1 welcome to {organization} foreclosures & short sales: dilemmas and solutions an appraisal...
TRANSCRIPT
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Welcome to{Organization}
Foreclosures & Short Sales:
Dilemmas and Solutions
An Appraisal Continuing Education Course
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Chapter 1
How Did We Get Here?
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Objectives
Upon completion of this chapter, the participant will be able to:• Describe the history and causes of the
current financial crisis• Identify common fraudulent practices in
mortgage lending• Discuss how Wall Street packages loans into
CDOs• Explain the difference between Wall Street
and Main Street lending
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Key Terms
• Equity Stripping To continually urge homeowners to refinance existing debt, usually at no advantage to the borrower
• Fannie Mae The nation’s largest “quasipublic” investor in residential mortgages. It is described as a Government Sponsored Entity
• Freddie Mac A federally chartered institution that functions as a buyer and seller of savings and loan residential mortgages
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Key Terms
• Tranches The pieces of a loan
• Under Water When a borrower owes more on their house than it is worth
• Yield Spread Premium An incentive offered to a broker where the lender shares with the broker some of the increased profit associated with the loan
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Contributors to the Real Estate Crisis
• Inflated home values
• Risky loans
• Refinancing
• Yield spread premiums
• Fraud
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Inflated Home Values
• Some markets experienced ever-escalating property values
• Consumers assume the lender-required appraisal ensures purchase price is “fair market value”
– Predatory lenders utilized drive-by appraisals, AVMs, or collusion with dishonest appraisers who “hit the number”
• When homeowners cannot refinance or sell the property, this leads to foreclosures and short sales
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Risky Loans
• ARMs• Exploding ARMs• Loans with Prepayment Penalties• 100% or 125% Loans• NINJA Loans (No Income, No Job, no Assets)
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Risky Loans
In the mortgage market, loans are classified as one of the following:• Prime• Alt-A• Sub-prime
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Prime Loans
Given to borrowers with:
• Excellent credit history• Sufficient assets• Good debt to income ratio (very low)
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Alt-A Loans
• Given to borrowers who are one step down from prime– Generally have a lower credit score, may have
more debt, and are often self-employed
• Self-employed borrowers singled out for special treatment when mortgage industry created “low doc,” “no doc,” and “stated income” loans
• Predatory lenders took hold of these loans and extended them to the sub-prime market
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Sub-Prime Loans
• Given to borrowers with troubled credit, past foreclosures or bankruptcies, high debt to income ratio, etc.
• Many predatory loans were sub-prime• In order to get these loans to work, predatory lenders:
– Convince borrowers they are “their only hope”– Misstate closing costs on the GFE– Lie to borrowers about loan’s terms and conditions– Submit false and fraudulent documents
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Refinancing
• Some homeowners treated their home like an ATM, getting a “cash out” refinance every year or two
• Some lenders continually urged homeowners to refinance existing debt, usually at no advantage to the borrower– This is known as equity stripping
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Yield Spread Premiums
• An incentive offered to a broker where the lender shares with the broker some of the increased profit associated with the loan
• Prevalent when the borrower is offered a loan with no closing costs– Costs actually recovered by the lender
through the cost of the loan itself• The new HUD-1 and GFE, required beginning
January 1, 2010, will help prevent this
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Fraud
• FBI estimates annual losses due to mortgage fraud between $4 and $6 billion per year
• Fraud occurs for two reasons:
1. Property
2. Profit
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Fraud Characteristics
• Stolen identities• “Air” loans• Non-existent borrowers• Misstatements about the borrower’s financial
condition• Misstatements about the property’s physical
characteristics• Falsified documents• Sales of properties not owned by the “grantor”
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Lending Before the Bubble Burst
• At one time, the lender was literally on Main Street—a local lender employed by a local bank or S & L
• Between the last real estate meltdown (the S & L bailout in the early 1980s) and the end of the first decade of the 21st century (2000-2010), many mortgage brokers have entered the business– These brokers often receive commission-
based income
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Changes on Wall Street
• Wall Street devised exotic ways to package and sell pieces of loans, or CDOs
• The pieces of a loan are known as tranches– Each tranch was rated for return and risk
• 2000-2005: The stock market was roaring and there was a strong demand for mortgage backed securities
– Brokers had little at stake
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Underwriters: Flawed Assumptions and Assertions
• The real estate market would continue to go up, and up, and up
• When no data was available to apply to the criteria of new loans being generated, they would simply apply data that had worked in other situations
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General Timeline of Crisis
• 2005: Alan Greenspan (the Chairman of the Federal Reserve) called for more oversight of both Fannie Mae and Freddie Mac
• Q2 2006: Steep decline in real estate prices• Q3 2006: Mortgage defaults increased steeply• April 2007: New Century, one of the largest
sub-prime lenders, filed for bankruptcy• Mid-2007: Housing crisis front and center in all
news stories, but by then, the snowball was too big to stop
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Aftermath of Bubble Bursting
• Many borrowers left underwater (owing more on their house than it was worth) and unable to sell or refinance
• The argument among the public and the media is whether lending institutions or the appraisal industry is more at blame than the other
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Aftermath for Lenders and Appraisers
• Some lenders faced bankruptcy, buyouts, or otherwise cease to exist
• Stricter lending guidelines• Troubled Asset Relief Program (TARP)• Fannie Mae Form 1004MC• The Housing Valuation Code of Conduct
(HVCC)• Difficulty of appraising property in a
declining/volatile market
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Chapter Quiz
1. A yield spread premium represents thea. difference in the interest rates at
competing financial institutions.b. difference in the PMI premium paid by the
borrower.c. profit, often paid as a kickback to the
mortgage broker, which occurs when the yield spread on the loan makes more profit for the lender.
d. tranch of the loan
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Chapter Quiz
2. CDO stands fora. Collateralized Debt Obligation.
b. Collateralized Disclosure Option.
c. Credit Debt Obligation.
d. Credit Disclosure Obligation.
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Chapter Quiz
3. Property values began to fall nationwide in
a. Q4 of 2005.
b. Q2 of 2006.
c. Q1 of 2007.
d. Q1 of 2008.
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Chapter Quiz
4. One of the most faulty underwriting decisions was made by Standard and Poor, when they rated ______ loans are “ no more risky than a conventional loan with 20% down.”
a. 80/20 Piggybackb. FHAc. stated incomed. VA
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Chapter Quiz
5. In order of lowest risk to highest risk, which is the correct order?
a. Alt-A, Sub-Prime, Prime
b. Prime, Alt-A, Sub-Prime
c. Prime, Sub-Prime, Alt-A
d. Sub-Prime, Alt-A, Prime
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Chapter Quiz
6. A “low doc” or “no doc” loan is often given to a borrower who
a. has an excellent credit rating.
b. is highly salaried.
c. is not a U.S. citizen.
d. is self-employed.
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Chapter Quiz
7. What is the FBI’s estimate of the dollar amount of mortgage fraud on an annual basis?
a. $3 to $5 million
b. $10 to $15 million
c. $120 to $130 million
d. $4 to $6 billion
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Chapter Quiz
8. In regard to tranches, which statement is TRUE?
a. All tranches, or slices, from a CDO have identical risk and return.
b. All tranches, or slices, from a CDO have the same amount of return.
c. All tranches, or slices, from a CDO have the same amount of risk.
d. Each tranch, or slice, has its own risk and return.
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Chapter Quiz
9. A loan on a non-existent property is known as
a. an “air” loan.
b. creative financing.
c. a NINJA loan.
d. a proposed loan.
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Chapter Quiz
10.One of the hallmarks of predatory lending practices is
a. borrowers being given accurate estimates of closing costs.
b. “exploding” ARMs.
c. fixed-rate loans.
d. honest mortgage brokers.
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Chapter 2
Flipping
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Objectives
Upon completion of this chapter, the participant will be able to:• Define flips—both legitimate and illegitimate• Describe the FHA’s rules in regard to flipping• Identify fraudulent practices in flipping
scenarios
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Key Terms
• Broker Price Opinion (BPO) An estimate of value from a real estate agent, often used when a property is pre-foreclosure, or even when the loan is being sold. A CMA, or Competitive Market Analysis, is the equivalent of a BPO. Some states allow real estate agents to prepare BPOs; some do not.
• Competitive Market Analysis (CMA) An estimate of the fair market price of a property for sale or purchase. CMAs are traditionally prepared by real estate agents in anticipation of a listing, or to assist a buyer in making an offer on a property.
• Federal Housing Administration (FHA) Government agency that insures mortgage loans.
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Key Terms
• Flipping Buying a property at a low price, and reselling it quickly, for a profit.
• Illegitimate Flipping Property is either fraudulently purchased at a low price, or is falsely appraised at a higher value, and quickly sold for a profit. The essence of an illegitimate flip is to find a buyer or seller who is not knowledgeable about the market value of the property.
• Legitimate Flipping Legally buying a property at a low price, and reselling it quickly, for a profit.
• Uniform Standards of Professional Appraisal Practice (USPAP) Professional appraisal standards developed by The Appraisal Foundation, and now recognized throughout the United States as accepted standards of appraisal practice.
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Flipping
• Buying a property at a low price, and reselling it quickly, for a profit
• Flips can be “legitimate” or “illegitimate”
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“Legitimate” Flips
• Ones where the buyer buys a home, for a variety of reasons, at a discount
• The buyers may improve the property or just clean it up and make it presentable
• The buyers then resell under the terms defined as market value
• The appraiser is obligated to document that the price paid was a discount, verify the work and improvements done to the property, and support the resale price with reliable market data
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“Illegitimate” Flips
• Involve an inflated appraisal or a buyer who acquires a property from an uninformed seller at a price lower than market value and re-sells for a profit.
• Illegitimate part may come with purchase or sale
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Flipping New Houses
• Illegitimate flipping is not limited to existing, previously-owned homes
• “Flippers” can consist of a builder and his cohorts (on-site lender, appraiser, title company, etc.)
• Out-of-town buyers are especially susceptible to flipping schemes in new housing developments
• Fannie Mae provides guidelines for appraisers to use in verifying data furnished by builders
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The FHA and Flipping
• HUD’s Anti-Flipping Rule, FR-4615 addresses “flipping” on mortgages insured by the FHA
• The FHA defines flipping as “when a recently acquired property is resold for a considerable profit with an artificially inflated value”
• In 2008, the FHA amended this rule to allow purchases of foreclosed homes and homes located in federal disaster areas
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Appraisers and Fraud
• Many inexperienced appraisers have been unwittingly drawn into schemes:
– Using data furnished by the builder– Not looking in competing subdivisions– Not verifying terms and conditions of sale
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Appraisers and Fraud
• Most common examples of fraud among appraisers (per Fannie Mae):
– Misrepresentation of the property’s physical characteristics
– Inappropriate (or non-existent) comparables
– Misrepresentation or concealment of material facts in the neighborhood or market
– Misrepresentation about the property’s occupancy
– Misrepresenting a property as a single-family home when it has more than one unit
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USPAP as Fraud Prevention
• Sometimes appraisers may be pressured to participate in fraudulent practices
• Doing so would also violate the Uniform Standards of Professional Appraisal Practice (USPAP)– Requires an appraiser not to, by omission or
commission, misrepresent any of the physical characteristics of the property; any market information; any external influences; or, in fact, anything of which the appraiser has knowledge
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Common Fraud Scenarios Involving Appraisers
• Appraisers should accept assignments in markets with which they are geographically competent
• Pre-foreclosure appraisals (BPOs and CMAs)• Volatile markets where value is fluctuating
– Even when fraud is not involved, value is not static
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Chapter Quiz
1. Buying a property at a bargain price, fixing it up, and reselling it at a profit is the definition of
a. capitalism.
b. entrepreneurship.
c. flipping.
d. fraud.
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Chapter Quiz
2. An agent advises Jane that the house she has inherited has a market value of $125,000 - $130,000. Jane wishes to sell quickly and agrees to list the property at $100,000 “as-is.” An investor purchases the property and re-landscapes, paints the exterior and interior, modernizes the kitchen, replaces the roof and windows, and refinishes the floors. The investor then lists and sells it for $195,000. This is a description of
a. fraud on the part of the agent.b. fraud on the part of the investor.c. an illegitimate flip.d. a legitimate flip.
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Chapter Quiz
3. A common error of an “amateur” flipper is
a. estimated the costs of carrying and making repairs to the property.
b. having enough cash reserves.
c. planning on a downturn in the market.
d. relying on friends and family to do the repairs.
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Chapter Quiz
4. “Professional” flippers are most likely to NOT
a. have a “plan B” if the house does not sell.
b. have sufficient resources to finish the job.
c. put any profit into the business plan.
d. spread themselves too thin by acquiring more properties than they can rehab.
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Chapter Quiz
5. One day, an investor knocks on Marge’s door and tells her that her neighborhood is going downhill, and that she is lucky that he is willing to buy her house. Marge sells the house to the investor for $50,000. He paints the house, and two months later, resells it for $150,000 to a family relocating from a big city. This is
a. good business sense on Marge’s part.
b. an illegitimate flip.
c. a legitimate flip.
d. a normal business transaction.
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Chapter Quiz
6. Which is NOT associated with the FHA Anti-Flipping Rule FR-4615?
a. No real estate agent may be involved.
b. The sales contract may not be assigned.
c. The seller must be the owner of record.
d. There must be a “seasoning period” between the last sale and the current sale.
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Chapter Quiz
7. Which is an amendment to the FHA Anti-Flipping Rule FR-4615?
a. The FHA allows flips of properties which have gone through foreclosure.
b. The FHA allows flips within 30 days if the parties are not related by blood or marriage.
c. The FHA allows flips without an explanation of the increase in value, providing the flip occurs within 90 days.
d. There are no amendments to this rule.
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Chapter Quiz
8. Which is a challenge associated with a pre-foreclosure appraisal?
a. ability to perform only an exterior-only inspection
b. abundant comparables
c. Adequate MLS and courthouse data
d. cooperative homeowners
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Chapter Quiz
9. Which is NOT a “common misrepresentation” in fraudulent appraisals, per Fannie Mae?
a. inappropriate comparablesb. misrepresentation of the property’s
occupancyc. misrepresentation of the property’s
physical conditiond. misrepresentation of the property's
zoning
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Chapter Quiz
10.Which acronym represents a government agency that insures mortgage loans?
a. BPO
b. CMA
c. FHA
d. USPAP
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Chapter 3
Fraud and Predatory Lending
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Objectives
Upon completion of this chapter, the participant will be able to:• Identify common predatory lending practices• Compare Main Street lending and Sub-prime
lending• Recite examples of how different real estate
professionals can be involved in predatory lending practices
• Explain how RESPA regulations help prevent predatory lending practices
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Key Terms
• Fraud An intentional or negligent misrepresentation or concealment of a material fact; making statements that a person knows, or should realize, are false or misleading.
