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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From my perspective, the "one-unit housing trends" on the URAR reflect the trends "for all properties in the neighborhood", not just those directly competitive with the subject. The neighborhood may have a range of 1,200 to 2,200 SF and the subject can be in, at the top or bottom of that range. While some of the sales represent a "substitute property", a buyer looking for a 1,200 SF home is not in the market (or cannot afford) for a 2,200 SF home in that area, nor would a buyer looking for a 2,000 SF home consider a 1,200 SF home. 

As such, trends for homes that are truly "comparable to the subject" may not reflect the overall trend in the neighborhood as required for the URAR. This was evident in the example used in the class, a large subdivision in Phoenix, AZ. The neighborhood's overall trend was declining, while the segment directly competitive with the subject (1,600 to 1,800 SF) was stable or slightly increasing. This will require the appraiser to comment and document (more addenda), since "all ships do not rise and fall with the tide ... equally". 

You can have one trend for the lower end of the neighborhood (simply based on size, price, etc.) due to a buyer's desire to get into that area, school district, etc. and another trend for the upper-end properties, due to an excess of homes for sale. As such, we will have to be careful to measure and provide support for conflicting trends between "competitive to the subject" and "overall neighborhood".

Another red flag, "inventory analysis instructions" for the 1004-MC. Per Fannie Mae, the absorption rate is reflected by the number of sales over a period, divided by the period. 60 sales over 6 months, equals a rate of 10 per month. Again, the 1004MC requires the appraiser to consider "comparable to the subject" for the absorption rate. The supply of homes (total listings) divided by absorption rate equals months of inventory.

The current inventory in the neighborhood may or may not be competitive to the subject. As such, neighborhood supply in the "one-unit housing trends" in the neighborhood section of the URAR will be different than months of supply (or over/under supply) identified on the 1004MC.

How will you account for "effective supply" vs. "actual supply"? NAR has published various articles on issues faced by agents regarding "unsalable price points" being set by owners. If there are 50 homes available and the absorption rate is 5 homes per month, you have 10 months of supply. If 5 months of supply is considered normal, you have an over-supply situation.

What if 25 of those 50 listings are "significantly over-priced", that is, at a price point where they won't sell? You have 10 months of supply "on paper", however, if only 25 of the homes are appropriately priced, the "effective supply" represents 5 months and the "effective trend" would be "in balance", requiring more explanation and comments, since the value opinion relates to marketing time, competition, etc.

One more issue with the 1004MC, the appraiser will need to document and support his/her rationale for the various areas of the new forms and required conclusions. While the 1004MC is one-page, it will take a few more pages, charts, etc. to document your findings and support your conclusions, which must be included with the URAR.

More to come

Fannie Mae is taking steps in the right direction with the 1004MC, but still needs to "clarify" more than a few issues on the form and in Announcement 08-30, including adjustments for "effective age", the use of the cost approach for insurance purposes, concessions, etc.

To be consistent, appraisers must understand the issues and conflicts the new 1004MC and Announcement 08-30 present. The 1004MC requires analysis of properties "competitive with the subject" and their trends, something that is vital to understanding the subject property. However, those trends may not be the same as the "one-unit housing trends" for the overall neighborhood, something that could be misleading.

This concept is well illustrated by the Case-Shiller, OFHEO and NAR housing market indexes. You can have a "regional area" with a declining trend overall and a sub-market or neighborhood that is stable or increasing. "Not all ships rise and fall with the tide … at equal rates".

Trends must be segmented to present the impact of the "four forces" (if any) on the market, neighborhood and on the subject property. The 1004MC is a step in the right direction, but it doesn't provide the transparency intended, perhaps just the opposite.

As professionals, we need to take a few steps in a new direction as well, to ensure the intended user gets the message. Regardless of how you interpret the 1004MC, Fannie Mae's instructions or USPAP, the assignment is the same as its always been, "provide the client with the analysis needed to identify, measure and underwrite the risk associated with the subject property".

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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]  Look for the new Outside The Boxes category for a collection of Patrick's articles on Appraisal Scoop!