Fannie Mae has put lenders on official notice that they can only use appraisers who are knowledgeable about the area in which they are being asked to value property, and who have the ability to access records on recent sales in those markets.
In a June 30 notice updating several policies related to appraisals, Fannie Mae also fleshed out previous guidance to lenders on the selection and use of comparable sales, saying appraisers must consider a property’s condition when choosing to use foreclosure sales or short sales as comps.
Fannie Mae is also barring lenders from making unilateral changes to appraisal reports, including the appraised value, saying only the appraiser who completed the original report is authorized to change it.
If lenders can’t work out their difference with the appraiser, they can order a formal review or a new appraisal, Fannie Mae said, but must stick with the new appraisal’s findings.
The mortgage securitization giant also said that new rules for appraisals adopted last year by Fannie Mae and Freddie Mac don’t bar Realtors or other authorized third parties from requesting that appraisers correct factual errors in their reports, or provide additional information or explanations about the basis for their valuations.
Some lenders cited the new rules as justification for policies that prohibit communications with appraisers, Fannie Mae said.
Since the new rules for appraisals were adopted in May 2009, Realtors have complained that lenders have been relying more on appraisal management companies, and that appraisals are more likely to fall short of the contracted sales price.
The Home Valuation Code of Conduct, a product of New York Attorney General Andrew Cuomo’s investigation of the mortgage securitization process, was intended to protect appraisers from coercion by lenders.
Although it does not require lenders to use appraisal management companies, commonly referred to as AMCs, many lenders choose to employ AMCs to ensure they are compliance with the code.
Realtors and independent appraisers claim that AMCs often employ appraisers with little experience in the markets in which they are asked to provide valuations. Builders have also complained that the inappropriate use of distressed properties as comps have dented new-home prices.
Federal regulators that oversee Fannie Mae and Freddie Mac have defended the code of conduct, saying it’s improved the quality of appraisals.
In ruling that Fannie and Freddie would not be required to fund an independent institute to investigate complaints about attempted violations of the rules, the Federal Housing Finance Agency noted that the code will no longer be in effect after Nov. 1.
Language in the financial reform bill now under consideration by lawmakers would require a new Consumer Financial Protection Bureau to draft new interim rules for protecting appraiser independence within 90 days of the bill’s passage that would supersede the Home Valuation Code of Conduct.
In the meantime, Fannie Mae says post-purchase reviews of mortgage loan files have identified issues with appraisals, leading it to add new policy requirements and clarifications to a number of appraisal sections of the selling guide it publishes for lenders.
Appraiser selection
The new guidance on appraiser selection begins on page 476 of the selling guide, and is effective immediately. Lenders must use appraisers who "have the requisite knowledge required to perform a professional quality appraisal for the specific geographic location and particular property type," Fannie Mae said, as well as access to "necessary and appropriate data sources for the area in which the appraisal assignment is located."
Although the Uniform Standards of Professional Appraisal Practice (USPAP) spell out procedures that allow appraisers who haven’t demonstrated their knowledge and experience to accept and complete assignments, Fannie Mae said it will not allow that flexibility.
"In addition to knowledge, experience, access to the appropriate data sources, and geographical competence, the quality of appraisal work is a key criterion that the lender should use in selecting an appraiser," Fannie Mae said. The requirement for an appraiser to produce a high-quality work product "must always outweigh fee or turnaround time considerations."
The Federal Housing Administration adopted new appraisal guidelines on Feb. 15 that include "geographic competency" requirements.
Choosing comps
Guidance to lenders on the selection and use of comparable sales begins on page 532 of the selling guide, and is effective immediately.
Appraisers will be required to perform a neighborhood analysis in order to identify the area that is subject to the same influences as the property being appraised, based on the actions of typical buyers in the market area.
If an appraiser believes a foreclosure sale or a short sale within that area is an appropriate comp, the appraiser cannot assume it is equal to the subject property, Fannie Mae said. Appraisers are required to identify and consider any differences from the subject property, such as the condition of the home and whether any stigma has been associated with it.
When performing valuations of newly built homes, appraisers may need to rely solely on the builder of the property for comparable sales data, Fannie Mae said.
If comparable sales data is not available from typical sources, such as public records or multiple listing services, appraisers are permitted to verify recent sales of new homes by viewing a copy of the HUD-1 settlement statement from the builder’s file.
Fannie Mae will continue to require at least three comparable sales, although more may be submitted. While comps from the subject property’s neighborhood are preferred, comps located in competing neighborhoods are allowed, as "these may simply be the best comparables available and the most appropriate for the appraiser’s analysis," Fannie Mae said.
When that situation arises, appraisers must indicate the comparables are from a competing neighborhood, and address any differences that exist, instead of simply expanding the subject property’s neighborhood boundaries to encompass the comps selected.
Lender changes
Guidance on lender changes to appraised value and guidance on addressing appraisal deficiencies begins on page 543 of the selling guide, and applies to all loan applications dated on or after Sept. 1, 2010.
If lenders have issues with any findings in an appraisal report, including the appraised value, they must attempt to resolve their concerns with the appraiser who originally prepared the report, Fannie Mae said.
"It is not acceptable for the lender to exercise blanket discretion by arbitrarily changing the opinion of market value from a report for use in the lending process," Fannie Mae said.
Only the appraiser who originally completed the report is authorized to make changes. If lenders can’t resolve their concerns, they may order another appraisal report, but must rely solely on that report’s estimate of market value.
Lenders cannot "simply average the two opinions of market value in order to arrive at a final value conclusion," Fannie Mae warned.
In another miscellaneous change to policies governing appraisal forms and report exhibits beginning on page 492 of the selling guide, Fannie Mae stated that for loan applications filed on or after Sept. 1, 2010, it would require interior photographs of specific rooms and areas whenever an interior inspection is performed.
