Appraisal Underwriting. Review of The Sales Comparison Approach October 2015

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Godwin Cobb
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2 Session Overview Participants will learn about analyzing the Uniform Residential Appraisal Report Sales Comparison Approach Review of the Sales Comparison Grid Reconciliation Common Errors, Red Flags and Best Practices Resources 2

3 Appraisal Basics The appraisal report provides: Detailed description of the property Condition and marketability information Market value Appraiser s opinion Supporting detail on how the appraiser arrived at the opinion Additional property issues/information Sales Comparison Grid providing sales of property similar in market appeal to the subject 3

4 Appraisal Basics Seller/Lender Responsibilities Selecting Appraiser Providing Appraiser With Sales Contract Other Available Information Underwriting the Appraisal Disclosing Required Information Ensuring the appraiser has requisite knowledge Page 5 4

5 Appraisal Basics Appraiser Responsibilities An accurate, adequately supported opinion of market value. An objective analysis of quantifiable data to support housing trends. All relevant information that supports the conclusions about market conditions, including: Sales/financing concessions. Down payment assistance. Days on market, list-to-sales price ratios, and availability of financing. Provide minimum of three comparable sales that are: Verified closed sales Similar to the subject or a market alternative Adjusted for based on market reaction Page 8 5

6 AGENCY UPDATES Fannie Mae & Freddie Mac 6

7 Freddie Mac Bulletin

8 Freddie Mac Bulletin

9 Freddie Mac (04/01/14) requirements General property eligibility : 44.2 We expect the Seller to place as much emphasis on the adequacy of the property as collateral as it does on underwriting the Borrower's creditworthiness. The conclusion that a Mortgage is acceptable to Freddie Mac must be based on the determination that the Borrower is creditworthy (acceptable credit reputation and capacity) and the Mortgaged Premises is adequate collateral for the Mortgage transaction. The Seller is responsible for determining the eligibility of the property and the acceptability of the appraisal report. 9

10 Freddie Mac (04/01/14) requirements General property eligibility : 44.2 a)residential ) requirements Freddie Mac will purchase eligible Mortgages secured by residential properties in urban, suburban and rural market areas as long as the Mortgaged Premises is adequate collateral for the Mortgage transaction based on the value, condition and marketability of the property. Freddie Mac does not purchase Mortgages secured by vacant or undeveloped land, land development properties or properties used primarily for agriculture, farming or commercial enterprise. The Mortgaged Premises must be residential based on the property characteristics, zoning and land use. The Mortgaged Premises must: Be safe, sound, habitable and undamaged by fire or windstorms or other perils Be complete unless the requirements of Section 44.2 (b) are met Meet all conditions of the appraisal if an appraisal was performed and made subject to conditions, unless the requirements of Section 44.2(b) are met Represent the highest and best use of the property as improved (or as proposed per plans and specifications) in accordance with Section 44.15(d) 10

11 Freddie Mac : 44.2 General property eligibility requirements (04/01/14) Have a legal or legal non-conforming use in accordance with Section 44.15(d) Have legal access (ingress and egress) Have year round access Have utilities that meet community standards Have mechanical systems that meet community standards Have property insurance coverage that meets Freddie Mac's requirements and coverage for hazards specific to the location of the property Not be subject to a pending legal proceeding for condemnation in whole or in part See Section for requirements on reviewing the appraisal report and underwriting the property. 11

12 Fannie Mae LL

13 SEL

14 B Fannie Mae Selling Guide 14

15 LL Appraisal Tools, Processes & Policies Collateral Underwriter (CU) Selling Guide Updates Adjustments to Comparable Sales 15

16 Sales Comparison Sales Grid, Adjustments, Reconciliation Page 32 16

17 Sales Comparison This Section Covers Analyzing Comparable Sales Selection Reading the Sales Comparison Grid Non-Value Adjustment Fields Value Adjustment Fields Reconciliation Sales/Transfer History Page 32 17

18 Analyzing Comparable Properties At Least Three Closed Sales More can be provided. Pending sales or listings: Can be used when appropriate. These might provide additional supporting data. Comparable s Closing Date (Age) Check applicable guidelines. Should have closed within the previous year. Must make sense for market. Recent sales offer measure of current market. Over twelve months: Effort made to find newer comparable. Why newer comparables not available. Is there a market issue? Basis for any market condition adjustment. Page 32 18

19 Analyzing Comparable Properties Shortage of Comparable Properties Possible Reasons: Nature of property improvements. Relatively low number of sale transactions in the neighborhood. Comparables may have to be: Older than a year. From a nearby, competing neighborhood. Appraiser Explanation and Market Data. Page 33 19

Analyzing Comparable Properties When there is a shortage of comps, the appraiser should explain: Effort made to find better comps? Why the shortage of recent sales?

