Departments Copyright Information Archives Ask Henry Rants & Raves! Book Review: 1004MC Form

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2 Real Estate Valuation Magazine 2/16/09 3:47 PM Table of Contents Features Editorial Fannie & Freddie Strike Out Appraisal Practice Ready or Not: Here Comes FHA Work Appraiser's FHA Checklist Who are the Appraisers? Market Conditions 1004MC Form How to Fill in the 1004MC ~ With Case Study! HVCC: What You Really Need to Know Who CAN Order Appraisals for FHA? Market Conditions Addendum: 1st Impressions Departments Copyright Information Archives Ask Henry Rants & Raves! Book Review: 1004MC Form Ruth editor@revmag.com Henry henrysharrison@revmag.com H Alex webmaster@revmag.com Featured Advertiser Bluebook's Foreclosure Cost Handbook The Environmentalist Hot Topic: Green Buildings 1004MC Illustrated Guide with CD-Rom 1004MC Market Conditions Form Seminar 3-Book Special: URAR, 2055, 1004MC FHA Handbook includes free CD 5 Star Appraisals E & O from HRH Advertise with REV Magazine Online! Ann O'Rourke's "Special Guide to FHA" AMC Directory from Appraisal-Nation Appraisal Education by Harrison-Lee Appraisal E & O from 5 Star Appraisal Mastery Center: AQB & C.E. Appraisal World: NEW Online Directory AskHenryHarrison.com Be Wise: Liability Administrators E & O Bluebook.net : YOUR Cost Data Solution Continuing Ed Classes ~ Appraisal Mastery Continuing Ed Online from Harrison-Lee Advertisers E & O Insurance from Liability Admin. Environmental Seminar - for C.E. FHA Handbook with Free CD-Rom FHA "Special Report" from Ann O'Rourke FINCA Micro Loans Enrich Lives Fannie Mae Set for 1004MC Get More & Better Work with Nebb Inst. Harrison-Lee AQB Approved Seminars "Hot, Flat & Crowded" by Tom Friedman HRH 5 Star Appraisers for E & O Liability Administrators E & O Insurance Market Conditions Form (1004MC) Seminar NEBB Institute: for More & Better Work! "NY Times Guide to Everything" REV Magazine: Reach 20,000 Appraisers! SAVE $60: URAR, 2055,1004MC Books URAR Seminar Online for C.E. Yield Cap Seminar ~ AQB approved On the Front Cover...The luxury treehouse is a relatively recent phenomenon. Twenty years ago, there was no such thing as a master treehouse builder. Now, however, thanks to a confluence of eco-conscious clients looking for sustainable hideaways and recent technological advances that allow elaborate structures to be hung higher and more safely than ever, this may be the golden age of the treehouse. There are now more than 10 dedicated builders of adult tree dwellings in the United States. Peter Nelson and a partner founded TreeHouse Workshop in Their Seattle firm built a dozen treehouses last year. He has built everything from monkish yurts to multistory retreats, complete with every convenience, even plumbing. Some clients pay hundreds of thousands of dollars for their treehouses; most are around $70,000; while many cost far less. The most extravagant projects enjoyed sites with multiple trees, but even the bare-bones projects were handbuilt, timber-framed structures, assembled by a small crew of craftsmen dangling in harnesses from tree branches. Treehouses may be a unique solution in the current housing situation. Charley Greenwood, an engineer who supplies specialty parts for treehouses, lives full time in a 700 sq.ft. treehouse moored 14 feet up in an Oregon evergreen grove. He says it is a lot like living on a moored houseboat. Treehouses move. You have to be comfortable with a certain amount of horizontal travel is how he puts it. file:///private/var/folders/fa/fazxe7fmecq63isw041y9u+++ti/tempo idweaver/251/document /rwdocumentpagepreview/index.html Page 1 of 2

3 Real Estate Valuation Magazine Online Winter Our 22nd Online Issue! Welcome to the Winter 2009 edition of our magazine. We would like to remind you of the recently redesigned interface which will hopefully make your reading experience easier and more pleasant. For help with the new interface, click Help! here or on the yellow toolbar above. When we converted Real Estate Valuation Magazine into an online-only magazine 22 issues and over 5 years ago (!) the change was hard for some of our readers to accept. On the other hand, most readers told us they were delighted with the change, and the added convenience of "instantly clicking" to an article of interest. Since 2003, our readership has grown to over 20,000 appraisers, who have signed on and given us their names and addresses. These appraisal subscribers log into our magazine website over 100,000 times per issue! Historically, we mailed out over 80,000 copies per issue to a mailing list developed from the Appraisal Subcommittee's National Registry of Appraisers. Our first 74 issues were printed and mailed free of charge. Of course, we had no idea how many of them were actually read. The problem was that the cost of printing and postage skyrocketed and we were forced to increase our advertising rates to cover these costs. Like many newspapers and magazines around the country, we saw our profits shrinking with each issue and our advertisers becoming unhappy with the high cost of advertising. We had to decide whether to become a paid subscription print magazine or continue to offer the magazine as a free service to the appraisal industry, in an online version. When we switched to online, our advertisers benefited in two ways: Their costs to advertise were substantially reduced and the effectiveness of their advertisements exponentially increased. Readers can ~ and do ~ click on advertisements and are immediately connected to the advertiser s website. When we converted to the online edition, we deliberately kept the look and feel of the printed version.

4 Two issues ago, now, our son and webmaster, H Alex Harrison, convinced the editor, Ruth Lambert (who is also his mother), and myself (his father and the publisher), that the time had come to modernize the way we looked and how we produce the magazine. We took his suggestion and the result has been an unmitigated success. Readers have praised the ease with which they can read our magazine, now that all articles will run unbroken from start to finish. Readers will not have to jump around to find the end of an article. In addition, all articles will be easily accessible from drop down menus by topic. We are proud that you have received this format well, and we hope you will hang in with us through these trying times for appraisers: This year we will publish our 100th issue! Henry S. Harrison

5 Editorial Fannie & Feddie Strike Out with the Market Conditions Addendum by Henry S. Harrison Fannie and Freddie issued their new Market Conditions Addendum (Form 1004MC-71) in November They will require its use on all mortgages resold to them with an appraisal date of April 1st, 2009 or later. The new form is rightfully causing a lot of concern among appraisers. Their initial reaction is that it may take more time to complete the Market Conditions Addendum than to make the appraisal! The second reaction is that the lender/clients are not going to pay for the additional time it takes to gather and analyze the additional sales and listing data the new form requires. This concern is compounded by fear that the new HVCC requirements are going to scare many lenders into using only appraisals ordered through Appraisal Management Companies (AMCs) who are notorious for paying low fees and giving the assignments to anyone who will turn them out fast and cheap. (I)t may take more time to complete the Market Conditions Addendum than to make the appraisal! Fannie Mae s stated purpose for creating the 1004MC form is to: capture additional information to enhance the transparency of the market trends and conditions and condition conclusions made by the appraiser. Fannie Mae attempts to do this by requiring an Inventory Analysis, a Market Sale & List Price Analysis, DOM, and a List/Sale Price Ratio Analysis. For a subject property in a condominium or cooperative project, an additional analysis is required of the recently sold and currently listed competitive (comparable) units in the project. Appraisers need to learn how to turn out an acceptable 1004MC in as little time as possible. Their goal should be to do only what it takes to satisfy Fannie Mae's and Freddie Mac s requirements -- because in my opinion this form contributes very little towards making a better appraisal. Fannie Mae and Freddie Mac have the right -- as part of their scope of work requirements -- to ask for this additional data analysis. However, both the USPAP and the HVCC clearly state that the client cannot tell the appraiser which comparable sales to use or how much weight to give a comparable. It is completely up to the appraiser if they want to use any of the comparable sales reported on the 1004MC as part of their Sales Comparison Analysis. The secret to dealing with this form is to do exactly what Fannie and Freddie require -- and nothing more. Keep in mind that the form only asks for reporting of past overall trends and not any forecasting. The scope of work instructions also make it clear that only information about properties that are "comparable to the subject property" can be used. I have gone through the form line-by-line to explain just how to do this in my new Illustrated Guide: How to Fill in the Market Conditions Addendum to the Appraisal Report (Fannie Mae 1004MC-Freddie MAc 71), which is available for purchase online from or by calling Toll Free: (Item #300213)

