What REALTORS Need to Know about the Uniform Appraisal Dataset from Fannie Mae & Freddie Mac

Transcription

1 What REALTORS Need to Know about the Uniform Appraisal Dataset from Fannie Mae & Freddie Mac

2 For Further Information on Additional UAD Webinar Education Northern Michigan University, Continuing Education Appraisal 1401 Presque Isle Avenue, Marquette, MI Telephone: or Fax: Website: Webinar Presenters/Developers: Richard Heyn, SRA and/or Dawn Molitor-Gennrich, SRA About the Developers & Instructors Richard Heyn, SRA and Dawn Molitor-Gennrich, SRA are the webinar's developers and instructors. Both Rich and Dawn are AQB Certified USPAP instructors and Certified Distance Education Instructors. Dawn is a former member of the Appraisal Standards Board. For Educational and Informational Purposes Only Suggestions or recommendations presented in this webinar are not warranted or guaranteed by the developer(s), presenter(s), or sponsoring organization. None of the parties involved in the development, presentation or sponsorship of the webinar intend any information presented herein to: constitute an absolute solution to similar types of problems encountered by real estate professionals. The presentation merely provides guidance. constitute, or be a substitute for, legal advice or assistance from an attorney. If legal assistance is necessary, please consult your personal attorney or other competent legal counsel. Copyright 2011 by Heyn, Molitor-Gennrich, LLC, Baroda, MI. All rights reserved. Part 4 2 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac

3 Introduction I. The GSEs and Loan Origination Prior to September of 2011, Fannie Mae and Freddie Mac, also known as the GSEs (for Government Sponsored Enterprises) received almost no information about the subject property before they purchased a loan. They relied on a lender to represent and warrant that if the lender sold a loan to either entity, everything in the loan file from the loan application to the credit report and on to the appraisal report would be consistent with the requirements outlined in their respective Selling Guides. If the loan defaulted, or turned nonperforming the GSE would then take a hard look at the loan file to see if the lender had complied with GSE requirements. If not, they would force the lender to repurchase the loan. Unfortunately for the GSEs and taxpayers, these policies were ineffective during times of high levels of defaults. Realizing that voluntary lender compliance was ineffective, Fannie Mae and Freddie Mac, in 2009, began laying the foundation for a new lending initiative called the Uniform Mortgage Data Program, or UMDP. This new program would require lenders to electronically deliver loan documents and appraisal reports prior to the GSEs purchasing the loan from the lender. Subjecting the loan file to an automated review gives the GSEs the ability to either decline the purchase or require the lender or appraiser to correct deficiencies prior to acceptance. Reviewing an appraisal prior to or at the time of purchase may seem like an obvious element in risk management, but as stated earlier, the GSEs have historically relied on the lender s ability to properly underwrite the loan and the lender s signed representations and warranties, or reps and warrants. Given the volume of loans processed by the GSEs, delays caused by the simple logistical issues of getting a copy of the appraisal report and reviewing it prior to purchase were considered too time consuming, therefore, unacceptable. Consequently, the Uniform Mortgage Data Program instituted two elements to facilitate the electronic review of appraisals the Uniform Appraisal Dataset and the Uniform Collateral Data Portal. II. The UMDP, UAD, and UCDP The Uniform Mortgage Data Program (UMDP) initiative has a number of components that are referred to by using different acronyms, so first let s sort out the alphabet soup and then focus on the two components that have the most significant ramifications regarding appraisal reports. The general umbrella that covers the initiative is known as the Uniform Mortgage Data Program, or UMDP. Under the UMDP are two requirements that specifically deal with the appraisal report: the Uniform Appraisal Dataset (UAD) and the Uniform Collateral Data Portal (UCDP). The objective of the Uniform Appraisal Dataset is to bring more standardization and uniformity to the data reported by appraisers. The Uniform Collateral Data Portal is the HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac Part 4 3

