Revised 1999 to 2008 by Max E. Smith
Reviewed 2008 by Sharla McCafferty
Q #1 Why does the Appraiser have to see the Purchase Agreement?
The Appraiser acts as the “eyes” for the Lender (ultimately the end user of the report) and the appraisal report is a significant work sheet used in underwriting a loan. The Appraiser is responsible for analyzing and reporting everything about the transaction of the subject property being appraised and most lenders will not accept an appraisal unless the Appraiser has analyzed a complete copy of the purchase agreement. This insures all relevant factors to the transaction are properly analyzed and reported; such as inclusion of personal property, names of the parties involved, the real estate being purchased, included concessions, add-ons or repairs, as well as the total final agreed sales price. The only way the Appraiser can accurately report and analyze these items is if a completely signed purchase agreement is provided, including addendums. Note: an agreement isn’t considered final until signed by all parties.
Q #2 There have been confusing rumors about "seller concessions" over the past few years. What are seller concessions and why does reporting them matter?
Federal law and national banking regulations have always required mortgages be based on a nationally accepted definition of market value. The definition is intended to ensure that appraisals reflect an opinion of value of real estate after adjustments for any special or creative financing or sales concessions- such as seller contributions, interest buydowns, etc. Residential appraisal forms require the appraiser certify the standardized market value definition was used and if it isn’t- not only can appraisers get into trouble with regulators, but a mortgage originator can be forced to repurchase the loan and the note can also be called due immediately, which can cause a borrower to go into foreclosure.
It would be difficult to find even one Oregon appraiser, that doesn’t agree that hidden concessions causes real estate to be overvalued. The fact that Oregon Appraisers and the Oregon Appraiser Certification & Licensure Board continue fighting the practice should be reason enough that the practice is wrong. Real estate brokers always reported concessions in Oregon prior to the 2005 privacy rumor and even at the height of privacy rumors, nearly every Oregon broker wanted to know concessions too and continued believing concessions should be reported after a transaction had closed.
The reason deduction of concessions is required is that mortgage loans are to be based only on value of real estate. Misleading a lender or lender agent (appraiser) so that real estate is overvalued, is considered mortgage fraud by the FBI. Hiding seller paid concessions from market participants can be considered “misrepresentation by omission of a material fact”.
ORS 646.608 also states: 1) A person engages in an unlawful practice when in the course of the person's business, vocation or occupation the person does any of the following: 1(j) Makes false or misleading representations of fact concerning the reasons for, existence of, or amounts of price reductions. 1(s) Makes false or misleading representations of fact concerning the offering price of, or the person’s cost for real estate, goods or services.
The Appraiser is required to determine and report if any non-real estate items contribute value to a transaction and make necessary market adjustments to compensate for the items. Personal property, such as $10,000 tractor and irrigation equipment included with a residential acreage sale might be considered a concession; whereas, a rusty old tractor & pile of partially damaged irrigation pipe covered with blackberry bushes might not. Another example is a marketing approach used locally, to include Seller paid Buyer closing costs in an offer. Although Seller paid Buyer costs may not affect the resulting appraised value of the property being sold, Appraisers are required by Federal and State law to report and deduct seller concessions when using the sale as a comparable to support value of subsequent sales.
Some rules of thumb to follow: the net CASH PRICE seller receives at closing is usually considered the true sales price, by definition. Seller paid down payment assistance and closing costs are both considered concessions. Any credits that seller might contribute toward repair or upgrades that are NOT completed prior to closing are technically a concession too. This is because once a transaction has closed, new carpet or roof allowances are just cash-back to buyer, because no one can be certain the cash will be used for the intended purpose of increasing value of the real estate purchased. The cash price paid for, and value of, the REAL ESTATE at the time of closing is paramount to remember. Repairs and improvements completed prior to closing; or paid for directly to the contractor through escrow; both increase value of the real estate being purchased and should NOT be considered a concession.
Q #3 Why are Appraisers sometimes called “the transaction police”?