6 It is unfortunate that we have come such a long way from when the URAR was first developed. At that time, back in 1975, a committee of appraisers joined with staffers at Fannie Mae and Freddie Mac plus representatives from the appraisal organizations, lenders and many other talented people to create an industry-wide form that was well-designed and ideally suited for reporting a complete appraisal of a residential property. Now, Fannie and Freddie, who both have track records of doing very little right in the past several years, have created a form that will potentially cause serious harm to the appraisal profession. The real irony is that I don't believe for a moment that the 1004MC is going to improve their underwriting. The best way they could accomplish that goal is to follow the lead of the FHA: stop using computers to make their appraisals, and require that only certified appraisers do their work. HSH Back to Table of Contents

7 FHA Update Ready or Not, Here Comes More FHA Work by Ann O Rourke, MAI, SRA It will come as no shock to any appraiser who has been awake during the past three months that FHA has taken over much of the imploding subprime market. Many lenders have been applying to become FHA approved. And a new bill, signed into law last March, 2008, significantly increased FHA loan limits. The subprime implosion motivated Congress to pass the bill and various new government programs have been created to address the situation nationally. Foreclosure prevention, and opening up lending for home mortgages once again is the impetus for all the flurry. This is a basic primer on FHA work, to help you decide (a) if you already have the needed information to do FHA work and (b)

8 where to get more if you don t! FHA Appraising is Different When you do FHA work, you really need to look at the property as well the site/neighborhood more carefully. The big difference is that you must know the FHA requirements, which means you have to have in hand the 130+ page FHA Handbook , and know it well. (To buy a printed and bound copy of the FHA Handbook , click below now): For example under the Sites section, the Handbook notes: "New and proposed construction within Runway Clear Zone are ineligible." No dwelling or related property improvement may be located within the engineering (designated) fall distance of a high voltage transmission line." There are other site-specific requirements that are not found in Fannie Mae guidelines. BASEMENTS - A SPECIAL CASE Fannie does not permit below grade space to be considered as part of the GLA of the residence. However, the FHA has different rules. "The following requirements apply to the valuation of below grade rooms. 1. The windowsill may not be higher than 44 inches from the floor. 2. The windowsill must have a net clear opening (width x height) of at least 24 x 36 inches. 3. The window should be at ground level; however compensating factors may allow less. In all cases, use reasonable care and judgment. If these standards are not substantially met, the basement area cannot be counted as habitable space."

9 OTHER DIFFERENCES There are a few more steps for an REO appraisal and an appraisal for a Manufactured Home. Appraisal of Indian Lands calls for additional knowledge as well. FHA publishes a Valuation Protocol (Appendix D) for filling out the Fannie Mae form that they expect to be followed. MORE ABOUT THE FHA FHA and Mortgages FHA does not fund mortgages. It insures them. When you do an FHA appraisal, you are working for FHA, not the borrower. You work for a direct lender or mortgage broker. Integration of Repairs FHA appraisals have become very similar to typical appraisals completed for lenders reselling loans to Fannie Mae. An important difference, however, is that appraisers must rely on existing FHA procedures for guidance in the valuation of insured properties. This comprehensive set of procedures and standards is found in Appendix D of Handbook , CHG-1, Valuation Analysis for Home Mortgage Insurance for Single Family One-to Four Unit Dwellings. Instead of following an extensive checklist, FHA appraisers must integrate their findings into the standard Fannie Mae Report. Any and all references to Valuation Condition (VC) items addressed in Chapters 2 and 3 of Handbook are to be addressed in the appropriate section of the applicable appraisal reporting form. For example, Chapter 2, Section 2-2-E, entitled "Slush Pits" instructs: "if there is any readily observable evidence of slush pits, mark the "yes" column in VC-1." The new protocol requires the appraiser to address this condition in the site section of the appraisal report and note that the property may not be eligible for FHA financing, referencing the information found in Chapter 2. In the past, FHA required that appraisers turn on heating systems to see if they worked, had special sketch requirements, etc. They have dropped many of these requirements, but some appraisers who have been on the list think they are still required. FHA requires that appraisers get access to crawl space and attics. For attics, the requirement is explicit: "head and shoulders" in the attic. A large flashlight is very useful (both for visibility and fending off any varmints). Flash photos are also a good idea to demonstrate compliance. Photos of all 4 sides of the home are required, a street scene showing a portion of the subject site in the photo, and the grade of the lot if it is for proposed construction. FHA uses its own Compliance Inspection Report, and does not accept the Fannie Mae 442 (also called a drive-by ). A typical fee is $75 for re-inspecting a property to see if the repairs have been completed. This may be a low fee if you have to travel very far. Finally, FHA does not allow trainees to do their appraisals, so there is no provision for a supervisory appraiser to use a trainee on the assignment. MINOR PROPERTY DEFICIENCIES Another major change in FHA appraisal procedures is a de-emphasis on minor property deficiencies. FHA now only requires repairs for those property conditions that rise above the level of cosmetic defects, minor defects or normal wear and tear. This shift in emphasis, however, does not release the FHA Roster Appraiser from reporting all readily observable deficiencies, as well as any adverse conditions discovered performing the research involved in completing the appraisal, within the reporting form. FHA now permits an "as-is" appraisal for existing properties with minor property deficiencies that do not affect the safety of the occupants or the security and soundness of the property. The following are some of the items that no longer require automatic repair for existing properties: Missing handrails Cracked or damaged exit doors that are otherwise operable Cracked window glass Defective paint surfaces in homes constructed post 1978

10 Minor plumbing leaks (such as leaky faucets) Defective floor finish or covering (worn through the finish, badly soiled carpeting) On the other hand, examples of property conditions that may represent a risk to health and safety or the soundness of the property include: Inadequate access/egress from bedrooms to exterior of home Leaking or worn out roofs (if 3 or more layers of shingles or leaking or worn out roof, all existing shingles must be removed before re-roofing) Evidence of structural problems (such as foundation damage caused by excessive settlement) Defective paint surfaces in homes constructed pre-1978 Defective exterior paint surfaces in homes constructed post-1978 where the finish is otherwise unprotected In another effort to streamline the lending process, FHA no longer mandates automatic inspections for wood destroying insects in the absence of evidence of active infestation, wells unless there is evidence of possible contamination from several defined elements, septic systems unless evidence of system failure and for flat and/or unobservable roofs. Those items still requiring inspection include: Standing water against the foundation and/or excessively damp basements Hazardous materials on the site or within the improvements. Faulty or defective mechanical systems (electrical, plumbing, or heating) Evidence of possible structural failure (e.g., settlement or bulging foundation wall) APPRAISER DISCIPLINE REVVED UP Another significant difference is that FHA does not fool around with mistakes. A big portion of the FHA Handbook deals with discipline if you make a mistake that turns up in a review. They do monitoring reviews, and they separate problems into categories from ordinary negligence to maliciously repeated negligence. There are a whole series of penalties. A typical punishment if found lacking on review is to be required to take an additional CE course to continue to do FHA work. FHA REOS AND APPRAISAL REVIEWS FHA appraisal reviews and REO appraisals are handled by contractors that cover a wide geographic area. Specialist Marketing and Management contractors handle foreclosed properties, including getting appraisals done. The fees are low, but it is a reliable source of business. To get a list of M&M contractors by area of the country, go to: mmdoa.cfm FHA APPRAISAL WORK: THE RISKS & REWARDS In the past, many appraisers quit doing FHA because of low volume, low fees, or the perception that the appraiser is more liable to disciplinary actions. FHA does have additional requirements and a stricter review program that Fannie Mae. Reading and

