Many appraisers misunderstand the place Fannie Mae has in our work, and that misunderstanding helps create misleading appraisals.
Fannie Mae is a participant in the secondary market, buying mortgages from lenders and turning around and selling them to investors. This helps provide lenders with the funds to make new loans. When Fannie acquires and then sells the loan, your appraisal goes along with it.
Now, Fannie Mae deals with only a certain type of collateral. Fannie does not deal with loans secured by industrial property or commercial property; residential property alone is the world that Fannie participates in. But, it gets more specific than that: although Fannie Mae does get involved with other types of residential properties, Fannie generally deals with single family residential properties that are “typical,” such as a three-bedroom / two-bath home in a suburban area.
Fannie has other specifics in mind in determining if a mortgage loan is the type they will buy and sell on the secondary market. We’re all familiar with them: comparables within one mile of the subject; net and gross adjustments that do not exceed 15% and 25%; the home can’t be on a large acreage parcel, etc.
For example, if the property you are appraising is on 122 acres, it is not Fannie Mae collateral. If your subject property is so unusual that the best comparables have adjustments in the range of 60% to 80%, then that property may not be Fannie Mae collateral. If that property does not conform to the type that Fannie works with, it is called “non-conforming” collateral, just as a medical office building would be the type of collateral and type of loan not suitable for purchase by Fannie Mae.
It’s rather like playing Monopoly; some people always go for Broadway and Park Place; others like the trio of Oriental, Vermont, and Connecticut Avenues; some absolutely love the railroads. Lets say you like to go for the lower end to middle trios, such as between “GO” and “Free Parking.” Another player offers to sell you Park Place. You may decide that it’s a nice property, but you don’t really want to spend that much money on one parcel, and there’s a good chance you’ll never get Boardwalk, so you just aren’t interested. So, too, Fannie Mae has property preferences.
It is extremely important for an appraiser to realize that if he or she is appraising a property that is not suitable as Fannie Mae collateral (it’s Water Works, say, not St. James Place), then it’s just not suitable, it’s just not something Fannie will purchase! The nature of the property IS what it IS. If your client asks you to revise your appraisal, showing that the home sits on 2 acres, not 122 acres, they are asking you to make the property look like it qualifies for Fannie Mae – when it does not!
If you are desperately seeking comparables within 1 mile of the subject property, but the best comps are really 1.3 and 1.5 miles away, and you just don’t know what you’re gonna do – don’t worry! Or, if you’re fudging on your adjustments to make sure they don’t exceed 15% net and 25% gross – don’t! It simply may not be the type of collateral Fannie Mae wants. It IS what it IS, and we’ll cross the ethical line into “Lawsuitsville” when we try to hide the facts.
You see, appropriate appraisal practice considers how the market really and truly would react to the subject property. If typical, prospective buyers of the subject would also check out competing homes 3-5 miles away, then the appraiser by golly better go there, too, in the search for comparables. Your appraisal will then be truly “market derived” and market reflective.
Yet, how many appraisers have it exactly backward? Fannie Mae’s “guidelines” about the type of collateral they’ll work with has now been perverted and has become the “bible” of appraising every type of property in every type of situation. Comps have to be within 1 mile, lot can’t be large acreage, drone, drone, drone.
That “backward bible” is wrong, wrong, wrong!
If your best data falls outside of Fannie's parameters, then ignore those guidelines and keep going with it! Use the best data, put out a quality report with a realistic value, signed by you, a top-notch, professional appraiser. Remember the traditions and principles of appraisal practices – and stick to them in all cases! Let Fannie decide if it’s the type of loan they want or not.
This “backward bible” has also been adopted by waaaaay too many mortgage brokers, loan officers, and underwriters, sometimes in ignorance, sometimes not. That may have been the way they were (mis)trained. Or, perhaps its that they really, really want to make a profit on this loan and then sell it to Fannie for a second profit – so they need the appraisal to look like it “conforms” to Fannie’s desires. Again, the appraiser gets the pressure. In cases like that, I tell them I cannot cram the ugly stepsister’s foot into Cinderella’s shoe! And I won’t try.
Lastly, the truth of the matter is this: Fannie DOES accept an appraisal where the comparables are more than a mile away. Believe me? Go check out Fannie’s Selling Guide yourself...
Author: Barb Torres, ASA - Real Property, Accredited Senior Appraiser, American Society of Appraisers, California State Certified General Real Estate Appraiser - Phone: (760)341-8541
Recent Comments