Appraisers are licensed by their individual states, but are also part of a national appraiser licensing process resulting from an act of Congress from the Savings & Loan bailout of 1989. The bailout cost taxpayers $250 billion which was directly paid for by the U.S. government—that is, the U.S. taxpayer, either directly or through charges on their savings and loan accounts. The resulting legislation is known as FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989). The S & L bailout along with the 2008 government takeover of Fannie Mae & Freddie Mac are perfect examples why appraisers are taught they are ultimately responsible to the “end user” of their reports- which is seldom the loan originator initially ordering the appraisal. (*The current Federal commitment to bailout financial institutions as of Sept. 2008 is estimated at more than $$ONE TRILLION dollars!)
Appraisers are expected to perform valuation services competently and in a manner that is independent, impartial, and objective. All appraisers are guided by a nationally standardized set of rules and appraisal methodology named USPAP (Uniform Standards of Professional Appraisal Practice). The USPAP preamble begins by saying: “"The appraiser’s responsibility is to protect the overall public trust and it is the importance of the role of the appraiser that places ethical obligations on those who serve in this capacity to oversee transaction information to Federal lenders." Appraisers are unique among real estate professionals in part because their fees legally cannot be contingent on any specific result or outcome of a loan process, but USPAP also prohibits an appraiser from acting as an advocate- other than for their own analysis and conclusions. Appraisers also self-regulate themselves more than any other real estate professional. Their work is regularly reviewed by other appraisers and review appraisers routinely report significant violations to regulators. The Oregon Appraiser Certification & Licensure Board (ACLB) newsletters regularly report appraisers losing their license permanently and one appraiser assistant was even recently assessed a $342,000 fine for violations. Few understand that when an appraiser finds a bad actor in the loan process and reports them to regulators, they actually feel like they’re doing their job and it is that kind of attitude that sets appraisers apart.
This attitude by appraisers is further enforced by required continuing education training on how to spot mortgage fraud and bad appraisal methodology. Appraisal classes routinely warn of FBI investigations and Federal law (U.S.C. Title 18, section 1001 & 1014) used to protect Federally regulated financial institutions. The definition of mortgage fraud most recognized by FBI, Mortgage Bankers Association and others: “Mortgage fraud is the material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.” This definition applies to every participant in the loan process, with no exception. (The word “omission” is key)
No licensee wants FBI or State auditing their work files and is why it’s so important to remember USC 1014 states “Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of (any Federally regulated financial institution) shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
Appraisers are relied on to accurately research and report facts of a mortgage transaction and is why appraisers have more mortgage fraud training than any other professional, including private attorneys and most law enforcement. Government sponsored entities (GSE) such as Fannie Mae and Freddie Mac have always had implicit backing of the US Treasury and recent government take-over of these GSE’s clearly emphasizes the grave importance the appraiser has to protect the public trust.
An appraisal is a significant legal document relied on throughout the mortgage process, in both mortgage pre-approval and throughout the life of a loan as it moves through the secondary and bond markets. Appraisers are relied on to act as the eyes and ears of the “end user” and this is why all parties to a loan transaction are expected to provide the assigned appraiser information they require to complete their appraisal. Ultimately every real estate professional should simply remember that appraisers act as agents for Federally regulated institutions and the public trust; and are relied on to impartially provide a complete and independent report of all pertinent factors required by the appraisal process.
**The importance Federal lenders place on their appraiser agents is further reflected in HR3221- a Federal housing bill effective 10/1/2008; HR3221 Section 151-G states: “‘No mortgage lender, mortgage broker, mortgage banker, real estate broker, appraisal management company, employee of an appraisal management company, nor any other person with an interest in a real estate transaction involving an appraisal in connection with a mortgage insured under this section shall improperly influence, or attempt to improperly influence, through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, nonpayment for services rendered, or bribery, the development, reporting, result, or review of a real estate appraisal sought in connection with the mortgage.”
Q #4 Why when I ask the Appraiser for information, they say they can't divulge anything about the report unless the Lender authorizes it?
The ethics provision of USPAP covers confidentiality between the Client and Appraiser. The Client is the organization ordering the appraisal and is usually NOT the borrower paying the appraisal fee. This practice assures a perception the Appraiser is not "working" to attain a predetermined outcome, but rather as a disinterested party, an impartial observer/reporter of market conditions and value; in addition to protecting confidential information. Unless the client gives the Appraiser authorization, discussing non-public confidential information with any other party is prohibited.