11 understanding the 150+ page FHA Handbook is a challenge and a necessity. However, based on the current Federal bailout plans, FHA lending will definitely increase over the next months. In addition, the Hope for Homeowners program will pump another $1.5 trillion dollars into the system to help those at risk of default and foreclosure refinance into more affordable, sustainable loans. What do people who are refinancing need? A new appraisal! In this harsh economic climate, it s good news for appraisers who are willing to do what it takes. (For details on Hope for Homeowners, see: For more information on FHA appraising, go to look on the right side of the page for Housing Industry, then click on Appraisers and bookmark the site. Alternatively, use this link: This excerpt was reprinted with permission from Appraisal Today s Special Report on FHA Appraising by Ann O Rourke, MAI. To order a copy of the complete downloadable report, click on the image (left) or go to: Back to Table of Contents

12 FHA Update Appraiser's FHA Check List Reprinted with permission from A & E Appraisals.com Since its inception, The Department of Housing and Urban Development (HUD) has established minimum property standards. While these standards have varied over time, the recent changes have been some of the most dramatic in decades. By eliminating many "nuisance" repairs and mandatory inspections, HUD hopes to make it easier to buy or sell a home with FHA financing. Bold headings below indicate specific areas where recent changes in requirements have been made. POOR CONDITION A lack of maintenance that gives a "run down" look to a property is acceptable. Missing or damaged flooring or carpet, rotted or worn out countertops, poor workmanship, damaged plaster or drywall, bathroom tile, missing or damaged interior doors, debris, trash, or other cosmetic items that do not otherwise jeopardize the safety or structural integrity of the property are acceptable and will not require repair. CONDOMINIUMS - Projects must be at least 51% owner occupied and may not have a "right of first refusal" clause in the association documents. STRUCTURAL DEFECTS - Large settlement cracks, sagging floors or roofs, and significant deteriorated wood are conditions that require professional repair. Grading must be adequate to drain away from house. TERMITES - HUD will no longer automatically require a termite inspection. Minor (non-structural) termite damage will not require repair. Wood/soil contact that is not due to a structural problem will no longer require repair. Visible evidence of active or past infestation, or evidence of dryrot will require termite report with clearance of Section I items. LEAD PAINT - For homes built before 1978, any peeling, chipping, or chalking paint on the house, detached garage, shed, fence, or anywhere on the property must be scraped, primed, and painted. Use tarps to collect paint chips to avoid contaminating the soil. If the home is built after 1978 HUD will no longer require painting of defective paint surfaces, in most cases.

13 HEATING - The property must have a permanent heat source. The heating and air conditioning system (if present) must be operating properly. Space heating systems are acceptable if installed in accordance with local building codes. Combustible (oil/gas) heat requires exhaust ventilation. ROOFS - Leaking and worn out roofs require repair or replacement. While a remaining life of at least two years is no longer specified a roof with a life of less then two years should be considered "worn out". HUD will no longer require automatic inspection of a flat roof system. WINDOWS/DOORS - HUD will no longer require broken glass to be repaired. Exterior doors that are in poor condition but are otherwise functional are acceptable. Windows that stick, are loose, or are otherwise in poor but serviceable condition should be acceptable with the following exception: Inadequate access/egress from bedrooms to the exterior of the home is unacceptable. At least one window in each bedroom must open and close freely in order to allow escape in case of fire. Burglar bars on bedroom windows must have a release mechanism (at least one per bedroom). ELECTRIC/UTILITIES/MECHANICAL SYSTEMS - Fuses are acceptable. 60amp electric service may be acceptable (a small house with oil or gas for heating, cooking, and hot water). Loose wiring, open splices, and other hazardous conditions will require repair. An exception is low voltage (telephone or cable TV) wiring that would not present a hazard. All utilities should be on in vacant homes in order to avoid re-inspection. All mechanical systems must be operating. CRAWL SPACE & ATTIC - Access to both the attic and the crawl space is required. Both must have adequate ventilation. Crawl spaces must have sufficient clearance for inspection and maintenance. PLUMBING - Minor plumbing leaks and defects are acceptable. Major plumbing problems will require inspection and repair. Water heaters must have a pressure relief valve. SAFETY CONCERNS - Smoke detectors are not required but if they are present they must work properly. HUD no longer requires repair of the safety device that automatically stops an obstructed electric garage door opener. Trip hazards such as uneven walkways or sidewalks will not require repair. Missing handrails on stairways are acceptable. HUD DOES NOT REQUIRE HUD does not require the following: Appliances Screens Driveways Lawn sprinkler systems Pool repairs (unless they present a safety concern)

14 Thank to Ron Stalzer, RAA, of Tempe, AZ, for permission to reprint this article, which also appears on his website at: He can be contacted as follows: Ron Stalzer, RAA Ph: Fx: Mobile:

15 Appraisal Practice Who Are the Appraisers? AppraisalWorld.com Residential Appraiser Survey Results AppraisalWorld, an online community of appraisers, has published its findings from its online survey of members. While there are no big surprises, it's still interesting to see who is involved in appraising. Gender Breakdown As you probably suspect, the appraisal profession is heavily dominated by men almost 4 out 5 practitioners are men.

16 Age Breakdown Note that the middle age groups are almost evenly divided. Appraisers in their 40s represent 30%, appraisers in their 50s make up 31%, while appraisers under 40 represent 28%. Appraisers over 60 represent a little more than 10%. Years of Experience Appraising Interestingly, appraisers were split 50/50 with 50% having more than 10 years of experience and the other half having 10 or less years of appraisal experience. There are very few trainees, but still a substantial group (23%) of relatively new appraisers with between 1 and 5 years of experience. Educational Level More than three quarters of residential appraisers have an advanced degree beyond the high school level. Income Level The education levels seem to be paying off in higher income levels as more than two-thirds of all appraisers make over $50,000 per year. More than 30% of the appraisers are making over $80,000 per year. This also shows that some appraisers, 15%, are having a rougher time with incomes of less than $40,000 per year. According to Money Magazine and Salary.com, Residential Real Estate Appraising is the #6 Best Job in America for people over 50. Here's what Money has to say: Median pay is $42,000; 90% make more than $30,900; Is Appraising the Primary Source of Income? Overwhelmingly, 94% of residential appraisers stated that appraising was their primary source of income. Only 6% considered appraising to be secondary or supplemental income.

17 Statistics courtesy of AppraisalWorld which invites you to go online and check them out. You are welcome to join AppraisalWorld's online community of residential appraisers. The Directory Membership is FREE. Click here for details:

18 Market Conditions 1004MC Form Market Conditions Addendum is Mandatory April 1st What You Need to Know NOW by Henry S. Harrison Editor s Note: The following article includes an excerpt from Henry Harrison s newest Illustrated Guide: How to Fill Out a Market Conditions Addendum the Appraisal Report: Fannie Mae 1004MC - Freddie Mac 71 reprinted with permission from the author. In November 2008, Fannie and Freddie released a new form entitled Market Conditions Addendum to the Appraisal Report (Fannie Mae #1004MC - Freddie Mac #71) to be used to reflect current market conditions. Its use will be required for all appraisals of 1-to-4 family units made for both as of April 1, Some lenders/clients have jumped the gun and are already requiring the use of this form as part of their Scope of Work. Fannie Mae & Freddie Mac have the right as part of their scope of work requirements to ask for additional data analysis. However, the USPAP and the HVCC clearly state that the client cannot tell the appraiser which comparable sales to use and how much weight to give to a comparable. It is completely up to the appraiser if they want to use any of the comparable sales reported on the 1004MC-71 as part of their Sales Comparison Analysis.

