Appraisal Scoop

First Impressions: Fannie Mae's New Market Conditions Addendum

If you attended my class at the "a la mode Regional Appraiser Conventions", I mentioned that Fannie Mae was working on a "one-page Market Conditions addendum" (similar to Wachovia and RELS forms). Fannie Mae has released the 1004MC form as part of Announcement 08-30, which also includes clarifications and amendments to the existing Fannie Mae Selling Guide. Download MCA_Appraisal_Report.pdf

Key Highlights of Announcement 08-30:

•  New Market Condition Addendum form 1004MC

• Supervisory appraisers must now inspect the subject property

• Reporting prior sales and listing history

• Appraising a property on sites over 5 acres

• Effective age adjustments

• Cost approach for insurance purposes

The 1004MC: "Houston, we have a problem"

My initial thoughts, I think we have some bridges to cross here, one of the reasons I started the series on URARS – Uniform Residential Appraisal Reporting Standards. While I believe this is a step in the right direction, the form and instructions appear to be in conflict with other Fannie Mae Appraisal Guidelines, The Appraisal of Real Estate and "generally accepted appraisal practice". 

As an example, the 1004MC requires the appraiser to report housing trends based upon "sales and listings of properties that compete with the subject property, determined by applying the criteria that would be used by a prospective buyer of the subject property".The conclusions for those trends (based on properties that are competitive with the subject) are to be "reported in the "one-unit housing trends" area of the URAR.

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URARS Sidebar - Focus on the "Common Ground"

The Right Start was about the "possibilities", collective action to move the profession ahead as opposed to going backwards or standing still. That led to The URARS, ways to convey the message, enlist the support of appraisers and get the process started. While I anticipated debate, I also expected a spirit of cooperation. After all, the URARS was about "improving our lot in life" so to speak something all would benefit from.

 After witnessing (and participating in) a conversation on the WinTotal User's Group regarding "effective age", I had to take a step back and rethink our course of action. While the discussion was (for the most part) constructive, a simple question prompted 80+ responses. To be honest, I don't think there was a clear consensus in the end, although I do believe most involved (and those lurking) have a far better comprehension of the issues surrounding effective age and the use of the term in the URAR.

Having watched Brian Davis, Lee Hill and others "get busy" with the topic, my observations led to a few fundamental conclusions. Appraisers are in the "opinion business", so like other things, we all have one (or more), often we are quick to give it (asked for or not) and when we do, we defend it vigorously (right or wrong). 

What starts as a simple question or observation can quickly become "sport" and in doing so, all bets are off and we lose perspective. This is a key point for the URARS and the state of the appraisal profession. At times, we are so quick to take a position that we lose objectivity and become indifferent to the views of others.

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The URARS Part 5: Making the List: Key Reference Sources of Appraisal Procedures Definitions and Techniques

Have you read a few good books lately? Perhaps all of us should read a little more. When I was teaching the Housing Market Analysis class at the "a la mode regional conventions", I would ask the audience, "how many of you have read The Appraisal of Real Estate"? To my surprise (and shock) at several locations, only a few hands were in the air.

For the many years I have been in this profession, most I know have always considered "The Appraisal of Real Estate" as the "bible of appraising" and perhaps the most definitive and authoritative source on appraising currently in print. That's not to say that there aren't other good appraisal books out there, only to make a point. Many of those in the profession have yet to read and study the most widely referenced book on appraising.

If that is the case (and I have no reason at this point to believe otherwise) would appraisers have a better understanding of the principles, techniques, applications, etc. (outlined within The Appraisal of Real Estate) if they did? If The Appraisal of Real Estate was "required reading" for appraisers, users of appraisal services, underwriters, loan offices, agents and others, would some of the issues fade away?

For the URARS addendum, should we have a section that lists key references by title and edition? If so (and given the number of books and publications available), how much is enough? Should we limit the list to several that are comprehensive or should a few specialty references be added? Listed below are a few of my choices. What other publications (they must be in print and widely available) would you suggest or is this list adequate?

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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"

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The URARS: Part three - One step back before two steps forward!

When I came up with the concept of the URARS (Uniform Residential Appraisal Reporting Standards), it was "all about communication", between us and the clients, readers, reviewers and underwriters. I thought that if we had better communication, we would have fewer problems, so I proposed such things as "de facto standards" to replace "subjectivity with objectivity".

