An Appraisal Continuing Education Course
Welcome to
{Organization}
Foreclosures &
Short Sales:
Dilemmas and
Solutions
1
Chapter 1
How Did We Get Here?
2
Objectives
1
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
3
Key Terms
• Equity Stripping
To continually urge
homeowners to
refinance existing
debt, usually at no
advantage to the
borrower
1
• 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
4
Key Terms
• Tranches The
pieces of a loan
• Under Water When
a borrower owes
more on their house
than it is worth
1
• 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
5
Contributors to the
Real Estate Crisis
•
•
•
•
•
1
Inflated home values
Risky loans
Refinancing
Yield spread premiums
Fraud
6
Inflated Home Values
1
• 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
7
Risky Loans
•
•
•
•
•
1
ARMs
Exploding ARMs
Loans with Prepayment Penalties
100% or 125% Loans
NINJA Loans (No Income, No Job, no Assets)
8
Risky Loans
1
(continued)
In the mortgage market, loans are classified as
one of the following:
• Prime
• Alt-A
• Sub-prime
9
Prime Loans
1
Given to borrowers with:
• Excellent credit history
• Sufficient assets
• Good debt to income ratio (very low)
10
Alt-A Loans
1
• 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
11
Sub-Prime Loans
1
• 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
12
Refinancing
1
• 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
13
Yield Spread Premiums
1
• 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
14
Fraud
1
• FBI estimates annual losses due to mortgage
fraud between $4 and $6 billion per year
• Fraud occurs for two reasons:
1. Property
2. Profit
15
Fraud Characteristics
1
•
•
•
•
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”
16
Lending Before
the Bubble Burst
1
• 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 commissionbased income
17
Changes on Wall Street
1
• 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
18
Underwriters: Flawed
Assumptions and Assertions 1
• 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
19
General Timeline of Crisis
1
• 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 subprime 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
20
Aftermath of Bubble Bursting 1
• 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
21
Aftermath for Lenders
and Appraisers
1
• 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
22
Chapter Quiz
1
1. A yield spread premium represents the
a. 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
23
Chapter Quiz
1
2. CDO stands for
a.
b.
c.
d.
Collateralized Debt Obligation.
Collateralized Disclosure Option.
Credit Debt Obligation.
Credit Disclosure Obligation.
24
Chapter Quiz
1
3. Property values began to fall
nationwide in
a.
b.
c.
d.
Q4 of 2005.
Q2 of 2006.
Q1 of 2007.
Q1 of 2008.
25
Chapter Quiz
1
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.
b.
c.
d.
80/20 Piggyback
FHA
stated income
VA
26
Chapter Quiz
1
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
27
Chapter Quiz
1
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.
28
Chapter Quiz
1
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
29
Chapter Quiz
1
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.
30
Chapter Quiz
1
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.
31
Chapter Quiz
1
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.
32
Chapter 2
Flipping
33
Objectives
2
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
34
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.
2
• 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. 35
Key Terms
2
• Flipping Buying a property at • Legitimate Flipping Legally
a low price, and reselling it
buying a property at a low
quickly, for a profit.
price, and reselling it quickly,
for a profit.
• Illegitimate Flipping
Property is either fraudulently • Uniform Standards of
purchased at a low price, or is
Professional Appraisal
falsely appraised at a higher
Practice (USPAP)
value, and quickly sold for a
Professional appraisal
profit. The essence of an
standards developed by The
illegitimate flip is to find a
Appraisal Foundation, and
buyer or seller who is not
now recognized throughout
knowledgeable about the
the United States as accepted
market value of the property.
standards of appraisal
practice.
36
Flipping
2
• Buying a property at a low price, and
reselling it quickly, for a profit
• Flips can be “legitimate” or “illegitimate”
37
“Legitimate” Flips
2
• 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
38
“Illegitimate” Flips
2
• 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
39
Flipping New Houses
2
• 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
40
The FHA and Flipping
2
• 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
41
Appraisers and Fraud
2
• 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
42
Appraisers and Fraud
2
(continued)
• 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
43
USPAP as Fraud Prevention 2
• 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
44
Common Fraud Scenarios
Involving Appraisers
2
• 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
45
Chapter Quiz
2
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.
