The effects of the recent announcement made by FNMA (see Announcement 7-11) regarding an appraiser’s responsibility to document and support market analysis and stated conclusions on market conditions are now being realized at the front lines.
Banks, mortgage lenders and investors have begun making demands that appraisers document stated conclusions on market performance indicators (declining, stable, and increasing), supply and demand, and marketing time.
As of July 22, 2007, Fannie’s Desktop Underwriting System (DU) was modified to include an automated appraisal review process in an attempt to identify appraisals that report faulty conclusions founded on inadequate appraiser research and support.
The net effect is this: if the market condition conclusions stated in an appraisal report differ from statistical trend analysis conducted by Fannie, both the appraisal and the appraiser will become suspect. The repercussions of failing to accurately report market conditions could result in Fannie’s refusal to purchase the loan, or worse: the appraiser may ultimately be black-listed by Fannie for all future purchases. Understanding the role of the secondary market has never been a more relevant topic than it is now.
Who is the true “intended user” of appraisal services? Having conducted interviews with a large number of appraisers in the Southern California market area, it is evident that the stream of commerce and the true intended user is unclear to most.
What is the “secondary market” and what role do they play? For those that have dabbled in stock or commodities trading, the function of “liquidity” is a well-known and understood precept: “buy” and “sell” orders under normal operating conditions are executed within minutes, sometimes even seconds, hence – they are liquid.
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But, what about real-estate? If a “sell order” is placed on a home or mortgage, does this same level of liquidity exist? Well, yes and no – depending on who the seller is. For the common homeowner, real-estate represents a hard, illiquid asset that may require months on the open market in order to sell. Conversely, the secondary market provides liquidity to large investors who trade mortgage-backed securities (home mortgages) like playing cards. This secondary market includes players like Fannie Mae and Freddie Mac who, until recently, offered a level of liquidity that rivals that of the stock market.
The pressure to report the truth about current market conditions has now been placed squarely on the shoulders of the direct lender. Based on recent announcements, secondary market participants have stated their intentions to raise the bar on the quality of mortgage-back securities by making selective purchases contingent upon the quality of the appraisal that ultimately funded the loan. This action alone will substantially impact the liquidity of mortgage backed securities and will most certainly result in Lenders becoming more selective in the appraisers they engage.
Unless the loan is serviced by the originating lender, the probability of an appraisal finding its way into the secondary market is extremely high. With major banks now strapped for cash, the option to package a block of loans for sale to the secondary market is highly probable; and, the appraisals that funded these loans will be sent with the transaction and will come under scrutiny.
The road will be short for appraisers that have not developed the skill to develop, report and defend market condition conclusions. For those that have acquired the skills to accurately measure and report market conditions, the journey is only beginning.
For more information on how to measure, support and present market conclusions, please visit our web-site at www.express-appraisals.net.
[Editor's Note: The author has modified his business model in response to market conditions. Dennis offers a variety of webinars to appraisers . Click here for more information.]
AUTHOR: Dennis Jorgenson, Licensed Staff Appraiser, Express Appraisals Group - Associate Member of the Appraisal Institute 7375 Day Creek Blvd. Ste. 103-149
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