Home : Blogs : Marc Brinitzer : Marc's Blog

“Check Your Appraisal”

….was the heading on yesterday’s email from Wells Fargo Wholesale. This is a heads-up to Realtors and home buyers…

Fast Rewind

In mid July, FannieMae issued Announcement 07–11, entitled Collateral Valuation Practices and Declining Markets. Here are several key points from the memo:

FannieMae’s Desktop Underwriter (DU) Version 5.7 released July 22, will now generate a message when it thinks that a property is located in a declining market.
The appraiser must also indicate when the property is in a declining market.
The lender is responsible for ensuring the accuracy of the appraiser’s work.
Any pressure by the lender on an appraiser will cause the mortgage loan to be subject to immediate repurchase by the lender.

What’s The Big Deal?

The appearance of that term—declining market— in an appraisal has thrown a monkey wrench into many a loan approval. Appraisers avoid saying it, and lenders discourage the use of the term. However, FannieMae is tightening its jaws on past practice with this announcement. The teeth in those jaws are threat of immediate loan repurchase by the lender.

read on

Posted by Marc Brinitzer on 08/24/2007 10:19 PM

Comments (38)

appraisal, declining values, mortgage, subprime, bubble

This post has been included in California Information Sacramento County, CA Information
Post is included in group: Mortgages
Post is included in group: What is New in Loan Products
Post is included in group: Everything California

38 Comments on “Check Your Appraisal”

AUG

2007

All lenders are tighening their guidelines. It's good to see, however, it may keep good borrowers from purchasing. Even better reason to keep your credit "squeeky clean".

Good point. Thanks for pointing that out. I will look at the next appraisal I get very carefully. The burden on the lender is a strong hammer.

Thank you, Marc, for your post. As if we did not have enough problems, now we may be shot down by the appraiser!

Who the heck is going to decide these "declining" areas? That's my big concern.

Thank you,

DavidC

Appraisals is one way that the market is being readjusted. This is an example of just that. If FannieMae is not going to buy a loan the lender will not do it. This reminds me of about four years ago when FannieMae quit buying loans on double wides. No one would lend on a double no matter how it was anchored.

Sign of the times...Lenders are getting very tight with the funds. Those quick commitments are not so quick any longer

Hi Kay, I do not see what credit has to do with Marc's post. An appraiser can blow the deal, no matter the credit worthiness of the buyer. The declining market tag can be up to one person's discretion. That's the rub! Am I reading you right, Marc?

DavidC

I don't think this is such a bad thing. I've had deals with the lender "shopped" 3 appraisers until one "gave him some love" (his terms, not mine). The pressure on appraisers is huge, and pressuring them to inflate values helped to create a problem.

Yes, this will keep some buyers out of the market, but they shouldn't be in it in the first place.

The declining market tag will be an interesting variable...

Marc - Good post. This issue is really getting a spotlight the past few days. I find the language very vague in the guidelines.

The lender is responsible for ensuring the accuracy of the appraiser's work.

Appraisers are third parties hired to give their opinion of value. Appraisers have worked very hard studying to be eligible for their licenses and have worked in apprenticeships several years. They have professional knowledge and experience to look at the features of a home and market trends. What is scary in that appraisals are not all encompassing when it comes to features. When an appraisal is ordered the appraiser visits the subject property and evaluates first hand the condition of the subject property. That first hand knowledge is then compared against raw data from prior sales without knowledge of the condition or features of the comparable properties.

I am unable to ensure -- guarentee -- accuracy of a report on a property I have never seen. I now pass it to an underwriter or appraiser review in my lenders office who may be states away. They are unfamiliar with the property and dumb about the area. How can this person ensure (guarentee) the accuracy? The accuracy is guarenteed by the LICENSEE who has signed the report. Isn't that what they are being paid for?

I know it is what we are facing but it sure doesn't make sense to me.

The choice is either increasing or decreaaing, the option of neutral is not available. Increasing is difficult o prove today in some markets.

I understand the thinking beind this. We sell Atlanta Real Estate, and this market is usually a great market even in a bad economy, but this time it is takign a hit as well.

Thank you for this informative post!

This goes hand-in-hand with a post I read yesterday, that the lender decided the appraisal was wrong, since they don't believe the market has hit the bottom yet. So the lender reduced the appraisal by $100,000!

Can you label an area as declining? wouldn't you have to give a reason..... Like ghetto area ? :) thats a no no I thought.