Q #5 Why does the Appraiser have to do a final inspection when they make appraisal repair requirements?
The Appraiser is the one who made the requirement and is the best individual to determine if the items are properly completed. Additionally so, since the appraisal requirement affected either property value or condition in the appraisal and the Lender/Client is required to confirm that it no longer negatively affects the real estate. (The Appraiser acts as the "eyes" of the client and end user of the report.)
Q #6 The HUD “VC Sheet” has to be included with appraisals for FHA; is that a home inspection?
As of January 1, 2006 attaching the HUD Valuation Conditions Sheet (VC Sheet) to the appraisal is no longer required; however, FHA rules still apply and still require the appraiser perform the same property checks that were on the VC Sheet and still require the appraiser report certain deficiencies. It is important to note appraisers are NOT Home Inspectors; appraisers work for the lender and are inspecting/observing property factors to the degree required to arrive at a reasonable value opinion, while meeting standard property condition reporting requirements of the end-user (HUD). Home Inspectors are separately licensed by the State of Oregon and work directly for sellers and buyers.
Q #7 Should I provide the Appraiser with any satisfactory reports such as a roof or pest and dry rot inspection?
If reports on a roof inspection or pest & dryrot inspections have been recently completed, it would be advantageous to provide them to the Appraiser. This would help them in not having to make appraisal requirements to provide inspection reports, which might hold up the transaction. Every directly involved party to a transaction wants to avoid hiding “material information” and is why most professionals provide completed inspections to the appraiser upon request. As acting agent for the Lender and “end user”, it is the right of the appraiser to request and receive inspection reports.
Q #8 What does “full” or “drive-by” appraisal mean?
Federal and State regulations continue to evolve and certain requests that used to be considered extensions of a previous appraisal can now be considered a completely new assignment. There is some confusion caused by ever-changing rules and varying nomenclature used by market participants. Additionally, Fannie Mae changed their appraisal forms in 2005 for the first time since 1993 and the new types of appraisal assignments now include:
• Form 2055 Exterior-Only Inspection Residential Appraisal Report – form is nearly identical to the 1004, except typically only uses the Sales Comparison Approach to value and an exterior-only inspection/observation from the street (often called a drive-by); final discretion that use of the form will not result in a misleading report is up to the Appraiser (a newly constructed home with no County data is one example this type of assignment might not be appropriate).
• Form 1004 Uniform Residential Appraisal Report (URAR) - (often called full, complete or URAR) a standard reporting of factors using both the Sales Comparison Approach to value and an on-site inspection/observation of property features by the Appraiser. The Cost Approach to value is no longer required by Fannie Mae, yet most lenders still require it.
• Form 1004C Manufactured Home Appraisal Report (manufactured home addendum) - is required by Fannie Mae whenever an appraisal is performed on manufactured housing (often called 1004C). This form was added in part to a past high number of REO manufactured housing. It provides additional data specific to manufactured housing and should only be performed by Appraisers with specific qualifications and experience in manufactured housing.
• Form 1004D Appraisal Update and/or Completion Report - Since the effective time-frame an appraisal can be used by a lender is typically 4 months, an Appraisal Update is used to extend (update) an original appraisal’s effective date to a current date, to allow a Lender additional time to complete the loan function. An Appraisal Update is technically considered a new appraisal. The update form also includes a separate section used to confirm that repair or proposed construction requirements were satisfactorily completed, per an original appraisal requirement (often called a 442).
• Form 1025 Small Residential Income Property Appraisal Report - used to appraise small income 2-4 family property (often called duplex or 2-4 family).
• Form FNMA 2070 & FHLMC 2075 Property Inspection Reports - are NOT appraisals because they do not give an opinion of value; often used in conjunction with an AVM value (automated valuation model); usually only used when the loan is in a strong position (low LTV or strong Borrower)
Q #9 Why are FHA work requirements more stringent than on conventional appraisals?
Most requirements for both conventional and FHA loans are based on health or safety related hazards, as well as physical deterioration and weather-related inadequacies. The premise of these requirements is that the property will be basically sound, free of hazards, and marketable at time of loan closing; that the collateral is sound and the new buyer is not put at risk in the near future (safe-sound-sanitary). Fannie Mae property requirements set the standard that most conventional lenders require their Appraisers meet in reporting for conventional financing. FHA loans are insured by the Federal government (primarily intended for moderate income and/or first time buyers; less down payment and liberal qualifying) to aid this market segment in obtaining loans that some lenders might be reluctant to make. The fact that FHA is insuring a loan is a partial reason their property requirements are often more stringent.