46
Chapter Quiz
2
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.
47
Chapter Quiz
2
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.
48
Chapter Quiz
2
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.
49
Chapter Quiz
2
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.
50
Chapter Quiz
2
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.
51
Chapter Quiz
2
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.
52
Chapter Quiz
2
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
53
Chapter Quiz
2
9. Which is NOT a “common
misrepresentation” in fraudulent
appraisals, per Fannie Mae?
a. inappropriate comparables
b. misrepresentation of the property’s
occupancy
c. misrepresentation of the property’s
physical condition
d. misrepresentation of the property's
zoning
54
Chapter Quiz
2
10.Which acronym represents a
government agency that insures
mortgage loans?
a. BPO
b. CMA
c. FHA
d. USPAP
55
Chapter 3
Fraud and Predatory Lending
56
Objectives
3
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
57
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.
3
• 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.
58
Key Terms
3
• RESPA (Real Estate
• Predatory Lending
Settlement Procedures
A practice attributed to
Act) Federal law dealing
certain mortgage lenders
with real estate closings
that seek to take
that sets forth specific
advantage of the lack of
procedures and
knowledge or naivety of
guidelines for disclosure
borrowers.
of settlement costs.
• Silent Second A
mortgage between buyer
and seller which does not
appear on the HUD-1.
59
Common Predatory
Lending Schemes
3
• 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”
60
Targets for Predatory Lending 3
• Homeowners who are in financial distress
due to:
– Job loss
– Poor health
– Other conditions
61
Why Predatory
Lending is Successful
3
• 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
62
Main St. Lending vs.
Sub-Prime Lending
3
• 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
63
The HUD-1
Settlement Statement
3
• 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
64
RESPA
3
• 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
65
“Anything of Value”
3
Agents have been cited for RESPA violations
for accepting:
– 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
66
It Takes a Village
3
• For fraud to work, many players need to be
involved
– Lenders
– Title companies (help prepare fraudulent
paperwork)
– Real estate agents
– Appraisers
67
Other Fraudulent Schemes 3
•
•
•
•
•
•
“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
68
Appraisers and Identity Theft 3
• 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
69
One-Stop Shopping
3
• 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
70
Case Study 1
3
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
Fraudulent appraisals;
misstatements of physical
condition, occupancy, etc.
Steer buyers to certain
lenders; help falsify
documents; prepare two
contracts
71
Case Study 1
Title Agents
Prepare false HUD-1
Loan Origination
Officer
Create false loan
applications; coach buyers
to lie
Paralegal
Assist title company and
attorney
Bank Teller
3
Assist in laundering
money, no report of
deposits of over $10,000
(federal law)
72
Case Study 1
Property Finder
Money Launderer
Identity Thief
3
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
73
Case Study 2
3
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.
Would violate
74
Case Study 2
3
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.
Would violate
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.
Would NOT violate
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.
Would violate
75
Case Study 2
3
The title company furnishes a videographer to make
virtual tours of the real estate company’s listings.
Would violate
The title company sponsors “Happy Hour” at the annual
REALTOR® Association Holiday Party.
Would NOT violate
The title company sponsors the real estate company’s
annual golf and picnic outing at the local country club,
paying greens fees, refreshments, etc.
Would violate
76
Chapter Quiz
3
1. The FBI reported a ____ increase in
SARS reports during fiscal year 2008.
a. 18%
b. 25%
c. 36%
d. 40%
77
Chapter Quiz
3
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.
78
Chapter Quiz
3
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
79
Chapter Quiz
3
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.
80
Chapter Quiz
3
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.
81
Chapter Quiz
3
6. SARS reports are
a. generated by the FDIC.
b. generated by USPAP.
c. reports of suspicious activity.
d. Statements of accounting reserves.
82
Chapter Quiz
3
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.
83
Chapter Quiz
3
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
84
Chapter Quiz
3
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.