• HUD The Department of Housing and Urban Development, a government agency that deals with housing issues.
• HUD Uniform Settlement Statement (HUD-1) A settlement statement, required under RESPA, which details all costs associated with closing a loan, showing how much was paid, to what companies or parties, and for what purpose.
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Key Terms
• Predatory Lending A practice attributed to certain mortgage lenders that seek to take advantage of the lack of knowledge or naivety of borrowers.
• RESPA (Real Estate Settlement Procedures Act) Federal law dealing with real estate closings that sets forth specific procedures and guidelines for disclosure of settlement costs.
• Silent Second A mortgage between buyer and seller which does not appear on the HUD-1.
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Common Predatory Lending Schemes
• Selling a product which is actually another product (AKA bait and switch)
• Misrepresenting a loan’s terms and conditions• Lying about closing costs• Charging for non-existent services, or services
which are not required (e.g., credit life insurance)• Equity stripping• “Investor loans”
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Targets for Predatory Lending
• Homeowners who are in financial distress due to:– Job loss– Poor health– Other conditions
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Why Predatory Lending is Successful
• Buying a home or refinancing are transactions (most) consumers participate in less frequently
• Predatory lenders often work with cooperative title companies, RE agents, and appraisers
• The increasing use of the Internet
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Main St. Lending vs. Sub-Prime Lending
• There is often no real person to meet with and talk to when doing business with an Internet-based lender
• Mobility of the Internet allows a dishonest broker to simply move on to the next victim
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The HUD-1 Settlement Statement
• Some agents/consumers report they were not furnished with the HUD-1 until getting to the closing table
• HUD revised and “simplified” the HUD-1 to correlate to the new GFE
– Both required for use beginning Jan. 1, 2010
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RESPA
• Helps prevent real estate agents from taking kickbacks for directing prospects to lenders
• Prohibits a person from giving or accepting anything of value for referrals of settlement services related to a federal mortgage loan
• Prohibits a person from accepting a charge for a service that is not performed
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“Anything of Value”
– Virtual tours of their listings
– Brochures– Advertising– Meals– Vacations (e.g.,
use of a condo)
– CE classes– Entertainment (e.g.,
tickets to events)– Parties for the
company or donating the open bar at the company holiday party
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Agents have been cited for RESPA violations for accepting:
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It Takes a Village
• For fraud to work, many players need to be involved– Lenders– Title companies (help prepare fraudulent
paperwork)– Real estate agents– Appraisers
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Other Fraudulent Schemes
• “Air loans”—loans on non-existent properties• Made up borrowers• Identity theft (e.g., consumers and appraisers)• Forged appraisals• Forged mortgage applications and documents• Straw buyers (either non-existent people or
stolen identities used by others)• Lenders reselling the same mortgage multiple
times
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Appraisers and Identity Theft
• Appraisers are vulnerable to identity theft because:– Certification numbers or copies of their state licenses
are often in their reports– Some state-maintained websites include appraisers’
license numbers
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One-Stop Shopping
• Fraudulent practices aided by consumers’ desire for one-stop shopping convenience
• RESPA prohibits a lender from requiring a consumer to use a particular title company
• Honest and ethical RE appraisers and agents help to defend consumers
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Case Study 1
1. If the following group of individuals were involved in a fraud scheme, describe each person’s role in the fraud scheme.
Appraiser
Real estate agent
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Fraudulent appraisals; misstatements of physical condition, occupancy, etc.
Steer buyers to certain lenders; help falsify documents; prepare two contracts
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Case Study 1
Title Agents
Loan OriginationOfficer
Paralegal
Bank Teller
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Prepare false HUD-1
Create false loan applications; coach buyers to lie
Assist title company and attorney
Assist in laundering money, no report of deposits of over $10,000 (federal law)
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Case Study 1
Property Finder
Money Launderer
Identity Thief
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Locate vulnerable people (e.g., elderly, individuals who speak English as a second language, etc.)
Provide an avenue to funnel the money made through fraudulent schemes
Provide stolen identity without which the fraudulent scheme would not work
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Case Study 2
2. For each of following interactions between a real estate licensee and a title company, indicate whether the interaction would or would not violate RESPA.
The title company owner takes the agent to a Big Ten Football game, with tickets on the 50 yard line, all expenses paid.
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Would violate
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Case Study 2
The title company pays a real estate instructor to do an ‘in-house’ continuing education program at no cost to the real estate company. The agents receive full credit.
The title company comes to an office meeting to explain the difference between standard and re-issue title rates, and brings a box of donuts.
The real estate agent accepts the offer of the title company to print full color postcards, and mail them for her, advertising her new listing.
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Would violate
Would NOT violate
Would violate
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Case Study 2
The title company furnishes a videographer to make virtual tours of the real estate company’s listings.
The title company sponsors “Happy Hour” at the annual REALTOR® Association Holiday Party.
The title company sponsors the real estate company’s annual golf and picnic outing at the local country club, paying greens fees, refreshments, etc.
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Would violate
Would NOT violate
Would violate
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Chapter Quiz
1. The FBI reported a ____ increase in SARS reports during fiscal year 2008.
a. 18%
b. 25%
c. 36%
d. 40%
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Chapter Quiz
2. A settlement statement that details all costs associated with closing a loan, showing how much was paid, to what companies or parties, and for what purpose is called
a. HUD.b. HUD-1.c. RESPA.d. USPAP.
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Chapter Quiz
3. Which is a predatory lending scheme?a. approving an ARM for a client
b. charging a disclosed fee
c. misrepresenting terms and conditions of the loan
d. providing a HUD-1 statement before closing
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Chapter Quiz
4. Which statement regarding a “silent second” is TRUE?
a. The agent is always aware of the arrangement.
b. Appraisers do not need to take such financing into account when forming a value opinion.
c. It appears on the HUD-1.
d. It does not appear on the HUD-1.
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Chapter Quiz
5. Which is a RESPA regulation?a. The HUD-1 can be given to agents and
consumers only after the lender receives the necessary fee.
b. The HUD-1 should be given to agents and consumers before closing, only if requested.
c. The lender must require a client to use its preferred title agency.
d. A person cannot give or accept any thing of value for referrals or business related to a federal mortgage loan.
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Chapter Quiz
6. SARS reports area. generated by the FDIC.
b. generated by USPAP.
c. reports of suspicious activity.
d. Statements of accounting reserves.
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Chapter Quiz
7. When a lender encourages a borrower to refinance often, usually at no benefit to the homeowner, it is called
a. equity allocation.
b. equity stripping.
c. fraud.
d. refinancing.