How can a realtor find out what is considered an declining market in a given area? How can one determine how much it will have an impact on value- e.g. what percent decline?

Thanks for the info, good article

I had coffee with a lender today who gave me a heads up on this. It was kind of scary as our market is currently stable.

Good article

AUG

2007

Good post. Recently heard of a situation where they went through 4 different appraisals to finally get one that they "liked". Oh well.....

It's probably a "not so good" sign of the market in my area (Michigan) but I've had several mortgages over the last year that have gone on to an appraisal review. (I believe that is when the underwriter says "let's have others take a look at it") All of them came out fine but it certainly showed me that they are cracking down, and rightfully so (in my opinion).

Very prudent by Fannie Mae. Hight LTV loans in a declining market isn't wise. I see this as a good protection measure for the consumer!!

Sounds to me like a conspiracy to hold down property values. 'Guess all the government agencies are too busy clamping down on greedy real estate agents to even notice... Seriously, if NAR came out with something like that, you know the DOJ would be all over it!

"immediate repurchase".

That should cause some very cautious underwriting guidelines. Maybe that's why my listing didn't settlement last week. They had a full loan commitment and still didn't settle.

Shucks.

Great post. For more information, take a look here. This links to a pdf file from Fannie Mae.

Key item to note: "There is no standard industry definition of what constitutes a declining market." But, they do then list a few indexes to consider. Everything we've heard about this so far has been so very vague.

I haven't had any appraisals kicked back yet as being in a declining market.

Yep, just another example of the ripple effect.........every aspect is becoming tighter and more scrutinized.

great post

Thanks everybody!

David, I'm not sure how areas are earning the "declining market" designation, but I don't think it's one person's discretion. At least a couple of my wholesale lenders have provided lists that have come from somewhere. Even if those lists are proprietary, FannieMae's DU engine is also reporting this so they must have their own list. My entire market area appears to be affected, so I'm keeping a close eye on all those borrowers for whom I am attempting to secure 100% financing.

In the end, this issue may result in more conservative lending. I think that's great. However it won't in already slow markets and it won't help people avoid foreclosure.

AUG

2007

David -

Great post. This is a very active topic amongst appraisers on forums and blogs. It's great to be reminded of our shared responsibilites in the transaction and the impact that we all can have on each other.

Yes, appraisers HAVE noticed a CHANGE in the climate recently? No, I'm not talking about global warming! I'm talking about the new interest, from lending clients, on the analysis aspects of residential appraisals.

You note that Fannie Mae recently issued their guidance to lenders and appraisers on the importance of accurately reporting or disclosing declining markets. Download Fannie Mae Ann. 07-11-Declining (33.8K). Part of their instructions to lenders states:

"Generally accepted appraisal standards and our appraisal report forms require the appraiser to include support for his/her conclusions regarding market conditions, including housing trends. The Neighborhood Section of the appraisal is the primary area where the appraiser would indicate whether property values are increasing, stable or declining. If the lender believes the property is in a declining market and the appraisal indicates otherwise, the lender should request additional information from the appraiser that supports the appraiser's conclusion."

Appraisers are starting to see those requests coming in! Take a look at these instructions from a large AMC:

You have recently received an appraisal order for Bank XYZ on a property located in the state listed above. The lender has requested that the appraiser specifically address each of the four following questions within the body of the appraisal report that you are completing for the above referenced property:

List the 12 month change in house prices (appreciation/depreciation) for the subject's immediate market area or MSA. Please cite the source of information.
Were foreclosure sales used in the appraisal? If so, why were foreclosure sales deemed necessary? Were adjustments made to the foreclosure comp(s)? If so, please qualify.
Were sales over 6 months old used in the appraisal? If so, please explain why.
Provide an overall analysis regarding supply and demand for the subject's immediate market area.

Please complete the required Property Addendum information (4 items noted above). Please address each item in detail, place within the addendum of the report separate from other comments and labeled Property Addendum. If not completed as requested, or if a item is not addressed, we will ask for additional corrections to be made before the report is completed.

Lets face it . . . appraisers (and maybe loan officers and agents?) that have only been in the real estate business for 5, 10,15 years have never EXPERIENCED a down market! They may never have had to really ANALYZE things like:

What is inventory and supply?
What are housing prices really doing?
How long is the marketing period for the average home?

