Underwriting Vs. 1004MC
Continued from Page 17
Since April 1, Fannie Mae, Freddie Mac, the U.S. Department of Veterans
Affairs (VA), and the U.S. Department of Housing and Urban Development (HUD) have required the 1004MC with all appraisals. The one-page
document’s stated purpose is “to provide the lender/client with a clear
and accurate understanding of the market trends and conditions in the
subject neighborhood.”
Because the implementation of the HVCC no longer allows brokers to order
appraisals for loans to be
backed by Fannie and Freddie, this document most
often falls in the hands
of appraisal-management
companies or independent
appraisal-orderers. Often,
appraisals are ordered blind,
with no guarantee of the ap-
praiser’s qualifications or the appraisal’s reliability.
In an appraisal, however, trustworthy information about a property and
conditions in its market are a key part of risk-assessment. Underwriters and
lenders rely on it to evaluate and communicate elements of a potential deal.
In turn, it’s a major factor in mortgage pricing.
A one-page summary that identifies risk directly related to the collateral
thus can be a vital addition to the overall underwriting process and loans for
which brokers seek funding. This kind of delineation of reliable, clear and
accurate information is aimed at getting back to good appraisal practices.
But so far, clarity and accuracy might not be the strong suits of the
1004MC. Issues from the appraiser and lender side range from conflicting
instructions to misleading conclusions. Some worry that as is, the 1004MC
could increase lenders’ risk assessment, which could cost borrowers more
in terms of rates, points and fees.
While the “MC” stands for “market conditions,” it could just as easily
represent “mortgage consequences” — especially considering the addendum
represents one more potential headache for mortgage brokers of which they
have increasingly less control.
“Some worry that as is,
the 1004MC could increase
lenders’ risk assessment,
which could cost borrowers
more in terms of rates,
points and fees.”
The trouble with data
All appraisers work within the Uniform Standards of Professional Appraisal
Practice, with supplemental guidelines from Fannie, Freddie, the VA and
HUD. Each set offers direction and is sufficiently vague, which allows flexibility and fosters opposing views.
Data extracted from a multiple-listing service or based on the appraiser’s opinion can dramatically alter appraisal conclusions. In other words,
two appraisals on the same property can yield different conclusions about
a property’s value as well as about market trends, what comprises a “
neighborhood,” and what is a comparable or “competitive” property. The resulting
appraisal can leave underwriters in an untenable position. And that trickles
down to loan terms.
Already, appraisers and their liability insurers have objected to including
the 1004MC with this in mind. Critics say the form merely reports sales statistics without analyzing the underlying and related economic factors. Cited
faults include the 1004MC’s analysis periods and instructions, which could
be at odds with accepted appraisal practices and established guidelines.
The 1004MC requires appraisers to report data in intervals of the past
three months, the previous four to six months and the previous seven to
12 months. They also must check a box indicating if the “Overall Trend”
shows an increase, decrease or stability.
On the Web
1004MC Market Conditions Addendum
(PDF): bit.ly/1004MC
Guidelines for how appraisers should use
the 1004MC (PDF): bit.ly/FAQ1004MC
18 Scotsman Guide | Residential |
scotsmanguide.com | July 2009
But by combining use of median-price-data points with an indication of
the overall trend, the form could incite appraisers to indicate trends that no
longer exist or to miss those that do. Readers also could interpret the trend
differently depending on how they consider the three time intervals.
Consider our recent market slowdown, for example. A median sales price
in an area could have been $309,000 over the seven-to-12-month interval,
$312,000 in the four-to-six-month section and $308,000 in the past three
months.
If appraisers simply compare the seven-to-12-month data to the past
three months’ reading, they’d check the box for a stable trend. In reality,
comparing the four-to-six-month trend to the past three months would have
provided the reader a more accurate picture of a price decline and signaled
the need for a closer look.
In another example, suppose the median sales price in the prior seven to
12 months was $300,000, declining steadily at 2 percent each month, with
a $282,000 reading seven months ago. Say prices stabilized in the four-to-six-month period, settling in with a $275,000 median and remaining there
through the end of the year.
The “Median Comparable Sales Price” for the periods still will be
$300,000, $275,000 and $275,000 — and the overall trend could be “
declining,” despite a stable market for the past six months.
Seasonal issues — such as those dictating greater sales volumes in the
summer, versus fall or winter — also come into play. Although the 1004MC
requires the appraiser to discuss seasonal and other anomalies, it may take
a lot more than the appraiser’s opinion to convince a lender that a sales
reduction is seasonal, rather than tied to greater economic factors. Underwriters must consider this when
reviewing the 1004MC.
These trend indications could prompt underwriting questions and require explanations from the appraiser — all of which could delay a mortgage decision
for a broker. Appraisers often need lengthy addenda to
defend market observations that are inconsistent with
the 1004MC.
To reflect the true trend and accurate market conditions, the semiannual and quarterly format of the
1004MC may require an additional nine months of reported results. In anything less than a “perfect market”
or in areas with limited sales data, the 1004MC could
mislead and create problems for those relying on it.
Ultimately, for brokers, when the market reaches
bottom and stabilizes, 1004MC data could push lenders to have consumers pay for mortgage risk that no
longer applies. This could delay a recovery in the housing market, with entry-level-housing trends overshadowed by the market as a whole.
Suspending logic
The 1004MC’s instructions and frequently-asked-questions document
(
bit.ly/FAQ1004MC) not only conflict with what’s considered good appraisal practice but also could defy logic at times.
Instructions require appraisers to include data on “properties that compete with the subject property” and suggest the conclusions be transferred
to the neighborhood section of the Uniform Residential Appraisal Report.
Labeling comparables as representative of the entire neighborhood can
lead to erroneous conclusions. Neighborhood trends can be dominated
by properties in a certain price range, style or physical-characteristic set.
Continued on Page 26
Patrick Egger is owner/principal of Area Real Estate Advisory Services and is a certified
general appraiser with 35 years’ experience in valuation, consulting and real estate studies.
He was two-term vice chairman of the Advisory Committee to the Lied Institute for Real
Estate Studies at the University of Nevada, Las Vegas, and teaches valuation, housing-market analysis and economic subjects. Egger writes for publications like Appraisal Press
and The Appraisal Scoop. Contact: LVREQA@cox.net or (702) 324-6652.
