BRIAN J. DAVIS & ASSOCIATES
www.OurAppraisal.com
Bloomington-Normal & Mclean Co. Illinois

November 8, 2005

Appraisal News for Lenders

Our eNewsletter

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NEW Fannie Mae Forms Questions & Answers

What's Change?

How many new appraisal
forms are there?

In total, there are eleven new forms covering all residential appraisal types including single family, 2-4 units, condos, manufactured homes and co-operatives. Chart of forms.

What is the required use date
of the new forms?

Appraisals completed on or after November 01, 2005 (destined for FNMA) are required to be on the new forms. FHLMC and FHA have set a required use date at January 01, 2006 but have announced that they will accept the new form after November 01, 2005.

Won't my appraiser know
which form to use?

Brian J. Davis, RAA has been to classes on the new forms and is familiar with the implementation dates, however it is the client's responsibility to know what format they need based on where the intend to place the deal (FNMA, HUD, FHLMC, etc.) and whether they need an interior inspection, etc.

Since my appraisers already
know about the forms, why
could this be a problem?

There are many reasons for problems to occur. Some lenders are not up to speed on the required implementation date for FNMA. The new forms have significant and in some cases controversial reporting requirements. As such, its highly likely that appraisers, underwriters and reviewers will have different opinions on what is expected with regards to completion of individual sections of the report.

This occurred when the URAR was introduced and caused delays in loan closings until appraisers, underwriters and reviewers collectively agreed on what constituted the "minimal reporting requirement" on various issues.

Underwriters, processors, etc have checklists and often "internal policies" that require the appraiser to include such things as a cost approach, special maps, additional photos, etc. that may not be applicable or necessary under USPAP standards.

Habits, procedures and mindsets that have been in place for decades won't disappear overnight. If you are a mortgage broker or loan officer, make sure you know what the under-writing requirements are

What other issues
should I be aware of?

FNMA has different forms for compete appraisals with an interior inspection vs. compete appraisals without and interior inspection. It will be up to you to tell the appraiser which one you need and that may vary from lender to lender.

You must ensure that the appraiser is given a complete copy of the purchase agreement. If you don't, the appraiser will report that you did not and it will be a red flag for the underwriter.

FNMA is worried about flipping. In a markets where there have been value spikes and multiple sales by investors, you need to insure that the appraiser has adequately explained the sales history of the subject and comparables. This is going to be another red flag for the underwriter.

In the past, appraisers reported the property's condition in relation to those in the area. How has this changed?

FNMA use to require the appraiser to report the subject's condition relative to the general condition of units in the neighborhood. I.e., if the homes in the area were generally in fair condition and the subject was in fair condition, the subject would be rated as "average" for the area.

Now FNMA is requiring the appraiser to rate the subject's actual condition, i.e. if the area homes are generally in average condition and the subject needs work, it will be rated "fair." Historically, a "fair" rating on the subject will cause a secondary or primary lender to reject the property.

In addition to the condition rating, the appraiser will also be required to specifically list the condition of various items (carpeting, walls, etc.) that may need some attention. As such, you can expect lenders to require repairs on more items prior to funding. This will also require the appraiser to re-inspect the property, hence time delays and re-inspection charges.

As a side note, for those of you familiar with HUD's Valuation Conditions sheet where appraisers were required to report property deficiencies on a 4-page attachment to the URAR, FHA (after a review of the new FNMA URAR form with its new reporting requirements on condition) has announced that it will be eliminating the need for the VC sheet.

This is significant for several reasons: 1) FHA believes the expanded reporting requirements of the new FNMA form now covers the items formally covered by the VC sheet and 2) its likely that appraisers will begin reporting property deficiencies similar to those required by FHA.

Have the flood hazard reporting requirements changed?

In the past, a property was only considered to be in a flood area if the improvements themselves were in the zone. Now, if any part of the site is in the zone, flood insurance will be required.

What are the new
certification requirements?

Appraisers are now required to disclose not only the use of an assistant or trainee, but also specifically the extent of the trainee's contribution to the report. Some lenders now prohibit the use of trainees or mandate that trainees have only a minor role in the appraisal.

This could be an issue in a pre-funding review or if you have multiple lenders you fund with. Loan officers/mortgage-brokers; make sure that you understand the "use of a trainee" requirements of the lender the loan is being funded by.

Fannie Mae Forms Guide
Chart of Forms
Fannie Mae Forms FQA

The NEW Fannie Mae Forms - Are YOU Ready?

The New FNMA Appraisal Forms

How will they impact your business?

Over the past two years, FNMA has been undergoing the process of changing all of the major 1-4 residential appraisal forms. This is the first major revision of the URAR and related forms in more than 10 years.

When the current URAR appraisal was introduced in the early 1990's, all of the major users of residential appraisal reports joined together for the development and implementation of the forms. This time, FNMA has taken the lead and as a result, there will be different implementation dates.

On the left is a summary of questions and answers regarding the new forms. There are additional references at the bottom of that section regarding the use of the new forms.

What ARE the NEW Fannie Mae Forms?

Residential Appraisal Report (Form 1004 dated March 2005) for an appraisal of a one-unit property (including an individual unit in a PUD project) based on an interior and exterior property inspection.

Exterior-Only Inspection Residential Appraisal Report (Form 2055 dated March 2005) for an appraisal of a one-unit property (including an individual unit in a PUD project) based on an exterior-only property inspection.

Manufactured Home Appraisal Report (Form 1004C dated March 2005) for an appraisal of a one-unit property (including a manufactured home in a PUD, condominium or cooperative project) based on an exterior-only property inspection.

