I have been developing a workshop on the 1004MC and as I work through the process, every day is one of discovery. Despite having read 08-30 and the FAQ's, along with the existing appraisal guidelines, I am not certain that I have all of the answers, but I do have more than a few questions and observations.
On the plus side, reading and re-reading has provided perspective and possibilities as to what Fannie Mae wants, how we can provide it, efficiently and effectively. Still, I am no expert, and like others, I am second-guessing based on what I know thus far. With that understood, here are a few more of my observations.
First, the 1004MC is not (and I repeat not) a new appraisal form. The 1004MC, like its number-sake is an underwriting form that appraisers are required use. If appraisers designed the 1004MC, it would look different, as would the URAR Download MCA_Appraisal_Report.pdf
Haves and Have Nots
The 1004MC requires the appraiser to provide "all of the information to the extent it is available or provide explanation if the data is not available". With the advent of multiple listing systems, computers and technology, how will you sidestep providing the data? If someone in your market area is "filling in the form", you will need to do the same.
"Use sales and listings of properties that compete with the subject, determined by the criteria the buyer would use". Your assignment, appraise a home in a new tract. What (from the buyers perspective) is competitive to the subject, only new homes? People "buy new" for a reason, often because they want to be the first ever in the home, at other times because it is the best deal. Are re-sales in the same area "competitive", from the buyer's perspective?
Either way, statistics taken from new home tracts that compete with the subject may be different from statistics for the neighborhood or the market area. Unless the neighborhood is all new homes (that are competitive with the subject), getting the numbers will be an adventure and not stats you can pop-up on your MLS. You will have to visit competing projects to get them.
This brings up another observation. What happens to "the trends" when there are no comparable closed sales in a period or the only closed sale is a lone "short sale or REO"? While it may be inconceivable that something won't be listed (in any neighborhood over a 90 day period), it is not unrealistic that "competitive to the subject" will post a goose-egg, especially in smaller neighborhoods.
Compounding the problem, the only reported closed sale for the period is an REO that was sold "as is - where is" or a "short sale" that is more reflective of distress than market value. Neither may be representative of a trend due to condition or motivation. They will show up in the numbers and therefore you will have to deal with them and defend your conclusions as to their impact.
Anomaly Snowmen
Explaining the effects of anomalies such as seasonal markets, the impact of foreclosures etc., will present a problem. Most markets behave in a seasonal pattern to some degree, simply based on families with school age children. Sales tend to improve during the spring and summer and fall-off some in the fall and winter.
Since the reporting periods (7-12, 4-6 and 0-3) will overlap "traditional buying seasons", will a normal dip in sales (fall and winter) show up as a "declining trend"? On the other hand, is the dip due to seasonality or due to a sudden lack of demand associated with price, credit, etc.?
To defend seasonality, you will need a chart with a few years of monthly data to back you up. You will also need to comment or explain all of this in the few lines provided. Since the form has no room for a "seasonality chart", you will need an "addendum to the addendum".
Speaking of anomalies, short sales and REOs have become "the norm" as opposed to the exception. What data service tracks this information and is it a reliable source? You know REOs and short sales are a factor in many neighborhoods and markets. As such, the abnormal has become the norm, even if only for a temporary period.
How long must the trend be in order for you to declare a change? Is a change in a 3-month period sufficient or must you have 6-months or a year before you can support a shift from "declining to stable" or "stable to increasing"? If we have a median price of $350,000 in the 7-12 month column, $320,000 in the 4-6 and 0-3 month columns, many may observe a "stable trend".
Will others state that "overall", the trend is "declining", based on the drop from $350,000 to $320,000. To declare the trend as "stable", logically, aside from price, you need to see supporting movements in the absorption rate, supply, market times, etc.
One observation on reporting sales, in the Inventory Analysis, "Total # of Comparable Sales" has the word "settled" behind it and settled means closed. You cannot include pending or contingent sales in the totals and for good reason. Many pending and contingent sales never close, so including them would be misleading. The 1004MC does give you the option to comment on pending sales in the "Summarize" area.
House Cleaning
Among the most important steps, cleaning the data and avoiding duplicates. Cleaning the data will be a necessary step for several reasons. Often, datasets will include "outliers", that is a sale or listing that is far above or below the neighborhood norms, possibly due to an oddball sale or an isolated short sale, etc. While using medians will eliminate (for the most part) the impact of the outlier, averages are impacted.
In some datasets, you will have duplicates. The property lists, expires and is subsequently re-listed and sells, and the system reports it twice. This is one property with two unique MLS listing numbers. There was only one property so ensure you count it one time. You may have to combine the DOM or adjust the listing date if your system does not recognize or record duplicates as "one listing".
The cleaning process will be slower if you define the neighborhood as a large area as opposed to a smaller one. Larger area equals more records to review. If you define a smaller area, fewer records to review, however perhaps the dataset is too limited and the indicators are not reflective of the market trends.
Absolutely
One point I want to make clear. As much fault as I find with the 1004MC, I do believe that it is a positive step for several reasons. First, it will make appraisers more aware of neighborhood trends and help them to identify and support those trends and their impact on the subject property in the URAR.
Secondly, it will provide "verifiable and measurable indicators". You will not be able to say "it's my opinion", the data will do that for you, replacing "subjectivity with objectivity", at least to some degree. Is it perfect, absolutely not, but it is better and we will have a Fannie Mae or Freddie Mac "standards" to point to, getting us off the hook with underwriters and clients that have opposing views.
The 1004MC is not absolute. Three appraisals on the same property may have slightly different numbers in each of the columns and rows, based on their view of what the neighborhood is and what defines "competitive to the subject".
While it is conceivable that the indicated trends could be different, it would be unlikely. This is the point of the 1004MC. This is not about the numbers. The numbers are not expected to be "absolute" for each property; however the trend should be consistent, regardless of the technique used.
Authors Note: Many have emailed me asking about the workshop I am preparing, "The 1004MC – Problems and Solutions". The workshops will be held locally and we are currently looking at different cities and possible dates. If you are interested in having a workshop in your area, let Adam Calvery know. He can be reached by e-mail at adam@alamode.com . We are trying to get a feel for the demand for the workshop and the locations to have them.
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