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

Last week NAR released what the group described as a preliminary analysis of a survey of members, in which 70 percent reported an increased use of out-of-area appraisers after May 1, and 37 percent reported lost home sales.

NAHB said its own survey of about 500 builders found that 26 percent have seen sales contracts fall through because appraisals came in below the contract sales price.

NAHB Chairman Joe Robson, a Tulsa, Okla.-based homebuilder, in a press release called Freddie Mac’s bulletin to lenders "a step in the right direction."

NAR is calling for an 18-month suspension of the code. A bill that would accomplish that, HR 3044, was introduced June 25 and now has 19 co-sponsors. The bill has been referred to the House Committee on Financial Services.

The new appraisal rules were the result of an agreement between New York Attorney General Andrew Cuomo and Fannie Mae, Freddie Mac and their federal regulator, the Federal Housing Finance Agency.

Cuomo had subpoenaed Fannie and Freddie as part of an investigation into the packaging of mortgage loans into investments, after filing a lawsuit against First American Corp. and its appraisal management subsidiary, eAppraiseIT.

The companies were accused of allowing Washington Mutual to pressure them into inflating property appraisals. WaMu was not named in the suit, which is ongoing, and the companies have denied wrongdoing (see story).

Although the Home Valuation Code of Conduct applies only to loans to be purchased by Fannie Mae and Freddie Mac, the rules are also affecting valuations conducted for loans guaranteed by the Federal Housing Administration, trade groups representing appraisers say.

The code has resulted in "a significant transfer" of appraisals ordered by mortgage brokers to appraisal management companies, and many experienced appraisers don’t want to do FHA work for the companies because of limits on fees, the groups maintain (see story).


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