20 Analyzing Comparable Properties When there is a shortage of comps, the appraiser should explain: Effort made to find better comps? Why the shortage of recent sales? What does the shortage indicate? Stable market? Marketability issue? Shared unique characteristics? Why a potential comp was not selected? i.e. Foreclosure sale or non-arms length transaction. Page 33 20

21 Analyzing Comparable Properties Unacceptable Comparison Selection Practices Misrepresentation Inappropriate Comps Unacceptable Locationally Not Physically Similar Uninspected Properties No Appraiser Drive-By Page 34 21

22 Analyzing Comparable Properties Requirements Include: Same or Competing Market/Neighborhood Similar Factors Impacting Value Marketability issues. (Adjacent to dump) Functional obsolescence. (Only bathroom located through kitchen) Location issues. (Busy street) Unique features. (Swimming pool) Page 34 22

Analyzing Comparable Properties Review Appraisal Map Review Carefully Does the map support the Appraiser s Conclusions? Distances make sense?

23 Analyzing Comparable Properties Review Appraisal Map Review Carefully Does the map support the Appraiser s Conclusions? Distances make sense? Natural boundaries honored? i.e. Waterways, Highways, Large Parks. Compare with other maps. Google Maps, MapQuest, etc. School maps. Municipality maps. Page 34 23

24 Analyzing Comparable Properties 24

25 Analyzing Comparable Properties How far (distance) can the appraiser go to find comparables? NO set distance rules. Distances must make sense. Urban location: Highly densely populated, should be close, within one mile. Suburban location: No set distance rule. Case by case. Sometimes more than a mile is appropriate. Rural location: Not a lot of homes to select from. Might be miles to find similar market alternative. Appraiser explanation is key. Page 35 25

26 Analyzing Comparable Properties Subject located in a subdivision, condominium or PUD project. Established (Resale Market) All comparables should be from within the project. Institutional or investor sellers/buyers may require outside comparables as well. New (Builder/Developer still selling) At least one comp from within the project. At least one comp from a nearby competing project. Appraiser should note the nearby project is unrelated to subject s builder/developer. Page 35 26

27 Analyzing Comparable Properties Accounting for Foreclosure/Short Sale Activity in Choosing Comps Suppose the following situation: Two similar houses, one green, one red. Each is on the market for an non-negotiable $200,000. There is no negotiation on the price. Which property are you more likely to purchase? Page 36 27

28 Analyzing Comparable Properties Most would purchase the non-foreclosure if all other things are equal. May indicate a bifurcated market. REO properties. Non-REO properties.but let s keep looking. Page 36 28

29 Analyzing Comparable Properties Suppose there is another house nine blocks away: a blue house. Page 36 29

30 Analyzing Comparable Properties This may point towards three price points: Foreclosed properties. (Green) Properties amongst foreclosure/short sale activity. (Red) Properties away from the foreclosure activity. (Blue) Appraisers must explain: Is there foreclosure/short sale activity in the subject s market? How does this impact the subject? Do the selected comparables reflect this impact? Lenders/Underwriter concerns: A Lender must not require the appraiser include or exclude REO sales or short sales as comps. Analysis: Has the appraiser explained the impact of foreclosure/short sale on the subject? Does this explanation make sense? Do outside resources agree with the appraiser s explanation? Appraisers can include additional documentation as support. Page 37 30

31 Analyzing Comparable Sales When foreclosures are the market Foreclosures /short sales are the only sales. These would typically be used as comps. Marketability issues due to foreclosures/short sales in market Appraiser should address why the subject is marketable despite the activity. Foreclosure/short sale activity needs to be taken into account in the appraisal. Page 38 31

32 Analyzing Comparable Sales Bracketing At least one comparable superior and one inferior to the subject. As many bracketed items as possible: Unadjusted Sale Price Gross Living Area (GLA) Lot Size Adjusted Sale Price Other Major Physical Characteristics Bracketing is a best practice. Accurate Picture of Value Tighter Range/Spread of Values Because there are both upward and downward adjustments in each field. Conformity to Neighborhood Bracketing size and actual range supports the subject s conformity to the neighborhood. Page 39 32

33 Analyzing Comparable Sales Gross Living Area (GLA) Square Footage and Bedroom Count Page 39 33

34 Analyzing Comparable Properties Gross Living Area (GLA) Square Footage Subject and comps should be similar size. Differences < 100 square feet are not usually adjusted. Common exception: small homes (<1,500 sq ft). Bedroom Count Similar bedroom count is best. Two bedroom subjects must have at least one two-bedroom comps. Appraisers can go up or down one bedroom in choosing comps. Ex: Three and four bedroom homes can usually be compared. Page 39 34

35 Analyzing Comparable Properties Declining Markets Check applicable guidelines carefully. Typical guideline requirements: At least two comparables closed within the past three months. A minimum of one, preferably two, listing(s) and/or pending sales. Downward time adjustments may be warranted. If older comparables used. If market conditions have changed since the comparable went under contract Page 40 35

36 Analyzing Comparable Properties Do the subject and comparables appear to be similar? 36

37 Analyzing Comparable Properties Resources Recent home sales and listings. Distressed home information. Street level pictures. Local real estate tax records, local school district sites, free online AVMs (use with caution). Pay sites, such as Core Logic, Platinum Data s Collateral Expert, FNC Collateral DNA and RealtyTrac. Page 40 37

38 Analyzing Sales Comparison Grid Start: Comp s Actual Sales Price Compare: To make the comp more like the subject, one must add/remove a. Consider: Does bring value to property? If not, no adjustment warranted. If yes, how much? Example: To make this comp more like the subject, add the finished basement rooms. (+) The appraiser s research indicates the rooms bring $3,000 in value, so there is a + $3,000 adjustment. Value: Indicated Value for Subject is established by adding/subtracting the column. Page 42 38

39 Analyzing Sales Comparison Grid Value Adjustment Basics Adjustment based on value feature contributes to property. Not based on building cost. Differ by market area. Must be supported, justified and explained. Should make sense. Page 42 39

40 Analyzing Sales Comparison Grid Field Types Non-Value Adjustment Fields Value Adjustment Fields Basic Information Guidelines and Best Practices 40

41 Analyzing Sales Comparison Grid Non-Value Adjustment Lines Address Proximity to Subject Sales Price Sales Price/Gross Living Area Data Source Verification Source Page 43 41

42 Analyzing Sales Comparison Grid Address Verify at Proximity Distance In miles, to two decimal points. As the crow flies. Direction From the subject, to the comp. Sales Price Actual sales price, Page 43 42

43 Analyzing Sales Comparison Grid Sale Price/Gross Living Area AKA Price per Square Foot: Sales Price divided by Gross Living Area square footage. Can indicate whether the subject and comparables are similar Page 43 43

44 Analyzing Sales Comparison Grid Data and Verification Sources Specific Data Source used for each comparable shown. Specific MLS and MLS#, when applicable. Other sources explained in the Comments section. Days on Market (DOM), to four digits, must be included. Verification Source required. Data Source can be party related to transaction. So long as Verification Source public, published, and verifiable Page 44 44

45 Analyzing Sales Comparison Grid Across the Board Adjustments Subject feature No similarly featured comparable Adjustments to each comp in the same direction for any single item of comparison. Common Examples: Swimming Pool, Shed, Barn, Greenhouse or Workshop Questionable market acceptance Unsupported value additions/subtractions Additional comparables Older, distant or otherwise not usually acceptable Market acceptance Value Page 45 45

46 Analyzing Sales Comparison Grid Sale or Financing Concessions First Line Type of sale. Second Line Financing type. Concession Amount. See Fannie Mae and Freddie Mac Uniform Appraisal Dataset Specification, Field-Specific Standardization Requirements (Appendix D) for abbreviations. Page 45 46

47 Analyzing Sales Comparison Grid Financing Concessions Within allowable limit? Adjustment required? Narrative included? Is sales price inflated by concession s inclusion? Excessive financing concessions deducted from sales price? LTV recalculated, if necessary? Sales Concessions Non-real property items in contract? Non-real property items deducted from sales price? LTV recalculated, if necessary? Page 46 47

48 Analyzing Sales Comparison Grid Date of Sale/Time Sale date and contract date. Market condition adjustments: Sometimes warranted for significant market changes. Explanation required. Measured from date of contract, not sale. Page 47 48

49 Analyzing Sales Comparison Grid Location Look for similar ratings and factors. Impact on value rating. Neutral (N) Beneficial (B) Adverse (A) Factor(s). One or Two Explain what impacts the value rating. Value adjustment may be warranted: Otherwise similar properties. Appraiser explanation. Page 47 49

50 Analyzing Sales Comparison Grid Site Lot size. Not description. (i.e. Average) Entire site. Less than one acre: Whole numbers, square footage. One acre or more: Acreage to two decimal points. Similarly sized lots. Adjustments Consistent with lot value in cost approach. Supported with market data. Page 48 50

51 Analyzing Sales Comparison Grid View Look for similar ratings and factors. Impact on value rating: Neutral. (N) Beneficial. (B) Adverse. (A) Factor(s): One or Two. Explain what impacts the value rating. Value adjustment may be warranted: Otherwise similar properties. Appraiser explanation. Page 48 51

52 Analyzing Sales Comparison Grid Design Architectural design/style Narrative i.e. Mid-Century Modern, Colonial, Craftsman, Ranch Non-Architectural descriptions unacceptable Average Brick Any adjustments require explanation. Page 48 52

53 Analyzing Sales Comparison Grid Quality of Construction UAD Quality Rankings: Q1-Q6 See Appendix D for specific ratings definitions. Q1: Unique Q2: Custom Design Q3: Higher Quality Q4: Meet or Exceed Applicable Codes Q5: Economy Construction Q6: Basic, Lower Cost Similar rankings. Otherwise, possible adjustment. Appraiser explanation Actual Age Page 49 53

54 Analyzing Sales Comparison Grid Condition UAD Condition Rankings: C1-C6 See Appendix D for specific ratings definitions. C1: New C2: No deferred maintenance C3: Well maintained C4: Minor deferred maintenance C5: In need of significant repairs C6: Substantial damage Subject s condition rating must be the same as rating indicated in Improvements Section. Appraisal subject to completion/repair. Sales comparison based on anticipated condition upon completion. Similar rankings. Otherwise, possible adjustment. Appraiser explanation. Page 50 54

55 Analyzing Sales Comparison Grid Bedrooms Appraiser explanations for adjustments. Particular markets. Bathrooms Full and half baths reported. Square Footage Similar adjustments. Page 50 55

56 Analyzing Sales Comparison Grid Basement First Line Square footage. Finished square footage Basement access: Walk-out (wo), walk-up (wu) or interior only (in). Second Line Number of rooms. Type of finished rooms: Rec room (rr), bedroom (br), bath (ba) or other (o). Baths reported in full.half format. Basement value and adjustments must make sense. Page 51 56

57 Analyzing Sales Comparison Grid Functional Utility If adjusted, explained in comments., Heating/Cooling Energy Efficient Items, Garage/Carport, Porch/Patio/Deck, Fireplace. Adjustments need to make sense. Other Outbuildings (see next slide) In blank spaces. Need to make sense. Page 52 57

58 Analyzing Sales Comparison Grid When there are outbuildings: Minimal outbuildings Typical in the subject area. Comparables with similar outbuildings. Significant outbuildings. Residential vs. Agricultural Avoiding across-the-board adjustments Finding additional comparables Expanded search dates/criteria Extent of search Fannie Mae Single Family 2015 Selling Guide Section B

59 Fannie Mae Selling Guide 59

60 Freddie Mac Selling Guide Neighborhood section Properties with outbuildings, such as a barn or stable, must be considered in the underwriting process to determine whether the property is residential or nonresidential. A property with a small barn or stable may be acceptable if the contributory value of the outbuilding(s) is minimal and the appraiser demonstrates through the use of comparable sales with similar characteristics that it is typical for residential properties in the market area. However, if the property has a large outbuilding, such as a large barn or multiple outbuildings, it may indicate that the property is agricultural or non-residential and ineligible as security for a Freddie Mac Mortgage. Properties in rural locations often have relatively large sites as compared to other locations. In addition, there may be a lack of comparable sales due to the relatively low number of recent sales transactions in the market area. In such cases, appraisers may have to use comparable sales that are located a considerable distance from the subject property or comparable sales that are not very similar to the subject property. This is acceptable as long as the appraiser can justify and support the use of the comparable sales and analysis in the appraisal report. 60

61 Analyzing Sales Comparison Grid Previous Sale or Transfer History Page 53 61

62 Analyzing Sales Comparison Grid True or False? Given the Adjusted Sales Price of the Comparables shown here, the indicated value for the subject is $158,200. ( $153,000 + $157,800 + $163,800 ) / 3 = $158,200 Page 55 62

63 Analyzing Sales Comparison Grid The appraiser discusses how he/she weighted each comparable and arrived at the indicated value. The arrived at conclusion should be: Weighted Average Consistent with the data provided in the report. All comments provided by the appraiser. All data sources used to verify the report. Should be supported by everything on the appraisal. Page 55 63

64 Reconciliation The Appraisal is Made As Is If any other box is checked, the appraiser or a subject matter expert will have to inspect the property after work is completed. Last Line Appraised Value Appraisal Date Inspection Date Good for twelve months If more than four months on note date, update must be provided Page 55 64

65 Comments Read Comments Section Carefully Look for anything impacting: Value Structural Integrity Marketability Page 55 65

66 Statement of Assumptions/Ltd Conditions Page 59 66

67 Appraiser/Supervisory Appraiser Signatures Page 60 67

68 Common Red Flags Common Red Flags Include Choosing dated comps, in the absence of sufficient explanation, particularly when there are more recent comps available. Not relying upon the indicated value from the most similar comparable property. Closest. Most recent sale. Most similar property. Indicated value outside the predominant range for the neighborhood. High land to value percentage without explanation. Photos show a feature/situation not reflected in the appraisal. Major Farm structures or livestock may evidence farm use. Appraisers should explain unusual circumstances and confirm that the land is used solely residentially. Page 61 68

69 Common Red Flags Common Red Flags Include Gross adjustments in excess of 25% of the original sales price on several comps without sufficient explanation and justification. Not identifying an area as declining when credible evidence suggests a decline. Lack of bracketing for price, age and/or square footage. Lack of comments from the appraiser relating to the property, comps, market or trends in the area. Boilerplate appraiser statements, such as best comps were selected or there are no additional comps available. Page 61 69

70 Genworth MI Coverage and Appraisals Sales Comparison Considerations: Underwriting Loans for Genworth MI Coverage Genworth Appraisal Guidelines can be found online Under the Rates and Guidelines tab. Value Not Supported by Comparables is cited on Genworth s Top MI Decision Errors as a common underwriting issue. Genworth follows Agency Appraisal Standards and Uniform Standards of Professional Appraisal Practice (USPAP) guidelines. When Genworth s underwriting manual is silent and does not address a guideline, the lender must follow Agency Standard guidelines. See the Delegated MI Underwriting Decision Tips flier for additional information. Page 62 70

71 Genworth Appraisal Review Checklist 71

72 Questions? 72

73 Thank You! 73

74 Legal Disclaimer Genworth Mortgage Insurance is happy to provide you with these training materials. While we strive for accuracy, we also know that any discussion of laws and their application to particular facts is subject to individual interpretation, change, and other uncertainties. Our training is not intended as legal advice, and is not a substitute for advice of counsel. You should always check with your own legal advisors for interpretations of legal and compliance principles applicable to your business. GENWORTH EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THESE MATERIALS AND THE RELATED TRAINING. IN NO EVENT SHALL GENWORTH BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES OF ANY KIND WHATSOEVER WITH RESPECT TO THE TRAINING AND THE MATERIALS. Desktop Underwriter, DU, and MyCommunity Mortgage are registered trademarks of Fannie Mae. Loan Prospector and Home Possible Mortgage are registered trademarks of Freddie Mac. The Appraisal Foundation owns the copyright to the Uniform Standards of Professional Appraisal Practice (USPAP). Simply Underwrite SM is a registered service mark of Genworth Financial. 74

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