After all . . . they're just checkboxes on the appraisal form!

After years of misuse and general neglect, the importance of fields on an appraisal form that state the appraiser's conclusions pertaining to supply, demand and pricing were often overlooked during the recent period of rapid appreciation in home values and required little or no thought or support.

Now, the housing market has changed and the importance of this data has recently become a major topic that is now bringing into question the competence of the average residential appraiser.

As an appraiser, I can tell you that TONS of appraisers are now having to learn, polish, or hone their "Market Area Analysis" skills!

Author: Brian J. Davis, RAA - Brian Davis & Associates - Brian has over 23 years of appraisal experience in Central, IL and hosts the Appraisal Scoopblog and the WinTOTAL Users Group an email forum for appraisers. Active Rain blog

Brian - good information. I'm glad to hear from someone on the appraisal side of this issue. Let me ask this - with a good, thorough report like you describe is this strong enough to support value and withstand UW or appraisal reviews red pen? What have your experiences been in that area.

Mary -

Absolutely! It's mainly a matter of having clients that WANT to hear the truth. How many lenders and sales people do you think want to hear from their appraiser that the property is not worth as much today as it was 6 to 12 months ago? How many want to hear that (based on the number of active listings and sales activity) there is an 18+ month supply of homes in their market? That's been the problem.

I've got a parody of "A Few Good Men" on my Active Rain blog: http://activerain.com/blogsview/181843/Humor-A-Few-Good

When the Pioneer Appraisers(the ones that first got the arrows!) started reporting declining markets . . .lenders just stopped using them and moved on to those that either didn't KNOW the market was changing or choose to ignore the fact. This is still going on!

Appraisers HAVE the tools! It can be as simple as including a "trend-line" graph using Excel or doing some more advanced analysis with real estate specific applications from off-the-shelf packages like NCSS.com - http://www.ncss.com/appraisal.html

The market will determine the type of appraiser they WANT! If the market wants to use "Hit the number" appraisers, that will ignore or exclude facts, and pay them fees that I worked for 23 years ago . . .They'll get what they deserve!

When those properties start to go into default and foreclosure, those same clients will start to seek out appraisers that can give them an honest opinion of value.

Our relocation, FSBO, estate, divorce, and tax appeal clients VALUE an honest opinion of value. They're demanding of analysis and willing to pay for it. Can we say the same thing about the majority of lenders?

Marc -

Thank you for posting this and starting this great discussion.

Brian - I'll be ringing your phone next week if you don't mind!!

Mary -

I'll look forward to your call!

AUG

2007

Thanks for making this a great discussion everyone!

SEP

2007

Hey Marc,

Good topic. I'll be brief.

"Increasing", "Stable" and "Declining" check boxes in the URAR form are to be accompanied at all times with supporting language in the body of the appraisal. After 11 years appraising I've been through "moments of pause" - shall we say - here in Southern California where decline was visible or appreciation was heated. The position I've adopted over the years is pretty simple and is widely accepted.

"Increasing" and "Decreasing" are relative terms. It's a "sideways - right to left" look at the market. Not "front to back". That is, if the pace of decline or increase in a subject neighborhood is "particularly" sharp in contrast to relevant surrounding markets, then those boxes should be checked "and explained". If the market area, is equally contracting or expanding with surrounding markets, then stable should be checked.

Property values go up and down. That's not to say there is market instability. That's market movement.

Michael Tarabotto
California Appraisal Solutions Corporation

JUN

2008

It is my understanding that Fannie Mae has removed many of the guidelines that apply to properties in declining markets.

I have found that in areas that I did not feel were declining, underwriters would take statistical information from various sources and declare an are declining.

James, you are absolutely right. Fannie just lifted the 5% reduction. We still have to be careful however because the MI companies are pulling back on what they will insure. So, 95% conventional loans with MI can still get approved with Fannie, but you may not be able to find an MI company to insure it.

Nice way for the GSE's to look good while letting the MI companies play the bad guy.

We have been spoiled and haven't seen this type of declining market.... It is tough all over....

JUN

2008

I have witnessed lenders flat rejecting 'declining market appraisals' or simply shaving about 3% off of the appraised value. It is frustrating. Thank you, Marc. Your blog has been featured here.

APR

the market has not really been moving. it is really spoiled. i hope after some time they will be changes

Leave a response…

Name:

Email:
(optional)

Comment:

What does the graphic say?