Appraisal Scoop

Best Practices: Appraisals - Freddie Mac Single-Family Guide Bulletin 2009-18 Highlights Requirements and Best Practices for Sound Mortgage Underwriting

Although Freddie Mac has seen improvements in credit quality over the last few months, we are still seeing a number of deficiencies in the underwriting process. To address this concern, we are issuing Single-Family Seller/Servicer Guide (Guide) Bulletin 2009-18 to help you enhance your underwriting processes and controls, and mitigate the risk of defaults and repurchases.

With this Guide Bulletin, we are announcing changes to our underwriting requirements, providing additional guidance and emphasizing existing requirements for underwriting a borrower and appraisals, and sharing underwriting best practices that will help strengthen the quality of the mortgages you deliver to Freddie Mac.

Today's Guide Bulletin is aligned with our efforts to work with you to rebuild a strong mortgage finance system. By promoting responsible lending standards that withstand market fluctuations, we can work to ensure that you and your borrowers are successful throughout the entire life of a mortgage.

The revised underwriting requirements announced in today's Guide Bulletin are effective for all mortgages with applications dated on or after October 1, 2009, and settlement dates on or after January 1, 2010. While the new requirements are not effective until October, we strongly recommend that you begin underwriting mortgages with these new requirements to help strengthen your origination processes and enhance the quality of the mortgages you deliver to Freddie Mac.

We encourage you to thoroughly review the Bulletin to learn more about the requirement changes and best practices.

Underwriting appraisals. We recognize the challenges that current market conditions pose in connection with determining accurate property values. To help you address these challenges, we strongly recommend that you become familiar with our appraisal requirements detailed in Guide Chapter 44 and the best practices outlined in today's Bulletin.

Our reminders include information about selecting qualified appraisers, maintaining qualified staff to underwrite appraisals, and ordering appraisal reviews. We recommend the use of Home Value Explorer®, Home Value Calibrator® or other validated and tested automated valuation models (AVMs), as well as other collateral valuation tools, to assess the quality and accuracy of appraisals.

 

 

Unfair State Board Complaints by a National Lender

Source: Appraisal Legal Defense and Insurance Blog by Peter Christensen and Robert Wiley - Legal issues and insurance matters affecting residential and commercial real estate appraisers

 

We've observed a new pattern by a certain national lender. "Risk Management" at this lender has been submitting numerous complaints to state boards based only on single review appraisals which merely indicate "potential violations" of USPAP. I think the lender wants to show that it's "getting tough" on appraisers.

In general, I don't think the tactic of filing numerous board complaints based on "potential violations" of USPAP indicated by a single review is the right way for this or any lender to show good appraisal management practices. For one thing, the practice may backfire on the lender: appraisers subjected to the tactic may claim that it is being used to intimidate appraisers -- just as the blacklisting practices of other lenders have fueled lawsuits against those lenders by both appraisers and borrowers.

I think the better practice for lenders to deal with alleged appraisal performance problems is for a knowledgeable in-house appraiser to obtain and fairly consider the appraiser's view without any threatened action; if there are real issues, then the in-house appraiser should counsel the appraiser and give the appraiser specific usable advice as to how performance should be improved. Only where fraud or genuine incompetence is apparent should the lender file a state complaint.

"Sending anonymous, vague letters threatening appraisers with blacklisting and using form letters to file numerous board complaints about "potential violations" are not the answer."

The most troubling aspect of this particular lender's practice, however, is reflected in the lender's statement in the form letter that: "We are unable to provide any additional information for your investigation."

That's false. In several cases of which I am aware, the lender possessed written explanations from the accused appraisers which fairly defended the subject appraisal reports against dubious review appraisals. But the lender withheld this information from the state boards.

This is an unfair tactic, especially in those states that don't inform appraisers of the nature of the complaint against them and keep the identity of the complaining party anonymous. A lender like this shouldn't file a complaint, while withholding relevant information from the state and claiming "we are unable to provide further information."

Indeed, I've seen an instance where a related lender filed a board complaint in the same manner even after being informed by the accused appraiser that the subject appraisal was a forgery.

Source: Appraisal Legal Defense and Insurance Blog by Peter Christensen and Robert Wiley - Legal issues and insurance matters affecting residential and commercial real estate appraisers

URARS Part 4: Three Basic Rules - Patience Persistence and Compromise

Getting back to the original story, Dorothy, the Tin Man, Scarecrow and Lion arrived at OZ with great expectations. After all, the Wizard was known for his powers, however they quickly discovered that he wasn’t about to grant their wishes without some showing of worthiness on their part. He gave them a test to measure their patience; their persistence and in the end, their willingness to compromise.

