Inside and Outside the Boxes:  Covering Your Fannie

This article reprinted with permission of Brian Davis of

The Federal National Mortgage Association (FNMA) represents a major part of the secondary market. FNMA is the "government sponsored entity" referred to in the Scope of Work, Limiting Conditions and Certifications in the URAR. Their guidelines are the "yardstick" by which mortgages are measured.

FNMA's Appraisal Guidelines - Key Issues

There is one reoccurring theme throughout the FNMA Guidelines. The lender and the appraiser are responsible for the reliability of the value opinion. In FNMA Announcement 07-11, "Collateral Valuation Practices and Declining Markets", FNMA restated its emphasis on the lender's and the appraiser's responsibilities.

  • The lender has sole responsibility for managing the appraiser relationship and the activities of the appraiser it selects.
  • The lender must have appropriate business controls in place to avoid actions that may compromise the accuracy of the appraisal report.
  • Provide objective assessments of market conditions; describe reasons for these trends and indicate what impact these trends have on the subject property.

While some appraisers looked upon the direction in the memo as "new policy", it was neither new nor clear and merely a restatement of existing guidelines. Essentially, what FNMA wants today is the same thing they always wanted, risk free loans.


Fannie Mae Announcement 07-11: Overstating Property Values In Declining Markets
FAQs for Announcement 07-11, Collateral Valuation Practices and Declining Markets (PDF)

FNMA & Hedging

FNMA hedged their bet by transferring full appraisal responsibility to the lender and appraiser. The lender has a mortgage buy-back clause while the appraiser is required to have errors and omission insurance. Should a loan go bad, FNMA will look to the lender and the lender in turn, will look to the appraiser.

In a fluctuating or declining market, it becomes far more important for appraiser to understand FNMA Guidelines and document market trends in a manner that clearly identifies the risk. Doing so alerts the lender to consider the risk and make the appropriate underwriting decision.

Key excerpts from FNMA's Guidelines:

Specific language from FNMA is in italics. Note what FNMA requires in reference to the market, neighborhood and subject property. What level of documentation must the appraiser provide to satisfy these requirements?

XI, 102.01: Objective & Unbiased Appraisals (03/20/95)

The appraiser's comments that address an unfavorable condition must discuss how the condition affects the value and/or marketability of the property being appraised and explain how the condition was taken into consideration in the valuation process.

In a declining or fluctuating market, or if there are unfavorable factors within the neighborhood, the appraiser must indicate the impact to the subject property. No simple task.

XI, 203: Appraisal (or Property Inspection) Reports (06/30/02)

The appraiser's analysis should go beyond any limitations of the forms, with additional comments and exhibits being used if they are needed to adequately describe the subject property, document the analysis and valuation process, or support the appraiser's conclusions. The extent of the appraiser's data collection, analysis, and reporting must be determined by the complexity of the appraisal assignment.

In difficult markets, the assignment is "complex" and FNMA is expecting the appraiser to go beyond the limitations of the URAR form to analyze the data and support their conclusions.

XI, 403: Neighborhood Analysis (06/30/02)

  • Generally accepted appraisal standards and our appraisal report forms require the appraiser to 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. Failing to report such factors or conditions in the appraisal report and/or making assumptions about those factors that might affect value without performing adequate market research are unacceptable appraisal practices.
  • The appraiser must understand the value-influencing characteristics in the neighborhood and arrive at an appropriate neighborhood description and opinion of value for the property even if this requires more extensive research for particular property types or for properties in certain geographic locations.
  • The appraiser must consider the influence of market forces economic, governmental, and environmental on property values in the neighborhood or market area.
  • The appraiser 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.

XI, 403.03: Trend of Property Values, Demand/Supply, and Marketing Time (01/31/06)

  • The appraiser must report on the primary indicators of market condition for properties in the subject neighborhood by noting the trend of property values, the supply of properties in the subject neighborhood and the marketing time for properties as of the effective date of the appraisal. We also expect the appraiser to describe the reasons when the trend of property values is declining, supply is an over-supply, or marketing time is over six months.
  • The appraiser's analysis of a property must take into consideration all factors that affect value. Because we purchase mortgages in all markets, 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).

How are appraisers accomplishing this? You cannot simply check the "declining trends" box in the one unit housing trends section of the neighborhood without analysis and support for these conclusions within the appraisal report.

FNMA Announcement 07-22 - Maximum Financing in Declining Markets.

In December, FNMA announced its policy to lower the loan-to-values of properties in declining markets, essentially reducing mortgage availability for many borrowers and increasing pressure on the appraiser to support conclusions with regard to "declining trends." Click here to download the document.

As before, FNMA directed lenders and appraisers to use sources such as Case-Shiller, OFHEO and NAR reports as a guide to identify value trends in the market. While these services report the overall trends of the metropolitan areas they cover, trends at the regional area level may be different then those at the neighborhood level. Ultimately, it's the appraiser's responsibility to determine the neighborhood's value trends and report the impact of those trends on the subject property.