19 The secret to completing this form is to do exactly what Fannie & Freddie require and nothing more. At first glance, the form seems overwhelming. One s initial reaction is that it may take more time to complete the Market Conditions Addendum then to make the appraisal! I ve written a new Illustrated Guide to the 1004MC form that shows you how to gather the data and analyze it in a way that complies with the Fannie Mae requirements, to answer the 14 overall trend questions plus the additional four overall trend questions if the subject property is a condominium or a cooperative unit. As in all my other Illustrated Guides, the material is organized on a line-by-line basis.

20 For each line there are all the Fannie Mae Guidelines pertaining to the line, instructions on how to fill out the line, and example of the line filled out. Where appropriate, I have added AUTHOR S COMMENTS to explain in greater depth the implications of some of the items on the Market Conditions Addendum form. Another feature of this Illustrated Guide are the many Model Comments that can serve as a models for comments that based on the recommendations in this Illustrated Guide

21 you made to decide to use in your appraisal reports. The new Illustrated Guide also contains a detailed case study of a condominium, with all the information you need to complete the 1004MC-71 form. A model 1004MC-71 solution is included with the Illustrated Guide (or provided to your instructor if the Illustrated Guide is used a part of a seminar.) The secret to completing this form is to do exactly what Fannie & Freddie require and nothing more. Keep in mind that the form only asks for reporting of past overall trends and not any forecasts. The scope of work instructions also make to clear that only information about properties that are comparable to the subject property can be used. The use of other comparable sales and listing from the neighborhood and market area is not permitted. This substantially limits the amount of data you need to collect and analyze. Keep in mind that the 1004MC-71 Form only asks for reporting of past overall trends -- not any forecasts. Generally, when using statistical analysis of a population of items (in this case, the number of unsold listings that have been on the a market for up to 12 months) you should either use all of the items, as we have in this case study, or use a sample of the population. For a sample to be useful for statistical analysis it should be of sufficient size (many statisticians think 18 items is a minimum) and must be randomly selected. In most cases, this is difficult for the appraiser to accomplish. Therefore it is better to use the whole population as in the following example.

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26 Winter 2009 Appraisal Practice The HVCC - What You Need to Know by Dave Ehrnstein, Certified Residential Appraiser The Evolving Environment of Residential Lending The Home Valuation Code of Conduct (HVCC) is nearly upon us -- its effective date is May 1st, and it is going to dramatically change conventional appraisal practices. order@appraisal-nation.com or fax: The HVCC is a sweeping set of reforms instituted by Fannie Mae and Freddie Mac in order to halt an investigation into their lending practices by New York Attorney General, Andrew Cuomo. When the changes incorporated in the HVCC go into effect as of 5/1/2009, they are going to alter conventional residential appraisal practices in many ways. Residential appraisers must learn about the HVCC if they are going to survive these changes. The HVCC will create a new business and marketing environment, and business as usual will not be possible. The HVCC was published in is final form on 12/23/2008, and can be viewed and/or downloaded as a PDF file at The HVCC document is detailed and convoluted enough to lead to many questions, so Fannie Mae also published FAQs about it, and its implementation, in another document dated 1/7/2009 which can be viewed or downloaded at:

27 The following are some of the basics every appraiser needs to understand; however, this is a very short article about a very large topic. I will only have space to mention the major points of the HVCC requirements: Appraising for Fannie & Freddie assignments under HVCC: CMAs, BPOs and Comp Requests will not be allowed. Mortgage brokers will not be allowed to order appraisals. Mortgage brokers or loan officers cannot request specific appraisers. Value pressure on appraisers will not be allowed. Owners' values or hoped for values cannot be communicated. Black listing cannot be done without notice to the appraiser. Value shopping by the lender is not allowed. COD payment for appraisals will not be allowed. Withholding timely payment is prohibited. Borrowers must be supplied a copy of any appraisal. There is a required 10% re-appraisal or review of reports. Lenders will be held accountable for appraisal quality control. Lenders will be required to report appraisers to State Boards of Real Estate Appraisers if appraiser misconduct is suspected. As you can clearly see, the HVCC is going to dramatically change the ways we are allowed to do business. Most importantly, your mortgage broker and loan officer clients will not be allowed to use you any longer for these types of assignments. I suggest printing out and reading through the HVCC documents; whether you do or not, these changes will impact your

28 appraisal practice in the months and years ahead. About the author: David Ehrnstein, is an AQB Certified USPAP Instructor; he has been an appraiser since 1977, and a Certified Residential appraiser in Colorado since He and his wife Maria own and operate the Appraisal Mastery Center, in Strasburg, CO. Reach him by phone:(303) or via at: office@appraisalmastery.com For detailed information on the HVCC ~ Home Valuation Code of Conduct, check out the preceding links, and the one below in the FHA Homeowneship box.

29 Book Review Book Review: Illustrated Guide to the 1004MC Form by Henry S. Harrison Harrison s Illustrated Guide How to Fill Out a Market Conditions Addendum to the Appraisal Report Fannie Mae 1004MC - Freddic Mac 71 New Collegiate Publishing Company 315 Whitney Avenue New Haven, CT (100+ pages soft cover: $49.95) (Available on CD-Rom, also $39.95)

30 Fannie Mae s stated purpose in requiring this form -- to be used on all appraisals made after April 1, is to capture additional information to enhance the transparency of the market trends and conditions and condition conclusions made by the appraiser. Fannie Mae attempts to do this by requiring a complete analysis of the competitive (comparable) properties in the neighborhood, using an Inventory Analysis and a Market Sale & List Price, DOM, and List/Sale Price Ratio analysis. For a subject property in a condominium or cooperative project, an additional analysis is required reviewing all of the sold and currently listed comparable units within the project where the subject is located. At first glance, the form seems overwhelming. Many appraisers' initial reaction has been that it could take more time to complete the 1004MC Market Conditions Addendum than to make a full appraisal and complete an appraisal report on the URAR or Condo form! Fortunately, in this timely Illustrated Guide, appraisal author and educator Henry S. Harrison explains exactly how to gather the comparable sales and listing data to comply with the Fannie Mae requirements, and shows in a straight-forward, step-by-step process exactly how to analyze it to be able to answer the 14 mandatory overall trend questions. Like all his Illustrated Guides to the Fannie/Freddie forms, the material is organized on a line-byline basis. For each line, he includes the Fannie Mae Guidelines pertaining to the line, instructions on how to fill out the line, and an example of the line filled out. In addition, as usual, he includes special Author s Comments to discuss special concerns, pitfalls and problems, of the form, and Model Comments which you can use to explain what you have done in the comments section or on another addenda page. The book also contains a detailed case study of an individual condominium unit, providing

31 complete examples of each kind of neighborhood survey and the calculations needed to turn the raw data into the trends Fannie requires for the 1004MC. These sections provide a way for you to practice this methodology, and then compare your answers to the suggested solution which is also included. Finally, the entire form is completed and presented, based on the case study data. The Editor

32 Market Conditions Addendum New Form 1004MC: First Impressions by Patrick Egger, Certified General Appraiser Houston, We Have a Problem The 1004MC represents a new direction. While many appraisers have always provided some level of housing market analysis, others avoided the required documented support within the report itself.

