Guest Author: Ken Shure, Certified Residential Appraiser in the Los Angeles, California area. Contact: kbshure@Yahoo.com
The 2055 form issued by Fannie Mae is a common vehicle for the reporting of an appraisal. The form includes a pre-printed scope of work indicated as the minimum needed to properly complete the assignment. This scope of work sets the minimum required inspection of the subject as a viewing of the exterior from the street. This minimum inspection requirement has provided some appraisers that complete reports utilizing the 2055 with a false sense of security as to their liability and overall responsibilities, particularly since the edits to this form that occurred in 2005.
Readers will note that the 2055 is designed to report appraisals of one unit properties or one unit properties with accessory units while the 1075 form is designed to report appraisals of a unit in a condominium project or a condominium unit in a planned unit development. While the focus is on the 2055 form the following discussion pertains to both forms, each of which are labeled as "Exterior Only Inspection" reports and have the intended use of evaluating a property for a mortgage finance transaction.
The scope of work section of the form includes the following paragraph:
The appraiser must be able to obtain adequate information about the physical characteristics (including, but not limited to, condition, room count, gross living area, etc.) of the subject property from the exterior-only inspection and reliable public and/or private sources to perform this appraisal. The appraiser should use the same type of data sources that he or she uses for comparable sales such as, but not limited to, multiple listing services, tax and assessment records, prior inspections, appraisal files, information provided by the property owner, etc.
Based on this paragraph the appraiser is expected to obtain proper levels of information that allow for a credible comparison of the subject to the comparable sales and per certification #10 due so without relying on unverified information provided by parties with a financial interest in the subject such as the property owner.
The data available to the appraiser for establishing the physical characteristics of comparable sales typically includes information as to the condition and quality of the interiors of these properties. The appraiser that is unable to verify the interior condition of the subject property while remaining true to certification #10 is therefore often in the position of having far better documentation for the interior condition of the comparables than for that of the subject. If interior condition and/or quality are factors with an effect on value for the particular assignment of interest, the information available regarding the interior of the comparable sales mandates an exercise of comparison for this parameter between the subject and these properties in order to provide a credible result.
Per USPAP, a properly incorporated extraordinary assumption with regard to the condition and quality of the interior of the subject property would be a compliant manner in which to proceed when one has highly relevant information regarding the interior of the comparable sales. However, the language within the 2055 form does not provide for making an extraordinary assumption while the "as is" box (CB1) is checked within the reconciliation section. This presents some level of difficulty for the appraiser attempting to properly make use of an extraordinary assumption regarding the interior condition and/or quality of the subject property when using this form.
While appraisers utilizing the 2055 form are certainly satisfying the specified minimum level of work by only completing an exterior inspection from the street, this does not remove them from any subsequent due diligence regarding the interior of the subject property.
Many appraisers have concluded that they have the ability to incorporate an extraordinary assumption into the report regarding the interior condition and submit the report with CB1 checked. Per the form language, that cannot be altered in cases where the report is to be utilized in transactions heading to Fannie Mae or Freddie Mac, additional assumptions cannot be made beyond those already accounted for within the form's format. An extraordinary assumption can only be incorporated via the proper mechanism located within the reconciliation section.
The proper route for doing so on the 2055 and certain other Fannie Mae forms such as the 1004 and 1025 involves checking the fourth box in the reconciliation section (CB4) and requiring a subsequent inspection for confirmation. By checking CB1 and incorporating an extraordinary assumption into the narrative of the report one could be accused of producing a misleading report. This is due to the fact that the presence of an extraordinary assumption within the narrative is in direct contradiction to what is present in the reconciliation section when CB1 is checked rather than CB4. Contradictions such as this are not to be considered beneficial elements within an appraisal report and could be used as a means to discredit the appraiser that allows them to be present in their work product. This issue is discussed further in a prior article: You Can Write an Appraisal on a Napkin..... But you probably just didn't
Unfortunately, proper incorporation of an extraordinary assumption in this case would often be seen as defeating the originally intended minimum scope of work and so is not popular among appraisers and certainly not among their clients. Short of overcoming the awkward nature of utilizing CB4 and in effect requiring an interior inspection on a form labeled "Exterior-Only Inspection Residential Appraisal Report", the only option by which to proceed in order to avoid potential liability is to verify the interior condition of the home if it is determined that interior condition is a factor that effects value within the market. One can either utilize sources typically available for the comparable sales such as a current or recent MLS listing of the subject, if available, or go beyond the minimum inspection requirement and request to view the interior of the home.
The appraiser completing an assignment on the 2055 must recognize that they cannot allow themselves to be limited to the minimum level of inspection if it inhibits their ability to produce a credible result that conforms with the entire scope of work stated on the form. This could result in the decision to use a different format or form for the report which would be far better than going forward in a manner that leaves one vulnerable. If the 2055 format is retained the appraiser completing the assignment would be well advised to be quite comfortable with their ability to compare all pertinent features of the comparable sales, as determined by their analysis, to those same features of the subject property regardless of the extent of the inspection.
One historical exception to this was the specific direction given by Fannie Mae with regard to REO properties in instances where that agency ordered the appraisal directly and delegation of responsibility for appraisal quality was not shifted to a lending client. In these cases the agency gave direct instructions within the engagement to utilize an extraordinary assumption that the interior was similar in condition to the exterior as it appeared from the street. This is not an authority that could be claimed by a lender mandating the use of the 2055 form and should not be viewed as a blanket exemption regarding the scope of work requirements on the form for other assignment types.
There are practitioners who choose to alter the 2055 prior to using it in cases where they have been advised by the client that Fannie Mae or Freddie Mac will not be involved in the transaction. This can be a suitable path by which to proceed but should be done in a manner that makes an adequate effort to avoid misleading any intended user. When altering the 2055 form in order to modify the scope of work, assumptions and limiting conditions, certifications, or reconciliation options the following should be seen as prudent in cases where the form was a request or requirement of the engagement:
- Obtain written agreement from the client to do so
- Be certain that the modifications performed, particularly to any certifications, maintain compliance with USPAP
- Remove any reference to the form being or having been a 2055 issued by Fannie Mae
The last item is to ensure that intended users or other parties who per certification 23 (a standard inclusion of the 2055 form) are able to rely on the report cannot later claim certain expectations that would typically be in place with a report issued on a form labeled as a 2055. This would apply to any form issued by Fannie Mae or Freddie Mac.
As a final note, it must be noted that the issues related to the 2055 form discussed here should in no way reflect on the potential liability or USPAP compliance of other reporting formats that are used where the scope of work performed and described is limited to an exterior only inspection or involves no inspection of the subject property. There are certainly an abundance of instances where the use of the 2055 is not a condition of the assignment. In these cases a scope of work involving a limited or non-existent inspection should not automatically be seen as having the potential to increase an appraiser's liability or inhibit their ability to produce a credible report that satisfies a client's needs and complies with USPAP.
Copyright 2011 - KB Shure
Guest Author: Ken Shure, Certified Residential Appraiser in the Los Angeles, California area. Contact: kbshure@Yahoo.com
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