Outside The Boxes - Part 1: What does Fannie Mae want to know?

This is the first in a series on the URAR from the course "Inside & Outside the Boxes: Developing and Communicating the URAR.  Each week I'll be covering different topics related to residential appraisal development and reporting. - Patrick Egger

While the URAR form provides for the appraiser's observations, the real challenge is not the answers inside the boxes, but the questions being asked … outside the boxes.  ."

What question does the client want answered? Is it only "what is the value of the property" or is something else also being asked?

The valuation process has 8 steps and the first step is "definition of the problem"

From the client's perspective, "We're making a 30-year loan to a buyer, using this property as security. Please provide us with an opinion as to the current value and your assessment of the market environment in which the property exists."

Since market conditions fluctuate and neighborhoods cycle, the client needs a "time line" for the market so that they can understand at "what point" on that line was the appraiser's "snap shot" taken and what is the appraiser's assessment of the factors impacting the subject property (past, present and foreseeable future)?

From FNMA:

• It is the role of the appraiser to analyze the market, identify the trends and develop a value opinion (reflective of the market) as of the time period or "date of value."
• It is the role of the client to consider the appraiser's report, market evidence presented, credit worthiness of the borrower, etc., to appropriately measure the risk and underwrite the loan.

Two parts data, one part perspective:  Consider the "one-unit housing trends" section of the URAR from the client's perspective, a long-term mortgage. Neighborhood factors are key considerations in the evaluation of risk and FNMA Guidelines make it clear that factors impacting the neighborhood are to be considered as well.

From FNMA:  The appraiser …

• Must consider the influence of market forces—economic, governmental, and environmental—on property values in the neighborhood or market area." … 
• Must determine, analyze, and consider the factors that should be considered in the valuation process based on his or her identification of all forces or factors that have the potential to influence the value of the property.
• Must take into consideration all factors that affect value.
• This is particularly important for market areas that are experiencing significant fluctuations in property values (including sub-markets for particular types of housing within the market area) … "

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To meet these objectives the appraiser needs to have perspective of the economy, employment, population trends, housing demand along with the short and long-term impacts of cycles, trends and fluctuations in supply, demand, housing prices, etc.

While the URAR is "neighborhood specific," FNMA and USPAP require the appraiser to analyze the market environment beyond the neighborhood to identify factors in the housing market, economy, etc. that may impact the subject property.

From FNMA:

• It is expected that the appraiser will utilize generally accepted appraisal standards … research, analyze, and report on the factors in the neighborhood that may affect the market value or marketability of the properties in the market area.

Market analysis is complex. Absent specific directives from FNMA and lacking a consensus of the "appraiser's peers" as to what should and should not be considered, how do appraisers answer these questions?

Effectively, one of the most critical and complex evaluations of the subject property is open to broad interpretation and subjective analysis. Can it be done, absolutely it can. The key is to focus on factors that impact housing; communicate the indicators, trends and potential risks to the client; and let the client make the appropriate risk decisions.   

While the appraiser's task is to answer the client's value questions, the answers must be presented in a manner that permits the reader to comprehend and follow the appraisers logic. 

Therefore it is important that appraisers include two key elements in the report:

1. A housing market summary (with key economic indicators related to housing demand) to provide the client with perspective on factors influencing the market.
2. Reference to standards or definitions used in the development of the housing market summary, analysis and value opinion.

The first can be accomplished by presenting key economic indicators and trends while the second is merely a reference to sources such as the "Appraisal of Real Estate", "Real Estate Appraisal Terminology" or "The Essentials of Real Estate Economics". 

Upping the Liability Ante - In 2007, FNMA and FHLMC issued amendments to their guidelines that addressed declining market issues and made it clear that housing market trends and fluctuations must be considered by the appraiser and addressed in the URAR.  Unfortunately, terms associated with shifting markets, trends, regression, etc. are not universally understood.

Until recently, in most markets appraisers haven't had to deal with fluctuations or declining trends and therefore many haven't developed techniques or formats for reporting shifting market conditions and economic trend indicators in a way that is easily understood nor in a manner that shifts the burden of risk assessment from the appraiser to the client.

FNMA and Freddie Mac hold lenders responsible for the accuracy of the appraisal. Lenders are expected to review the report and to determine the property's acceptability. Making it easier for your client to do just that will also make it easier for the client to see the professional you are.

The goal is for the client to comprehend the findings and use that knowledge to complete a successful real estate transaction.  Authoring a report that is meaningful and that provides the basis for understanding the property and its market environment is the key to solving the client's problem.

What makes a good appraiser has less to do with time in the field, coursework or credentials behind their signature and more to do with how well they grasp "the principles of value", apply "the value of their principles" and communicate their findings to the client.

In part two, we'll examine cycles, fluctuations and one unit housing trends.

About the 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 [email protected]