The same holds true for us. To be successful, we will need patience with others (and trust on both sides), we will need to be persistent (continue to get appraisers involved) and we will need to recognize that in the end, compromise will be necessary to develop a version of the URARS that will be acceptable to a widespread group of professionals. 

The Basic Setup

The original intent of the URARS was to compliment the URAR – Uniform Residential Appraisal Report by specifically addressing reporting requirements related to residential mortgage transactions as opposed to a more comprehensive addendum that would cover a wide range of issues related to residential appraising in general.

To get us started and as a general direction to take, the focus here will be on Fannie Mae, Freddie Mac, HUD and VA appraisal guidelines along with USPAP, to develop both the URARS addendum and to create the URARS.org website.

• The URARS addendum can serve as a general outline of what the appraiser did and did not do (clarifying the scope of work), cite general definitions and reference material used in development of the report and direct the reader to the URARS.org website for more specific and definitive references (along with examples, publications, etc.), to provide the users of appraisal reports with "the actions of our peers" and "generally accepted appraisal practices" that are "verifiable and measurable"

Click here to continue reading . . .

The "Right Start" - Step 4 - Reviews

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. Click on Outside The Boxes for a collection of Patrick's articles on Appraisal Scoop!

Most appraisals are for home loans that involve some form of Federal underwriting (purchase or sponsorship by Fannie, Freddie, HUD, VA, regulated lenders, etc.) and therefore, the taxpayers underwrite the risks. As such, it would only seem logical that taxpayers should get something in return.

The argument is the GSEs and others provide the taxpayers with “loan availability” and that is true, however when those same taxpayers continuously have to foot the bill for bailouts, I am not sure that this is such a good deal. In this morning’s news, “Fannie & Freddie bailout expected to be $100-Billion”. I do not think “America” had that in mind.

No one expected housing to lose money, including Congress, when the GSEs were authorized. That was then and this is now, so we need to look at this more as a taxpayer’s investment. We want “return on” and “return of” of our money, so what else should we be getting if not our money back?

Since County Assessors are “government sponsored” as well, why not give them “some help” in the form of a copy of each appraisal completed? I have heard the arguments that appraising for assessment purposes is “way different than for loan purposes”, but we share basic value principles and techniques. Essentially, the elements of valuation are the same, the applications slightly different. Even if we stock county assessor offices with “reviewers”, it would be a step in the right direction.

Click here to continue reading . . .

Adventures in Reviewing New Construction Appraisals

AUTHOR: Anthony Blackburn is a Certified Residential Appraiser in Martinez, CA and one of the co-owners of Apple Appraisal, Inc. -  811A Ferry Street, Martinez, CA 94553 - Apple Appraisal, Inc. does Appraisals and Reviews Throughout California.

So many times, when I am reviewing an appraisal of proposed new residential construction, I find that appraisers don’t put the necessary information in the appraisal for me to make a good judgement about the quality of their work.

There are several key pieces of information in an appraisal of a new home in a tract, that must be included in the report.

1.       Base price of the subject and comparables.

Being able to compare the base price of the subject and sales of the same model, is the best way to track prices over time, discounts and incentives notwithstanding. For example, with all else being equal, if the subject’s base price is $200,000 and the same model, with a different contract date has a base price of $190,000, then the difference in base price of -$10,000 is a time adjustment.

2.       Lot Premiums.

Because buyers in new subdivisions pay for difference between properties on a dollar for dollar basis, the lot premiums paid for things like views, large lots, cul-de-sac locations, etc., become the site size or location adjustments. If your subject has a $2,000 lot premium for it’s larger lot, as compared to a comparable in the same tract with no lot premium, then your lot size adjustment to your comparable would be $2,000. Remember, that $2,000 is exactly what the buyer paid for that larger lot. By definition, the adjustment is $2,000. What could be easier?

3.       Upgrades.

Here again, the adjustments, or differences between the subject and comparables in the same tract are on a dollar for dollar basis. I usually make this adjustment at the bottom of the grid, where I can put my own line title of “Upgrades”, but putting it in the “Quality of Construction” field works too, as long as you explain that the adjustment is for upgrades and not the overall quality of the home.

4.       Incentives

This is the most difficult item in a new home appraisal to quantify. IF you can get the builder to fully and accurately disclose all the incentives, sometimes it can take some work to see where they fit in the appraisal. Incentives can be loan related, like rate buy-downs, prepaid payments, closing costs and more. Other incentives can be a little easier to quantify, like free upgrades. Sometimes an incentive is just a discount on the total package. The best way to handle adjusting for these is to find out the total incentive, what it was made up of, like free upgrades or discount points being paid, and split them up into their proper places in the adjustment grid.