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Chapter Quiz
8. Who would most likely be involved in preparing a false HUD-1 Settlement Statement?
a. borrowers
b. real estate agents
c. real estate appraisers
d. title company agents
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Chapter Quiz
9. A lender gets a customer to take a mortgage loan by telling them it is a fixed rate loan, when in reality it is an ARM. This practice is known as
a. bait and switch.
b. equity stripping.
c. a silent second.
d. stacking the price.
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Chapter Quiz
10.A characteristic of massive mortgage fraud is
a. it can involve several individuals.
b. it is always one person acting alone.
c. the perpetrators make very little money.
d. the perpetrators never get caught.
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Chapter 4
Foreclosures and REO Listings
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Objectives
Upon completion of this chapter, the participant will be able to:• Describe what foreclosure is and the steps
and procedures involved• Identify the difference of valuing the
foreclosed property “as-is,” “as repaired,” or as a “quick sale”
• Explain the importance of changing market conditions
• Discuss the 1004MC Form
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Key Terms
• “As-Is” Value The value of
the property in its current condition.
• “As Repaired” Value An estimate of what the property will sell for if it is rehabilitated to a condition competitive in the marketplace for homes of the subject’s age and type.
• Cash For Keys A process where the agent is authorized by the lender to offer a set amount of money to the occupants of the house, providing they leave (and take their belongings with them) by a certain date.
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Key Terms
• Debtor A person or other entity who owes money to another.
• Deed In Lieu of Foreclosure Process where the former owner voluntarily deeds the property back to the mortgagee, moves out, and gives them the keys. Also called a Friendly Foreclosure.
• Forecasting Predicting the price a property will sell for with time restraints.
• Foreclosure The legal process whereby the lender, who is not being paid, reclaims the property, which is security for the loan. The process varies from state to state.
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Key Terms
• Liquidation Value The value if the asset is sold within 30 days.
• Principle of Substitution States that a knowledgeable purchaser will pay no more for one property than the cost of obtaining a substitute or comparable property.
• Quick Sale Any sale that occurs in a less than typical marketing time for a property of the subject’s type.
• REO (Real Estate Owned) A property that has gone through the foreclosure process and is owned either by the original lender, a private mortgage insurance (PMI) company, or an intermediary.
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What Is Foreclosure?
• The process varies from state to state
• At some point (in the absence of redemption) the lender obtains legal title to the property and:
– Evicts occupants from the property
– Secures property (re-keying it or boarding it up)
– “Trashes out” the property
– Has the property appraised
– Lists and sells the property
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REO
• What a property becomes once it has gone through foreclosure and is owned by the original lender, PMI company, or an intermediary
• These properties are a liability for banks
• Sometimes a property becomes REO due to friendly foreclosure
– AKA a deed in lieu of foreclosure
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Cash for Keys vs. Physical Eviction
Cash for Keys• Occupants offered set
amount of money providing they vacate (and take their stuff with them) by a certain date
• Occupants could use money as a security deposit or first month’s rent for housing elsewhere
Physical Eviction• Often done by the
sheriff• Different laws apply to
protect belongings of former occupants
• Agents may have to arrange for moving & storage
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Appraising and Otherwise Valuing the Property
• CMAs or BPOs
• Full appraisals:
– “As-Is” value
– “As Repaired” value
– “Quick sale” value
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“As-Is” Value
• The value of the property in its current condition
• Lenders expect to do a trash out (cost not considered a repair)
• Low-priced properties typically attract:
– First-time buyers
– Investors
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Investor’s Formula
• Resale value
• Less repair costs
• Less entrepreneurial profit
• Less holding/closing costs
• Equals acquisition cost
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Determining a Discount
• If appraisers are able to derive a meaningful market discount factor or percentage, this will often work across price ranges
• Adjust for condition
• Determine appropriate discount that a non-investor buyer would make
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“As Repaired”
• Estimate of what the property will sell for with repairs
• Appraiser will need to address:– Mechanical systems– Infestation and related damage– Exterior (curb appeal)– Interior– Roof
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Determining Costs
• Estimate costs for repairs• Lenders may want correlating increase in value• Sources for remodeling estimates:
– Local contractor– Building supply store employees– Published cost services
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Quick Sale Value
• Similar to Employee Relocation Company (ERC) work
• Anticipate sale price within a pre-determined time frame (often less than the typical DOM)
• The value will not be market value• Liquidation value is more extreme than an
ERC or quick sale appraisal• Keep in mind the principle of substitution
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Competing Listings
• Lenders will most likely want to see at least three competing listings
• Appraisers should verify data– At a minimum, Fannie Mae requires an
exterior inspection• “Which house would a typical buyer purchase?”• Make appropriate adjustments• Utilize MLS data
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REO, Foreclosure, and USPAP
• A client cannot instruct an appraiser regarding how to consider data if following the instruction would lead to results that are not credible
• USPAP requires appraiser to consider all relevant market data available to prepare a credible report
• In some markets, REO listings are the market• Valuing REO or pre-foreclosure properties can
be a challenge due to extra work and shifting markets
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Chapter Quiz
1. Which statement regarding “friendly foreclosure” is TRUE?
a. It is also known as a deed in lieu of foreclosure.
b. It is also known as a quick sale.
c. It is what happens in non-recourse states.
d. No foreclosure is friendly.
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Chapter Quiz
2. For a lender, REO isa. best sold “as repaired.”
b. a pre-foreclosure listing.
c. “real estate owned,” and an asset on the balance sheet.
d. “real estate owned,” and a liability on the balance sheet.
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Chapter Quiz
3. A lender instructs an agent to go to an occupied house and offer the occupants (who are behind on payments and will soon be facing foreclosure) a set amount if they will vacate the property. This is known as
a. cash for keys.b. eviction.c. foreclosure.d. a trash out.
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Chapter Quiz
4. Which is NOT a duty of a real estate agent handling an REO listing?
a. arranging for lawn mowing and snow shoveling
b. arranging for re-keying and securing the property
c. checking the property periodically to make certain no one has broken in
d. completing an appraisal
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Chapter Quiz
5. The “as-is” value of a property reflects the value of the property
a. after minor repairs.
b. in its current condition.
c. in the future.
d. in the past.
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Chapter Quiz
6. A typical characteristic of many owners of REO listings is that they prefer
a. “as-is,” cash sales.
b. sales that require financing on the part of the buyer.
c. selling the property “as repaired.”
d. to hold on to the property as long as possible.
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Chapter Quiz
7. An investor generally determines the offering price for an REO listing by
a. computing the cost per square foot of new construction.
b. having an appraisal done.
c. performing a discount cash flow analysis.
d. starting at the end (e.g., what he thinks the property would be worth fixed up, and from there deducing costs, profit, etc.).
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Chapter Quiz
8. If sufficient market data is available, a good measurement for an appraiser to develop is the
a. average net return to investors in REO properties.
b. average percent by which buyers discount foreclosures and REOs in the market.
c. average price per square foot for remodeling costs.
d. internal rate of return to investors.
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Chapter Quiz
9. Which would likely NOT be included in “as repaired” value?
a. refurbishing of mechanical systems
b. treatment for an insect infestation
c. total kitchen remodeling
d. trimming of shrubbery, grass, and plants to create “curb appeal”
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Chapter Quiz
10.The Fannie Mae 1004MC Form requires the appraiser to consider only homes
a. in foreclosure or that are REO.
b. in the pool of listings the typical purchaser would consider.
c. in the subject’s immediate neighborhood.
d. the lender suggests.
