Fannie Mae Underwriting

Real Estate Broker/Owner with Real Estate Training Academy - Real Estate Education

August 31, 2008

I recently received an appraisal assignment asking for the value of a subject property on 5 acres.  The property is on a 45.94 acre parcel and according to the Fannie Mae Handbook for Appraisers printed in 2003 this is an unacceptable assignment condition.  At the end of this blog is what I do in this case if I get to the property and I think the property can be appraised with additional assignment conditions. 

I have always wondered why the clients that request this type of an appraisal are not held to the same standard that the appraiser is held to.  Fannie Mae clearly states the appraiser cannot appraise a property this way because it inaccuratley reports the facts of the subject property.  The appraiser is subject to fines and penalties for appraising a property as instructed if there is a problem later.  If that is the case then why do the Fannie Mae underwriters or those responsible at Fannie Mae allow their Lenders to consistently order appraisals against their own guidelines.

The reality is that if the appraiser refuses work because it is considered an unacceptible appraisal assignment by Fannie Mae the appraiser won't just loose that assignment but risks being viewed as a problem appraiser for future assignments.  Isn't that nice, if you are a professional and knoweldgable appraiser you jeopordize your earning ability; thanks Fannie Mae!  Why doesn't Fannie Mae crack down on these types of assignments and hold the Lenders' feet to the fire if they are so concerned.  The message I get is that they want the appraiser responsible if something goes wrong but don't want to inhibit the Lender, otherwise you wouldn't see assignments with this request on a regular basis. 

This is similar to the lack of training and licensing required for Loan Officers as opposed to the training and licensing for appraisers and real estate agents.  Think about this, in Michigan starting in January of 2009 Loan Officers will be required to pass an exam and have taken a 24 hour approved class to become registered by the State.  They also must pass a back ground check that shows they have not been convicted of embezzlement.  That means that in the past and up until January 1, 2009 a Loan Officer with a prior conviction for embezzlement may be out there working.  Why only a 24 hour class when to get a real estate license you must take a 40 hour class and work for a licensed broker.  To sign an appraisal for a Federally Financed Loan you must have taken 150 hours of AQB approved classes, pass a state exam and have 2,000 hours of field experience to become a State Licensed Appraiser.  To make matters worse if a Loan Officer has been working 4.5 years out of the past 5 years they do not have to take the class.  Try that if you are getting a real estate or appraisal license.  You will be required to take the classes and pass the tests, no questions asked. 

What is the thinking behind this exemption for Loan Officers with 4.5 years out of the last 5 years not taking the class.  Could it not be argued that in the last five years we have had this crisis brewing and it is now front page news.  Why allow those who have been on the front line over the last 5 years and involved with this mess not required to take the 24 hour class.  The mortgage industry apparently has a powerful lobby and is not all that concerned with correcting the problems.  In contrast, the appraisal industry is self regulating in the true sense of the word and doesn't enact training and licensing requirements for show.  This puts the appraiser at a disadvantage; even though I and many other appraisers agree with the training and licensing requirements for appraisers.  There are two parts to the equation when an appraisal is ordered from my simplistic viewpoint.  The appraiser who receives the assignment and the Lender or their Loan Officer who requests the assignment.  Does it make sense that the appraiser is in the drivers seat here.  Of course the work can be turned down, and it often is, but if the Lender can speed dial until he or she finds the right appraiser then the bad guys are winning ad the good guys are loosing; thanks again Fannie Mae!       

It reminds me of the song by Chicago that goes "Does anybody really know what time it is, does anybody really care..."  It seems to me that when The Appaisal Foundation and the AQB upped the education requirements to 150 hours they were expecting the appraisers' to correct the obvious problems in the loan origination process that deals with appraisers.  As an AQB Instrtuctor I am required to know USPAP better than the average appraiser even though all appraisers are just as responsible for following USPAP as I am.  If I try to explain to a Loan Officer, and I have many times, that what they are requesting is not in compliance with USPAP they at best listen politely and I imagine that after hanging up they call appraisers until they get the answer they want.  

