Considerations For Your Appraisals In A Time Of Review

Presented to our internal staff of appraisers, East Team Lead Alexis MacDougall lead our webinar on extra considerations to make for your appraisal reports. She pulled her information from Working RE magazine articles The State Appraisal Board Wants To Throw Me Under The Bus, Right?, by Barry Phillips and Tim Andersen; and the article Sins Of The Past Are Back To Haunt Appraisers, by Richard Hagar, SRA. Read on to learn more about the different parties who view appraisal reports and how today’s appraisers can better protect their reports as well as themselves from federal and state scrutiny.

Review is Routine & Inevitable

It’s no secret that the time of low quality reports being accepted has officially ended and that appraisal reports are regularly reviewed for different purposes and by different parties. It’s even being argued that those old, low quality reports are still lurking in the shadows. Appraisal investigations can take up to a year to complete. How can appraisers best protect their reports and themselves from scrutiny?

First, it’s good to identify who all could be intended users, as well as recognizing that some unintended users may also view the report. They are the lenders, Fannie and Freddie, FHA/HUD, state boards, and potentially borrowers, homeowners, and real estate agents.

Common Uses for Reviews

Some common uses for reviews are mortgage insurance claims, litigation support, USPAP compliance reviews, appraisal negligence investigations, rebuttals, loan portfolio reviews, reconsideration of value, or just standard due diligence reviews required by both lenders and states. A review may also be considered as a means to obtain a second opinion of value without a second inspection and could also be considered as a quicker and cheaper option as opposed to having a new appraisal completed.

Collateral Underwriter

Collateral Underwriter is one of the main ways that appraisal reports that are submitted to Fannie and Freddie are regularly reviewed. The Collateral Underwriter can look for alternative comparable properties, market level metrics and trends, MLS, public records, peer adjustment data, and also aerial imagery to see if there are any external factors that weren’t mentioned in the report. The Collateral Underwriter scores are used also as part of the Appraiser Quality Monitoring by Fannie Mae. Completing reviews of reports done by other appraisers is a great way to provide perspective on how other appraisers are completing their reports.

Field/Desktop Reviews

When doing a field review or a desktop review, appraisers can see other potential USPAP deficiencies, how other appraisal reports flow or if they’re divided into sections and organized in a different way. Maybe a report is reviewed that has more pictures, maps and charts; today’s appraisers can use this peer review system to better their own reports down the line.

Common Deficiencies

This list has been adapted from the Working RE Winter/Spring 2023 article Sins of the Past are Back to Haunt Appraisers by Richard Hagar SRA. IVG’s Alexis MacDougall encourages readers to click the graph below to read the original article.

According to his bio, Richard Hagar is an appraiser at a busy office in the state of Washington. His company does many reviews and he highlights these deficiencies as the top offenders:

• No highest and best use analysis is done, as if the property is improved but vacant.

• Failure to make appropriate time/market adjustments. Only one approach to value completed without appropriate commentary.

• Incorrect or unsupported site value.

• Square footage costs and depreciation based more on opinion or “experience” rather than reality (ie, current and verifiable sources).

• Unsupported adjustments, including “legacy” adjustments or those based on “experience” 

• Failure to personally inspect and photograph comps 

• Failure to measure the subject, relying primarily on assessor sketch 

• Writing in all capital letters 

• Inclusion of prohibited words and descriptions

Federal Requirements

All appraisals must also be reviewed post-closing, so the lenders received a checklist from Fannie Mae for the already mandatory post-closing review.

Confirm appraiser received full contract and all counter offers. 

Is original contract date prior to effective date? Were concessions listed and was their potential impact on value considered? 

Confirm that non conforming and illegal land uses were specifically addressed, and the report included information regarding impact on market value. 

Is the subject’s land use better suited for commercial or residential use? 

Were the most appropriate quality and condition ratings provided? 

Look at photos. Confirm that quality ratings of comparables meet the rating definitions.  

Were apparent safety and soundness or structural issues noted? 

Confirm that the property is free of structural issues that could impact eligibility. 

Did the appraiser provide actual support for how the adjustments were derived? 

Compare the appraiser adjustments vs model adjustments provided in CU; are there concerns? 

Do adjusted and unadjusted prices of comparables support the final value? 

Does the sketch meet ANSI requirements? 

Were all CU warning messages addressed by the lender? 

Do aerial images confirm that all external influences were identified and addressed by appraiser? 

Check that appraiser is not on the AQM (Appraiser Quality Monitoring) list.  

If the lender identifies material errors in the appraisal that invalidate the opinion of market value, the lender must self-report to FNMA. 

If lender or FNMA, or any other person, becomes aware of USPAP violations, the appraiser must be reported to state. 

What about reviews by the State board?

 Adapted from The State Appraisal Board Wants to Throw Me Under the Bus, Right?, by Barry Phillips and Time Andersen, from Working RE, Winter/Spring 2023 edition. CRA Alexis MacDougall recommends reading the full article, linked to image to the right.

State boards look to see if the appraisal report meets USPAP requirements for Standards 1 and 2. The rest of the investigation elaborates on this purpose; however, there are more complaints coming to state boards from consumers, including borrowers, homeowners and real estate agents, rather than from actual intended users or clients. While it seems counterintuitive, state boards often tend to favor consumers over appraisers.  

Some Examples of Questions from State investigators 

• Describe the process by which you selected comparables, as well as a show from the data in workfile, how and why you chose them. Please indicate how and why you chose these sales and not others. Please indicate filters you applied… as well as why you chose those filters. Please point out where in the workfile you maintain the details of this process.  

• Please show, from the data in your workfile, the protocols and analysis by which you concluded it was necessary to make the adjustments you made to comparables. From the same source, please show the analyses by which you arrived at the dollar amounts of your adjustments.  

• You chose to omit the Cost Approach from your analyses, thus from your value conclusion as well. From the data in your workfile, please show the process(es) by which you arrived at the conclusion that the analyses of Cost Approach were neither applicable nor necessary to the formation of credible value conclusion.  

• since you chose to omit cost approach, there is no indication of the subject site value as if vacant. This means you also chose not to form an opinion of subject site’s highest and best use as if vacant. From your workfile, please show market support for this decision.  

• Even though you chose not to value subject site as vacant, you made adjustments to comparables for differences in site size. Please show the process by which you concluded how much to adjust the comparables sales.  

• Please show in workfile market data and analyses supporting subject effective age.  

• Please show in workfile market data and analyses supporting % accrued depreciation.  

• Please show in workfile support for cost/square foot.  

• You chose to omit the Income Approach from your analyses, thus from your value conclusion as well. From the data in your workfile, please show the process(es) by which you arrived at the conclusion that the analyses of Income Approach were neither applicable nor necessary to the formation of credible value conclusion.  

• On p 1 of the appraisal report, you indicated the highest and best use of the subject as improved as the current improvements. Nowhere in the report is the summary for the support and rationale for this conclusion.  

• Given a summary of HBU is a requirement of USPAP SR2-2 (a)(xii), please explain how this omission results in a credible value conclusion.  

• Please describe from market data in your workfile the support you have for your HBU conclusion.  

• In your report, you indicated that from the oldest sale to most recent sale, rates have increased by 25%. The report’s narrative has no discussion on how this increase may have affected market value. From your workfile, please indicate the process(es) by which you made the conclusion that such an increase did not affect market values over time.  

• In your reconciliation, you indicated you have greatest weight to Comp #Z and least weight to Comp #Y.  

• From the data in your workfile, please describe and explain the market support you have for giving these weights.  

• Despite the statement about the weight you have each of comparable sales, the final value conclusion is the average of the adjusted sales, rounded to the nearest $100. From the data in your workfile, please explain this potential inconsistency or explain why it is not an inconsistency.  

  What Can we learn from these questions? 

  The appraiser’s full workfile is key. Documenting everything about the analyses and keeping all of it in their workfile, appraisers can avoid violating the Record Keeping Rule. Appraisers should be taking advantage of digital workfiles - scan any paper documents, print emails to PDF, and download the MLS files. Appraisers don’t know when they’ll need to reference this material again, play it safe, if they aren’t sure if something should be added or not, add it to the workfile.

  The next key point is demonstrating, showing, and explaining. Appraisers should be summarizing their analysis in the report. Air on the side of summaries over statements, especially in regards to the Highest and Best Use section, and when using boilerplate or Quicklist items, add specific language tailored to the specific subject. For example, in the Highest and Best Use section, is the appraiser specifically referencing what other uses, if any, are allowed by zoning?

  Appraisers should also be regularly reviewing their templates. Is COVID language current and/or even necessary anymore? Is there out of date interest rates or market trends that could be updated? Templates are amazing saving graces as long as they are regularly reviewed for updates. 

  
  Why it matters & what today’s appraisers can do

  It’s safe to assume that appraisers and their reports are always under scrutiny. This means that it’s essential for appraisers to present their reports as the experts they are. The analyses and any exhibits demonstrate the competency, professionalism, and experience of the appraiser; and while appraisers don’t have all of the tools that FNMA does to review their own reports, appraisers can use the technology that is available to them to develop a report that is thorough and thoughtful with a complete workfile to support it.

  Only the best appraisers who will continue to be successful as the market shifts towards products that seem to eliminate the need for appraisers. It is more important than ever for appraisers to demonstrate the need for analysis beyond an algorithm.