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Chapter 5
Determining a Value Range
of a Foreclosed Property
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Objectives
Upon completion of this chapter, the participant will be able to:• Summarize the valuation process that an
appraiser goes through• Identify the importance of data analysis• Construct a value range for a foreclosed
subject property• Calculate liquidation value• Calculate a discount for market conditions
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Your Assignment
To perform an REO/foreclosure appraisal:
The subject property’s address is 670 Elm St. It is a 2-story, single-family home located in a typical borough (neighborhood) in your county.
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Your Research
• Homes in the subject’s neighborhood typically sell for $180,000 to $210,000
• Usually have six to seven rooms, three bedrooms, and one to one and a half baths
• The average size is about 1,600 square feet, with most homes somewhere in the 1,400 to 1,800 square foot range
• Most of the housing is approximately 80 years old.
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MLS Findings—Current Listings 5
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MLS Findings—Current Listings 5
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Independent Findings of Current Listings 5
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MLS Findings of Sold Listings 5
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Country Records Search for Sold Properties 5
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Subject Property Inspection
• In many respects, is a ”typical” foreclosure:– Somewhat beat-up (fists through a few
walls, all floor coverings will need to be replaced)
– Clean out is complete– Mechanical systems are not on– Your inspection also shows that the subject
is 1,700 sq. ft. with a 6/3/1 configuration.
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Analyze the Data
1. What information do you consider to be most reliable? Why?
2. What information do you consider to be least reliable? Why?
3. What data may you decide not to use? Why?
4. Can you obtain additional information? If so, how and why?
5. Based on the information gathered from the market, what range of value would you place on the subject property?
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Analyze the Data
6. What are the market trends?
7. What is the absorption rate?
8. What correlation are you seeing between time frame and sale price?
9. What correlation are you seeing between time frame and days on market?
10. What is the Listing Price/Sale Price ratio?
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Earliest to Most Currently Listed 5
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Determine Absorption Rate
• Currently 11 available listings in this neighborhood for sale.
• 7 sales from the entire previous year• Excess supply of one and one half years:
7 ÷ 12 = 0.5833 houses per month
11 ÷ 0.5833 = 18.858 months’ supply• This fact alone is more important than how the
house looks inside!
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Highest to Lowest Priced 5
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Lowest Priced Properties 5
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Most DOM to Least DOM 5
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Definite Comparables
• The LP/SP ratio is lengthening• That leaves 530 Locust St. and 442 Pine St. as
definite comparables– Most appraisers would also pick 668 Elm
St. because it is only 3 months old and is next door to the subject
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Range of Value
• $154,900 to $185,000• Look at:
– 807 Ash St., which occurred seven months ago– 530 Locust St., which is 2 months old.
• Both were sold ”As-Is”• $10,000 difference in value• Strongly suggests a sale price at the lower end of
the range
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Market Trends
• Market is going downward• There is an oversupply• More concessions are seen• LP/SP ratio is changing.• Note: Again, the range is large. In this
circumstance, as this market appears to be continuing to decline, the lower end of the range is suggested ($150,000s)
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Conclusion?
• Our listing range goes from $144,900 to $185,000
• Market is declining, and client is looking at potential foreclosure
• Lower end of the range for a quick sale– $144,000 to $150,000 as an asking price
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Conclusion
• Sale prices range from $154,900 to $185,000. – If we don’t list over $150,000, chances are quite
slim that, in this market, we will get competing offers over the asking price
• Property should sell quickly for $148,000 to $150,000
• Remember:– Over 18-month supply of housing– Property must be priced very competitively in order
to sell in a reasonable amount of time
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Chapter Five
• What did you learn?
• Will this exercise help you to price or appraise property better in the future?
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Chapter 6
“As-Is” or “As Repaired”
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Objectives
Upon completion of this chapter, the participant will be able to:• Compare physical, functional, and economic
obsolescence• Describe how an obsolescence may be either
curable or incurable• Explain the difference between “as-is” and
“as repaired” values and in which situations each would be applicable
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Key Terms
• Curable Repairable or able to be fixed; something that can be fixed at a reasonable cost, with the value added to the property being more than the cost of the repair. Compare to: Incurable.
• Estate Property owned by a person who is now deceased.
• Executor/Executrix A person appointed in a will to carry out the provisions of the will. If a man is appointed, he is called an executor; if a woman is appointed, she is called an executrix.
• External Obsolescence Refers to the situation when something outside the control of a property makes it less desirable. External obsolescence is always incurable, as the location of the property cannot be changed. Also called: External Depreciation (when doing a cost approach to value).
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Key Terms
• Functional Obsolescence When a building is less desirable because of something inherent in the design of the structure. Also called: Functional Depreciation (when doing a cost approach to value).
• Incurable Something that cannot be fixed at a reasonable cost, with the cost of the repair being more than the value added to a property. Compare to: Curable.
• Physical Depreciation A loss in value from general eroding of the physical structure or from deferred maintenance.
• Short Sale A lender-approved sale in which the proceeds are not sufficient to cover the mortgage amount(s). Typically done to avoid foreclosure and its inherent costs.
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Pre-Foreclosure Decisions
• The timeline and decisions made pre-foreclosure have an effect on the condition of the property
• Some lenders opt to forego foreclosure and accept a short sale
• Foreclosure costs estimated to be around $60,000 per house
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The Neighborhood
• Property location provides insight as to how to approach and conduct the appraisal
• Questions to ask:– What is the neighborhood’s composition?– What do typical homes in the neighborhood
look like?– How old/big are they?– What is their configuration?– Who buys them?
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Condition
• Condition of foreclosed properties varies
• Is the damage physical depreciation or
functional obsolescence?
• Is the damage curable or incurable?
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Physical Depreciation
• Loss in value due:
– Deferred maintenance
– General eroding of the physical structure
– Wear and tear
– Abuse
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Functional Obsolescence
• May also be called functional depreciation
• Property may be in “good shape” but is not
functional:
– A 4-bedroom home with only 1 bathroom
– Outdated kitchens and baths that do not
meet functional standards or requirements
of today’s market
– Captive rooms
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Curable vs. Incurable
Curable
• Cost to make repairs is justified by an increase in value
Incurable
• Cost to make repairs will not be justified by an increase in value
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External Obsolescence
• May also be called external depreciation• When something outside the control of a
property makes it less desirable– Poor location– Undesirable neighboring properties (e.g.,
chemical plant, junk yard, etc.)• Always incurable
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Market Conditions
• The market is context for value
• Appraisers need to be aware of anything that could cause and improvement or decline in the market
• “Is a foreclosure an unusual occurrence in this neighborhood, or is just one of many?”
• In markets where foreclosures dominate, so do investors
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Buyers
Owner/Occupiers• Act on emotion• Think they will never
sell the house• Not experienced
when it comes to calculating repair costs (often over-estimate)
Investors• Make decisions
based on financial sense
• Expects to re-sell at some point
• Do the math for repair costs and make offers accordingly
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Cost Experts
• Published cost services
• Local contractors
• Local builders
• Local home inspectors
• Online products
• Webinars
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Cost of Lender’s Decision
• Ultimately lender’s choice as to how to proceed with each property
• Each decision will cost money—question is, how much
– Short Sale– Foreclosure
• Selling “As-Is”• Selling “As Repaired”
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Chapter Quiz
1. The value of a property that sits vacant for any length of time will generally:
a. decline.
b. double.
c. increase.
d. stay the same.
