Underwriting Vs. 1004MC
If the analysis only included properties
“competitive to the subject,” the 1004MC
trends could be more meaningful to the
underwriter but might not represent the
Logically, it would seem the appraisal
should include direct analysis of collateral
trends. These trends could be compared
to the neighborhood for consistency. This
would let a lender identify or dispute additional risk associated with the subject
property. By focusing on neighborhood
trends, however, the 1004MC can overlook risks for the subject property that
otherwise could be identified.
Appraisers also are urged to consider
properties “competitive to the subject,
from the buyer’s perspective” — but the
1004MC doesn’t define “competitive.”
This leads to broad discretion when appraisers select data — not to mention,
If the subject property is 2,400 square
feet, would a 1,200-square-foot home
in the same area be competitive? If
not, should appraisers include it in the
Are the trends for homes in good condition the same, for example, as a real
estate owned property needing $50,000
worth of repairs?
Including all sales and listings in the
analysis shows different trends than only
using sales and listings that match the
subject property, be it turnkey or a real estate owned property needing work. Conversely, the lack of directly comparable
data may render the analysis useless.
Limited or dissimilar data also can
influence a trend’s accuracy. In many
markets, especially rural ones, appraisers
are having difficulty finding three good
comps, let alone a group of sales. Without
tying the data to the economic environment at the time, the trend information
also is based on the assumption that the
events and factors at the time of analysis
will be repeated.
Many factors impact real estate. But
the 1004MC doesn’t address supply, demand, interest rates, affordability, migration patterns or employment. It shows
underwriters the effect of an issue without the cause.
Good idea, bad execution?
Taken by itself, the 1004MC examines the
market in a statistical vacuum absent the
who, what, when, where, why and how of a
property. Often, the results have no basis
in the reality of what is “competitive to the
subject.” Instead of being an underwriting
tool, it can create havoc.
Appraisers already are adding disclaimers, expanded addenda and clarifications in their 1004MCs for lenders.
Fannie, Freddie, the VA and HUD also
are clear about the lender’s responsibility
regarding the appraisal and its reliability.
As always, lenders must review an
appraisal report thoroughly, as should
brokers. But at best, the addition of the
1004MC forces them to take a few extra steps to comprehend the appraiser’s
analysis and to consider local economics
affecting the subject property. Otherwise, both might be passing along implied risk to borrowers that might not
How to Use Economic Reports
and assesses economic information and
trends. Since 1919, it has measured cost-of-living data in the United States.
To produce the monthly consumer-confidence index, the Conference Board
surveys 5,000 U. S. households about their
attitudes on present and future economic
and employment conditions.
Consumer attitudes influence stock
and bond markets, and confidence in the
economy often means consumers are apt
to spend more. Reports are available at
U.S. Department of Labor Office of
Workforce Security Weekly Unemploy-
ment Insurance Claims report
This shows the number of first-time
filers for unemployment insurance. When
fewer people lose their jobs, the job market stands to strengthen. Increased household incomes can mean more consumer
spending and potentially more willingness to purchase a home.
Awareness of the jobless-claims report
can give you a sense of the job market’s
health and can help anticipate surges in
employment and pay. These can prepare
you for higher inflation and related interest-rate increases.
The report is online:
1. U.S. Treasury Department reports
Fixed mortgage rates are closely
linked to movements in long-term Treasury yields because mortgages are often
packaged and sold as mortgage-backed
bonds. When the yield on the 10-year
Treasury moves, mortgage rates typically follow.
In turn, these yield curves and their
spreads can foretell economic growth and
pressure on banks. Daily yield-curve rates
are available here:
2. Federal Reserve’s Federal Open Mar-
ket Committee Report
The Fed’s Federal Open Market Committee (FOMC) meets eight times per
year to review the economy and determine what policy and rate changes are
necessary. Its goal is to keep prices stable
and the economy growing.
The meetings usually address the federal funds rate, the rate banks charge
when they make an overnight sale to other
banks. At each meeting, the FOMC raises,
lowers or maintains the current rate, which
directly impacts mortgage rates.
For more information, visit the Fed’s
Web site at
■ ■ ■
In a market as turbulent as this one, a
solid understanding of economic reporting and forecasting can help you
recognize potential shifts in investor
guidelines, mortgage-interest rates and
Each economic report provides information that can help you understand aspects of the housing market and anticipate
trends. Viewed together, these reports can
help you understand the big picture. This
often will allow you to provide informed
advice to your customers as they make
critical home-financing decisions.
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Certified Public Accountants • Roger A. Stadtmueller