Q #10 Why does the Appraiser care if personal property is included in a transaction?
The Appraiser is required to report the inclusion of personal property and any contributory value it may have in a transaction. The Appraiser wants to insure that only the real property (real estate) is valued for a basis of acquiring a loan. The test for personal property is the manner in which it is attached and may include portable spas, marketable timber, Christmas trees, a satellite dish, freestanding appliances or anything else that can easily be removed. Most personal property included in a sale is often older or may be typical of other market sales, such as removable appliances or drapes and have no impact on value. Sales contracts sometimes include personal property such as a refrigerator, potted plants, birdbath, etc., also stating these items have no value. The Appraiser often agrees with the Realtor's no value comment, since few would think the inclusion or exclusion of these insignificant items would have any measurable impact on the cash price being offered for the real estate. Included drapes and unattached appliances are typical of nearly all market transactions and would seldom impact the price paid for real estate.
Q #11 Why is the appraised value often the same as the pending sales price?
An appraisal is a supportable defensible opinion of value that is arrived at by applying varying nationally recognized methodology and approaches to value. One of the approaches is the sales comparison approach. This approach is based on making market adjustments by comparing other recent sales of similar features to the subject being appraised and establishing a range of indicated value. If the pending sale price of a property falls within this range and other value indicators support it, the Appraiser will establish the opinion of value from within that range and will often select the sale price as the subject value, since determining if market factors support the sale price is a primary purpose of the appraisal.
Q #12 Why are some Appraisers not able to appraise certain types of residential property?
Beginning in 2010, the ‘licensed’ version will no longer be offered to new appraisers in Oregon- new appraisers will need to become ‘certified’. Rules contained in the new housing bill H.R.3221 will also eventually evolve, but currently read that only ‘certified’ appraisers can perform FHA appraisals and is consistent with industry pressure to improve quality of appraisals. Appraisal licenses currently available in Oregon:
• A Licensed Appraiser is allowed to appraise residential 1-4 family non-complex properties up to $1,000,000, complex properties with a market or transaction value up to $250,000, and all other types of real property having a market or transaction value of less than $250,000, providing the Appraiser is qualified.
• A Certified Residential Appraiser is allowed to appraise residential 1-4 family properties without regard to complexity or transaction value, and all other types of real property having a market or transaction value of less than $250,000, providing the Appraiser is qualified.
• A Certified General Appraiser is allowed to appraise all types of residential and commercial properties without regard to complexity or transaction value.
Q #13 How does an Appraiser arrive at an opinion of value of a property that is proposed and not yet built?
This is called appraising the property from "plans and specs". The Appraiser is given the plans, specifications, cost breakdown of the items proposed in construction and information about the home site. The Appraiser is then able to arrive at an opinion of value based on a hypothetical condition that construction is complete as of the date of value, although subject to completion of the home within a specific time frame per specific details given to the Appraiser. After construction is completed the Appraiser is typically asked to do a final inspection of the property, which is commonly referred to as a Satisfactory Completion Report. At this time the Appraiser checks the dimensions, workmanship, quality, and other pertinent factors of the completed project to determine if it was completed in the same manner it was proposed. Note: a Satisfactory Completion Report does not establish a new value.
If the property's value was lessened due to inferior quality, workmanship, reduced features or reduction of overall size of the dwelling, this may affect remaining cash disbursements and/or available maximum loan amount.
Q #14 What about the agreement resulting from NY Attorney General lawsuit against a national appraisal management company and lender?
The Home Valuation Code of Conduct agreement (HVCC) resulted from an investigation and 2008 agreement between New York Attorney General Cuomo, Fannie Mae and Freddie Mac. The HVCC was originally intended to become effective January 1, 2009 but due in part to this year’s financial crisis and that the original GSE oversight agency (OFHEO) was recently replaced by a new agency called FHFA- it was only recently learned the HVCC agreement still appears on track, but implementation is probably being delayed until March 2009 or so. (GSE= government sponsored enterprise)
The new Federal Housing Finance Agency (FHFA) combines the previous Office of Federal Housing Enterprise Oversight (OFHEO), the Federal Housing Finance Board (FHFB) and the HUD government-sponsored enterprise (GSE) mission team to regulate Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. Together these 14 GSEs provide funding for $6.2 trillion of residential mortgages in the United States.