33 With the 1004MC Form, Fannie Mae and Freddie Mac have upped the ante, requiring standardization of trend reporting as it applies to all valuation assignments, beginning April 1, My initial thoughts: the form and instructions appear to be in conflict with other Fannie Mae Appraisal Guidelines, The Appraisal of Real Estate (13th Edition) and generally accepted appraisal practice. For example, the 1004MC requires the appraiser to report trends based upon sales and listings of properties that compete with the subject property, determined by applying the criteria that would be used by a prospective buyer of the subject property." The conclusions for those trends (based on properties that are competitive with the subject) are to be reported in the one-unit housing trends area of the URAR. From my perspective, the one-unit housing trends on the URAR reflect trends for all properties in the neighborhood, not just those directly competitive with the subject. The neighborhood may have a range of 1,200 to 2,200 SF and the subject can be at the top, middle or bottom of that range. While some of the sales represent a substitute property, a buyer looking for a 1,200 SF home is not in the market for (and probably cannot afford) a 2,200 SF home in the same area, nor would a buyer looking for a 2,000 SF home consider a 1,200 SF home. Trends for homes that are truly comparable to the subject may not reflect the overall trend in the neighborhood as required for the URAR. This is evident in many areas where overall trends may be in one direction, while those properties that are competitive to the subject are going in another. You can have one trend for the lower end of the neighborhood (simply based on size, price, etc.) due to a buyer's desire to get into that area, school district, etc.,

34 and another trend for the higher-end properties, due to an excess of homes for sale. Competitive to the Subject vs. the Neighborhood How you define competitive to the subject will determine the calculated results and therefore the overall trends reported on the form. In the same dataset, a broad definition of the neighborhood or competitive to the subject could indicate very different trends than a narrow definition. For example, your assignment is to appraise a home in a new tract. What is competitive to the subject? Is it only new homes or should existing homes in the same neighborhood be considered? Statistics taken from new home tracts that compete with the subject may be quite different from statistics for the entire neighborhood. Haves and Have-nots The 1004MC requires the appraiser to provide "all of the information to the extent it is available or provide explanation if the data is not available". With the advent of multiple listing systems (MLS), computers and technology, how will you side step providing the data? And yet, MLS are not consistent; some are an excellent source of data, while others are not. One issue that has been a constant theme in the 1004MC workshops I have taught is whether MLS provide accurate medians, days on market, and totals for the periods specified, through the statistics feature or CMA function. This is something I have personally found to be a problem with my local MLS and I have heard of similar issues from others. Anomalies The influence of "seasonality" is a required comment, but the 1004MC does not seem to consider that many if not most housing markets are seasonal in nature. Seasonality can be attributed to family buyers with school-age children that buy a new home and move during non-school periods, resulting in higher or lower sales during different periods, not due to larger market forces, but rather to family needs and the school calendar. The reporting periods overlap traditional buying seasons. Will a normal dip in sales (during fall and winter) show up as a declining trend? On the other hand, is the dip due to seasonality or due to a sudden lack of demand associated with price, credit, excess stock, etc? Short sales and REOs have become the norm in many markets as opposed to the exception. As such, the abnormal has become the norm, even if only for a temporary period. Red Flags The absorption rate is defined as the number of sold during the period, divided by the period. Thus, sixty sales over 6 months equals a rate of 10 per month. Again, the 1004MC requires the appraiser to consider "comparable to the subject" for the absorption rate. The current inventory in the neighborhood may or may not be competitive to the subject. Therefore, neighborhood supply in the "one-unit housing trends" in the neighborhood section of the URAR will be different than months of supply (or over/under supply) identified on the 1004MC. Effective Supply vs. Actual Supply NAR has published various articles on issues faced by agents regarding unsalable price points being set by owners. If there are fifty homes available and the absorption rate is 5 homes per month, you have 10 months of supply. If 5 months supply would be normal, you have an over-supply situation. What if 25 of those 50 listings are

35 significantly over-priced sell? You have 10 months of supply on paper, but if only 25 of the homes are appropriately priced, the effective supply represents 5 months -- and the effective trend would be in balance, something we must comment on. The appraiser will need to document and support their rationale for the data and conclusions they report in various areas of the new form and substantiate the required conclusions. While the 1004MC is one-page, in my opinion it will take a few more pages, charts, clarification of scope of work, etc., to document your findings and support your conclusions. Inventory Analysis There are three time periods specified. The first is a 6-month period, while the other two are 3-month periods. With one being twice as long as the others, logically the numbers in the first column will be larger as compared to the others. This is bound to cause confusion. Imagine the underwriter calls you will get when the first column shows 18 sales and the second and third columns show 9 sales and 10 sales respectively. Don t you think someone somewhere will want to know why sales have dropped from 18 to 9 and 10 and why you selected stable? What defines a "comparable active listing"? Should it be physical characteristics or is price a factor too? If there are 10 active listings and 5 are over-priced, are they comparable? What constitutes "active listings" during the specified period? When you retrieve your dataset, the sold during the period will have also been actively listed during the same period, yet they are now closed sales, and the MLS status is changed. Be careful with the search criteria, as you need to define all the listings that were available during the period. What determines "months of supply"? If listings are over-priced, do they represent competitive supply or wishful thinking? Your comments should address normal supply and pricing issues. What about "days on the market" for both sales and listings? Do we include prior listings (cumulative days on market) that may have been over-priced for market conditions, or only the most recent listing days on market, after the property was appropriately re-priced and therefore the time on market now reflects a knowledgeable seller, as required in the definition of market value? How should we calculate median listing to sale price ratio? Should we use the original list price or the most recent list price as the basis? If you only consider the most recent list price, why would you use the cumulative days on the market? You ll need to be consistent with your methods.

36 Trends Overall and Otherwise The 1004MC requires analysis of properties that are competitive with the subject and their trends, something that is vital to understanding the subject property. However, those trends may not be the same as the "one-unit housing trends" for the overall neighborhood. This concept is well illustrated by the Case-Shiller, OFHEO, and NAR housing market indexes. You can have a region with a declining trend overall and yet have a sub-market or neighborhood that is stable or even increasing. As professionals, we need to take a few steps to ensure the intended user gets the message. Regardless of how you interpret the 1004MC, the assignment is the same as it has always been: to provide the client with the analysis needed to identify, measure and underwrite the risk associated with the subject property. What s the problem? The phrase "overall trend" applies to a comparison of the results in the prior 7-12 months to the results for the prior 4-6 months and 0-3 months. In analyzing the neighborhood, "the principle of change" mandates that the appraiser identify shifts in market conditions and trends to determine their impact on the subject property's value. From the appraiser's perspective, what defines a trend? Is it 3-months, 6-months, 9-months, or one year? By use of the term overall trend and a 12-month comparative matrix, the flexibility to observe and report a shorterterm change in the trend is lost. Despite observations and data support for stable or increasing values in the current period, the 1004MC seems to require a rating of declining if prices were higher 7-12 months ago than they were during the last 4-6 or 0-3 month periods. In many neighborhoods, prices are correcting. While they have declined from a year ago, at some point the market bottoms out. When that occurs, the trend stabilizes. The 1004MC's matrix would be more meaningful (and less misleading) if it used the current trend as opposed to the overall trend. Given the format, underwriters will expect results in the 0-3 month period to be equal or higher than in the 7-12 month period before accepting a conclusion that the area is stable or increasing. This creates a problem for the appraiser, lender, and borrower. Selecting the declining box in the 1-4 unit housing trends in the Neighborhood Section of the URAR may mandate a reduced loan to value, as required by the secondary market and PMI companies, long after market conditions have reversed in the neighborhood. The Devil is in the Details Is Seller-(developer, builder, etc.) paid financial assistance prevalent?