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Chapter Quiz
2. Which is an example of functional obsolescence?
a. broken stove
b. no back patio
c. no closet space
d. old carpet
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Chapter Quiz
3. Which is an example of physical depreciation?
a. bedroom accessible only through another bedroom
b. no closet space
c. old shingled roof
d. second floor with two bedrooms but no bathroom
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Chapter Quiz
4. When purchasing a property, investors are more likely than owner/occupiers to
a. get emotional.
b. leave their emotions out of the process.
c. not plan on reselling the property in the future.
d. overestimate the cost of repairs.
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Chapter Quiz
5. A foreclosed property needs $60,000 in repairs to return it to a competitive, marketable condition. When complete, the market value will be $40,000 to $45,000. An appraiser would characterize this as
a. curable functional obsolescence.
b. curable physical depreciation.
c. incurable external obsolescence.
d. incurable physical depreciation.
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Chapter Quiz
6. A foreclosed property suffers from poor design and layout. It can be cured by rearranging the interior walls, building a new staircase, and relocating the plumbing; for a total cost of $50,000. When complete, the house will be worth $30,000 to $35,000. An appraiser would characterize this as
a. curable external obsolescence.b. curable physical depreciation.c. Incurable functional obsolescence.d. Incurable physical depreciation.
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Chapter Quiz
7. When a lender is asked to accommodate the sale of a property involving an offer which is less than the amount owed against it, it is known as
a. deficit spending.b. a friendly foreclosure.c. a functional obsolescence.d. a short sale.
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Chapter Quiz
8. The average cost of a foreclosure in the United States is said to be
a. $5,000-$15,000.
b. $20,000-$30,000.
c. $50,000-$60,000.
d. $150,000-$160,000.
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Chapter Quiz
9. Which group will typically overestimate the cost to cure or repair items?
a. investors
b. lenders
c. owner/occupiers
d. real estate appraisers
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Chapter Quiz
10.Which is NOT a reliable source for real estate professionals to use when estimating the cost of rehab or repairs?
a. home inspectors
b. lenders
c. local contractors
d. Published cost services
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Chapter 7
Form 1004MC
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Objectives
Upon completion of this chapter, the participant will be able to:• Describe the purpose of the 1004MC Form• Define a “pool” of properties• Identify key terminology relating to the 1004MC Form• Recall the importance of analyzing the market for
clarity• Demonstrate how to fill out the form correctly• Discuss the importance of writing comments in an
appraisal report
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Key Terms
• Absorption Rate The number of properties sold (“absorbed”) by the market within a specific time frame.
• Appraisal Review The act or process of developing and communicating an opinion about the quality of another appraiser’s work that was performed as part of an appraisal, appraisal review, or appraisal consulting assignment.
• Pool As used by Fannie Mae in the instructions to appraisers for completion of the 1004MC Form, the pool represents “properties that the borrower would consider for purchase as well as the subject.”
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Key Terms
• Reserves for Replacement An amount of money set aside for future replacement of major items, such as the roof or heating system. Also called Reserves.
• Universe In statistical analysis, it is the total number of units in the analysis (the fewer the number of units, the less reliable the data).
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Form 1004MC
• Required by Fannie Mae for loans and appraisals delivered after April 1, 2009
• Also required by:– Freddie Mac– VA– FHA
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Why Did Fannie Mae Develop This Form?
Q: “What is the purpose of the Market Conditions Addendum?”
A: “Due to the complexity of the current real estate market, Fannie Mae created the Market Conditions Addendum to capture additional information to enhance the transparency of the market trends and conditions conclusions made by the appraiser.”
• March 2009 update to Fannie Mae’s Appraisal and Property Report Policies and Forms FAQs
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USPAP as it applies to Form 1004MC
Standards Rule 1-4:
“In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results.”
Standards Rule 2-2 (b) (viii):
“[a summary report must] summarize the information analyzed, the appraisal methods and techniques employed, and the reasoning that supports the analyses, opinions, and conclusions. . .”
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Analyzing a Market
• Supply and Demand
• Listings taken
• Listings sold
• Listing supply
• DOM
• Absorption Rate
• Seller Concessions
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Issues for Appraisers
• Some deeds may be recorded as “$1.00”
• Thin comparables
• Atypical properties
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The Pool
• The appraiser “must include the comparable data that reflects the total pool of comparable properties from which a buyer may select a property in order to analyze the sales activity and the local housing supply”
• “Neighborhood” and “Pool” are different from each other
• There are markets within markets
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Definitions
• Median: Number in the middle
• Mean: Average number
• Mode: Most frequently observed number
• Absorption Rate: the number of properties sold (“absorbed”) by the market within a specific time frame
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The Form’s Time Periods
• The Form 1004MC asks for statistics in three specific time periods:
– Prior 7-12 months
– Prior 4-6 months
– Current-3 months
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Statistically Meaningful
• The universe of sales affects the data’s reliability
• Any shortcomings in the data should be addressed in the comments on the report
• If data is extremely thin, the appraiser needs too indicate this with an explanation
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Anomalies in the Market
• If an appraiser discovers a property that would typically be in the pool but is not, she should comment on this anomaly
For Example: House may match all criteria except for its significantly higher list price
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Appraisal Reviews
• Appraisal reports are reviewed for quality, errors, and content
• “All comparables are sales, but not all sales are comparables”
• An appraiser must always report what he sees
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Sample Comment on an Anomaly in the Market
• “A listing analyzed, but not included in the grouping, is one which meets all the criteria for consideration by a buyer except that the asking price is significantly higher than competing listings, and in my opinion, the typical buyer would not consider this as competitive.”
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Sample Comment on an Anomaly in the Market
• “A listing which meets all the criteria that the typical buyer would be looking for was not included in the statistical analysis, as it is offered for sale ‘as-is’ at a very low price. The condition, per listing broker, will make conventional financing difficult if not impossible; because of this, my opinion is that the average buyer would not consider this listing.”
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Sample Comments on a Stable Market
• “Based on the trends shown by the comparable sold listings, derived from the data in the neighborhood that is required by Fannie Mae’s Scope of Work and, therefore, limited to ‘properties that compete with the subject property,’ the appraiser’s opinion is that the overall trend is stable.”
• “I did not observe any deviations in the market data, such as, but not limited to: A seasonal market, excess of new construction, or excess of foreclosures.”
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Sample Comment on a Declining Market Caused By REO and
Foreclosures
• I have observed a trend in the market, based on the data, of an increase in REO listings and foreclosures, increasing the supply. The absorption rate is declining and the supply is increasing. Prices are declining, and owners are competing with REO listings where the prices are low; in this market, we are observing investor activity, in response to the lower sale prices and the high inventory.”
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Sample Comment on a Declining Market Caused By REO and
Foreclosures
• “Based on the trends shown by the comparable sold listings, derived from the data in the neighborhood that is required by Fannie Mae’s Scope of Work and, therefore, limited to ‘properties that compete with the subject property,’ the appraiser’s opinion is that the overall trend is declining.”