85
Chapter Quiz
3
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.
86
Chapter 4
Foreclosures and REO Listings
87
Objectives
4
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
88
Key Terms
4
• “As-Is” Value The value of • Cash For Keys A
the property in its current
process where the agent
condition.
is authorized by the
lender to offer a set
• “As Repaired” Value An
amount of money to the
estimate of what the
occupants of the house,
property will sell for if it is
providing they leave
rehabilitated to a condition
(and take their
competitive in the
belongings with them) by
marketplace for homes of
a certain date.
the subject’s age and type.
89
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.
4
• 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.
90
Key Terms
• Liquidation Value The
value if the asset is sold
within 30 days.
4
• Quick Sale Any sale that
occurs in a less than typical
marketing time for a
property of the subject’s
type.
• Principle of
Substitution States that • REO (Real Estate Owned)
a knowledgeable
A property that has gone
purchaser will pay no
through the foreclosure
process and is owned either
more for one property
by the original lender, a
than the cost of
private mortgage insurance
obtaining a substitute or
(PMI) company, or an
comparable property.
intermediary.
91
What Is Foreclosure?
4
• 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
92
REO
4
• 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
93
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
4
Physical Eviction
• Often done by the
sheriff
• Different laws apply to
protect belongings of
former occupants
• Agents may have to
arrange for moving &
storage
94
Appraising and Otherwise
Valuing the Property
4
• CMAs or BPOs
• Full appraisals:
– “As-Is” value
– “As Repaired” value
– “Quick sale” value
95
“As-Is” Value
4
• 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
96
Investor’s Formula
•
•
•
•
•
4
Resale value
Less repair costs
Less entrepreneurial profit
Less holding/closing costs
Equals acquisition cost
97
Determining a Discount
4
• 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 noninvestor buyer would make
98
“As Repaired”
4
• 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
99
Determining Costs
4
• Estimate costs for repairs
• Lenders may want correlating increase in value
• Sources for remodeling estimates:
– Local contractor
– Building supply store employees
– Published cost services
100
Quick Sale Value
4
• 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
101
4
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
102
REO, Foreclosure, and USPAP 4
• 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
103
Chapter Quiz
4
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.
104
Chapter Quiz
4
2. For a lender, REO is
a. 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.
105
Chapter Quiz
4
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.
106
Chapter Quiz
4
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
107
Chapter Quiz
4
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.
108
Chapter Quiz
4
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.
109
Chapter Quiz
4
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.).
110
Chapter Quiz
4
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.
111
Chapter Quiz
4
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”
112
Chapter Quiz
4
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.
113
Chapter 5
Determining a Value Range
of a Foreclosed Property
114
Objectives
5
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
115
Your Assignment
5
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.
116
Your Research
5
• 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.
117
MLS Findings—Current Listings 5
118
MLS Findings—Current Listings5
119
Independent Findings of
Current Listings
5
120
MLS Findings of Sold Listings 5
121
Country Records Search
for Sold Properties
5
122
Subject Property Inspection 5
• 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.
123
Analyze the Data
5
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?
124
Analyze the Data
5
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?
125
Earliest to Most
Currently Listed
5
126
Determine Absorption Rate 5
• 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!
127
Highest to Lowest Priced 5
128
Lowest Priced Properties 5
129
Most DOM to Least DOM
5
130
Definite Comparables
5
• 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
131
Range of Value
5
• $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
132
Market Trends
•
•
•
•
•
5
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)
133
Conclusion?
5
• 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
134
5
Conclusion
(continued)
• 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
135
Chapter Five
5
• What did you learn?
• Will this exercise help you to price or
appraise property better in the future?
136
Chapter 6
“As-Is” or “As Repaired”
137
Objectives
6
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
138
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.
6
• 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).
139
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.
6
• Physical Depreciation A
loss in value from general
eroding of the physical
structure or from deferred
maintenance.
• Short Sale A lenderapproved sale in which the
proceeds are not sufficient to
cover the mortgage
amount(s). Typically done to
avoid foreclosure and its
inherent costs.