Although public comment period about the original HVCC agreement ended in April 2008, no one has released terms of how the original agreement will be changed. However, Fannie Mae and Freddie Mac agreed to provide an initial $24 million dollars to implement and monitor the code and that won’t decrease. When asked about the HVCC, New York Attorney General Cuomo said “Now national banks have a clear choice: immediately adopt the new code and clean up appraisal fraud in the mortgage industry or stop doing business with Fannie Mae and Freddie Mac- it is that simple.”
Primary components of the HVCC include that mortgage brokers will be prohibited from selecting appraisers; lenders will be prohibited from using “in-house” staff appraisers to conduct initial appraisals; lenders will be prohibited from using appraisal management companies that they own or control; all mortgage originators will be prohibited from requesting appraiser provided estimated values or comparable sales at any time prior to completion of an appraisal report; all mortgage originators will be prohibited from providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided; and in most cases, lenders will be prohibited from ordering a second appraisal. When implemented, Fannie Mae and Freddie Mac will require lenders represent and warrant that appraisals related to mortgage loans originated after the code is in effect, will conform to the code or they will not be purchased.
The final HVCC agreement may well turn out to be the most significant change to the appraisal industry in the last 20 years. Appraisers have long complained of valuation pressure and AMCs (appraisal management companies) for years; many believing AMCs effectively reduce overall quality of appraisals and inappropriately profit by taking as much as half of the appraisal fee (not by charging extra for their own management services, but by taking part of the “appraisal fee”). Attorney General Cuomo’s investigation originally focused on inappropriate practices by AMCs and their growing appraisal order market share being used to leverage pressure against appraisers- yet the initial HVCC agreement separated appraisers and mortgage broker clients they’d had for years and appeared to instead push them to the AMCs that were the initial problem. Appraisers have been complaining of appraisal fraud and pressure for years, but clearly do not agree the initial HVCC agreement was the correct way to do it.
However, one of the best features generally agreed on is that the HVCC establishes and funds formation of an “Independent Valuation Protection Institute”. This Valuation Protection Institute will provide a hotline for consumers to complain if they believe the appraisal process was tainted or if they feel they’ve been harmed by appraisal fraud. The Institute will also provide a hotline for appraisers who believe either their independence has been compromised or the appraisal process was tainted. Formation of the Valuation Institute will be the first time there’s ever been a national clearing house to report to and since appraisers have been asking for one for years- this part of the agreement has received broad acceptance. Combined with $24 million dollars initial funding for a Valuation Protection Institute and other likely eventual changes resulting from this nation’s current financial crisis- it is clear that consumers and professionals alike should anticipate more aggressive law enforcement and legislative focus on the real estate industry.
Q #15 Have there been other significant recent changes in real estate appraisal?
• SCOPE OF WORK: As of June 1, 2006, USPAP added what is called the “Scope of Work” rule. “Scope of Work” is what an Appraiser performs in arriving at their reported analysis and opinions. In certain acceptable instances the new Scope of Work rule gives Appraisers greater latitude in performing less work than was previously required. Even so, it is still up to the individual Appraiser to perform a Scope of Work that is adequate for a particular intended use, purpose, and Clients/users of the appraisal. (For example, an appraisal intended for eventual purchase by Fannie Mae/Freddie Mac still requires use of their appraisal forms and a specific minimum Scope of Work meeting their guidelines.)
• EDUCATION: Required education and number of apprenticeship hours was significantly increased in 2008, making it much more difficult to become an appraiser. Pre-requisite requirements before taking the Certified Residential Appraiser test now include an associate college degree, 200 hours specific required appraisal classes, and 2,500 hours appraisal work as a Licensed Appraiser Assistant working under the direct supervision of an approved Certified Supervisory Appraiser; and the 2,500 experience hours has to span a minimum period of 24 months.