37 This is a yes or no question, but some explanation is needed in your comments since once again you have to determine a trend. Here, they are not looking for concessions, but shifts in costs normally paid by sellers. Explain in detail, seller concessions trends for the past 12 months. Once again, is this for the entire market or those sales that are competitive to the subject? If larger homes in the neighborhood are requiring more seller concessions to support their sales, but you are appraising a smaller home, you may have to report a different trend. This is one reason market segmentation plays a key role in valuation. Are foreclosure sales (REOs) a factor in the market? This is a Yes or No question. If you answer yes, you are required to provide an explanation in the form of trends in listings and sales of REO and foreclosures. One might assume they meant the neighborhood here, as opposed to the market. You may want to point out trends in the overall market area and then discuss trends that are apparent in the subject neighborhood. Cite data sources for above information Be sure to state your sources such as the MLS, other reports on REO, etc. Be specific and keep a copy of data downloads and printed REO reports, newspaper accounts, etc., in your work file. Summarize the above information as support for your conclusions in the Neighborhood section of the appraisal report form. If you used any additional information such as an analysis of pending sales and/or expired and withdrawn listings to formulate your conclusions, provide both an explanation and support for your conclusions. I said the Devil is in the details" and here he pops up again. First, we have the conflict on neighborhood vs. competitive with the subject. Now we have to summarize all of the above, providing any additional analysis we used to formulate our conclusions, and provide explanation and documented support for our conclusions as well. If the subject is a unit in a condominium or cooperative project, complete the following. The 1004MC addendum calls for project level analysis of Condominiums and Cooperatives. Aside from the subjectlevel analysis above, you will need to provide specifics (as before) at the project level, including any REO or foreclosure issues. Closing Thoughts: 1004MC Highs and Lows Having completed several 1004MC workshops, read numerous forum posts and talked to many appraisers, one thing is clear: confusion reigns. Most do not see the merits of the 1004MC. They see the problems, including opposing opinions, various interpretations, and few immediate solutions given the limitations of their MLS data

38 services. At question is not the concept, but rather the execution. While many believe this is a step in the right direction of mandating a standard for measuring trends, the format is a time-consuming problem for many appraisers, rather than a solution. The unintended consequences over-shadow the potential benefit. The 1004MC is not about medians, totals, percentages and ratios, any more than it is about the neighborhood. The form is about the collateral and the trends related to the collateral. While market conditions and neighborhood trends are important, the trends of properties similar to the subject are the most critical. Lenders are not making a loan to the market area or the neighborhood; they are making a loan on the subject property, the collateral. The new form gets high marks in two areas: first, for attempting to replace opinion with statistical fact and thus limiting subjectivity; and secondly, it requires the analysis to focus on properties that are competitive to the subject, from the buyer's perspective, removing the influence of lesser or better properties in the neighborhood that do not compete with the subject. This has always been a problem with the URAR's Neighborhood Section. Neighborhood trends may or may not represent trends for the subject property and its comparables. This is especially true in heterogeneous neighborhoods. The problems with the new form come from a variety of issues, many of which I covered here and some that will manifest themselves in rural locations or fluctuating markets. Trends are only valuable when measured over a sufficient time-period to provide the reader with perspective and to provide a basis for projection of their future direction. Who cares about what happened over the last year, if it will not repeat this year? The form only considers listing and sales counts, medians, etc., to project trends, which can be misleading and produce results absent of changing motivations in the market. Sales/listing activity is merely one set of benchmarks of market forces on the subject. The statistics may be reflect a stable trend, but it is based on past data, and trends can shift quickly with in or out migration, employment and credit availability are different today compared with the previous quarter, or a year ago. It is not over until it is over and I for one do not think that the proverbial fat lady has sung yet. You can expect amendments to the 1004MC form or expanded instructions. The1004MC complements the URAR Neighborhood Trends section. It does not replace it. The trends for properties competitive to the subject are a basis for the URAR to compare and contrast the subject to the neighborhood. Remember too that the 1004MC is an underwriting form, not an appraisal form. (USPAP requires you to know the difference and supplement your report to make it meaningful and avoid being misleading.)

39 Mark Twain said it best: "Gather all the facts first, and distort them as you like". The absence of clear directives for the 1004MC and the standards for measuring various elements in the form and its parent, the URAR, remain the primary impediment to producing a credible estimate of value, the true purpose of any appraisal. What you determine as the neighborhood will set the stage for the trends. When the numbers are subject to selective interpretation (based on how you define the neighborhood and competitive to the subject), the results can be a garbage in, garbage out situation. If it wouldn't appear on the comparison grid in the URAR a property should not be considered as competitive to the subject. Before you do the math, eliminate the outliers and make sure that your dataset is based on what a typical buyer would consider. If you do this, everything that follows in the 1004MC Matrix will be credible in compliance with the USPAP. If you don t, that dog won t hunt. About the Author Patrick Egger is a Certified General Appraiser with 35+ years experience in valuation, consulting and urban real estate studies. From 1986 to 1995, he served as Vice-President of Market Analysis and Valuation for PriMerit Federal Savings Bank (formerly Nevada Savings & Loan). Prior to entering the appraisal profession, he was a staff member of the Clark County Regional Planning Council where he worked on demographic, housing, and economic studies. Patrick is a past Program Chairman of the Southern Nevada Land Faire Real Estate conference and was an original member and 2-term Vice-Chairman of the Advisory Committee of the Lied Institute for Real Estate Studies at UNLV. He has been a guest speaker on the housing market and economic conditions, real estate issues and appraisal topics for various organizations including Stewart Title of Nevada, First American Title Company, the Nevada Apartment Association, The Commercial Marketing Group, and The Las Vegas Chapter of the Appraisal Institute along with other civic and business organizations. He teaches classes and workshops for real estate appraisers and real estate agents on topics such as valuation, housing market analysis and the economy. Patrick also writes articles for The Appraisal Press and The Appraisal Scoop. Reach him by at LVREQA@Cox.net.

40 Ask Henry Harrison BRACKETING COMPARABLE SALES Dear H2, Is the bracketing of the subject value estimate by the unadjusted sale prices of the comparables sales good appraisal practice or not? By bracketing, I mean providing comparable sales on the sales grid that are both higher and lower in sales price [actual, unadjusted] than the subject estimated value. It is anticipated that the adjusted sale prices of the comparable sales will bracket the estimate of value provided for the subject. Is it also anticipated/good appraisal practice for the actual sales prices of the comparable sales to bracket the estimate of value of the subject property? And is this a requirement of any current underwriting standards [FHA,FNMA, Freddie, etc]?

41 Deborah Anne Carlisle Dear Deborah, All of what you describe is good appraisal practice. However, bracketing is only one consideration of picking out the best comparable sales. I know of nothing that requires bracketing. For example, in a declining market all of the comparable sales may be higher than the final estimated value. H2 CONTINGENT FEE Dear Henry, A real estate broker gets numerous requests for tax appeals which he would like to refer to me. In order to avoid making the homeowners pay for a full appraisal, the broker wants me to write a 2- page "narrative" appraisal. If the results of this "narrative" show that there are comps to support a win-able case to lower the homeowner's taxes, he then wants me to do a full appraisal with the payment I received from the narrative being applied to the full appraisal fee. The data in the "narrative" is at my discretion but it's obviously a BPO. What are your thoughts on the matter?

42 My other concern is that he wants me to provide an estimate of value based on an exterior inspection and not gridding any comps (just writing a paragraph on my opinion of value). If he is comfortable that my scope of work is limited to researching comps and not making adjustments to come up with a value, would that be okay? I worked for the past 4 years as a review appraiser where I just focused on value and Fannie Mae guidelines and was insulated from these types of issues. Now that I am in the "fee world", things are much more complex. Frank DiRocco, Jr. fdirocco@ atlanticappraisalgroupllc.com Dear Frank, The type of report you do is a decided as part of the scope of work dialogue you have with the client. Keep in mind that the USPAP does not require any one type of report. The confusion here seems to be that the client thinks the type of report determines the value that is estimated. You must do a "full appraisal" no matter what type of report you issue. As for the fee -- that's up to you! Another problem with what you are being asked to do is that the fee you are being offered is contingent upon

43 some result being obtained which is prohibited by the USPAP. It is okay to make an exterior-only inspection if that is agreed upon in the scope of work dialogue with the client. However, the client cannot tell you what you have to do to make a credible appraisal. Not making a grid and adjustments of the comparable sales seems to me to be a problem. I don't know how you could make a credible appraisal without doing this. H2 Follow Up: Dear Henry, The fee does not appear to be contingent on my results because I am going to be paid regardless of the results of the first appraisal. If the value of the first appraisal is below the assessor's value then I would be asked to do a complete URAR 1004 report, and the cost of the first appraisal would be deducted from the fee that I charge for the Isn't that okay or do you still not agree? Dear Frank, I still think you have a USPAP problem. You might be perceived as having a conflict of interest, as you could be tempted to make the first appraised value lower, so you would get the second assignment.

44 DOUBLE ADDRESS

45 Dear Henry, One of the appraisers in our firm appraised a property where the property was legally in one municipality but the mail was delivered by the post office in the neighboring municipality. The report was submitted stating Hammonton (Trenton Post Office). It said that in the header of every page of the appraisal. The lender said that FHA requires that the address be the postal address and requested we put just Trenton. They said we could put Hammonton in an addendum. The property pays taxes to Hammonton and goes to Hammonton Schools. The owners would vote in Hammonton. Standards Rule 2-1 states that an appraisal must: (a) clearly and accurately set forth the appraisal in a manner that will not be misleading: (b) contain sufficient information to enable the intended users of the appraisal to understand the report properly. The problem with an addendum is that it's tantamount to burying probably the most important clarification in the report in the fine print. The statistical odds of the addendum being missed far outweigh the inconvenience to the FHA. If the incomplete and thereby misleading information were not on every page of the appraisal, this might not be such and issue but given that it's so pronounced, to rectify it with an addendum does not seem to be a sufficient solution. It is for this reason that I believe that everywhere the misleading information exists, the notation should be adjacent. The lender's software does not allow for this, and they've rejected this solution. What's your take? Derek Eisenberg DEisenberg@ContinentalRealEstate.com Dear Derek, The USPAP gives the lender/client wide latitude about how the report should be presented. It does point out that the type report does not affect the appraised value. You are correct that the USPAP requires that the report not be misleading and even goes further saying that the appraiser cannot make a report which they believe will be used to mislead anyone. I don't see why you can't work out with the lender/client a way to present the address using foot notes, or a bracket referring the reader to the addendum, or asterisks that would solve the problem. Keep in mind that you should make it clear in the report the effects of this dual address and render an opinion as to how it effects the value. If you cannot work out a compromise with the lender, you may have to pass on this assignment! H2 ILLEGAL USE Dear Henry, Thank you for your Q&A site and your Ask Henry feature in REV Magazine. I have always found your take on appraisal concerns most helpful. My question regards 'legal use'. I see many questions and answers that refer to additions and improvements that have been done to properties without permits. Many times these improvements have been in place for several years and are well known to the tax assessor. I have found it very difficult to get building officials to say directly that a particular improvement is 'illegal' and have never had one willing to state it in writing. I do not feel comfortable making a declarative statement that such

46 an improvement is 'illegal' without something to protect myself. I am not an attorney, nor a building official! Permitting rules can vary, particularly for homeowner made interior improvements without a permit. I believe that in the absence of a 'citation', I should describe and value the property as I find it. To my knowledge, some courts have actually ordered municipalities to issue conformance certificates, if the property has been taxed for several years and never cited. However, what if I have serious concern or place a high contributory value to possibly unpermitted improvements? Bill Hoban hoban@wdh.necoxmail.com Dear Bill, The USPAP requires you to report everything of significance that you find. I know of nothing that requires you to research every house you appraise to determine if it is a legal or illegal use. However, if you see something out of the ordinary that leads you to believe it may be an illegal use, you must report it. I recommend that you add a comment in your report that says something like this. "During my inspection of the property, I observed. I was unable to determine if it was a legal use (or improvement). The value estimated in this appraisal is based on the assumption that there are no illegal uses (or improvements) to the property. H2 P.S. Thanks for your kind words. We are pleased that our Ask Henry column here, and the ancillary website are both so well received. Hi Henry, OVER IMPROVEMENTS

47 Many homes in my area have converted garages, or other structures, finished basements, etc. and I want to know if these have to be corrected under FHA's rules, even if they appear safe to a layman. What I am questioning is the ambiquity of their health and safety requirements. If a property has improvements that are not permitted, they may not meet the local building codes. Thus there may be health and safety issues even though visually the structures appear to be okay to me. As I am not a building or home inspector, I am not qualifed to accurately access this in the absence of permits. I actually called FHA and received some clarification. They said that I should note if any interior renovations were done in a "workman-like manner". They also said I should put in the report that I recommend verification of permits or an inspection to verify that all of the improvements meet code. According to FHA, this assures that the lender is informed and it is up to them to decide how to proceed. Also - regarding over-improvement adjustments: what is a good method to determine the amount to adjust? Thanks! Eddie Davis edavis2@earthlink.net Dear Eddie, Current FHA requirements are clearly spelled out in their Handbook regarding health and safety issues. Check out pages in Appendix D. [To download Appendix D, click the link shown below.] There is no standard answer for how to make any adjustment. It all depends on what happens in your market area for the type of over-improvement you have found. I don't think there should be any adjustment made for over-improvements (super adequacies) unless you have some evidence that they are adding value to the property. H2 To download Appendix D Click here. REGULATION OF AMCs Dear Henry, As we all know, appraisal management companies (AMCs) are becoming bigger and bigger players in the appraisal business. To my knowlege, AMCs are not required to be licensed and are not regulated by any standards or laws. Are you aware of any work being done by the government, the Appraisal Foundation, other appraisal associations and organizations, etc., on developing some laws or standards for AMCs? I believe it is way overdue! Michael Watts wattsappraisals@cox.net Dear Michael, The role of AMCs in the appraisal process seems to be on the radar of all the entities you mention. I am not aware of any specific legislation that is pending at either the state or national level right now. I do believe, however, that it is just a question of time before they will be regulated. H2

48 Winter 2009 The Environmentalist Hot Topic: Green Buildings by Kate L. Harrison, Esq. As Jim Amorin, MAI, SRA, 2009 president of the Appraisal Institute recently noted: The green building industry is expected to value between $19 billion and $38 billion by 2010 [and therefore] it s vital for appraisers and other industry professionals to understand the importance of this sector of the market going forward. To that end, the Appraisal Institute is offering a series of green building seminars this year throughout the country. Whether or not you can make this series, the following is a list and short explanation of key terms and concepts that are covered in the classes. How much impact do buildings have on the environment? According to the U.S. Green Building Council, buildings have a tremendous environmental "footprint. They use: 36% of all energy 65% of electricity 30% of raw materials 12% of potable water consumption

49 They also produce 30% of greenhouse gas emissions and create 30% of waste output (136 million tons/yr) What is a green building? A green building is any structure that has been constructed or modified to reduce its impact on human health or the environment. Common adaptations include construction with recycled or sustainable resources (such as bamboo), the use of natural or non-toxic materials (e.g., VOCs-free carpeting: and the installation of energy efficient appliances, heating and cooling systems, and ventilation systems. In addition, new green buildings are often sited in such as way as to maximize natural light and passive heating and cooling. What are the benefits of green buildings? Green buildings often cost more to construct upfront but have significantly lower operating costs over their life cycle. For example, green buildings use up to 80% less energy than their traditional counterparts. Green buildings also offer social benefits in the form of improved occupant health and reduced pollution. Green buildings use up to 80% less energy than their traditional counterparts. What does LEED stand for? LEED is the Leadership in Energy and Environmental Design for Homes" rating system, a nationally accepted standard for green buildings developed by the U.S. Green Building Council. LEED certification is the best way to demonstrate that a space is eco-friendly. There are currently four levels of certification for new construction: Certified, Silver, Gold and Platinum. All are based on achievement in five areas of green design: (1) sustainable site; (2) water efficiency; (3) energy and atmosphere; (4) materials and resources; and (5) indoor environmental quality. LEED has different certification requirements for new buildings, existing buildings, cores, schools, retail spaces, healthcare facilities, homes, etc. Read more about each type of building on the ISGBC website. What is the ENERGY STAR Program? Energy Star is a government-backed program helping businesses and individuals protect the environment through superior energy efficiency. Energy Star rates appliances based on their energy efficiency and corresponding cost to run for consumers (look for the yellow Energy Guide tag on everything from toasters to refrigerators). The Energy Star program has also begun to rate new homes for energy efficient construction based on efficiency standards set by the E.P.A. To be rated an Energy Star home, a residence must be least 15% more efficient than houses built to comply with the 2004 International Residential Code (IRC), and include additional energy-saving features that typically make them 20 30% more efficient than

50 standard homes. These features include high-performance windows, the installation of compact fluorescent lighting (CFL) fixtures, and sealing cracks in heating and cooling ducts. You can learn more on the Energy Star website.