Individual Condominium Unit Appraisal Report (Form 1073 dated March 2005) for an appraisal of an individual condominium unit based on an interior and exterior property inspection.

Exterior-Only Inspection Individual Condominium Unit Appraisal Report (Form 1075 dated March 2005) for an appraisal of an individual condominium unit based on an exterior-only property inspection.

Individual Cooperative Interest Appraisal Report (Form 2090 dated March 2005) for an appraisal of an individual cooperative unit based on an interior and exterior property inspection.

Exterior-Only Inspection Individual Cooperative Interest Appraisal Report (Form 2095 dated March 2005) for an appraisal of an individual cooperative unit based on an exterior-only property inspection.

Small Residential Income Property Appraisal Report (Form 1025 dated March 2005) for an appraisal of a two-unit to four-unit property (including a two-unit to four-unit property in a PUD, condominium or cooperative project) based on an interior and exterior property inspection.

Appraisal Update and/or Completion Report (Form 1004D dated March 2005) for appraisal updates and/or completion reports for all one-unit to four-unit appraisal reports.

One-Unit Residential Appraisal Field Review Report (Form 2000 dated March 2005) for appraisal field reviews for one-unit appraisal reports.

Two to Four Unit Residential Appraisal Field Review Report (Form 2000A dated March 2005) for appraisal field reviews for two-unit to four-unit appraisal reports.
* Excerpted from Fannie Mae Announcement 05-02

Appraiser's Scope of Work for Lending Assignments

How does the new appraiser's Scope of Work differ
and will it cause me an issue?

Historically, agents, buyers and sellers all believed that appraisals not only were used to justify the loan amount, but to substantiate or validate that the property's contract sale price as being "market value."

With regulation and guideline changes, this hasn't been the case since after the S&L crisis. While the reported value by the appraiser may be the same or close to the sale price, contract terms, financing, etc. may be in conflict FNMA's guidelines, appraisal regulations and the client's definition of market value.

Under GLB, the lender is required to give the borrower a copy of the appraisal report. Most do so without explanation of the "unique conditions, guidelines etc" under which the value was derived, because they really don't understand it themselves.

While the GLB requires you to give a copy of the appraisal to the borrower. It does not require you to explain the unique conditions and valuation premises of that value opinion, but it is very important that you do exactly that. The seller, buyer, agent, etc all believe that the appraiser's role in the transaction is to justify the sale price as being representative of market value.

On the new forms, FNMA has made it very clear that the report is for "mortgage lending purposes only." The new appraisals are not intended to establish market value for the sale, but rather market value for underwriting purposes and specifically market value based on FNMA's guidelines . guidelines that mirror the marketplace, but also remove unique or unusual sales from consideration.

The appraiser is required to develop the value opinion based upon USPAP and the client's supplemental guidelines. The client is making the loan, it's their appraisal for their use, developed under their guidelines .its their underwriting tool and it is based on their needs.

Not explaining this unique subtleness does a great disservice to the borrower, agent, etc. You run the risk of alienating your clients because you do not make this issue clear enough.

What ARE the KEY CHANGES?

The new forms require more research and analysis,

firmer representations on the part of appraisers, and
eliminate the cost and income approaches to value.
You and your bank will be getting more useful, solid information, which you may find in different places than you're used to. But you'll still be getting the quality, professional service you expect from us. We won't miss a beat with the new forms and we want to be sure you won't, either.

More comprehensive research required

Formerly the URAR asked the appraiser if there were any apparent adverse site conditions or external factors, like encroachments, environmental issues or land uses. The new version of the URAR eliminates the word "apparent" and may require your appraiser to search recorded deeds and land records.

The new form asks the appraiser to analyze the sales contract for a property being sold and the sales or transfer history of the property for the last three years.

The new form also asks the appraiser to analyze the sales history for the selected comparables for the previous year.

The new form asks how many properties are listed for sale in the subject's neighborhood and in what listing price range. It also asks for the number of comparable sales in the neighborhood within the last 12 months and their sales price range.

The 2055 form now asks for more data than previously, including an extensive sales history of the subject and comparables, like the URAR. The 2055 is now specifically exterior only. For interior inspections, measurements and/or pictures, please order a 1004 URAR.

New Certifications and Limiting Conditions

The new form asks whether any part of the land involved in the mortgage transaction is in a flood hazard area. The former form only asked if the house or any improvements were.

The new form asks whether there are any adverse conditions that affect the livability, soundness or structural integrity of the property. As with adverse site conditions, there's no word "apparent" here, so we are likely to be more thorough in our evaluation.

The new form has the appraiser certify that we didn't use comparables that combined a land sale with the contract purchase price of a house.

There is new, stronger language in the form where the appraiser certifies that we were not subject to pressure to "hit a number," with the current assignment or any future work contingent on achieving a certain value.

The language in the form says "written or otherwise," meaning we cannot complete the new form(s) if our client asks us whether we can "come in" at a certain value before assigning us the appraisal, or threatens not to pay for completed work if the value isn't at least $X. This has always been our policy and now we will need to certify to Fannie Mae that our client has not asked us to reach a certain value in the report. We take this new representation on our part seriously.

No more cost or income approaches?

The new form does not require the "cost" or "income" approaches you're used to seeing if the appraiser doesn't think it's necessary. So you may only see the more standard (for residential mortgages) "sales comparison" approach. Formerly, Fannie Mae required the appraiser to calculate all three. This helps you better understand the opinion of value you're looking for on single family residential mortgage loans where the cost and income approaches aren't as useful.

Brian Davis, RAA
Brian J. Davis and Associates
1303 Dover Rd
Bloomington, IL 61704-7610

www.OurAppraisal.com Ph. 309.662.4070 Fax 877.808.0168

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