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Appraisal Insights

January 2020

©2020 Genworth Financial, Inc. All rights reserved. 0

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Introduction

Points to keep in mind in conjunction with the material presented in

this session:

– The material presented is designed to provide guidance on common challenges

surrounding appraisals from the perspective of an underwriter

– There are no specific words or information that can be included on an appraisal

that will guarantee the property will be deemed acceptable collateral

– Detailed explanations and descriptions help the appraisal reviewer or underwriter

understand the subject property more fully and enable them to make an informed

decision

Appraisal Insights

Session Overview

Topic

Introduction

Communicating with the Appraiser

Valuation, Guidelines, Underwriting and Comps

Examples

Objectives:

1. Increased awareness of requirements

2. Increased success in working with appraisers

3. Increased knowledge of property valuation on complex properties

Appraisal Insights 2

3Appraisal Insights

Real Estate or Personal Property?

4Appraisal Insights


Appraisal Insights

5Appraisal Insights


Communicating with the Appraiser


Improper CommunicationsFHFA, FRB, CFPB jointly issued the interim final rules on October 28, 2010. Amongst other things, the rules address appraiser independence:

– Covered persons (e.g. creditors, mortgage brokers, appraisers, appraisal management companies, real estate agents, title insurance companies)

– Covered persons are subject to the prohibition on appraiser coercion and similar practices that may compromise appraiser independence, as noted in TILA and the Interim Final Rules

– Acts or Practices that are cited as violations of appraiser independence:• Causing or attempting to cause the value assigned to the property to be based on a factor other than

the independent judgment of than appraiser• Mischaracterizing the appraised value of the property• Seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the

making or pricing of the transaction• Withholding or threatening to withhold timely payment for an appraisal report or for appraisal services

rendered when the appraisal report or services are provided for in accordance with the contract between the parties

Improper Communication is Prohibited

Source: Part IV, 12 CFR Part 226, Truth in Lending; Interim Final Rule (Federal Reserve System)


Proper Communications

Appraiser independence rules do not prohibit a mortgage lender,

mortgage broker, mortgage banker, real estate broker, appraisal

management company, consumer or another other person with an

interest in a real estate transaction from asking an appraiser to:

– Consider additional, appropriate property information, including information

regarding additional comparable properties to make or support an appraisal

– Provide further detail, substantiation, or explanation for the appraiser’s value

conclusion

– Correct errors in the appraisal report

Proper Communication is Allowed

Source: Part IV, 12 CFR Part 226, Truth in Lending; Interim Final Rule (Federal Reserve System)


The Appraiser’s Obligation*A partial list - for more information please consult the Uniform Standards of Professional Appraisal Practice, www.appraisalfoundation.org

• Must perform assignments with impartiality, objectivity, and independence

• Must not advocate the cause or interest of any party or issue

• Must not perform assignments in a grossly negligent manner

• Must protect confidentiality

• Must be competent to perform the assignment (license, knowledge, skill)

• Must perform the assignment competently

• Must understand what information needs to be gathered & analyzed to solve the problem

• Must not allow assignment conditions to impair the credibility of the assignment results

• The report must contain sufficient information to enable the intended users to

understand the report properly

• Credible assignment results require support by relevant evidence and logic

• The appraiser’s work file must contain all information necessary to support the

appraiser’s opinions and conclusions

CREDIBILITY IS FUNDAMENTAL


http://www.appraisalfoundation.org/

Automated Appraisal Review Systems1. Automated appraisal review systems have been in place >15 years

2. Early systems were designed to aid the manual underwrite process

3. Fannie Mae & Freddie Mac

a. UAD - Standardization of Data (structured data) – Common Lexicon

b. Fannie Mae Collateral Underwriter (CU)

c. Freddie Mac Loan Collateral Advisor (LCA)

d. Rep & Warrant Relief – assess risk prior to loan purchase

e. Improved analytics

f. Fraud reduction - detect inconsistencies in appraisals/data

g. Property Inspection Waivers

4. Many proprietary systems today – complex, integrated


Collateral Underwriter or CU

11Appraisal Insights

Fannie Mae’s Collateral Underwriter

https://www.fanniemae.com/singlefamily/collateral-underwriter



https://www.fanniemae.com/content/fact_sheet/collateral-underwriter-fact-sheet.pdf

https://www.fanniemae.com/content/fact_sheet/collateral-underwriter-fact-sheet.pdf

What Does CU Provide?

– CU provides a Risk Score (1-5)

• 1 means lowest risk to 5 highest risk

• Score of “999” indicates a score could not be generated

– Risk Flag Messages fall into one of three categories

• Property Eligibility/Compliance Messages

• Overvaluation Risk Flag

• Appraisal Quality Risk Flag



Remember to review the CU Score if it appears on the DU Findings

– 4 or 5 require a more detailed review

– Appraisal Quality Messages Fall Into one of Four Categories

• Data Integrity

• Comp Selection

• Adjustments

• Reconciliation

– None need to be technically “cleared”, but they are there for a reason, most will

warrant further attention and underwriter review

Best Practices With CU Messages


Loan Collateral Advisor® or LCA


Freddie Mac’s Loan Collateral Advisor

https://sf.freddiemac.com/tools-learning/loan-advisor/our-solutions/loan-collateral-advisor

https://sf.freddiemac.com/tools-learning/loan-advisor/our-solutions/loan-collateral-advisor

What Does Loan Collateral Advisor Provide?

– LCA provides a Risk Score (1-5)• 1 means lowest risk to 5 highest risk• Score of “99” indicates a score could not be generated

– Risk Flag Messages fall into six categories• Risk Level (4000)• Valuation (4100)• Comp Selection/Adjustments (4200)• Report Completeness (4300)• Report Inconsistencies (4400)• Data Discrepancy (4500)• Eligibility (4600)




Loan Collateral Advisor®

http://www.freddiemac.com/loanadvisorsuite/faq/loancollateraladvisor.html

http://www.freddiemac.com/loanadvisorsuite/faq/loancollateraladvisor.html

The Appraiser has been hired…now what?


Forces that Create ValueIf I put a for sale sign in front of it…

…Who would buy it‏

…What else would they buy‏

?What are those properties selling for‏

Market Alternatives

Principle of Substitution


Forces that Create Value

Utility

Desire

Scarcity

Effective Purchasing Power

Forces that Affect Value


What Creates Value?

Social

Economic

Governmental

Environmental

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Adjustments to the comparables must be made for special or creative financing

or sales concessions.

Market Value - What is “Market Value”?

Market Value defined:

– The most probable price a property should bring in a competitive, open market.

– Buyer and seller are typically motivated.

– Both parties are well informed or well advised and each acting in what he

considers his own best interest.

– A reasonable time is allowed for exposure in the open market.

– Payment is made in terms of cash in US dollars.

– The price represents normal consideration for the property sold unaffected by

special or creative financing or sales concessions.

No adjustments are necessary for those costs, which are normally paid by the

sellers as a result of tradition or law in a market area. These are readily

identifiable in virtually all sales transactions.

Fannie Mae Single Family 2020 Selling Guide Section B4-1.2-03

Freddie Mac Single-Family Seller/Servicer Guide Section 5601.3

Appraisal Insights

Engagement

• Mortgage Lender sends appraisal request

Scope of Work

• Appraiser determines the requirements

Information Gathering

• Appraiser gathers the data necessary to solve the problem

Analysis

• Appraiser utilizes recognized methods and techniques to analyze the data

Write Report

• Appraiser prepares the written appraisal report

Communicate Results

• Appraiser sends the written appraisal report

• Appraiser responds to follow-up questions

• Site Inspection

• Comp Inspection

• Phone calls/interviews


Appraisal Process Overview

Information Gathering


Information Gathering Sources

Property RightsReview of Public Record Information (subject,

sales, listings)

Taxes, Special Assessments Review of MLS information

School District Interview occupant of subject property

Market Data (e.g. Inventory, Sales Volume,

Prices, Marketing Time, Concessions, etc.)

Interviews (e.g. real estate agents, builders,

developers, other property owners, appraisers,

building department officials, etc.)

Neighborhood Information (characteristics) Aerial Maps

HOA Information (Bylaws, Amenities, Mgmt,

Fees/Dues)

Flood hazard maps, soil survey maps, lava flow

maps,

ZoningTitle Search (legal description, easements,

restrictions, vesting, transfers/conveyance)

Sale Restrictions (POS) Deed

Inspect The Subject Survey

Inspect the Comparable Sales & Listings Plans/Specifications/Cost Breakdown

Drive the Neighborhood News/Future expectations



What do you think the appraiser looks for when inspecting the

subject?

Inspecting the Subject


Physical Characteristics

1. Gross Living Area

2. Quality of construction

3. Condition of Improvements

4. Layout

5. Features/Amenities

6. Design/Appeal

7. Landscape

8. View

9. Site characteristics (e.g. topography, access, improvements)

External Characteristics (land uses, neighborhood, street, traffic, etc.)

Look through the lens of a typical buyer – <30 minutes for typical

buyer inspection…what does a buyer remember about a house when

shopping?

Inspecting the Subject


What do you think the appraiser looks for when inspecting Comps?

Inspecting Comparable Sales/Listings


Physical Characteristics

1. Quality of construction (exterior view)

2. Condition of Improvements (exterior view)

3. Features/Amenities

4. Design/Appeal

5. Landscape

6. View

7. Site characteristics (e.g. topography, access, improvements)

External Characteristics (land uses, neighborhood, street, traffic, etc.)

Look through the lens of a typical buyer

Inspecting Comparables

Appraisal Review Techniques



Roles in Collateral Assessment

The Field Appraiser Does the Following:

- Identify (the problem & the relevant data to solve the problem)

- Report (the relevant information that was gathered)

- Analyze (the relevant data to solve the problem)

- Report (the results of the analysis)

The Underwriter Examines the Appraisal Report:

1. Completeness (of the appraisal report)

2. Consistency (of the data and analysis)

3. Credibility (of the analysis and value conclusion)

4. Guidelines (e.g. conformity to lender, GSE, investor, insurer, government, etc.)

Investor/External Guidelines vs. Internal Guidelines

Guidelines come and go….

• 15% Net Adjustment

• 25% Gross Adjustment

• 1 Mile Comp Distance

• Comps No Older Than 12 Months

• 30% Land to Value Ratio

• 10% Line Item Adjustment

Guidelines vs Benchmarks

No More Rule Book For These; Do We Want “Wild And Crazy”

Comparables?


Existing Construction

Requirements when there are INCOMPLETE ITEMS or CONDITIONS AFFECTING SSS

1. Must be appraised SUBJECT-TO completion or repair

2. Includes the following examples that COULD affect SSS:

a. Partially completed addition

b. Partially completed renovation

c. Cracks or Foundation settlement

d. Water Seepage

e. Active Roof Leaks

f. Curled or Cupped Roof Shingles

g. Inadequate electrical service

h. Inadequate plumbing fixtures


Fannie Mae Property Condition

General Requirements

1. Similar to Fannie Mae (except for inclusion of C5 below)

2. Properties in C5 or C6 condition are ineligible for sale to Freddie Mac unless the repairs are

completed in advance of the purchase by Freddie Mac.

3. As-Is condition is permitted when conditions do not affect the safety, soundness or structural

integrity of the property

4. Freddie Mac expects the Seller to place as much emphasis on the adequacy of the property as

collateral as it does on underwriting the Borrower’s creditworthiness (Section 44.2)


Freddie Mac Property Condition5601.12: Property description and analysis (10/17/18)

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Examples For Review

Appraisal Insights


1. 1. Mold was noted. The appraiser is not a home inspector and

cannot determine if the mold is hazardous. The appraiser assumes

it is not.

2. Sanitary septic system showed evidence of failure?

Sample Statements…What Would You Do?


A Few Other Property Concerns:

– Additions without Permits: If the appraiser identifies an addition(s) that does not have the required permit, the appraiser must comment on the quality and appearance of the work and its impact, if any, on the market value of the subject property.

– If appraisal indicates evidence of wood-boring insects, dampness, or abnormal settlement, the appraiser must comment on the effect on the value and marketability of the subject property. Lenders must either provide satisfactory evidence that the condition was corrected or submit a professionally prepared report indicating based on an inspection of the property, that the condition does not pose any threat of structural damage to the improvements

Additional Improvement Considerations

Visit Our Website For Additional Information

New.mi.genworth.com/Training

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1. Is the above captioned description adequate?

2. Do you feel that the appraiser has addressed the pertinent questions?

3. If not, what additional items or description would you like to see?

Have You Ever Seen An Appraisal With Comments Like The Above?

Appraisal Insights

Market Data… Market Data… Market Data… Market Data…

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Barns and other outbuildings…

1. Describe (size, age, condition, utility, commonality)

2. Analyze (cost vs. contributory value, special purpose-what is it being used for?)

3. Value

4. Support with market data (comps that also have a horse barn and outbuildings?)

- An appraiser must not “Guess” at the contributory value of an outbuilding

- Devaluing outbuildings or overvaluing outbuildings are both inappropriate

Appraisal Insights

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1. Is the above captioned site description adequate?

2. Do you feel that the appraiser has addressed the pertinent questions?


Appraisal Insights

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Unique “Sanitary Sewer”…would want a bit more on acceptance

Where is it located? Which parcel. Same for well, is it working or appear to

be functioning properly?

Two parcels? Abutting or across street? What is the size of each parcel and

is this typical?

Are there any other items that you would require?

Appraisal Insights

Approaches to Value

We Will Cover Sales Comparison Only


Sales Comparison Approach


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Sales Comparison

• Emulates the process of comparison shopping used by prospective

purchasers of real estate.

• Adjust comp to the subject.

• Adjustments must be based on market reaction – market driven/data

• Requires the appraiser to have relevant logic and support

• Support must be in the report or in the work file (as appropriate)

Appraisal Insights

Q. With continued declines in the amount of sales

activity, how will an appraiser find comps?

•The principles of comp selection remain the same regardless of the

degree of sales activity

➢ Market alternatives

➢ Substitution

➢ Which properties compete with the subject?

➢ Expanded search criteria

▪ Dated sales

▪ More distant sales

Answer:


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Sample Adjustment Flow (partial list)

Third Level Adjustments

Basement/Finish/Foundation Car Storage Functional Utility Pools/Decks/FP/Heat/Air

Second Level Adjustments

Market Conditions

Site Value View Location Age Condition GLA Room Count

First Level Adjustments

Real Property Rights Financing Terms Conditions of SaleExpenditures Made

Immediately After Sale

Appraisal Insights

Q. What are some of the most common categories

of Sales Comparable misrepresentation?

➢ Misrepresented market conditions

➢ Omitting and/or failing to properly analyze externalities

➢ Misrepresenting comp characteristics

➢ Adjustments that do not reasonably approximate market reaction

➢ Improper Comp Selection

➢ Flawed methodology and/or technique

Answer:


• Adjustments are

derived from the

market

• Approximate market

reaction to material

differences between

the comp and the

subject

• Quantitative

• Qualitative


Approaches to Value - Sales Comparison


At Least Three Closed Sales

– More can be provided

– Pending sales or listings:

• Can be used when appropriate

• Might provide additional supporting data

Comparables Closing Date (Age)

– Check applicable guidelines

– Should have closed within the previous year

• Must make sense for market

• Recent sales offer measure of current market

• Over twelve months:

– Effort made to find newer comparable

– Why newer comparables not available

– Is there a market issue?

– Basis for any market condition adjustment

Analyzing Comparable Properties


Shortage of Comparable Properties

– Possible Reasons:

• Nature of property improvements

• Relatively low number of sale transactions in the neighborhood

– Comparables may have to be:

• Older than a year

• From a nearby, competing neighborhood

– Appraiser Explanation and Market Data



When there is a shortage of comps, the appraiser should explain:

– Effort made to find better comps?

– Why the shortage of recent sales?

– What does the shortage indicate?

• Stable market?

• Marketability issue?

– Shared unique characteristics?

– Why a potential comp was not selected?

• i.e. Foreclosure sale or non-arms length transaction



Unacceptable Comparison Selection Practices

– Misrepresentation

– Inappropriate Comps

• Unacceptable Locationally

• Not Physically Similar

– Uninspected Properties

• No Appraiser Drive-By

– See Fannie Selling Guide §B4-1.1-04

– See Freddie Mac Single-Family Seller/Servicer Guide §5601.3



Bracketing

– At least one comparable superior and one inferior to the subject

– As many bracketed items as possible:

• Unadjusted Sale Price

• Gross Living Area (GLA)

• Lot Size

• Adjusted Sale Price

• Other Major Physical Characteristics

– Bracketing is a best practice

• Accurate Picture of Value

• Tighter Range/Spread of Values

– Because there are both upward and downward adjustments in each field

• Conformity to Neighborhood

– Bracketing size and actual range supports the subject’s conformity to the neighborhood

Analyzing Comparable Sales

Let’s Look At Some Examples Of Bracketing


Sales Price and Gross Living Area (GLA)

Analyzing Comparable Sales


Review Appraisal Map

– Review Carefully

– Does the map support the Appraiser’s

Conclusions?

• Distances make sense?

• Natural boundaries honored?

– i.e. Waterways, Highways, Large Parks

– Compare with other maps

• Google Maps, MapQuest, etc.

• School maps

• Municipality maps



Do the subject and comparables appear to be similar?


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Cost vs. ValueSales comparison adjustments are based on the contributory value an

item brings to the property.

– This is not necessarily the cost of constructing the item.

– Land is said to have value; Improvements are said to contribute to value.

– The appraiser must measure the contributory value of barns, outbuildings, pools,

additional garages and other side improvements.

• Such measurements must be based on the utilization of appropriate methodology and

technique.

• The appraiser should include summary support for the opinions and conclusions

regarding the contributory value of outbuildings, pools, etc.

Fannie Mae Single Family 2009 Selling Guide Section B4-1.4-18

Otherwise, these are almost identical homes next door to each other that

each sold in the past month.

It appears the barn brought $10,000 additional value to Property A.

The correct sales comparison adjustment would be $10,000, not $20,000.

• The barn cost $20,000 to construct.

• Property A sold for $180,000.

• Property B sold for $170,000.

A

B

Example: Property A has a barn, Property B does not.

Appraisal Insights


1. Across the board adjustments in the same direction to all the comps for a

particular item

2. Neglecting to disclose external considerations (main road, contiguous non-

residential land uses, park, freeway, views, etc.)

3. Neglecting to sufficiently describe the market conditions

4. Neglecting to sufficiently describe the subject (site, condition, quality, features,

amenities)

5. Neglecting to sufficiently describe comparable sale challenges

6. Neglecting to bracket the appraised value when using the sales comparison

approach

7. Neglecting to sufficiently explain certain adjustments (positive, negative or zero)

where such explanation would reasonably be expected by the client and

intended users

8. Neglecting to sufficiently explain and support the site value opinion

9. Neglecting to appropriately verify comparable sale conditions (inadequate scope

of research)

10.Conflicting statements, conclusions, exhibits within the appraisal report

Potential Red Flags in Appraisal Report

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Outbuilding, Currently Used For Storage…But How Easy Would It Be To Convert Back to It’s

Original Use?

Appraisal Insights


Common Red Flags Include

– Choosing dated comps, in the absence of sufficient explanation, particularly

when there are more recent comps available

– Lack of comments from the appraiser relating to the property, comps, market or

trends in the area

– Not relying upon the indicated value from the most similar comparable property

• Closest

• Most recent sale

• Most similar property

– Questionable market acceptance

– Not identifying an area as declining when credible evidence suggests a decline

– Indicated value outside the predominant range for the neighborhood

– Photos show a feature/situation not reflected in the appraisal

• Major Farm structures or livestock may evidence farm use

• Appraisers should explain unusual circumstances and confirm that the land is used

solely residentially

– Boilerplate appraiser statements, such as “best comps” were selected or “there

are no additional comps available”

– No listings provided or days on market

Other Common Red Flags


Read Comments Section Carefully

– Look for anything impacting:

• Value

• Structural Integrity

• Marketability

– Are the comments consistent with data provided within the appraisal and all data

gathered outside the appraisal?

Read ALL Comments


Compare Sales Grid to First Page

Do The Comparables Selected Make Sense, Based On The Market Data; Do The

Neighborhood Housing Trends Make Sense, Based On The Data You See Here?


Sales Comparison - Site Value Consistency

1. Is the above captioned site valuation adequate?

2. Do you feel that the appraiser has supported the opinion of site value?


Where did vacant sales come from? How old and from same area? 11% typical?


Sales Comparison - Site Value Consistency

As indicated in the cost approach, the subject’s site value is $18,000.

1. How do you feel about the site value adjustments to comps 2 and 3?

A Few Final Examples


Address Sale Price Recording Date

418 Candlewood Trail $208,000 5/10/2002

7 Candlewood Ct $238,000 5/16/2005

260 Thomas St $225,000 9/29/2008

266 Thomas St $260,000 12/8/2009

300 High Rd $177,000 8/30/2010

354 Poplar St $207,500 5/1/2006

370 Poplar St $270,000 9/28/2005

4304 Peacock Ln $375,000 6/15/2005

763 Dogwood Ln $134,000 4/5/2010

765 Dogwood Ln $164,500 5/22/2008

2051 Litchfield Ln $284,500 9/27/2006

2081 Litchfield Ln $271,500 4/24/2006

850 Mayfair Ln $307,000 9/22/2005

1335 Westbury Dr $322,500 2/13/2007

1428 N Walnut Ave $444,000 1/10/2007

1663 Water Tower Ct $445,000 3/31/2009

1865 Golden Pond Ln $483,000 10/17/2007


What Would You Expect To See In The Photo???


Agency Appraisal Resources


http://www.freddiemac.com/singlefamily/appraiser_in

dependence_faq.html

https://www.fanniemae.com/singlefamily/originating-

underwriting-training

http://www.freddiemac.com/singlefamily/appraiser_independence_faq.html

https://www.fanniemae.com/singlefamily/originating-underwriting-training

Appraisal Insights

Underwriting & Guides

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Genworth Appraisal Review Checklist


Genworth Rate Express®


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Genworth Underwriting Guidelines


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LOS Connections


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Training Tools and Information


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Training Tools and Information


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Additional MI Site Information


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➢ ActionCenter®: 800 444.5664

➢ Your Local Genworth

Regional Underwriter

➢ Your Genworth Sales

Representative

Your Genworth Resources


Legal Disclaimer Genworth Mortgage Insurance is happy to provide you with these training materials. While we strive for‏

accuracy, we also know that any discussion of laws and their application to particular facts is subject to

individual interpretation, change, and other uncertainties. Our training is not intended as legal advice, and is

not a substitute for advice of counsel. You should always check with your own legal advisors for

interpretations of legal and compliance principles applicable to your business.

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Collateral Underwriter®, Home Ready® and Desktop Underwriter® or DU® are registered trademarks of Fannie Mae

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