51 What are the National Association of Home Builders National Green Building Standards? The National Association of Home Builders publishes the NAHB Model Green Home Building Guidelines to help builders, remodelers, home building associations, and homeowners learn how to build green. The guidelines are voluntary and are the basis of the Green Scoring Tool and forthcoming home certification program. To learn more about them, visit the NAHB's Green Certification website. What are the REGREEN Residential Remodeling Guidelines? The REGREEN program is a partnership between The American Society of Interior Designers Foundation and the U.S. Green Building Council. The two groups have created best practice guidelines and a suite of educational tools for eco-friendly residential improvement projects. They offer online seminars ( webinars ), a green product checklist and much more. How do green building practices affect appraisers? Because many green practices change the carrying cost of a property, their implementation can affect the application of the cost approach, may impact the application of the sales comparison approach, and may impact the application of the income capitalization approach. As real estate professionals, appraisers should support the "greening" of buildings. They should be careful to include a property's green features in the property description. Not only is it good appraisal practice, but it is also a way to encourage property owners and developers who are trying to make the world a better place to live in.

52 Winter 2009 Rants & Raves Dear REV Magazine: I have been a real estate appraiser working in central Indiana for more than 20 years. The following are some observations and suggestions for perhaps solving some of the problems facing our economy - specifically problems in the housing and mortgage lending industries: Whatever happened to appraisals? The troubles in the housing industry have many sources. Among them are the processes adopted by various mortgage lenders over the years in determining the value of real property to be secured. In years past - certainly prior to the S&L melt down in the early 90s - most mortgage lenders required detailed valuation reports which included full exterior and interior inspections by approved appraisers. However, over the last fifteen years or so that requirement has changed significantly. Now, a large portion of properties secured by mortgages are not backed by thorough "on the ground" inspections and detailed written appraisal reports. So called drive-by reports have become far more popular which are, as the name indicates, literally done by "driving by" a property, usually taking one or more photos of the front of the house from the public street, usually having no observations from the rear and no access to the interior. Some lenders are also relying on even less detailed and less reliable "desk top" appraisals completed without any inspection of the property at all. Even more troubling, given the current dire situation in the housing industry, many lenders have adopted the use of Automated Valuation Models or AVMs in determining the value of real property. There are now several companies offering AVM services to both the lending industry and individuals for both residential, and more recently, for a variety of commercial properties as well. AVM reports are computer generated valuations utilizing property and sales data acquired from a variety of sources all over the country. These reports also do not include any type of physical or visual inspection. They are completed while sitting in front of a computer screen. It is unclear just what oversight exists and to what standards these companies must adhere. It has been my experience that AVM data is lacking in detail and is often inaccurate. While these models may at

53 times work fairly well for properties located in large sub-divisions having a high number of recent sales, their reliability drops off drastically in areas of less homogeneity. The end result is that properties are often improperly valued through this process. While many people rightly repeat the mantra of 'location' being a primary factor in the value of real estate, there are also other factors having significant influence as well. An AVM generated report cannot make any determination regarding the condition of any improvements on a property, nor as regards quality or amenities. AVM reports usually cannot adjust for recent additions in living area or remodeling, etc. Neither can an AVM report adjust for unknown damage from storms, floods, fire, etc. If the core data is in error, there is no way in which an AVM valuation can be accurate. There is no substitute for a complete exterior/interior inspection of a property and a full, well considered appraisal report completed by a qualified and impartial appraiser.

54 Pressure! The word "impartial" is vital. All too often appraisers are pressured by mortgage brokers, loan officers, realtors, buyers, sellers, etc., to arrive at or above a specified figure. Since the current system allows these brokers and loan officers to choose their appraisers, they then become beholden to those brokers and loan officers for their very livelihood. Consequently, inordinate pressures can come to bear upon appraisers torn between doing one's job impartially, and the need to

55 have an income. Up until a dozen or so years ago, FHA maintained a panel of appraisers from which FHA, not the broker or lender, made appraisal assignments in an ongoing rotation. Pressures from the lending industry, and, I believe government cut backs caused HUD to abandon that system in favor of allowing individual brokers and lenders to maintain their own lists of FHA approved appraisers from which appraisal assignments are made. The effect of this is the loss of the "arms length" relationship between the lender and the appraiser. As you may know, most banks and mortgage companies have, over the last several years, done away with employing "staff appraisers" owing to the appearance of a conflict of interest. There is though, from the appraiser's perspective, little difference in being an employee or an independent contractor. The relationship remains largely the same. Lastly, it has been suggested in some quarters that regional or national appraisal management companies or AMCs should be given the task of making all appraisal assignments. While on the surface this may seem an attractive answer, it does not adequately maintain the desired "arms length" relationship owing to the fact that the AMCs have a fiduciary obligation to the lenders. Some appraisal management companies are owned by lenders. AMCs are NOT impartial. What to do? It is my contention as noted above that most if not all mortgage transactions should require full exterior/interior inspections and written appraisal reports completed by licensed or certified appraisers with assignments made through a government entity to insure impartiality. I realize that I am talking about more government bureaucracy, but the consequences we now face, which are at least in part the result of lax lending practices including the improper valuation of properties, weighs far heavier on us than what would be a relatively minor addition to government. The banking industry has pushed and shoved its weight around in its effort to divorce itself from responsible lending practices. Closer oversight and involvement by government could go a long way in preventing another such financial catastrophe as we now face. I understand that I have an abiding interest in this issue. I could possibly benefit personally if my suggestions were adopted. I certainly don't deny that. However, that does not obviate the problem nor invalidate either my concerns or the course I suggest to remedy the problem. Accountability and transparency are at issue. Accurate and impartial valuation of secured real estate is essential to achieving both. Sincerely, Terry L. Shannon tjshannon2@comcast.net Indiana Certified Residential Appraiser Terry Shannon bio: Mr. Shannon has been a residential appraiser since Off an on in the ten years prior he more or less pretended to sell residential real estate. He is a native of Indianapolis and a graduate of Indiana University. Formerly a designated member of the National Association of Independent Real Estate Appraisers (NAIFA) and twice chapter vice president, he now prefers the independence of scouring the internet for industry information. Joan, his wife of 36 years, schedules the work load - essentially telling her husband exactly where to go, and keeps track of the money, when there happens to be any. Their two sons are out hotly pursuing their respective careers, relegating the Shannons to "empty nester" status and adjusting to life in the slow lane.

56 Winter 2009 Real Estate Valuation Magazine Online is published quarterly by Henry S. Harrison, nationally renowned appraisal educator and author. It reaches nearly 20,000 licensed and certified appraisers and appraisal trainees throughout the country. Ads in our unique online magazine include a FREE hyperlink to your website. Your company is show-cased 24/7 for 90 days online! Our opt-in-only list has grown to nearly 20,000 online subscribers in the past 4 years; it is still increasing daily! We have 100,000+ hits on the website each month, as typical readers access REV Magazine Online many times during the quarter. In tough times, the tough GET GOING with targeted marketing that makes a difference. Let us help you achieve your marketing goals!

57 Back to Table of Contents Sincerely yours, Ruth Lambert