Mae announced that it will be alerting lenders if the collateral property for a mortgage is located in an area where house prices are declining. Fannie’s Desktop Underwriter will send a message to the lenders notifying them that they need to carefully review the appraisal to ensure its accuracy and require additional information from the appraiser, if necessary. They expect the appraiser to describe market trends and the effects it will have on the value of the property. Fannie Mae states “It is unacceptable for the appraiser to ignore these issues and not report the factual property value trends and market conditions. The alert process is to begin July 22." Download eAppraiseIT07-19-07notice.pdf (321.8K)
The letter recommends that all appraisers read Fannie Mae’s Announcement 07-11 in full, which discusses determination of market conditions, lender responsibilities and appraiser responsibilities, but doesn't provide the document or a link to it.
So . . .Here they are!
Highlights from Fannie Mae Announcement 07-11:
"An accurate value for the property securing a mortgage loan is important in all markets, but the value becomes more difficult to evaluate when the subject real estate market is experiencing a decline in property values ("declining market"). Recent trends indicate that certain markets are experiencing a decline in property values. One of the potential problems in a declining market is the overstatement of property values in appraisal reports. This may result in the borrower not having an accurate property valuation, and overvaluation of a property could increase loan losses should the mortgage loan subsequently default."
What is the definition of a declining market?
There is no standard definition of a declining market. In general, based on the tracking of home prices in a certain geographic location (state, Metropolitan Statistical Area, ZIP code, etc.), a declining market is one in which home prices are currently declining.
Is the lender or appraiser responsible for determining whether or not a property is in a declining market?
Both the lender and appraiser are ultimately responsible for determining whether a property is located within a declining market. The appraiser may indicate this in the neighborhood section of the appraisal report and/or the lender may make an independent decision based on its tracking of home prices in a certain area. We expect the lender to address any discrepancies between the information reflected in the appraisal report, and the results of the lender’s own due diligence by requesting additional information and justification from the appraiser.
How should a lender determine if a property is located in a declining market?
The Announcement lists several third-party sources that track current market conditions, indicating both appreciating and declining markets. The list of sources in the Announcement is not all inclusive; lenders must determine which source best meets their needs, and should explore other sources not listed. We will also add a new message in Desktop Underwriter® (DU®) Version 5.7 (to be released July 22, 2007) that will appear on loan casefiles for properties located in areas that may be experiencing a decline in property value, as well as markets in which it is difficult to assess home values.
What is the new DU message for properties located in declining markets?
The text of the DU message is as follows:
“The subject property has been identified as being located in either an area of declining home prices or in an area where it may be difficult to assess home values. The lender should carefully review the appraisal to ensure that the appraiser has appropriately analyzed property value trends and overall market conditions to arrive at the value provided. The lender should request additional support from the appraiser if it determines that the appraisal does not accurately reflect current market conditions (e.g. the declining property values field is not checked when market conditions suggest otherwise.) Please refer to our Property and Appraisal Guidelines in Part XI of the Selling Guide.”
How can a lender verify that the appraiser has accurately indicated the property is not in a declining market?
Generally accepted appraisal standards and our appraisal report forms require the appraiser to include support for his/her conclusions regarding market conditions, including housing trends. The Neighborhood Section of the appraisal is the primary area where the appraiser would indicate whether property values are increasing, stable or declining. If the lender believes the property is in a declining market and the appraisal indicates otherwise, the lender should request additional information from the appraiser that supports the appraiser’s conclusion.
To read the complete FAQ announcement from Fannie Mae, click here: Download Fannie Mae Ann. 07-11-Declining (33.8K)