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   ARTICLE   |   From Scotsman Guide Residential Edition   |   October 2011

How a Declining Market Affects Appraisals

For a smooth transaction, mortgage originators should know appraisers’ and underwriters’ responsibilities

Mortgage loans on properties in a declining market typically require additional data and analysis by the assigned appraiser and underwriter as part of the underwriting process. Mortgage originators and brokers must be aware of these requirements as they may increase the average loan-processing time and require the appraiser to use additional market data, including active listings and pending sales.

Loan transactions on properties in areas of declining home prices present a challenge to a lender’s underwriting staff because the property’s current market value dictates the maximum mortgage amount available to a prospective purchaser. As such, brokers and originators who understand how appraisers and underwriters analyze homes in declining markets can best advise their clients.

The U.S. Department of Housing and Urban Development (HUD) Mortgagee Letter 2009-09 defines a declining market as “any neighborhood, market area, or region that demonstrates a decline in prices or deterioration in other market conditions as evidenced by an oversupply of existing inventory or extended marketing times."

In this regard, the Federal Housing Administration (FHA) has mandated that the Market Conditions Addendum (Fannie Mae Form 1004MC) be provided with every FHA appraisal, including any appraisal update or completion reports.

There are numerous things underwriters should look for when reviewing these documents.  First, the neighborhood section of the appraisal report contains a housing-trends section where the appraiser marks a box indicating whether property values are increasing, stable or declining. The underwriter should note this determination and then analyze the Market Conditions Addendum carefully for consistency and continuity within the report.

Appraisers should provide a summary comment as to whether the trend is continuing or appears to be changing, and they must provide support for their conclusions. In addition, they should analyze market trends for at least the 12 months preceding the appraisal’s effective date.

Because an absorption-rate analysis is critical to developing and supporting market-trend conclusions, underwriters should review the appraiser’s absorption-rate conclusions as reflected on the 1004MC form, request copies from the appraiser’s work file or both. If the analysis does not make sense, underwriters should ask for an explanation or additional documentation.

If the appraiser didn’t provide a summary of market conclusions reflecting the type of transactions and the impact on the subject property’s marketability and value conclusion, further documentation is necessary.

If the conclusion is that the subject property is located in a declining market and fully supported by the data contained on the Market Conditions Addendum, underwriters must now review the appraisal report to determine if at least two of the comparable sales closed within 90 days of the appraisal’s effective date. In addition, at least two active listings or pending sales must be provided on the appraisal grid and reflected as comparable properties. The active listings should be adjusted to reflect list-to-sales-price ratios for the market. Pending sales should be adjusted to reflect the contract purchase price, if possible.

In reconciling these adjusted values, appraisers must determine if a time adjustment is appropriate. If they cannot obtain any of this data because of a lack of market data, a detailed explanation is required.

Finally, it is essential that mortgage lenders understand that HUD and FHA hold them equally accountable for the integrity, accuracy and thoroughness of an appraisal submitted to FHA for mortgage-insurance purposes. In this regard, the underwriter must review and analyze the appraisal report and should contact the appraisers for additional documentation to support their conclusions.

With an understanding of how appraisers and underwriters review and analyze properties and values in declining markets, brokers and originators can help manage clients’ expectations and keep the lines of communication open. 


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