I also proposed that we enlist "a la mode, Inc." to once again "step up and help us help ourselves", similar to what they did with the HVCC petition. Both suggestions met with favorable responses, but with some raised eyebrows as well, as so before we take a step forward, I want to take a step backward and do what I originally set forth to do when Brian Davis and I created the "Clarification of Scope of Work Addendum" (COSOW) , "clarify what we should be doing and why". 

The "de facto standards" I am advocating will not be similar to Wayne Brady’s Las Vegas act, "Making $%# Up", which seems to be the opinion of some. We won’t be pulling "de facto standards out of the air" so that appraisers can use them to justify actions or procedures that are contrary to good judgment or inappropriate for the requirements of the assignment.

Since I am advocating "de facto standards", let’s revisit the meaning of "de facto".

"De facto is a Latin expression that means "of the fact" or "in practice" but not ordained by law. It is commonly used in contrast to de jure (which means "by law") when referring to matters of law, governance or technique (such as standards) that are found in the common experience as created or developed without or contrary to a regulation. When discussing a legal situation, de jure designates what the law says, while de facto designates action of what happens in practice. It is analogous and similar to the expressions "for all intents and purposes" or "in fact". The term de facto may also be used when there is no relevant law or standard, but a common practice is well established, although not universal".

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The URARS Part 2: What steps to take and which direction to go?

In "You've ALWAYS Had The Power! Creating Uniform Residential Appraisal Reporting Standards (URARS), I suggested we start with the "Clarification of Scope of Work Addendum" (COSOW) as a template for the URARS for several reasons. First, the Scope of Work within the URAR is broad and unspecific and second, the COSOW defines many terms and states the appraiser’s actions in a format that is "uniform".Download COSOW.pdf

Uniform implies consistency and that is what is needed for the URARS. Regardless of the property’s location, physical attributes or local custom, the URARS (and the appraiser’s action) must be the same.

Does this mean the URARS will not allow for flexibility if needed? Absolutely not, the URARS is not about being "inflexible". It is about providing a framework or standard for analysis of common as well as unusual situations.

What will make it different?

The URARS doesn’t remove the appraiser’s ability to exercise judgment for a unique assignment, only that in employing a technique, it must be consistent with the methodology that other appraisers would use in a similar appraisal problem.

Through "uniformity" your definition of urban, suburban or rural will be same as my definition. When you define a neighborhood, it will be described using the benchmarks and guidelines that I would. Uniformity removes subjectivity via "de facto standards".

Through the URARS, those that rely on the appraisal (underwriters, clients, regulators, the secondary market, etc.) will have reference to and common understanding of the same terms, techniques and applications. As a result, appraisals will be measurable and verifiable.

More importantly, the URARS will provide a defensible document, one that is representative of "the actions of our peers" and "generally accepted appraisal practice", the same standards of performance identified within USPAP and by the secondary market.

If we build it will the come?

Appraisers are skeptics by nature and given what the industry has gone through since FIRREA (the document that was to solve all of our problems) it is reasonable that they should be. FIRREA and USPAP did solve some problems, but they also created some "intended consequences".

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You've ALWAYS Had The POWER! Creating Uniform Residential Appraisal Reporting Standards (URARS)

Most of us remember The Wizard of OZ, the characters, their plights and the journey that served as a lesson to be learned. The Scarecrow wanted a brain so he could think of great things, the Tin Man desired to be more human with a heart, the Cowardly Lion needed courage to face his challenges and Dorothy was looking for a way back to Kansas.

In the end, each realized that what they wanted, they had all along. The journey merely served the purpose of letting them discover what they hadn’t to that point, similar to what appraisers haven’t discovered to this point. Like the characters in the Wizard of OZ, we have the power to effect the changes desired, we simply need to band together on a journey to discover it.

In the series "The Right Start", I wrote of things we could accomplish by working together. The theme was simple, "what if", something I borrowed from an old TV commercial. "What if" represents the possibilities when we abandon preformed conclusions, no longer seeing the glass as "half-full or half-empty" by opening our minds to possibilities.

Objectivity allows us see the glass differently, neither "half-full nor half-empty", but rather twice as big as it needs to be to hold the same amount of water, which leads to new thoughts and possibilities. We have lived with a foregone conclusion that Fannie Mae or Freddie Mac must take action or that USPAP must apply to all to resolve the issues, overlooking the possibilities of our own action to "fix that which is broken", at least to some degree.

What can or should be done?

A good place to start would be to consider appraisal fundamentals and the types of issues taken for granted by many professionals, but confusing or points of debate with others we deal with. The mortgage industry lacks consistency in application, definitions and comprehension of what we do and how it should be done.

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Identifying and Understanding the Relevant Characteristics of the Subject Property of a Real Property Appraisal Assignment

Author: Cliff Odom, RAA, IFA - Cliff Odom Appraisal Services, Inc. is a residential real estate appraisal firm serving the Birmingham Metropolitan Area in North Central Alabama. Cliff Odom is a Certified Residential Property Appraiser providing timely, accurate residential appraisals to more than 30 mortgage lenders nationwide.

We as appraisers realize that each appraisal assignment begins with a “problem” which is an unsolved question. The term “solution” however refers to both the method for resolving the question and the answer. Every appraisal assignment begins with a question about value and involves a solution that is both a process and an answer. It is important to understand, however, that with respect to these two elements, USPAP addresses the method by which an appraiser arrives at an answer, not the specific answer itself.

The first step in the solution is called Problem Identification or what is sometimes referred to as Define the Appraisal Problem.

This step involves gathering specific information about the problem in order to identify what needs to be done to arrive at an appropriate and meaningful solution. In appraisal assignments there are certain factors that are included in Problem Identification.

They include:

1. intended use
2. intended users
3. the type and definition of value (these three are considered the drivers)
4. the property (as in the subject property)
5. relevant characteristics
6. effective date
7. assignment conditions (including assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions)

All seven combined . . . gives us the Scope of Work.

As we all began our appraisal careers, we attend USPAP courses and other type of educational courses each year for our qualifying education. I have set through many courses and I must admit that in many I was totally confused on some of the “terminology”, verbs, adverbs, nouns, pronouns, etc., which we all hear.

Relevant Property Characteristics of the subject property finally begin to flow to the top.  After attending many USPAP courses and constant study of USPAP terminologym, I finally realized that this was a very important subject and one that must be fully understood in order to complete appraisal assignments correctly.

This article is being written with reference to USPAP and Advisory Opinion 23 (AO-23), to help other appraisers who may have had (or still do) some misunderstanding and misconceptions of this subject article.

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The End is Just the Beginning - Virginia REAB Hears Petition To Prohibit Use of Appraisal Delivery Webportals That Transmit Altered Appraisal Reports

Appraisal Scoop reported previously (click here) on the May 22, 2008 Virginia State Board for Real Estate Appraiser's (VREAB) meeting to discuss among other things, a petition submitted by George Dodd, SRA.  Click Here to: Download Virginia_Appraisal_Board_Petition_052208.pdf

The petition was written to prevent online sites, or web-portals from changing or otherwise altering reports that appraisers prepare.  Web-portals would include such companies as: AppraisalPort, RELS, and other AI ready required companies. It also seeks to limit the illegal PDF stripping down, and programs that erroneously copy information from reports such as Lighthouse.

Click here for Part 1 and for Part 2 and for Part 3

August 19, 2008 - Legislature and policy is one of those things that can baffle most people. I know that sometimes I can get downright angry at the inefficient ways government can work sometimes. Here we all are in Richmond, VA, the front lines to the fight for appraisal portal conversions.

On the 19th a decision was to be made as to whether or not appraisers were to be allowed to continue to do business with companies that require reports to be converted to formats that were not the true copy of the appraisers report. A victory would not be had by either side of this fight .

Neil Olson, Chief Legal for FNC, Inc was there to give presence to the companies who want to continue to require appraisers to submit limited reports. * See comments I once again applaud Mr. Olson for being the lone offense, as no one from First American was there, no one from Lighthouse, no one from any other company that would be even slightly allied with FNC’s struggles. There were no lenders there to support Mr. Olson’s claims from the lender’s side. Without a lender there to agree this is the only way they want these reports, Mr. Olson appears to be painting with broad strokes when he insists they do.

George Dodd, SRA was there to thank the board for their time looking at and considering his petition. This same petition asked that no companies that required the practices of conversions of reports be allowed to do business in the Commonwealth of Virginia.

The committee was required to recommend that the petition be rejected. It was simply not written in such a way that was enforceable. The petition sought to limit an industry that it did not oversee. The Board’s opinion was to leave the committee open to further discussion and allow it to look even deeper into the entire process.