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Sample Comment on a Declining Market Caused By REO and
Foreclosures
• “During the past period of current-to-3 months, we have not only had an increase in the number of available listings, the percentage of those listings which are REO listings has increased from less than 10% to over 35%. This is, in my opinion, is causing the market to become less stable, as prices are being depressed by REO owners and investors are being drawn into the market. The typical purchaser would be an owner/occupier who would get a mortgage; agents are reporting that many sales are being made to investors, who are willing to accept the property ‘as-is’ and pay cash. This all has an effect on the market, which is creating instability. Buyers other than investors appear hesitant to buy; sellers who are not REO owners are frustrated by the competition of REO listings at ‘bargain basement’ prices.”
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Sample Comment on an Increasing Market
• “Based on the trends shown by the comparable sold listings, derived from the data in the neighborhood that is required by Fannie Mae’s Scope of Work and, therefore, limited to ‘properties that compete with the subject property,’ the appraiser’s opinion is that the overall trend is increasing.”
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Sample Comment on an Increasing Market
• “We have observed an increase in number of sales and sale prices, as demonstrated by the data, combined with a decrease in the number of listings available, as well as the days on market. Agents are reporting multiple offers above listing price, leading us to conclude this market is increasing.”
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Sample Comment on Seasonal Activity
• “In this market, we generally observe an increase in listings during the period from March through May, and a corresponding increase in closings in June through August. Therefore, the increase in listings in the most recent period is considered to be historically normal, and not an indication of a change in the market.”
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Sample Comments for a Market Not Influenced by REO or Foreclosures
• “There have been no REO or foreclosure sales in the neighborhood.”
• “There have been three foreclosure or REO sales within the past 12 months in the neighborhood considered comparable to the subject. However, none are available for sale at this time; so no effect on value is seen for a property offered for sale now.”
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Sample Comment for a Market with a Trend for More Foreclosures
• “There have been several foreclosure and REO sales in the neighborhood within the past 12 months. Currently, six listings are already REO, and several other properties in the neighborhood are slated for foreclosure, as per published records. As this is public information, this will affect the value of any comparable property offered for sale, including the subject.”
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Condos and Co-ops
• The final section of the 1004MC Form deals with these projects
• Appraisers must complete this part of the form if applicable
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Chapter Quiz
1. What is the effective date for the use of the Fannie Mae 1004MC Form?
a. November 30, 2008
b. January 1, 2009
c. April 1, 2009
d. May 1, 2009
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Chapter Quiz
2. The Fannie Mae 1004MC Form is NOT required for use in
a. FHA loans.
b. loans to be sold on the secondary market.
c. private investor loans.
d. VA loans.
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Chapter Quiz
3. The Fannie Mae 1004MC Form is NOT required for use with
a. condominiums.
b. single-family homes.
c. small commercial properties.
d. two- to four-family units.
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Chapter Quiz
4. The Fannie Mae 1004MC Forma. relates back to Jurisdictional Exception in
USPAP.b. relates back to Supplemental Standards in
USPAP.c. requires more analysis than required in the
past by USPAP and Fannie Mae.d. requires the same analysis as required in
the past by USPAP and Fannie Mae, with more reporting required.
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Chapter Quiz
5. The pool of comparable properties the appraiser must analyze for the 1004MC Form consists of
a. all of the properties in the MLS.b. listings and sales which represent the pool
of comparable properties the buyer would consider, as well as the subject property.
c. only listings and sales identical to the subject property.
d. only listings and sales in the subject property’s immediate neighborhood.
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Chapter Quiz
6. Which is NOT a time frame used on the 1004MC Form?
a. current-3 months
b. prior 3-6 months
c. prior 7-12 months
d. prior 13-16 months
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Chapter Quiz
7. The absorption rate indicated on the 1004MC Form is
a. the absorption rate for the pool of comparable properties that represents listings which would compete with the subject.
b. an absorption rate for the subject property’s neighborhood only.
c. a county-wide absorption rate.
d. an overall absorption rate for the entire market.
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Chapter Quiz
8. If an increase in the number of sales and sale prices is observed, combined with a decrease in the number of listings available and days on market, and agents are reporting multiple offers above listing price, appraisers can reasonably conclude that the market it is
a. declining.
b. increasing.
c. stable.
d. unable to be determined.
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Chapter Quiz
9. Under new Fannie Mae guidelines, what percentage of the units in a condo project must be sold or pre-sold (under contract)?
a. 25%
b. 51%
c. 70%
d. 100%
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Chapter Quiz
10.In order for the project to meet Fannie Mae guidelines, a homeowners association must have ____ budgeted for reserves.
a. 10%
b. 15%
c. 20%
d. 25%
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Chapter 8
Future Challenges for Appraisers
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Objectives
Upon completion of this chapter, the participant will be able to:
• Identify challenges that appraisers face.• Describe the Uniform Appraisal Dataset.
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Key Terms
• Automated Valuation Model (AVM) Employs mathematical formulas (including multiple linear regression) to view the universe of properties and sales, make adjustments, and value for tax purposes.
• Broker Price Opinion (BPO) An estimate of value from a real estate agent, often used when a property is pre-foreclosure, or even when the loan is being sold. A CMA, or Competitive Market Analysis, is the equivalent of a BPO.
• Government Sponsored Enterprise (GSE) Privately held corporations with public purposes created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the economy. Members of these sectors include students, farmers, and homeowners. Two prominent GSEs are Fannie Mae and Freddie Mac.
• Uniform Appraisal Dataset (UAD) A standardization of appraisal data, which defines all fields required for an appraisal submission for specific appraisal forms and standardizes definitions and responses for a key subset of fields to enhance data quality and promote consistency.
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Future Challenges
• Appraiser Independence
• AMCs
• AVMs & BPOs
• UAD
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Appraiser Independence
• Appraisers have long wanted some kind of legislation to protect them from pressure from lenders and others.
• Examples of issues that challenge an appraiser’s independence include:
Targeting a predetermined value Instructions to ignore defects and external influencesMisrepresent property conditionOther stipulations or instructions that could cause the
resulting report to be fraudulent
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Dodd-Frank Act and Appraiser Independence
• The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 addresses issues about appraiser independence.
• Provides that it is unlawful for lenders for transactions secured by a principal dwelling to engage in any act or practice that violates appraiser independence.
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Dodd-Frank Act and Appraiser Independence
• No person with an interest in the transaction pressures an appraiser, or attempts to pressure or influence an appraiser to cause the appraised value to be based on any other factor other than the independent judgment of the appraiser.
• Withholding payment, or threatening to withhold timely payment for an appraisal service is unlawful.
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Dodd-Frank Act and Appraiser Independence
• A person with an interest in a transaction may ask an appraiser to:
Consider additional information or comparable data.Provide further detail, substantiation, or explanation.Correct errors in the appraisal report.
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Appraiser Independence Requirements (AIR)
• In 2010, Fannie Mae, in conjunction with the Federal
Housing Finance Agency (FHFA), Freddie Mac, and
other industry participants, rolled out the Appraiser
Independence Requirements (AIR) to address
appraiser independence.
• AIR has replaced the Home Valuation Code of Conduct
(HVCC) but retains the core principles of the HVCC.