4 electronic mailbox that allows the GSEs to receive the appraisal reports transmitted to them by lenders. In addition to Fannie Mae and Freddie Mac, two other government agencies the Federal Housing Administration (FHA) and Veteran s Administration (VA) require appraisers to submit their appraisal reports using the standardized responses of the UAD, although FHA and VA do not use the UCDP. Consequently, the overwhelming majority of appraisal reports are not written in the new language of the UAD. III. The Uniform Collateral Data Portal The Uniform Collateral Data Portal is a means of electronically collecting the appraisal report data, but it requires a standardized data file format. Once in this format the lender can deliver to the Enterprises the appraisal report data electronically through the UCDP prior to loan delivery. So the lender will provide the GSEs a PDF version of the appraisal report and an electronic version of the appraisal report using a standardized data file format through a uniform portal. This will allow the GSEs to ensure that the appraisal report "passes" the Rules Set, which includes the Guide requirements for completeness and standardized responses. IV. The Uniform Appraisal Dataset Essentially, the UAD is a series of common appraisal data definitions and standardized responses that must be used in UAD-complaint appraisal report forms. In the words of the GSEs, the objective is to enhance data quality and promote consistency in appraisal data. In layperson s terms, it simply means that if a computer is going to read the report, the responses must be from a list of items that the computer can understand. For example, prior to the UAD, if an appraiser were reporting on a property that had a view of a golf course, he or she might state Golf Course or Fairway in the data field for View. Under UAD requirements, however, appraisers now pick from a defined list in their forms preparation software that has a line item for Golf Course view. When the report prints to PDF or to paper, Glfvw appears on the report. In addition to dozens of new abbreviations and acronyms that appraisers must use, the GSEs implemented new rating systems for condition and quality. These new rating systems are of particular interest to REALTORS as loans involving properties with certain ratings are ineligible for delivery to the GSEs. For ease of adoption for lenders, vendors and appraisers the GSEs did not making significant changes to the actual appraisal report forms. Instead, the primary focus is on developing clear appraisal definitions (datasets) that will produce standardized responses to key data fields in the report. These data fields are the ones that the GSEs have determined to be material to understanding the value and for which the data, in their opinion, had previously been insufficient. Part 4 4 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac

5 A. The four UAD-Compliant Appraisal Report Forms The only forms to which the uniform dataset applies are: Uniform Residential Appraisal Report (Form 1004/70) and Exterior-Only Inspection Residential Appraisal Report (Form 2055/2055) Individual Condominium Unit Appraisal Report (Form 1073/465) and Exterior- Only Inspection Individual Condominium Unit Appraisal Report (Form 1075/466) The GSEs will also accept other appraisal report forms completed using the uniform dataset standards, where applicable. In other words, if an appraiser uses the standardized responses on GSE report forms other than the ones identified above it will be acceptable to the GSEs. V. UAD Specifications Guide and Other UAD Resources The Uniform Appraisal Dataset Specification: Appendix D was released by the GSEs on December 16, While not published specifically or exclusively for appraisers, it serves as a guide for appraisers wanting to comply with the UAD. It is an essential document for REALTORS who want to be able to decipher the cryptic abbreviations now found in appraisal reports and properly understand the condition and quality ratings. The URL for this publication at the time this handbook was developed is: The GSEs occasionally distribute FAQs on the UAD and UMDP. These can be obtained by visiting Fannie Mae s webite at: At the homepage, click on appraisers and when the next page appears, click on UAD Page which will take you to a page with a number of UAD resources, including any recent FAQs. HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac Part 4 5

6 VI. Significant URAR Data Fields This handout reviews significant data fields in the order that they appear on the appraisal report, using the URAR form as the example. Not every data field is addressed, only those pertinent to REALTORS. A. Contract section The UAD calls for the appraiser to identify the sale type using a predefined list created by the GSEs. This requirement applies to the comparables as well, so don t be surprised if you receive more calls or s from appraisers than occurred in the past regarding the circumstances behind the sale, for example an appraiser may ask if the transaction is a short sale, and what were the short-sale processing fees. Fannie Mae s and Freddie Mac s guidelines require a lender to provide the appraiser with a copy of the sales contract in a purchase transaction. The guidelines clearly state that the lender must provide the appraiser with a copy of the complete, ratified sales contract and all addenda for the property that is to be appraised Additionally, it is considered unacceptable practice for an appraiser to fail to analyze and report on the sales contract. While these requirements have been in effect for some time, it was difficult for the GSEs to enforce it prior to the existence of UCDP. While GSE guidelines specifically address the lender, any party to the transaction can provide the sales contract to the appraiser; it does not have to be only the lender or the lender s agent. If the appraiser is not supplied with a copy of the contract and checks the did not analyze checkbox, the UCDP will notify the lender of a hard stop and the lender will have to put the transaction on hold until the appraiser is supplied with and reviews the contract. The file will then need to be resubmitted to the UCDP. The obvious point here for REALTORS is to simply make sure the appraiser has received a copy of the sales contract to avoid UCDP problems that will delay the timely processing of the transaction. Part 4 6 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac

7 B. Site section 1. View - Requirement The data field for View is a good example of what the GSEs refer to as a repurposed data field i.e., a data field that has been assigned new and additional functions by the GSEs. The way that appraisers respond to this data field is a twostep process. a. Step 1: Overall View Rating The first step is for the appraiser to rate the view to describe the overall effect on value and marketability. Only one selection is allowed. b. Step 2: View Factor In the second step of the process the appraiser reports the View Factor from a list of GSE approved, abbreviated entries. At least one, but not more than two, view factors can be selected. If the property has more than two view factors, the appraiser can include additional description in the comments of the Site Section or on an addendum. HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac Part 4 7

8 Other. If a view factor not on the list materially affects the value of the subject property, the appraiser can enter a description of the view factor associated with the property in the allowed space under View. The description will print on the appraisal report (the word Other will not). c. Competing views Properties that have both Beneficial and Adverse views are not reported as Neutral. A good view and a bad view, per the GSEs, do not offset or neutralize each other. The word neutral in this context means a view that is neither beneficial nor adverse regarding the value and marketability of the property. Basically, a neutral view has no effect on the value. Therefore, if the appraiser reported the view as neutral it would be considered misleading. The appraiser is to report which of the view factors would be most influential, given the market are and price range. The design of the dwelling and manner in which it's oriented on the site will likely be a factor. If the design and orientation take advantage of the beneficial view and minimize the adverse view, it is likely that the good view will a greater influence on the value. Likewise, if the design and orientation emphasize the adverse view it will likely affect the value negatively. Part 4 8 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac

9 C. Improvement section The GSEs have instituted some significant new requirements regarding the data field for property condition. The new requirements call for a rating system wherein you select an overall condition rating of C1 through C6. As stated earlier, this new rating system is important to REALTORS because properties with condition ratings of C5 or C6 are may be considered to be unacceptable by the GSEs. 1. Labeling condition Is it relative or absolute? It is important to understand the perspective from which to view the condition of the subject property relative or absolute. Illustration: Is condition relative or absolute? Question: Does the condition of other neighborhood properties affect how an appraiser should report the condition of the subject property? Suppose the subject dwelling has a worn-out roof, but most of the other neighborhood properties have worn out roofs as well. Should the condition of the subject, therefore, be reported differently than if the other homes in the neighborhood mostly had roofs in good condition? Answer: No. A property s condition is not somehow elevated from poor to average just because it s surrounded by homes that are in similar condition. 2. Condition Rating Definitions: C1 through C6 C1 Rating The improvements have been very recently constructed and have not previously been occupied. The entire structure and all components are new and the dwelling features no physical depreciation.* (Bold added for emphasis.) *Note: Newly constructed improvements that feature recycled materials and/or components can be considered new dwellings provided that the dwelling is placed on a 100% new foundation and the recycled materials and the recycled HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac Part 4 9

10 components have been rehabilitated/re-manufactured into like-new condition. Recently constructed improvements that have not been previously occupied are not considered new if they have any significant physical depreciation (i.e., newly constructed dwellings that have been vacant for an extended period of time without adequate maintenance or upkeep). The key words in the definition are recently constructed, not previously occupied, new, and no physical depreciation. This rating is for improvements where all the components are new (including the substructure and superstructure) and have suffered no physical deterioration. The definition allows for the use of recycled materials and components in like-new condition. However, a C1 improvement must have a new foundation (substructure); otherwise, an improvement cannot be categorized as C1. Furthermore, even if a dwelling has never been occupied, to qualify for the C1 rating, it must not display any physical deterioration. Consider the case of a new dwelling that has been vacant for an extended period of time without adequate maintenance or upkeep. C2 Rating The improvements feature no deferred maintenance, little or no physical depreciation, and require no repairs. Virtually all building components are new or have been recently repaired, refinished, or rehabilitated. All outdated components and finishes have been updated and/or replaced with components that meet current standards. Dwellings in this category either are almost new or have been recently completely renovated and are similar in condition to new construction. (Bold added for emphasis.) The key words in the definition are no deferred maintenance, updated, renovated, almost new, and meets current standards. This rating applies to improvements with no deferred maintenance (no repairs are needed) and little or no physical deterioration. Virtually all components (short-lived items) must be new or recently repaired, refinished, and/or rehabilitated. All outdated components and finishes must be updated and/or replaced with components that meet current standards. This rating applies to homes that are nearly new or older homes that essentially have been gutted and renovated, but with the substructure and superstructure remaining intact. In other words, C2 homes don t quite meet the C1 category because they are not 100% new. Part 4 10 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac

11 C3 Rating The improvements are well maintained and feature limited physical depreciation due to normal wear and tear. Some components, but not every major building component, may be updated or recently rehabilitated. The structure has been well maintained. (Bold added for emphasis.) The key words in the definition are well maintained, limited physical depreciation, updated, and rehabilitated. Some components, but not every building component (including the substructure, superstructure, and short-lived items), may be updated or recently rehabilitated. The improvement, however, is not new or nearly new. C4 Rating The improvements feature some minor deferred maintenance and physical deterioration due to normal wear and tear. The dwelling has been adequately maintained and requires only minimal repairs to building components/mechanical systems and cosmetic repairs. All major building components have been adequately maintained and are functionally adequate. (Bold added for emphasis.) The key words in the definition are adequately maintained, minimal repairs, cosmetic repairs, and functionally adequate. All building components (including the substructure, superstructure, and short-lived items) have been, at best, adequately maintained and is functionally adequate, but not updated or recently rehabilitated. C5 Rating The improvements feature obvious deferred maintenance and are in need of some significant repairs. Some building components need repairs, rehabilitation, or updating. The functional utility and overall livability is somewhat diminished due to condition, but the dwelling remains useable and functional as a residence. (Bold added for emphasis.) HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac Part 4 11

12 The key words in the definition are obvious deferred maintenance, some significant repairs, livability diminished, and useable. This rating is for improvements that feature obvious deferred maintenance and are in need of some significant repairs. Due to the improvement s condition, the functional utility and overall livability are diminished; although the dwelling remains useable. C6 Rating The improvements have substantial damage or deferred maintenance with deficiencies or defects that are severe enough to affect the safety, soundness, or structural integrity of the improvements. The improvements are in need of substantial repairs and rehabilitation, including many or most major components. (Bold added for emphasis.) The key words in the definition are deficiencies or defects, affect safety, soundness, or structural integrity, and substantial repairs. Due to the improvement s condition, the safety, soundness, or structural integrity is at risk, as are the occupants. 3. Condition Rating Quick reference guide Ratings C1 C2 C3 C4 C5 C6 Quick Reference Definitions New; never before occupied and on a new foundation. Almost new condition; could be a few years old but still in near-perfect condition or of any age if it has been totally renovated and is in near-new condition, but is not on a new foundation. Well maintained and displays little (if anything) in the way of deferred maintenance. Adequately maintained and needs only minimal repairs. Livable condition but shows obvious signs of deferred maintenance and needs repairs, rehabilitation, or updating. Severe deficiencies or defects in structural integrity that could affect the safety of the occupants. Part 4 12 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac

13 4. Properties that make loans ineligible for delivery to the GSEs SPECIAL NOTE ON C5 RATING: Fannie Mae will purchase loans that involve C5 properties while Freddie Mac will not. Also, many lenders simply do not make loans on properties that are not C4 or better. Remember that a C4 rating is an improvement, which is adequately maintained meaning it only needs minimal repairs, and is functionally adequate. Any improvement inferior to a C4 rating is either a C5 or C6. SPECIAL NOTE ON C6 RATING: The C6 rating is a special case and triggers significant loan and appraisal requirements that must be fulfilled before the loan is saleable to either GSE; therefore, expect a C6 rating to cause delays in processing a loan and obtaining financing. Whereas the other ratings are based on an overall condition that considers all aspects of the dwelling, the C6 rating is an either/or rating. Either a dwelling does have or does not have issues related to safety, soundness or structural integrity. In other words, if any portion of a dwelling is affected by safety, soundness or structural integrity, the entire dwelling must be rated a C6 overall. Conversely, even if a dwelling is in rough shape if issues affecting safety, soundness or structural integrity are not present, the dwelling would be rated a C5 or better, but not a C6 rating. 5. Recommendations for REALTORS regarding C5 and C6 properties. Be realistic about the property s condition with yourself and the buyer. Waiting for the appraiser to state obvious inadequacies will only forestall inevitable conflicts. Be familiar with the policies of lenders you use regarding C5 and C6 properties. Sellers should be informed that they will either have to make repairs or wait for the right buyer, such as an all-cash investor who will accept the property as-is. Buyers should be informed that property s purchased in as-is condition will require their own funds to be expended for repairs or alterations. Recognize that the need to match certain properties with certain buyers takes on a greater importance with C5 and C6 dwellings. 6. Kitchens & Bathrooms Updated, Not Updated, Remodeled? Requirement After the appraiser rates the condition, he or she will, in their forms preparation software, be asked an additional set of string questions using lists that are not on the appraisal report form. This is another example of what the GSEs refer to as a repurposed data field. HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac Part 4 13

14 Question: Any Material Work. The appraiser mist first answer if the property has had any material work done to the kitchen(s) or bathroom(s) in the prior 15 years. 1. If the answer is No. The text entry, No updates in the prior 15 years is automatically generated by the software. 2. If the answer is Yes. The appraiser will select responses from lists for both the kitchen(s) and bathroom(s) regarding the updating or remodeling of those improvements. a. Question: Level of Work Completed. The first selection from the kitchen and bath lists will relate to the level of work completed. The appraiser indicates whether the room has not been updated, has been updated, or has been remodeled. There can only be one entry for level of work for the kitchen and bathroom, even if there is more than one kitchen or bathroom. b. Question: Timeframe Identified. The appraiser then selects the timeframe within which the majority of the updating or remodeling took place. The list is: Less than one year One to five years ago Six to ten years ago Eleven to fifteen years ago and Timeframe unknown Definitions of Updated, Not Updated, and Remodeled Requirement Updated The area of the home has been modified to meet current market expectations. These modifications are limited in terms of both scope and cost. An updated area of the home should have an improved look and feel, or functional utility. Changes that constitute updates include refurbishment and/or replacing components to meet existing market expectations. Updates do not include significant alterations to the existing structure. Implicit in the definition is that the market expectations are measured within the context of the neighborhood and submarket s price range. In other words, purchasers of Part 4 14 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac

15 modest, less expensive homes are not expecting fixtures and finish materials not typically found in that price range. The definition states that the updated area should have an improved look and feel, or functional utility. Updates do not include significant alterations. Not Updated Little or no updating or modernization. This description includes, but is not limited to, new homes. Residential properties of fifteen years of age or less often reflect an original condition with no updating, if no major components have been replaced or updated. Those over fifteen years of age are also considered not updated if the appliances, fixtures, and finishes are predominantly dated. An area that is Not Updated may still be well maintained and fully functional, and this rating does not necessarily imply deferred maintenance or physical/functional deterioration. A kitchen or bathroom that is labeled not updated means just that not updated; no material work has been done to those improvements. The definition is not restricted to improvements more or less than 15 years of age. While it may seem counterintuitive, this category includes new homes (new construction) as well as the perfectly preserved home the one with all the original flooring, wallpaper, cabinets, counters, fixtures, etc., in mint condition. Remodeling Significant finish and/or structural changes have been made that increase utility and appeal through complete replacement and/or expansion. A remodeled area reflects fundamental changes that include multiple alterations. These alterations may include some or all of the following: replacement of a major component (cabinet(s), bathtub, or bathroom tile), relocation of plumbing/gas fixtures/appliances, significant structural alterations (relocating walls, and/or the addition of square footage). This would include a complete gutting and rebuild. Remodeling is considered more extensive than updating. The definition uses the terms fundamental changes and multiple alterations followed by examples that include replacement of major building components, relocation of fixtures and appliances, significant alterations, and increasing the size of the dwelling. HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac Part 4 15