It would not be fair to not acknowledge the many competent and ethical Loan Officers out there.  The Loan Officers I have dealt with fit this deiscrition for the most part.  The problem is that the ones that don't have pretty much operated with impunity.  I joined the Michigan Mortgage Lenders Association (MMLA) this year and I can't say enough about that organization.  The MMLA was instrumental in getting the Loan Officer Registration passed and singed by the Governor.  The MMLA promotes the highest standards in lending practice and as far as I can see it is not for show, they really mean it.

The legislatures in this country need to wake up or get out of bed with the lobbyists if they want to solve the problems.  There is a simple solution but unfortunately government doesn't always use a simple solution.  The current HVCC regulations coming down the pike will present as many problems as solutions and will cost the borrower, the lender and the appraiser unnecessarily.  The simple solution from an appraisers' standpoint is that every loan officer take the 15 hour National USPAP class and pass it.  There would never be a problem with an appraisal assignment if the Loan Officer and Appraiser followed USPAP, I guarantee it.  If you add the 24 hour class that not even all Loan Officers must take and the 15 hours USPAP class you are up to 41 hours, just above the 40 hours required for a real estate agent and 109 hours below a State Licensed Appraiser.  This is not too much to ask for someone involved in one of the most important financial decisions a member of the public makes.

Below is the solution I use when the subject property appears to merit the additional assignment conditions:

The most current Fannie Mae 'Handbook for Appraisers' which sets forth the rules appraisers must follow to maintain compliance with the Selling Guide published by Fannie Mae that... "apply to mortgage companies, credit unions, commercial banks, and thrift institutions-to underwrite "investment quality" mortgage loans..." (quoted from the preface to the handbook) states that it is an unacceptable appraisal practice to appraise only a portion of a larger site.

Page 35 of the handbook states the following:

"Some appraisers report that they have been asked to appraise only a portion of a larger site: for example, the borrower owns a 30-acre site and you are asked to appraise only five acres and the property improvements. Fannie Mae considers this an unacceptable appraisal practice because the appraisal does not accurately report the facts of the subject property."

The request for the subject property to be appraised with only 5 acres and the improvements requires the use of a hypothetical condition and an extraordinary assumption. The appraiser is using a hypothetical condition (defined below) by stating the subjects' value on 5 acres to comply with the clients' request.

Hypothetical Condition:


"Hypothetical condition. That which is contrary to what exists but is supposed for the purpose of analysis. Hypothetical conditions assume conditions contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis. A hypothetical condition may be used in an assignment only if:

o Use of the hypothetical condition is clearly required for legal purposes, for purposes of reasonable analysis, or for purposes of comparison;

o Use of the hypothetical condition results in a credible analysis; and

o The appraiser complies with the disclosure requirements set forth in USPAP for hypothetical conditions.

(USPAP, 2002 ed.)"

The extraordinary assumption (defined below) is that the subject property can be split to contain a 5 acres parcel that will include the improvements. The appraiser assumes that the property could comply with Clayton Township Zoning and Building Department requirements, allowing the subject property to be split in a manner that would leave a 5 acre parcel with the improvements; as appraised.

Extraordinary Assumption

 "Extraordinary assumption. An assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser's opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal, or economic characteristics of the subject property; or about conditions external to the property such as market condtions or trends; or about the integrity of data used in an analysis. An extraordinary assumption may be used in an assignment only if:

o It is required to properly develop credible opinions and conclusions;

o The appraiser has a reasonable basis for the extraordinary assumption;

o Use of the extraordinary assumption results in a credible analysis; and

o The appraiser complies with the disclosure requirements set forth in USPAP for extraordinary assumptions.

(USPAP, 2002 ed.)"


The Fannie Mae statement on page 35 stating that appraising a smaller parcel of a larger site is an unacceptable appraisal practice is apparently not well known or ignored by clients who order appraisals, as it is commonly done. The appraiser is not aware of any efforts by Fannie Mae underwriters to instruct Lenders that they are requesting the appraiser to perform an appraisal that does not accurately report the facts of the subject property. The result of this mis-communication is that appraisers either turn down appraisal assignments or ignore the requirement without disclosure. The appraiser uses USPAP allowed assignment conditions of hypothetical condition and extraordinary assumption to comply with the client request and the satisfy requirements of Fannie Mae and USPAP.