How appropriate is it that the 1004MC addendum to the URAR will be required for all valuation assignments for Fannie Mae, Freddie Mac, VA and FHA, that became effective on April 1 2009 – "April Fools Day"?
Picking up where we left off in part-one, here are a few more FAQ's from my workshop on the 1004MC.
FAQ #4 – "At the effective date (mid-month or near month end) there were zero closings in the current to 3-month period however, there are 10 pending sales. Should I use zero in the grid?
This is a judgment call, but then most of what we do is based on "judgment and communication". There are reasonable arguments for both sides. Many pending sales never close. At the same time, if a high number of them do close, you'll post a "goose egg" on the effective date (along with a declining trend) and several days later (when the sales close) it may shift to "stable".
The primary objective of any valuation assignment is to inform the reader so they can make an effective business decision. I would suggest that you verify the pending sales (call the agents to see if they expect them to close), record the details and place a number with an asterisk (and footnote) that these are pending and expected to close.
The key here is not to mislead. You must verify the pending status and document the same. Wishful thinking is not going to help the client. If you ignore the pending closings (and they close) you'll look like an idiot a week or two after your report.
FAQ #5 – "Many markets are seasonal or have anomalies how do I explain this"?
Seasonality generally exists in most market due to families with school-age children and or severe weather conditions. There seems to be a tendency to have higher sales volumes between March and August as opposed to September through February.
As mentioned above, the "addendum to the addendum" is a good place to address seasonal issues. From historic data in your MLS, chart out the last 5 to 7 years of monthly sales activity. If your market is seasonal, you'll see a clear trend in the overall market data and you can use that chart to show that a slight variance in monthly sales in the 4-6 and 0-3 periods (as opposed to the 7-12 period), may be a result of seasonal issues.
Other anomalies may occur in a period due to lender sales of REOs (you will see a slight spike in the sales) or due to college locations (lower sales in summer months). The key is to track and present sales data from your MLS over a long time period so that annual trends are apparent to a reader.
FAQ #6 – "What about the number of available listings in the matrix for a given period"?
Many of the homes on the market are priced at a level that makes them "unsalable". They add to the inventory numbers, but there isn't a provision in the 1004MC to address "gross supply vs. effective supply" and the "median list price and available statistics" can be off from period to period because of this.
The 1004MC asks for the "Total Number of Comparable Listings" during the period, but doesnt specify how we should count or total them. Essentially, if it was listed or available for one day during the period, it gets counted. Naturally, this is misleading and impacts the "Months of Housing Supply" figure reported in the matrix as well.
There isn't an alternative to this problem. In some cases, the listing was only available for one day, one week or one month. In other cases, it was available for the entire period. Underwriters will see high supply numbers and excessive months of supply shown in the various periods, if you count them all.
On the upside, the calculations for current supply on page two of the URAR will bring the count back to reality however, not until after the underwriter has seen the gross figures reported in the 1004MC. Once again. the addendum to the addendum can be used to clarify the situation.
Optionally, since counting all of the properties available (even for only a day) could be considered misleading, and unless your MLS can provide an accurate count, you can elect not to complete that section and state the reason for the omission. The 1004MC was revised for this reason. In this case, you simply report the listings available in the current to 3-month period.
FAQ #7 "The 1004MCs instructions are vague. Many would say that the form and statistics can be misleading. How can the appraiser best serve the client and still meet USPAP"?
This is an observation I have heard from many in the 1004MC Workshops. I think the key is to consider your responsibility to the client and to yourself. First, housing market analysis has always been required and you have the responsibility to provide a meaningful analysis.
You can complete the 1004MC with data from your MLS using one of many Excel Workbooks available and or via the MLS itself as many will now produce a report for the 1004MC. The key is to advise the client of the limitations of the data, the trends/conclusions being provided and the methodology you selected to complete the 1004MC.
There are two issues here, supplemental instructions from the client (underwriters, Fannie, Freddie, etc.) or on the 1004MC form that are open to "broad interpretation" and conflicts between those instructions, the design of the form (competitive to the subject vs. the neighborhood) and good appraisal practice.