16 Do not confuse updating or remodeling with overall condition. It s important to remember that this discussion about updating and remodeling applies only the kitchens and baths and is distinct from the overall condition. Just because an improvement had a recently updated or remodeled kitchen or bathroom does not automatically result in a condition rating of C2 or C3. The condition rating is an overall rating of the improvement, not a rating of a portion of the home. So if the same home had otherwise been harshly treated or had underlying structural issues, its overall condition rating could be a C4, C5 or even C6. Conversely, a new or nearly new home may be in very good condition and receive a C1 or C2 overall rating but still be identified in the appraisal report as having a kitchen and bath that is not updated. D. Sales Comparison Approach Section As with page one of the appraisal report, this handout will comment only on the data fields on page two that are of significance to REALTORS Part 4 16 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac

17 The same reporting requirements apply to both the subject and comparable property characteristics. In other words, if the UAD calls for given abbreviations to be used to describe the subject, the same abbreviations apply to the comparable properties. This precludes the use of terms like similar, inferior, or superior to describe comparables as well as terms like average or typical. 1. Sales or Financing Concessions This two-line field is used to report sale type, financing type, and any concessions involved in each comparable sale. a. Sale Type Line 1 is used to indicate the sale type for each comparable. Valid sale types include: b. Type of Financing Line 2 is used to report the type of financing applicable to the comparable and the amount of concessions, if any. Valid financing abbreviations include: HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac Part 4 17

18 2. Type of Transaction/Date of Sale/Time For each comparable, the appraiser will first identify the status type or type of transaction from this list. a. Active status Active status is referring to an active listing, which is identified with the entire word Active rather than an abbreviation. The following abbreviations identify the date status type. b. Contract, Expired, or Withdrawn status Properties under contract (pending) and listings that have either expired or been withdrawn are identified with a single letter on the Date of Sale/Time grid line as c, e, or w, respectively, followed by the contract, expired, or withdrawn date (MM/YY format). c. Settled sale status Settled sales are reported with both the settlement date (closed date) and the contract date (meeting of the minds). Part 4 18 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac

19 3. Location The location data field in the Sales Comparison Approach Section grid is much like the View field on Page 1 and requires the use of abbreviations. a. Step 1 Location Rating First, the appraiser will identify one location rating only for the subject and each comparable from one of the following choices: b. Step 2 Location Factor Second, the appraiser will choose at least one but no more than two entries from the list that best identify the location factor(s) for the subject and each comparable. If a location factor not on the list materially affected the sale price of the comparable or if additional location factors beyond two choices materially affected the sale price of the comparable, the appraiser must provide a description of such location factor(s) in the comments or in an addendum. The subject s location rating and factor(s) are to be addressed on Page 1 in the Neighborhood and/or Site Sections and correspond with the rating/factor(s) identified in the sales comparison grid. HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac Part 4 19

20 c. Special note on Location The Location data field in the sales comparison grid is only to be used to adjust for differences between properties in the same neighborhood. If an appraiser uses comparables from different neighborhoods and adjustments are warranted, the appraiser is to report those adjustments on one of the three blank lines at the bottom of the grid. 4. Quality The new Q1 Q6 ratings may be the most challenging issue of the entire Uniform Appraisal Dataset. Appraisers are required to rate the quality level of the subject dwelling on a scale with Q1 being the best quality and Q6 the worst quality. The intent of the GSEs was to establish a meaningful rating system that actually speaks to the quality of the dwelling. In a sampling of almost 300,000 appraisal reports, the GSEs found that 44% referred to quality in terms of building materials like Frame, Brick, Aluminum, etc., and that another 48% were rated as Average. Less than one-half of one percent was rated Fair and virtually none were of poor quality. Note: The quality ratings in the UAD were developed independently and are proprietary to the GSEs. 1 a. Basic obligations in reporting a quality rating The new quality ratings require the appraiser to select only one quality rating for the subject property and each comparable property. The quality rating must represent the overall quality of the property. Illustration: Is quality relative or absolute? Question: Does the quality of other neighborhood properties affect how the appraiser should report the quality of the subject property and each comparable property? Answer: No. It s the same as the condition issue. The quality of a structure is based on facts that are unaffected by the quality of surrounding properties. 1 Fannie Mae & Freddie Mac UAD FAQs, Question 42, dated 4/12/2011. URL: Part 4 20 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac

21 b. Quality rating definitions: Q1 through Q6 Q1 Rating Dwellings with this quality rating are usually unique structures that are individually designed by an architect for a specified user. Such residences typically are constructed from detailed architectural plans and specifications and feature an exceptionally high level of workmanship and exceptionally high-grade materials throughout the interior and exterior of the structure. The design features exceptionally high-quality exterior refinements and ornamentation, and exceptionally high-quality interior refinements. The workmanship, materials, and finishes throughout the dwelling are of exceptionally high quality. (Bold added for emphasis.) The key word in the definition is exceptional. According to the GSEs, less than one percent of the residences in the nation qualify for this rating. Q2 Rating Dwellings with this quality rating are often custom designed for construction on an individual property owner s site. However, dwellings in this quality grade are also found in high-quality tract developments featuring residences constructed from individual plans or from highly modified or upgraded plans. The design features detailed, high-quality exterior ornamentation, highquality interior refinements, and detail. The workmanship, materials, and finishes throughout the dwelling are generally of high or very high-quality. (Bold added for emphasis.) The key word in the definition is high-quality. This rating often applies to plans designed by an architect for a home to be built on an individual property owner s site or in a housing development specifically for custom-built homes. Although, a dwelling s quality is totally a function of its building components, regardless of its location, the appraisal principle of conformity states that value is created and sustained when the characteristics of a property conform to the demands of its market. 2 Therefore, it would not be uncommon (but not a requirement of the definition) to find homes of this quality congregated in a custombuilt housing development. 2 The Dictionary of Real Estate Appraisal, 5 th ed. Chicago: Appraisal Institute, HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac Part 4 21

22 Q3 Rating Dwellings with this quality rating are residences of higher quality built from individual or readily available designer plans in above-standard residential tract developments or on an individual property owner s site. The design includes significant exterior ornamentation and interiors that are well finished. The workmanship exceeds acceptable standards and many materials and finishes throughout the dwelling have been upgraded from stock standards. (Bold added for emphasis.) The key words in the definition are higher quality, above-standard, exceeds standards, and upgraded. So it appears that one might describe a Q3 improvement as better than standard. The improvement was likely built from available or modified architectural or designer plans but less likely a custom set of plans. Again, as with the C3 rating, it would not be uncommon (but not required) to find homes of this quality congregated in a semi-custom housing development. Q4 Rating Dwellings with this quality rating meet or exceed the requirements of applicable building codes. Standard or modified standard building plans are utilized and the design includes adequate fenestration and some exterior ornamentation and interior refinements. Materials, workmanship, finish, and equipment are of stock or builder grade and may feature some upgrades. (Bold added for emphasis.) The key words in this definition are meet, standard, adequate, and builder grade. So it appears that a Q4 improvement might be described as a builder-plan commonly designed by a builder s draftsperson (and not an architect) consisting of standard finishes with some design and upgrade features. Unlike the prior ratings, it would be common (but not required) to find homes of similar quality congregated in a mass-produced tract housing development. Part 4 22 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac

23 Q5 Rating Dwellings with this quality rating feature economy of construction and basic functionality as main considerations. Such dwellings feature a plain design using readily available or basic floor plans featuring minimal fenestration and basic finishes with minimal exterior ornamentation and limited interior detail. These dwellings meet minimum building codes and are constructed with inexpensive, stock materials with limited refinements and upgrades. (Bold added for emphasis.) The key words in this definition are economy, minimal, inexpensive, and stock. This rating applies to improvements with a plain exterior design and basic floor plan with a minimal amount of finish and fit and no or limited upgrades. The term minimum code compliance applies to Q5 dwellings. Q6 Rating Dwellings with this quality rating are of basic quality and lower cost; some may not be suitable for year-round occupancy. Such dwellings are often built with simple plans or without plans, often utilizing the lowest quality building materials. Such dwellings are often built or expanded by persons who are professionally unskilled or possess only minimal construction skills. Electrical, plumbing, and other mechanical systems and equipment may be minimal or non-existent. Older dwellings may feature one or more substandard or non-conforming additions to the original structure. (Bold added for emphasis.) The key words in this definition are basic, lower cost, simple, unskilled, and substandard. Such improvements might be commonly found in cottages, cabins, etc., that are used as vacation homes. The descriptor for this rating might read, One step above camping! Note: A mortgage loan secured by a property with a quality rating of Q1 Q5 is eligible to be sold to the GSEs. However, a property with a Q6 rating generally does not meet the GSE s property eligibility requirements. HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac Part 4 23

24 Quality Rating Quick reference grid Ratings Quick Reference Definitions Q1 Exceptional quality improvements; few will qualify. Q2 High quality or very high quality but not exceptional quality. Q3 Above-standard, higher quality finish with noteworthy ornamentation and/or design. Q4 Builder-grade dwelling that meets code and may have some upgrades. Q5 Economy structure with basic functionality. Q6 Built of the lowest possible quality, often constructed in a nonprofessional manner and substandard in functionality. 5. Basement The UAD has some very specific requirements for reporting basement characteristics and features. These same requirements apply to both the subject and the comparables. a. Size, Finish, and Access On Line 1 the appraiser is to report three items and three items only: 1. Total size of the basement area in square feet (sf), 2. Finished area in square feet (sf, not as a percentage), and 3. Type of basement access available, which can be expressed in one of three standardized ways: a. Walk-out abbreviation: wo, b. Walk-up abbreviation: wu or, c. Interior only abbreviation: in. Part 4 24 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac

25 b. Room Count and Type of Rooms On Line 2 the appraiser is to report: 1. Number of each type of finished room and 2. Identify the room type using the following abbreviations: a. Recreation Room abbreviation: rr b. Bedroom abbreviation: br c. Bathroom abbreviation: ba. Separate a full bath from a half bath with a period (.) d. Other Rooms abbreviation: o 3. Apply the same method used for the subject to determine the standardized bathroom count: a. A three-quarter bath is to be counted as a full bath in all cases. b. Quarter baths (baths that feature only a toilet) are not to be included in the bathroom count. c. The number of full and half baths must be entered, separated by a period. The full bath count is represented to the left of the period. The half bath count is represented to the right of the period. 4. If there are no rooms in the finished space, the second line will be blank. Note: If information about the basement is not readily available in the normal course of business, the appraisal report must include an explanation that each figure used, such as square feet, percentage finished, or room count, is an estimate and identify the source for that information. If the information is unknown, then describe what due diligence efforts were undertaken but unsuccessful in obtaining this information. HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac Part 4 25

26 One of the last things we want to cover in this handout relates to how to understand the reporting of the appraiser s adjustments in the sales comparison grid. Not the amount of adjustment, but why some lines on the grid have adjustments, some have zeros and yet others are just left blank by the appraiser. When reviewing a sales comparison grid, at first, it may seem as if some of the entries are incorrect, or at least inconsistent. Some of the adjustment fields are blank, while zeros have been entered in others. Some comparables have the same description as the subject and are not adjusted, while other comparables have the same description but are adjusted. Odd as this may seem, all these entries are accurately disclosed and consistent with the UAD requirements stated in Appendix D. If the subject and comparable descriptions differ but no adjustment is warranted the UAD calls for the appraiser to enter a zero, indicating that even though there is a physical difference, the appraiser determined no adjustment was warranted. For example, the descriptions and adjustments on the View line identify that the subject has a beneficial mountain and water view, yet there was no adjustment between the subject and Comparable 1, which had a beneficial mountain and golf course view. Why? The appraiser in this case determined that both views were equally valuable and that no adjustment was warranted. So the appraiser entered a zero to indicate that he or she had considered the difference. Part 4 26 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac

27 CLOSING REMINDER: Earlier in this handout, we provided a link to Appendix D, from the GSEs, which is your go-to guide for understanding reports written in the language of the UAD. The URL for Appendix D also appears, along with several others, on the following page. At the end of Appendix D, is an Exhibit Section. It contains the condition and quality definitions as well as a list of the UAD abbreviations created by the GSEs that can be and are encouraged to be used by the appraiser when completing a UAD report. Appraisers sometimes refer to this list as the decoder ring for the UAD. We encourage you to have this list handy when you are reading an appraisal report that s been prepared in compliance with the UAD. HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac Part 4 27

28 UMDP, UAD, UCDP, AND MISMO-XML URL LINKS Topic Uniform Mortgage Data Program Uniform Appraisal Dataset Overview Uniform Collateral Data Portal MISMO UAD Field Specifications: Appendix D Uniform Loan Delivery Dataset Fannie Mae Link (Freddie Mac distributed the same information; only the Fannie Mae URL is provided) view.pdf Part 4 28 HMG, LLC The Uniform Appraisal Dataset from Fannie Mae and Freddie Mac