Written By: Bonnie Wilt-Hild, Op-Ed Writer
As we forge ahead in this very uncertain market property appraisals have become an issue. HUD has even gotten into the act changing their approach from “there is no clear definition of a declining market” to the issuance of ML letter 2009-09, which adopted the use of the Market Conditions Addendum as well as provided further guidance and requirements for properties located in a declining markets such as the use of active listings as well as requiring that two comparable sales provided in the appraisal report be comparables that have closed within 90 days of the effective date of the appraisal.
These requirements have come at a time when most appraisers are already having serious issues finding any comparable sales located within 1 mile of the subject property which closed within 6 months of the effective date of the appraisal. Underwriters on the other hand are under the gun where accepting such reports are concerned as HUD is policing underwriting policies and practices harder than ever, has begun reimplementation of the use of Special Work Assessment Teams and have begun over selecting particular cases for PETR. So what can appraisers do to provide underwriting with a comfort level that the information provided in the report is not only the best available but also provides a clear indication of the true fair market value of the property.
When I consider that the declining market we are experiencing has been further complicated by a overall lack of sales data in almost any given market area and the fact that appraisers are finding it increasingly more difficult to provide comparable sales within 1 mile or less that have settled within the most recent six months, let alone 2 within 90 days as is now required per ML 2009-09, I have formulated some suggestions as to what might provide a greater comfort level.
First and foremost remember that the underwriters out there are getting beat up pretty hard at a HUD level during reviews so they need to be provided as much information as possible. Over documentation is a good thing. Next, make sure that at least 1 of the comparable sales, preferably 2 are in the subjects immediate market area particularly if the property is located in an urban area. You may find slightly more flexibility if the property is in a suburban area or rural area but even under these circumstances, the closer the proximity the better. If you must utilize comparable sales that are not in the subjects immediate market area make sure that the appraisal report clearly indicates the what, whys and how the neighborhood selected is similar to that of the subject property.
Strong narrative comments as well as supporting documentation will help. DO NOT limit your comments to things like “best available or similar neighborhood” tell the underwriter why and how it is similar. If you comps are somewhat dated provide adequate adjustments to take into consideration factors such as a declining market. If the subject property is located in a declining market, indicate in the report at what rate it appears to be declining and if the comparables are greater then 3 months old make adjustments to take these factors into consideration.
If you feel that the area has stabilized, discuss this in detail. Include information at what rate of decline the subject’s market area has seen over the most recent 12 months and indicate at what time period it seemed to level out. In instances of declining values further explain to the underwriter that it is more efficient to analyze data from a broader range of comparables, including properties not limited strictly to the subject immediate market area to determine the broad range of the market. This method will give the underwriter a clearer picture of overall market price for competing properties in competing neighbors in the subject’s market area.
Lastly, make sure the comments are not buried somewhere at the end of the appraisal report. Perhaps use a single narrative addendum that is placed directly behind the comparable data grid so that the underwriter can not loose the information at the end of the appraisal. If supporting documentation will be provided, include it in this area as well. It may seem like more work but perhaps a list of recent settled sales from the appraiser’s data source can also be provided so that the underwriter can determine that there really is nothing else available and that the appraiser is not trying to conceal other sales that might indicate a lower value range.
I think if I were provided this type of data I would be more inclined at that point to determine if the property is acceptable, not the appraisal. As always, happy underwriting.
About The Author
Bonnie Wilt-Hild - As an op-ed writer, Bonnie has held many mortgage underwriting positions, including Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans".