Industry News, Mortgage, Story

Freddie Mac issues appraisal bulletin

Appraisers must have local expertise, choose 'appropriate' comps

Appraisers "must be familiar with the local market" in which properties they are valuing are located, choose "appropriate comparable sales," and certify them as the homes "most similar" to the property being appraised, Freddie Mac said in a bulletin to lenders.

The mortgage giant said new rules for appraisals don’t require that appraisers select distressed properties — including short sales, foreclosures or real estate-owned properties — when identifying "comparable properties" for valuations.

"However, if the appraiser determines that these are representative of the properties available to typical purchasers for the market in which the property is located, appraisers must consider their use," Freddie Mac said.

The bulletin, published Friday, comes amid criticism from real estate industry groups that new rules for mortgages slated for purchase by Freddie Mac and Fannie Mae have had unintended consequences.

After the Home Valuation Code of Conduct went into effect on May 1, critics say lenders began relying more on appraisal management firms employing appraisers with little experience in their local markets. Some appraisers haven’t made the proper adjustments when using distressed properties as comparable sales for nondistressed properties, critics say.

Groups representing appraisers have said that while the code may have its shortcomings, market forces and not appraisers are usually to blame when valuations come in below the contract sales price (see story).

One such group, the Appraisal Institute, issued a statement in support of Freddie Mac’s bulletin, calling the guidelines similar to policies in place at Fannie Mae instructing lenders to review appraisers’ education, experience, and professional affiliations.

In the bulletin, Freddie Mac said it recognizes "the challenges that current market conditions pose in connection with determining accurate property values," and that the selection of comparable sales "is crucial to providing an accurate opinion of value."

Although loan underwriters may take into account "reasonable" adjustments to an appraisal, "the higher the amount of the adjustments or the number of adjustments, the more likely the comparable sales might not be representative of the subject property," Freddie Mac said.

If an appraisal review is required, it should include current listings and pending sales to support any adjustments. If an appraiser determines older sales are more representative, they must provide current listings or pending sales to support any time adjustments or lack of adjustments for the differences in the age of the sales, Freddie Mac said.

The mortgage financier said best practices for determining whether an appraisal is acceptable include using automated-valuation models and other collateral evaluation tools as part of the loan-origination process.

The National Association of Realtors and the National Association of Home Builders have complained that low appraisals have derailed many sales. …CONTINUED