Why Your Appraisal May Be Too Low
In an attempt to protect Fannie Mae and Freddie Mac from buying a new round of bad loans, their new oversight agency, the Federal Housing Finance Agency, has introduced new guidelines for appraisers in how they arrive at valuations on homes in which the mortgage loans will be sold to the secondary market.
And it’s not good news for home buyers.
The new Fannie Mae 1004MC-71 appraisal form (MCF), which went into effect April 1, 2009, will be used for Fannie Mae – and Freddie Mac –bound loans. It features stricter requirements for appraisers, including gathering comparables as far back as a year.
Typically, appraisals go back only six months, but the new form means that appraisers use a new formula for determining home values, which takes declining markets into account.
Here’s why that’s bad - if a market declined in the last year, the subject property being appraised may be worth less because of what happened nearly a year ago, regardless of how the market is performing today.
The housing market swung from a bubble of ever-escalating home values to three years of steady declines on a national basis. From upside down values, to foreclosures, to resetting ARMs at unaffordable levels, many homeowners are unable to make their payments or to sell their homes to get out from under the burden of debt.
As foreclosures rose to frightening levels in many parts of the country, investors in mortgage-backed securities panicked until there were no new buyers. A banking stalemate ensued in which lenders virtually stopped making residential mortgage loans, prompting the federal government to step in and take over the management of the secondary market.
Among the guilty in contributing to the housing meltdown were unscrupulous appraisers, appraisal management companies, lenders and mortgage brokers whom New York Attorney General Andrew Cuomo says, conspired to inflate home values to unsustainable levels.
Cuomo threatened Fannie Mae, Freddie Mac and the Office of Federal Housing Enterprise Oversight* with a lawsuit to result in cooperation agreements requiring that banks and appraisers adhere to new standards designed to ensure independent and reliable appraisals.
The new code of conduct took place May 1, 2009, and it is designed to distance banks from influencing appraisers.
On the appraisal side, Fannie Mae introduced a new form for appraisers. As of April 1, 2009, the Fannie Mae 1004MC-72 form requires appraisers to report stricter market conditions than they have in the past.
*The Federal Housing Finance Agency took over from OFHEO in overseeing Fannie Mae and Freddie Mac in late 2008.
The solution – The Fannie Mae 1004MC-72 appraisal form
The new 1004MC-72 form requires a much more detailed analysis of market conditions. Appraisers must discuss not only current trends, but market conditions dating back as much as one year. Details are to include such information as absorption rates, foreclosure trends, and more.
Appraisers are required to provide comparables for three specific categories of sales:
current sales - previous 3 months
sales from 4-6 months ago
sales from 7-12 months ago
If a home is deemed to be in a “declining market”, buyers are required to put more skin in the game with higher down payments of 10 percent, and a credit score above 700, for a loan that will be sold to Fannie Mae or Freddie Mac. (FHA/VA loans do not recognize declining markets.)
While on the surface, the declining market formula doesn’t appear to be a bad thing, but it does reset the equity clock so that almost any home purchased before May 1, 2009 is unlikely to be worth what was paid for it, if it were being valued today.
Melanie McLane, an appraiser-REALTOR® in Williamsport, Pennsylvania defends Fannie Mae going back one year, saying that the lenders will still have some discretion in judging changing markets.
“If you aren’t going to be stuck with a mortgage, you don’t care how bad it is,” she explains, “but more lenders are going to hold those loans on their books.”
But mortgage broker T. Sami Siddiqui of GreatWest GMAC in Sacramento says, the new form in effect will find that all markets are “declining.”
“If they are including comps from 7-12 months ago, values were down 30 percent, but in the last two months the market went up in Sacramento,” he explains. “If you use the declining market scenario, on an annualized basis, the market declined 24 percent or two percent a month. They are going to say that the house that sold two months ago for $160,000 is worth only $153,520. However, when you look at the median price, it went up, so the appraisal and the market price are not in sync.”
In other words, if the appraisal does not give more weight to the current market, appraisal values will continue to decline. “They should look at the market today, not a year ago,” says Siddiqui.
The outcome for consumers is positive in some ways – appraisers are no longer being pressured to raise valuations to make loans go through. The irony is that now, they’re being pressured the opposite way – to make sure valuations are low enough to protect Fannie Mae and Freddie Mac.
That’s not necessarily a bad thing – at least the government is trying to protect the market from further implosion, even if that makes it a little harder for you to buy a home.
What can you do?
The new appraisal rules only apply to appraisals which will be used to fund loans that will be sold to Fannie Mae and Freddie Mac. You can also go FHA or VA for a conforming loan. Also, jumbo loans aren’t purchased by Freddie Mac and Fannie Mae, so they aren’t subject to the Fannie Mae appraisal rules.
If you feel that a home you own or intend to buy has been undervalued, ask to see the appraisal. Your REALTOR® can examine the comps used and provide you with a CMA, a detailed market analysis with closer comparables, that could sway the bank in your favor.
Some banks that are receiving TARP funds from the government are enacting stricter borrowing guidelines as a result of greater oversight by the Fed. If the bank has turned down your loan because of a low appraisal, you may need to find a bank that is more independent, such as a home town bank, or credit union. Be prepared to pay the bank for a second appraisal.
The appraisal process is taking longer because of the exacting requirements. When you apply for your loan, make sure you get at least 45 days to close, in case your appraiser needs more time.
Don’t be afraid to buy a home in a “declining” market. Ask your REALTOR® to amortize your payments and you will quickly see how fast you will build equity, regardless of what the market is doing. You may be pleasantly surprised that even in a market that is declining, your principal and interest will return equity to you quickly, offsetting any temporary losses in market value.
Blanche Evans is CEO of Evans Emedia, Inc. and publisher of The Evans Ezine. As an award-winning journalist, Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and twice recognized as one of the industry's most "Notables."
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