Mr. Dodd humbly accepted that decision, as if he knew it was coming. He seemed pleased to get the opportunity to continue on to help shape what is ultimately going to be an important step in the re-establishment of appraiser’s independence.

Over the last several months there are some things that should be taken into account that cannot be just coincidence. When the Board originally met in the late spring I began this series of stories. The first one seemed well received. The second one was followed by something I did not expect. Within a day of the second story being published Fannie released a statement:

"Since relocating our appraisal ordering process to AppraisalPort in April, we have discovered limitations within various appraisal software providers using the AI Ready format when trying to send the level of documentation that the NUC requires."

I have no clue if yours truly had anything to do with it. I do hope that I had a small part in it. Within this same time frame AppraisalPort released something that they had never offered prior in their previous several years of operating. They finally made a PDF converter available for their ENV format.

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Virginia REAB Holds "Special Meeting" on Appraisal Delivery Web Portals: Part 3 of 3 - FNC's Chief Legal Officer Responds

Appraisal Scoop reported previously (click here) on the May 22, 2008 Virginia State Board for Real Estate Appraiser's (VREAB) meeting to discuss among other things, a petition submitted by George Dodd, SRA.  Click Here to: Download Virginia_Appraisal_Board_Petition_052208.pdf

The petition was written to prevent online sites, or web-portals from changing or otherwise altering reports that appraisers prepare.  Web-portals would include such companies as: AppraisalPort, RELS, and other AI ready required companies. It also seeks to limit the illegal PDF stripping down, and programs that erroneously copy information from reports such as Lighthouse.

Click here for Part 1 and for Part 2.

July 23, 2008 - Richmond, Virginia

Mr. Olson, Chief Legal Officer for FNC, did in fact take several minutes to discuss some points, many of which are similar to the comments he had made at previous meetings.  Download Neil_Olson_FNC_Response.pdf   He did not prepare or use a power point presentation this time. He chose to sit at the Board’s table and comment and answer questions as they were asked.

Much of what was said can be summed up in a few sentences.

“The ENV file that is submitted is the true copy. Many recent improvements to the AI Ready format were made that allow for inclusion of more images. The limitations of the presentation and formatting of the reports in the ENV are done so because that is the clients’ wish for the reports to be presented in such a way. He did also say that the security given by the system is the biggest advantage of Appraisal Port.”

Personally, I must say that I respect Neil Olson, any one that is willing to travel this many times and essentially defend his company the way he has done, gets a pat on the back. The lack of interest, or perhaps the lack of presence by the other companies that convert reports, and the lenders that are allowing or requesting it, leaves Mr. Olson there to defend the concept all by himself.

The point he made regarding the lender/client’s wish to have the reports in such a format, I do think this needs to be examined closer. I think a more accurate statement would be that this is the system that Appraisal Port sells to lenders on the merits of rule set reviewing and quality control. The system essentially reads the file and if any of the data in the fields is outside of an established tolerance (example: greater than 10% line adjustment) it is flagged. What I assume happens from there is that a reviewer or otherwise trained person looks over the report and decides if further appraisal review is needed, or if the report properly explains the variance.

One can surmise from the absence of the lender/clients and the fact that the programs are so limited to exclude the appraiser’s intended forms and presentation; it may not really be the lender/client that wants the reports in such a manner.

It is likely that the lender/client was solicited on the benefits of the rule sets and review features. They are not here defending the right to do so, they are leaving that to FNC. I believe this is a reasonable assumption to make regarding Lighthouse and AI Ready. This means that it is likely that the lenders using these types of services may not realize that the reports they are receiving are in many cases, limited in what they can contain. If the lender/client is aware it can be assumed that no consideration is given to the appraisal process when a business decision like this is made.

This may also explain why there has been resistance from Mr. Olson when asked about allowing the lender to receive a PDF, then converting the PDF into an ENV. This would certainly prompt a lender to ask, “Why do WE need to do this?”, and I am sure the credibility of the converted report would then be at question.

There is a loop hole here that is being used to force appraisers to convert formats and then the appraiser be held accountable for what is essentially two different versions of a report. Most appraisers do not understand that the reports are limited, and from many I have spoken to, they do not read the converted report and compare it to the report in their forms package.

Is This What the Lenders Really Want?  Click here to continue reading . . .