Three items on that list are worth more discussion:
- Lender changes to the appraised value and guidance on addressing appraisal deficiencies
- Appraiser selection criteria
- Market Conditions Addendum to the Appraisal Report (Form 1004MC)
Picture this: You've signed a contract to sell your house. Your buyers say they have nailed down the right mortgage. All is well. But then the appraisal comes in low -- $25,000 to $50,000 under what was agreed upon in the contract.Fannie Mae, in their Announcement, links to language in the Selling Guide to make it clear that such actions by the lender or underwriter are NOT PERMITTED.
The lender insists on cutting the mortgage amount to reflect the lower appraised value. You refuse to negotiate anywhere near the price indicated by the appraisal, and suddenly -- poof! The whole deal is off. You, the buyers and the agents involved are all left sputtering over the appraisal that scuttled the transaction.
This scenario is not unusual in many markets across the country, say home builders, brokers and appraisers.
Here's one little-publicized reason why: Lenders unilaterally may be lowering the numbers on the appraisals submitted to them, in order to avoid accusations that the loans they sell to giant investors Fannie Mae or Freddie Mac are based on inflated appraisals -- even slightly inflated.
Changes to the Appraised ValueThat guidance certainly differs from reports we've heard from the field and relayed to Ken:
The lender is responsible for ensuring that appraisal reports are complete and that any changes to the report are made by the appraiser who originally completed the report. If the lender has concerns with any aspect of the appraisal that result in questions about the reliability of the opinion of market value, the lender must attempt to resolve its concerns with the appraiser who originally prepared the report. If the lender is unable to resolve its concerns with the appraiser, the lender must obtain a replacement report prior to making a final underwriting decision on the loan. Any request for a change in the opinion of market value must be based on material and substantive issues and must not be made solely on the basis that the opinion of market value as indicated in the appraisal report does not support the proposed loan amount. For information concerning the process lenders must follow to address a change of the opinion of market value, see Guidance on Addressing Appraisal Deficiencies, below.
Lenders must pay particular attention and institute extra due diligence for those loans in which the appraised value is believed to be excessive or where the value of the property has experienced significant appreciation in a short time period since the prior sale. Fannie Mae believes that one of the best ways lenders can reduce the risk associated with excessive values and/or rapid appreciation is by receiving accurate appraisals from knowledgeable, experienced appraisers.
In other situations, we have seen out of state reviewers and "Chief Appraisers" for certain lenders contact appraisers with their concerns about value, suggest alternative comparable sales and "more credible" value estimates. These comments are based on first hand, personal experience.
Typically, Gregoire says, the lender orders a low-cost electronic valuation -- based on publicly available statistical data, with no onsite inspections -- to review the accuracy of what was submitted by the appraiser. If there's a discrepancy between what the computer says and what the appraiser reports, the lender's underwriters sometimes simply cut the number -- even if this means knocking the real estate transaction off track. Or they demand an immediate explanation from the appraiser.The fact that Fannie decided to specifically address this in the Selling Guide seems to indicate the practice of arbitrarily changing the opinion of value must be fairly widespread.
Ken also addresses the Fannie guidance on Appraiser Selection Criteria:
Fannie also makes it clear that the use of an Appraisal Management Company is not required to comply with the HVCC.
Fannie's new guidelines also attempt to clarify other issues that have arisen during the past year, including the widespread use of inexperienced appraisers who are unfamiliar with local market conditions. Real estate agents, builders and mortgage brokers have complained to Congress that rules adopted by Fannie and Freddie last year encouraged lenders to use "appraisal management" companies to value properties.Specific guidance is in the Selling Guide, page 476
Those companies, in turn, often pay appraisers deeply discounted fees -- half off traditional prevailing rates in some cases -- and require them to complete their assignments far faster than normal turnaround times. Critics have said that low-budget appraisers working for management companies frequently travel long distances to do their valuations, have minimal access to local data, and make excessive use of foreclosures and short sales as comparables
Fannie's letter attempts to clarify its "appraiser selection" standards. Top on the list: Appraisers should be experienced, "have the requisite knowledge" about local market conditions and have access to all local data sources. Fannie also emphasized that the demonstrated experience of an appraiser should always trump fees or turnaround times -- a clear swipe at management companies that bid out their work on the latter two criteria.
- neither the Home Valuation Code of Conduct (HVCC) nor Fannie Mae requires the use of a third-party vendor;
- lenders are ultimately responsible for representations and warranties related to the value, condition, and marketability of the subject property; and
- lenders must hold the AMC responsible for complying with Fannie Mae’s requirements.
There is still a BIG question about the use of Review Appraisers. This section of the Selling Guide requires an inspection of the subject property by the appraiser signing the report. The section of the Selling Guide that addresses lender/underwriter changes to value opinions outlines the procedures the lender must follow if they do not have faith in the original appraisal. One of those is an Appraisal Review.
Although Fannie has not spelled it out, in reading all the sections together, I believe the Review Appraiser would have to meet the same, "USPAP Plus", Competency Standard the new language makes clear.
That leaves the Fannie Mae 1004MC. There's plenty to discuss about the "new" guidance. My concern is that it will result in a misleading report, or misleading information about the condition of the current market. It's worth a post of its own.
UPDATE - Thanks to Jonathan Miller (MATRIX) for the mention and link!