5.       Prices of different models in the same tract.

The difference in base price, in the same time period, of one model, vs. another, is generally related to size. If you have model A in a tract that is a 3/2 and 1,200 sf, base price of $200,000 and Model B, which is a 4/2 and 16,00 sf, base price of $215,000, then your total “Size” adjustment is $15,000.

There are other pitfalls to watch out for. Sometimes a builder will have homes in “Standing Inventory” and need to move them. These can be great deals for home buyers, but tricky for an appraiser, as many of the options are pre-decided by the builder and the incentives or discounts can be greater than on other homes.

What does FNMA say about appraising new construction?

Click here to continue reading. . .

Most Common FHA Appraisal Report Compliance Issues

Anthony Blackburn, of Apple Appraisal, Inc., in Martinez, CA responded recently to a WinTOTAL Users Group forum question about common errors with FHA appraisals. The following was his response.  At the bottom of this blog post is a "bookmarked" pdf highlighting the references to his list.

"I'm reviewing a batch of about 25 reverse mortgage appraisals, post funding. Not a single one complies will all of HUD's guidelines!"

Most commonly, the reports that I review fail to:

1. Include patios, porches, garages, breezeways and other offsets on the sketch. Failure to state "covered" or "uncovered" to indicate a roof or no roof (such as over a patio).
2. Have the street scene photo include a portion of the subject site.
3. Enter a legal description of the property.
4. To state that the use of the appraisal is to support FHA's decision to provide mortgage insurance on the real property that is the subject of the appraisal; and intended users include the lender/client and FHA.
5. Clearly define the boundaries - north, south, east and west - of the subject's neighborhood. Providing a description of neighborhood boundaries by physical features such as streets, rail lines, other man-made barriers or well defined natural barriers (i.e. rivers, lakes, etc.) details the make up and understanding regarding neighborhood composition.
6. To adequately and accurately describe current market conditions in the subject's neighborhood.
7. List all dimensions of the site beginning with the frontage. If the shape of the site is irregular, show the boundary dimensions (85' X 150' X 195' X 250')
8. Describe the view from the property (None is not an acceptable response).
9. Include the CORRECT zoning
10. To correctly report the number of COMPARABLE sales in the past 12 months and active listings on page 2.
11. To correctly calculate time adjustments from the contract date of the sale, and report both the contract and closing dates when time adjustments are made.
12. Enter the name of the subdivision or PUD in the location field of the sales comparison approach.
13. Describe the view from the site on the sales comparison approach, i.e. similar homes, commercial area, water view, scenic view, etc. Such terms as "Average" or "Good" are only to be used as adjuncts, i.e. "Residential/Average", "Water view/Good".
14. To enter ONLY the actual age of the subject in the age field of the sales comparison approach.
15. To accurately report the subject's condition as "Fair" when it is indeed "Fair".
16. Research prior sales or transfers of comparable sales
17. To analyze and report the analysis of the subject's prior sales

Download 41502appdHSGH.pdf - This appendix to HUD's 4150.2 has been bookmarked to correspond to the list above.

Thanks to Anthony Blackburn, of Apple Appraisal, Inc., of Martinez, CA for compiling and sharing this list!

Runt Rants - AMC "Additional Comp" Request - Pressure or Good Business?

AUTHOR: Ken Verrett is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA.  Read all Runt Rants on Appraisal Scoop.

I had an interesting discussion with an appraiser in last week regarding AMCs. I thought we'd all benefit from his situation his view of the market, and his business decisions. Robert D. Mims IV owns 30-A Appraisal group, Inc. in Florida. He sent me the following email.

Ken -

I've read your articles and actually submitted to you an email last year from a broker that was pretty nasty. I subsequently passed it along to New York District Attorney. I was mentored by an MAI, I do commercial with an MAI, and take my SRA designation class in September.

Below is an email I received from an XXX rep when I asked for an additional $50 to consider two additional sales - after gridding 3 sales, 1 pending, and 2 actives for a total of 6 comps.

What alarms me is not that XXX is willing to pay additional $$$ for the additional scope of work, but that she said SSS will pretty much request additional consideration of sales whenever the purchase price is not met. So regardless of the quality, the number of comparables, Certification #7, etc. there will be an automatic request to consider additional sales to try and meet the purchase price?

Before I respond to XXX, I want your take. Am I overreacting here by interpreting this email as pressure to influence value? And a subtle threat that if I don't they'll will simply assign the work to other appraisers?

Here's XXX's response to the fee increase request I sent. What say you?

Click here for the REST of the story . . .

Outside the Boxes: Part 14 - 12 Tips To Increase Your "ODDS" ... Observe, Disclose, Disclaim & Specify

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 

As licensed professionals, appraisers are required to "promote and protect the public trust" in our profession. Clients and the public have a right to expect ethics, competency and consistency from all appraisers, even when many of those same clients contribute to problems in the market.  We are expected to provide a "credible appraisal", one that is "worthy of belief".

Over the next several years, "odds are the profession will change", perhaps dramatically. During this time appraisers will become the "odd man (or woman) out" as some of the blame for market conditions will be laid at our doorstep and rightfully so as many in our profession were willing participants of "housing gone wild".

The initiatives and actions we take from this point forth will determine the trust placed in the appraisal profession by clients and the public. The real estate industry that we are part of has lost credibility and to restore the confidence, we need to be pro-active and using the "ODDS Rule" will help. 

• Observe the property and the market.
• Disclose to the client what you did and did not do.
• Disclaim that to which you are not qualified to evaluate.
• Specify your reasons and logic.

Often, clients, underwriters, loan officers, buyers and sellers have questions. Some are reasonable and some are absurd, however all are important. We can't become a "culture of no". We must take the steps necessary to respond appropriately since our responses reflect on our profession as well as ourselves. 

Click here to continue reading . . .

Outside the Boxes: Part 11 - Overlooked & Under-reported

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 

Like the magician's illusions, not everything is as simple as it may appear to be. While appraising isn't "magical: (although I've seen a few appraisals that were "beyond belief") the URAR does pose a number of questions that seem to be straight-forward, when in fact they are anything but.

Property Rights

If the subject is on a longer term lease (say a year or more) without a provision for the landlord to terminate it for reasons other than default and or no law invalidates the lease at foreclosure, what are the true rights being appraised, "fee simple" or "leased fee"? If the rent is below market, would an investor pay less for the leased fee rights? If appraised as "fee simple" (for valuation purposes, you must use a "hypothetical condition" and disclose.

Zoning Compliance

Over time, zoning ordinances are changed. Uses once permitted are no longer allowed and setbacks, building coverages and other requirements may be modified to more current standards. Don't assume that similar zoning designations have similar meaning or requirements in different jurisdictions. While R-1 may may indicate "residential single family" for most cities, the permitted accessory uses, set-backs and other provisions can be very different.

Illegal Uses

In many older areas, owners may have expanded a building to the property line or into the setback area. Assessor records my reflect the improvements, however inclusion by the assessor does not indicate code compliance.

Click here to continue reading . . .

Declining Market: New LSI Policy — Two Pendings/Listings on all appraisal forms except REO reports

The following is from a notice sent from LSI's Chief Appraiser - Download LSI_Pending_Sales.pdf

As of January 7, LSI implemented a major policy change designed to help appraisers determine the direction (increasing, stable, declining) of the submarkets, by requiring two listings/pendings be added to every analysis.

Even in markets that have had no declines, there are submarkets that are deteriorating, and unless we provide some support for this, we run the risk of assuming the stability is still there, and only listings will tell you when the slide is beginning.

FAQ for New Policy of adding 2 Pendings and Listings to your analysis;

1. Fees: While LSl does not dictate fees, we do not expect this policy change to impact our costs. The scope of work in a declining market would dictate the prudent appraiser performs an analysis of listings and pendings, so we expected this research has been performed all along. Gridding of these offerings is to assure our clients of the direction of the submarkets in every region of the country.
2. Maps/photos: As with any gridded item, we expect the appraiser to include a comp photo of the listing or pending sale and its location noted or, the sales location map.
3. Duration of Policy; Until further notice. This policy is to be applied to all residential appraisals with one exception: REO reports that already have a page adder for consideration of competing listings need not add still more listings We expect to maintain this policy until the murky national picture clears and it becomes apparent that most markets are turning from a threat of decline to a likelihood of increases. At that point, we expect to suspend this blanket general policy for all but the known remaining areas in decline.
4. Granularity: Several have written to argue that you track and report the supply and demand, price changes, etc. based upon a broader database. This might be regular MLS statistics, or an online database that breaks it down to single family or condo. Use of average LP to SP ratios offered by MLS statistics may tend to mislead. They are incorporating properties of different types, locations, pride ranges, and attractive to different buying groups. This averaging process is not granular enough. To better support the estimate LP to SP ratio, build your adjustments from the data you find which is similar, proximate, and most current in your subject's locale, in other words, from your closed comparable sales.

Download LSI_Pending_Sales.pdf