Appraisal Scoop

First Impressions of the 1004MC: Part 5 - "Closing Thoughts"

Having completed several "1004MC Workshops", read numerous forum posts and talked to many appraisers, one thing is clear, confusion reigns! Most do not see the merits of the 1004MC. They see the problems, including opposing opinions, various interpretations, and few immediate solutions given the limitations of their MLS data services.

At question is not the concept, but rather the execution. While many believe this to be a step in the right direction of mandating a standard for measuring trends, the format is a "time-consuming problem" versus a "problem solving solution". The unintended consequences over-shadow any potential benefit.

The 1004MC is not about medians, totals, percentages, and ratios, no more than it is about the neighborhood. The form is about "the collateral" and "the trends related to the collateral". While market conditions and neighborhood trends are important, the trends of properties similar to the subject are critical.

Lenders are not making a loan to the market area or the neighborhood; they are making a loan on the subject property, the collateral. As goes the trend for properties similar to the subject, as goes the value of the collateral securing their loan.

Highs and lows

The 1004MC gets an "A" for effort and the focus on the subject verses the neighborhood, "C" for layout and "F" for format and function. I understand the need to "standardize trend analysis", however, the format is such that the numbers may mislead more than "make transparent".

It does get a high mark for two factors, first for attempting to replace opinion with statistical fact, limiting subjectivity and secondly, it requires the analysis to focus on "competitive to the subject from the buyer's perspective", removing the influence of lesser or better properties in the neighborhood that do not compete with the subject.

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First Impressions - The 1004MC - Part Four - "House Cleaning"

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?

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First Impressions of the Fannie Mae 1004MC Marketing Conditions Addendum: Part 3 - "Medians & Misleading"

In parts one and two of "First Impressions of the 1004MC", we identified the challenges presented by the new form. While its purpose is "to provide the lender/client with a clear and accurate understanding of the market trends and conditions prevalent in the subject neighborhood", the "unintended consequences" may (in all likelihood), provide the opposite.

From my perspective, the 1004MC perpetuates a long tradition of two flawed premises in FIRREA (The Financial Institutions Reform Recovery and Enforcement Act); "all appraisers (by virtue of being state licensed) are qualified to appraise" and "the secondary market (by virtue of its policymaking authority) understands USPAP and the appraisal process".

From Fannie and Freddie's perspective, they want consistent application of underwriting and risk management criteria. If appraisers report the same types of information, presumably you get consistency, which is the foundation of risk management. Eliminating "subjectivity" promotes reliability, a step in the right direction. 

As I am developing a seminar and an automated solution to the 1004MC for appraisers, over the past several weeks I have been working through the form to "fill in the blanks", analyze the results and better understand what Fannie and Freddie hope to achieve with the form.

On the surface, the questions are "mere mathematics", medians and counts, products and percentages, along with the trends they foretell. However in practice, the math and the trends are neither simple nor clear. In fact, when examined from a broader perspective they can be "misleading" in terms of how they are calculated, applied and their indications of change and neighborhood trends.

"Competitive to the subject vs The Neighborhood"

How you define "competitive to the subject" will determine the "calculated results" and therefore the "overall trends". In the same dataset, a broad definition could indicate very different trends from a narrow one. How the appraiser determines "the criteria that would be used by a prospective buyer of the subject property", is the key.

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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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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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"What if" ... Oh the Possibilities!

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!

In the The Right Start I talked about a few "what ifs" and my grand scheme to change things. The real questions for many appraisers was "is this doable" and if so "why should I as an individual get involved"? Essentially, what’s in it for me since it will take a lot of "collective effort" to get it going along with perseverance and patience.

It doesn’t take much of an imagination to conjure up a "few perks" that "the association" may yield but to satisfy idle curiosities, here are a few things to think about.

Data and Map Sharing

While we have public non-disclosure rules, what are the rules for a shared database via a professional association?

• Could key data from appraisals be shared among members of the association?
• Would verified data in non-disclosure and disclosure states make a difference in your everyday work?
• What other information could be shared such as market graphs, map mash-ups (see Windows Live Maps) with data overlays for neighborhoods where members could link and share map data, builder brochures, hazard locations, etc.?

Does a national level database make sense?

If say, 25,000 appraisers join "the association" and contribute data, maps, etc., are there users outside of the association for parts of these products?

• Verified sales data base.
• Shared graphs on neighborhoods trends, etc.
• Market reports sold to real estate agents.
• Real estate maps with hazard layers, neighborhood information, graphed trends, etc.

There are many websites providing market data that is misleading. Does a "realty reality" based website make more sense to those looking to finance purchase or sell a home?

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