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Appraiser Independence Requirements (AIR)
• Key provisions include:
At a minimum, an appraiser must be licensed or certified by the state where the property to be appraised is located and cannot be influenced by the lender.
Lender must not secure a second or subsequent appraisal in connection with a mortgage transaction, except under certain conditions.
Lender must ensure the borrower receives a copy of the appraisal report within three (3) days of closing.
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Appraiser Independence Requirements (AIR)
• The lender or their designee is responsible for choosing and compensating the appraiser.
• A lender’s sales/mortgage production functions must be separate from appraisal functions.
• Any employee of the lender or an affiliated appraisal company must be qualified in the area of real estate appraisals.
• AIR also addresses the use of appraisal reports by in-house appraisers or affiliated appraisers, transfer of appraisals, referrals of appraisal misconduct reports, and compliance.
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Appraisal Management Companies (AMCs)
• An appraisal management company (AMC) is a company that, for a fee, finds an appraiser to do the appraisal, assigns it to him, has the appraisal report sent to the AMC, and then delivers the appraisal report to the lender.
• AMCs are brokers of appraisal and other valuation services.
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Appraisal Management Companies (AMCs)
Dodd-Frank Act, defines an AMC as an “external third party” that oversees a network or panel of more than 15 certified or licensed appraisers in a state, or 25 or more nationally within a given year to:
• Recruit, select, and retain appraisers.• Contract appraisers to perform appraisal assignments.• Manage the entire process of having an appraisal
performed.
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Appraisal Management Companies (AMCs)
• Some states propose regulation for AMCs.
• These states want AMCs to be regulated and licensed and most want provisions that deny any person whose professional appraiser’s license was revoked or suspended from becoming a principal or employee in an AMC.
• Recently, some AMCs have are requiring residential appraisers to sign agreements that make the appraisers responsible for the AMCs’ actions, which could have a detrimental effect on an appraiser’s reputation and business.
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New Sources of Appraisal Business
• Estates
• Divorces
• Bankruptcy
• Valuation of partial interests
• Pre-appraisal for sellers
• Valuation of gas and oil leases
• Valuation of conservation easements
• Relocation appraisal work
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Appraiser Fees
• Appraiser fees are a significant concern for today’s appraiser.
• The Dodd-Frank Act addresses appraiser fees by providing:
“Lenders and their agents shall compensate fee appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.”
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Automated Valuation Model (AVM)
• Defined in the Dodd-Frank Act, means any computerized model used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer’s principal dwelling.
• USPAP AO-18 addresses AVM’s and that appraisers must be competent to understand and use the AVM properly; that the AVM and its data are appropriate for the assignment; that the output of the AVM is credible; and finally that the AVM output is sufficiently reliable for the assignment.
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Broker Price Opinion (BPO)
• Dodd-Frank Act defines a BPO as an estimate prepared by a real estate broker, agent, or sales person that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property’s condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model.
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Uniform Appraisal Dataset (UAD)
• According to Fannie Mae, the Uniform Appraisal Dataset defines all fields required for an appraisal submission for specific appraisal forms and standardizes definitions and responses for a key subset of fields to enhance data quality and promote consistency.
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Uniform Appraisal Dataset (UAD)
• The purpose of the UAD is to improve the quality and consistency of appraisal data on loans delivered to Government Sponsored Enterprises (GSEs).
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Uniform Appraisal Dataset (UAD)
• Four specific appraisal forms must comply with the UAD:Uniform Residential Appraisal Report (URAR) –
1004/70 Individual Condominium Unit Appraisal Report –
1073/465Exterior Only Inspection Residential Appraisal Report
– 2055Exterior-Only Inspection Individual Condominium Unit
Appraisal Report – 1075/466
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Uniform Appraisal Dataset (UAD)
• The benefits of using UAD data fields include:Creating efficiency and consistency in appraisal
reviews Improving data integrity related to home valuesStrengthening the loan underwriting process by
promoting a more consistent view and understanding of appraisal data
Supporting processes to manage and mitigate valuation risk
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Chapter Quiz
1. A computerized model used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer’s principle dwelling is a(n)a. AMC.
b. AVM.
c. BPO.
d. CMA.
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Chapter Quiz
2. Vicki’s job with an AMC requires her to work with appraisers on assignments. Vicki may ask appraisers to perform any of these tasks EXCEPT toa. consider additional property information.
b. correct errors in an appraisal report.
c. encourage a targeted value to facilitate the making of the transaction.
d. provide further explanation for a value conclusion.
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Chapter Quiz
3. Which is NOT a task that an AMC would perform? a. contract with licensed and certified appraisers to
perform appraisal assignments
b. manage the process of having an appraisal performed
c. process real estate loan transactions
d. recruit, select, and retain appraisers
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Chapter Quiz
4. Which statement about the Appraiser Independence Requirements is FALSE?
a. At a minimum, an appraiser must be licensed or certified by the state where the property to be appraised is located.
b. The seller [lender] must ensure the borrower receives a copy of the appraisal report within five (5) days of closing.
c. A seller [lender] must not secure a second or subsequent appraisal in connection with a mortgage transaction, except under certain conditions.
d. The seller [lender] or the seller’s designee is responsible for choosing and compensating the appraiser.
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Chapter Quiz
5. In an effort to protect appraisers’ fees, the Dodd-Frank Act requires that lenders and their agents compensate fee appraisers at a rate that is ________ for appraisal services performed in the market area of the property being appraised.a. contracted and invoiced
b. customary and reasonable
c. fair and practical
d. neither too low nor too high
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Chapter Quiz
6. Lenders often ask appraisers to review and comment on BPOs. A BPO is an acronym fora. bank pricing opinion.
b. bank purchase option.
c. broker price opinion.
d. brokerage price option.
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Chapter Quiz
7. Third Federal Bank uses BPOs to determine the probable selling price of properties. Which statement regarding BPOs is TRUE?a. Appraisers often comment that BPOs are faulty
when they prepare appraisals at the same time.
b. Appraisers typically prepare BPOs for lenders.
c. A BPO is a more accurate reflection of true property value than an appraisal.
d. A BPO may be used as the primary basis to determine a property’s value for a mortgage loan.
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Chapter Quiz
8. Which is NOT one of the reasons for development of the Uniform Mortgage Data Program (UMDP)?a. capture consistent data
b. create preliminary appraisals
c. drive improved loan quality
d. manage risk effectively
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Chapter Quiz
9. At the direction of the Federal Housing Finance Agency, Fannie Mae and Freddie Mac developed the Uniform Appraisal Dataset (UAD). The purpose of the UAD is to
a. create a method for mass appraising, most frequently at the county level to develop assessed values for real estate.
b. determine the collateral worth of a mortgage secured by a consumer’s principal dwelling.
c. improve the quality and consistency of appraisal data on loans delivered to government sponsored enterprises.
d. provide a varying level of detail about a property’s condition, market, and neighborhood.
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Chapter Quiz
10.An appraisal report must be completed in compliance with the Uniform Appraisal Dataset (UAD) for conventional mortgage loans sold to Fannie Mae or Freddie Mac for appraisals with an effective date (date of inspection) on or aftera. August 1, 2011.
b. September 1, 2011.
c. January 1, 2012.
d. March 1, 2012.
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