140
Pre-Foreclosure Decisions 6
• The timeline and decisions made preforeclosure 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
141
The Neighborhood
6
• 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?
142
Condition
6
• Condition of foreclosed properties varies
• Is the damage physical depreciation or
functional obsolescence?
• Is the damage curable or incurable?
143
Physical Depreciation
6
• Loss in value due:
– Deferred maintenance
– General eroding of the physical structure
– Wear and tear
– Abuse
144
Functional Obsolescence 6
• 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
145
Curable vs. Incurable
Curable
• Cost to make
repairs is justified
by an increase in
value
6
Incurable
• Cost to make
repairs will not be
justified by an
increase in value
146
External Obsolescence
6
• 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
147
Market Conditions
6
• 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
148
Buyers
Owner/Occupiers
• Act on emotion
• Think they will never
sell the house
• Not experienced
when it comes to
calculating repair
costs (often overestimate)
6
Investors
• Make decisions
based on financial
sense
• Expects to re-sell at
some point
• Do the math for repair
costs and make offers
accordingly
149
Cost Experts
•
•
•
•
•
•
6
Published cost services
Local contractors
Local builders
Local home inspectors
Online products
Webinars
150
Cost of Lender’s Decision 6
• 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”
151
Chapter Quiz
6
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.
152
Chapter Quiz
6
2. Which is an example of functional
obsolescence?
a. broken stove
b. no back patio
c. no closet space
d. old carpet
153
Chapter Quiz
6
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
154
Chapter Quiz
6
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.
155
Chapter Quiz
6
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.
156
Chapter Quiz
6
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.
157
Chapter Quiz
6
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.
158
Chapter Quiz
6
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.
159
Chapter Quiz
6
9. Which group will typically
overestimate the cost to cure or repair
items?
a. investors
b. lenders
c. owner/occupiers
d. real estate appraisers
160
Chapter Quiz
6
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
161
Chapter 7
Form 1004MC
162
Objectives
7
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
163
Key Terms
• Absorption Rate The
number of properties sold
(“absorbed”) by the market
within a specific time frame.
7
• Pool As used by Fannie
Mae in the instructions
to appraisers for
completion of the
1004MC Form, the pool
• Appraisal Review The act
represents “properties
or process of developing and
that the borrower would
communicating an opinion
consider for purchase
about the quality of another
as well as the subject.”
appraiser’s work that was
performed as part of an
appraisal, appraisal review,
or appraisal consulting
164
assignment.
Key Terms
7
• Reserves for
• Universe In statistical
Replacement
analysis, it is the total
An amount of money
number of units in the
set aside for future
analysis (the fewer the
replacement of major
number of units, the
items, such as the roof less reliable the data).
or heating system.
Also called Reserves.
165
Form 1004MC
7
• Required by Fannie Mae for loans and
appraisals delivered after April 1, 2009
• Also required by:
– Freddie Mac
– VA
– FHA
166
Why Did Fannie Mae
Develop This Form?
7
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
167
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.”
7
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. . .”
168
Analyzing a Market
•
•
•
•
•
•
•
7
Supply and Demand
Listings taken
Listings sold
Listing supply
DOM
Absorption Rate
Seller Concessions
169
Issues for Appraisers
7
• Some deeds may be recorded as “$1.00”
• Thin comparables
• Atypical properties
170
The Pool
7
• 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
171
Definitions
•
•
•
•
7
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
172
The Form’s Time Periods 7
• The Form 1004MC asks for statistics
in three specific time periods:
– Prior 7-12 months
– Prior 4-6 months
– Current-3 months
173
Statistically Meaningful
7
• 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
174
Anomalies in the Market 7
• 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
175
Appraisal Reviews
7
• 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
176
Sample Comment on an
Anomaly in the Market
7
• “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.”
177
Sample Comment on an
Anomaly in the Market
7
• “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.”
178
Sample Comments
on a Stable Market
7
• “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.”
179
Sample Comment on a Declining Market
Caused By REO and Foreclosures
7
• 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.”