As stated many times before, communication is the key. Even if you disagree with the form, instructions, etc., you can still comply provided you communicate effectively (which I believe you can) using an "addendum to the 1004MC addendum" along with a "clarification of scope of work", that spells out your methodology and the limitations of the data or its applicability.
FAQ #8 – "In the matrix (and the totals, medians, percentages, etc.), how much of a difference between the periods indicates a shift in the trend?
This is one of the top discussions in the workshops. What constitutes a "shift"? Clearly, a small drop in closed sales could be due to seasonality or other minor issues. The same goes for the medians and percentages. The real estate market isn't perfect and as such, you'll see shifts in the market from month to month, based on many factors that have less to do with demand and more to do with timing, credit and other issues.
To support a "trend shift", I would expect to see more than a slight change in "the numbers". I would also be looking for a change in the economics associated with those numbers (the four forces). Improvements in housing sales volume could be due to investor or REO activity as opposed to a clear change in other market conditions (interest rates, jobs, supply, migration, etc.)
FAQ #9 – "How much 1004MC training is being given to lenders especially underwriters and will they understand the issues"?
This is the "billion dollar" question. I am using billions here, since it has become a popular word in Washington, DC. nowadays. Fannie Mae has a 25-minute webinar for appraisers and lenders to get them up to speed with various issues on the 1004MC.
How effective this will be remains to be seen. I do know that several lenders have proposed webinars for their staff and that should help. I expect to see many issues raised, reports challenged and some head-butting until we get more definitive directions from Fannie, Freddie, VA and HUD. Hold onto your hats, it's going to get bumpy. The key here will be patience and communication, change is never a smooth ride.
FAQ#10 – "Even if we fill in the data for the 1004MC, will it help the lender or the secondary market"?
In my opinion no, it won't help them accurately identify a market shift. I demonstrated this in the workshop using historical data from Phoenix and selecting various points from 2005 and 2006. In some cases, it will show a reliable trend, however if the market is shifting from one trend (positive, negative or neutral) to another, this won't help identify the shift (until long after the fact or it's too late) or the reason behind it.
The 1004MC's lack of recognition of the impact of the four forces on the market (Economic, Governmental, Environmental and Social), essentially jobs, migration, effective supply, etc., during the periods measured and current or effective date, prevents the appraiser from presenting (within the 1004MC), any logical explanation as to "the why" this happened or is happening now.
The 1004MC examines "competitive to the subject" in a "statistical vacuum", absent any perspective of the "who, what, when, where, why and how". Essentially, well be posting numbers that have little or no basis (in most cases). in the "reality of realty" that is "competitive to the subject". The end result will be creating an "addendum to explain the 1004MC addendum".
Good idea … bad execution
While I have stated the 1004MC is a "step in the right direction", it remains the first step into a mine field for appraisers and lenders alike. It is not an appraisal form, but a form that appraisers must complete. You'll have to sidestep the intent of USPAP, or walk a very fine line (as this is misleading and not meaningful) and therefore you will have to disclaim in some manner the results of assignment instructions from the client, provide a clarification to your scope of work and at the very least, possibly endure a continuous stream of e-mails or calls from underwriters.
All said and done, the 1004MC is a "good idea … bad execution". So what could we do better? Appraisal guidelines and good appraisal practice have always required housing market analysis as part of the assignment, however the secondary market has never worked with professional organizations to develop a form or set process to identify the components (the key indicators of the impact of the four forces), nor provided any uniform method of gathering data and analyzing the results to provide a "clear and accurate understanding of market trends and conditions prevalent in the subject neighborhood", as required by the 1004MC.
Until such time that there is a national consensus on what data is required, the sources to be used, the methodology applied and the results reported, appraisals and housing market analysis will remain far more subjective and far less objective then they should be. Compounding the issue is the significant variances between indicated trends for homogeneous and heterogeneous neighborhoods; urban, suburban and rural areas; and inconsistencies in the data itself as reported by agents and complied by various MLS systems.
As such, until we have uniform residential data reporting standards that apply to all real estate information providers, we will have the dilemma of statistical GIGO, "garbage in and garbage out".
AUTHOR: Patrick Egger is a Certified General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market, appraisal issues for real estate agents and appraisers. He can be reached at lvreqa@cox.net Look for the new Outside The Boxes category for a collection of Patrick's articles on Appraisal Scoop!
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