Fannie Mae has established new guidelines for appraisals on properties in low-population areas. The company also clarified its policy on using appraisal management companies.
Fannie says its products are designed to provide financing for properties in all market segments. But it recognizes the unique challenges faced by lenders in less populated areas.
Appraisers can find it difficult to evaluate properties that have unique building types. Substantial distances between properties can also hinder the appraisal process, as can large lot sizes that might include farmland and non-public sources for utilities.
The Washington, D.C.-based company said that low-density areas with no homogeneity require appraisers who have the knowledge, expertise and experience to perform appraisals in rural markets.
“Qualified appraisers who understand the characteristics of these markets are key to ensuring compliance with Fannie Mae property eligibility and appraisal requirements,” the letter said.
Fannie is requiring lenders to ensure appraisers have the requisite knowledge, expertise and experience for the specific assignment type and market area, according to Lender Letter LL-2014-02.
Fannie issued the letter in response to a directive from its regulator, the Federal Housing Finance Agency, to clarify some of its property and appraisal requirements for homes in small towns and rural areas.
Small lenders that don’t have sufficient staff to maintain separation between the production and appraisal processes often utilize AMCs to comply with Fannie’s requirements.
The letter indicated that some lenders have the misconception that AMC’s are mandatory under Fannie’s Appraiser Independence Requirements.
“Lenders are not required to use an AMC or any other third-party vendor to order appraisals,” the letter stated.
In addition to AMCs, Fannie Mae sellers can utilize in-house appraisers whose function is independent of loan production staff influence and interference.
Sellers can also hire independent fee appraisers or engage third-party vendors.
Fannie’s independence requirements provide an exception for some small lenders that can “demonstrate prudent safeguards and processes to isolate its collateral evaluation process from influence or interference from its mortgage production process.”
Determining eligibility on mixed-use properties, homes with mixed zoning, or unusual properties that are common in rural areas and small towns can be difficult.
Fannie said it will purchase loans that finance properties in small towns and rural areas as long as they are primarily residential in nature and use, and all other eligibility requirements and conditions have been met.
Unique properties such as log homes, geodesic dome homes and berm homes are acceptable collateral.
“Fannie Mae will not purchase mortgages on properties that are not primarily residential in nature including, but not limited to, vacant land or property primarily used for agricultural or commercial purposes,” the letter said.
When there are a lack of comparable sales, more adjustments might be necessary to account for differences in location, site size, age, condition — among other things.
“The adjustments may exceed the generally accepted practice that any variation from the comparable sale price be limited to 15 percent net and 25 percent gross adjustments,” according to the letter. “This is often unavoidable given the limited availability and suitability of comparable data. Whenever possible, appraisers should attempt to balance the analysis by isolating dominant features within the subject property and select sales that compare to those features.”
An example was cited for a property with a large site that should be compared to comparable sales with large sites even though the sale may be distant, dated or dissimilar.
When appraisers are forced to find comparable sales in distant neighboring towns, they need to provide an appropriate amount of relevant narrative discussion. The narrative should cover current market conditions and available market data. It should also include an explanation of the analysis and conclusions contained in the appraisal.
“Appraisers that possess market knowledge and experience in more rural geographic areas will generally produce credible results that will enable lenders to make appropriate collateral evaluations and underwriting decisions,” Fannie concluded.