180
Sample Comment on a Declining Market
Caused By REO and Foreclosures
7
• “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.”
181
Sample Comment on a Declining Market
Caused By REO and Foreclosures
7
• “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.”
182
Sample Comment on
an Increasing Market
7
• “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.”
183
Sample Comment on
an Increasing Market
7
• “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.”
184
Sample Comment on
Seasonal Activity
7
• “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.”
185
Sample Comments for a Market Not
Influenced by REO or Foreclosures
7
• “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.”
186
Sample Comment for a Market with
a Trend for More Foreclosures
7
• “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.”
187
Condos and Co-ops
7
• The final section of the 1004MC Form deals with
these projects
• Appraisers must complete this part of the form if
applicable
188
Chapter Quiz
7
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
189
Chapter Quiz
7
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.
190
Chapter Quiz
7
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.
191
Chapter Quiz
7
4. The Fannie Mae 1004MC Form
a. 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.
192
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.
7
193
Chapter Quiz
7
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
194
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.
7
195
Chapter Quiz
7
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.
196
Chapter Quiz
7
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%
197
Chapter Quiz
7
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%
198
Chapter 8
Future Challenges for Appraisers
199
Objectives
8
Upon completion of this chapter, the participant will
be able to:
• Identify challenges that appraisers face.
• Describe the Uniform Appraisal Dataset.
200
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.
•
•
8
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.
201
Future Challenges
•
•
•
•
8
Appraiser Independence
AMCs
AVMs & BPOs
UAD
202
Appraiser Independence 8
• 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 influences
 Misrepresent property condition
 Other stipulations or instructions that could cause the
resulting report to be fraudulent
203
Dodd-Frank Act
and Appraiser Independence 8
• 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.
204
Dodd-Frank Act
and Appraiser Independence 8
• 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.
205
Dodd-Frank Act
and Appraiser Independence 8
• 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.
206
Appraiser Independence
Requirements (AIR)
8
• 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.
207
Appraiser Independence
Requirements (AIR)
8
• 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.
208
Appraiser Independence
Requirements (AIR)
8
• 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 inhouse appraisers or affiliated appraisers, transfer of
appraisals, referrals of appraisal misconduct reports, and
compliance.
209
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.
210
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.
211
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.
212
New Sources of
Appraisal Business
•
•
•
•
Estates
Divorces
Bankruptcy
Valuation of partial
interests
• Pre-appraisal for
sellers
8
• Valuation of gas
and oil leases
• Valuation of
conservation
easements
• Relocation
appraisal work
213
8
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.”
214
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.
215
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.
216
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.
217
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).
218
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 –
1073/465
 Exterior Only Inspection Residential Appraisal Report
– 2055
 Exterior-Only Inspection Individual Condominium Unit
Appraisal Report – 1075/466
219
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 values
 Strengthening the loan underwriting process by
promoting a more consistent view and understanding
of appraisal data
 Supporting processes to manage and mitigate
valuation risk
220
Chapter Quiz
8
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.
b.
c.
d.
AMC.
AVM.
BPO.
CMA.
221
Chapter Quiz
8
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 to
a. 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.
222
Chapter Quiz
8
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
223
Chapter Quiz
8
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.
224
Chapter Quiz
8
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.
b.
c.
d.
contracted and invoiced
customary and reasonable
fair and practical
neither too low nor too high
225
Chapter Quiz
8
6. Lenders often ask appraisers to review and
comment on BPOs. A BPO is an acronym
for
a.
b.
c.
d.
bank pricing opinion.
bank purchase option.
broker price opinion.
brokerage price option.
226
Chapter Quiz
8
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.
227
Chapter Quiz
8
8. Which is NOT one of the reasons for
development of the Uniform Mortgage Data
Program (UMDP)?
a.
b.
c.
d.
capture consistent data
create preliminary appraisals
drive improved loan quality
manage risk effectively
228
Chapter Quiz
8
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.
229
Chapter Quiz
8
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 after
a.
b.
c.
d.
August 1, 2011.
September 1, 2011.
January 1, 2012.
March 1, 2012.
230
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