This article reprinted with permission of Brian Davis of AppraisalScoop.com.
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.
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.
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 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.
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)
XI, 403.03: Trend of Property Values, Demand/Supply, and Marketing Time (01/31/06)
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.
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.