Appraiser Update

Questions about November 2024 Policy Announcement

Our November 2024 Selling Guide announcement states “Include an illustration of the methodology used to determine specific comparable sale time adjustments for changes in market conditions.” Since then, we have received several questions as to whether this means appraisers need to include the illustration in their appraisal reports. The answer is no; appraisers are not required to put such a chart in their reports. What we intended to convey is that we have included a link to the illustration in the Selling Guide as a learning aid to provide guidance to lenders and appraisers about how to make time adjustments.

Look for a deeper dive on market condition adjustments in our next newsletter.

Code Words and the Appraisal Report

In the marketing of real estate, use of subjective terminology is common – greatest view, nice upgrades, best kitchen, walkable neighborhood, for example. In the context of an appraisal, subjective phrases and descriptions lack the specificity needed to derive supported conclusions and, in some cases, can be perceived as code words for discrimination.

Code words are subjective or ambiguous terms, such as “crime-ridden,” “inner city,” “desirable neighborhood,” and “pride of ownership,” that suggest the appraiser may have considered a protected class when developing the appraisal. Even if the appraiser did not consider a protected class, inclusion of code words could cause the reader to believe otherwise. Thus, the appraiser is caught between the proverbial rock and the hard place – either being misleading or potentially in violation of fair lending laws. The best way to avoid this conundrum is for the appraisal report to use only concise, detailed, and objective language.

Consider the phrase “well established.” When used in an appraisal report, what does this term convey? Is “well established” a code word implying outsiders aren’t welcome, a neighborhood exclusively for the wealthy, or a certain type of people live there? These are all plausible conclusions for a reader of the report. Alternatively, the appraiser may intend to convey that the neighborhood no longer has new construction, has been in existence for many years, or has an active resale market.

By providing specifics and avoiding subjective language, appraisers can reduce the potential for unintended interpretations. For example, instead of making a broad statement like “well established,” the appraiser should provide specifics such as:

• The residences in the subject’s subdivision were all built in the 1990s.
• The development of the project began five years ago and there are ample resales from the past year in MLS to use as comparables.
• The subject is located in a designated historic district with the majority of homes having been constructed in the 1880s.

To encourage improvement in appraisal analysis and commentary, Fannie Mae has added three new messages to CU that identify potentially biased language in appraisal reports including references to protected classes, subjective phrases, and code words. You can read more about these new messages in the CU Version 6.5 release notes.

Appraiser Quality Monitoring will continue to send educational letters to appraisers when repeated usage of potentially problematic words or phrases are found. The Uniform Standards of Professional Appraisal Practice and Advisory Opinions 39 and 40 provide detailed information about antidiscrimination and nondiscrimination in appraisals.

Property Data Collection

The article “Introducing hybrid appraisals” in the March 2023 Appraiser Update issue provided guidance for appraisers on how to perform hybrid appraisals for certain loan applications. We appreciate the feedback from the appraiser community about our approach to hybrid appraisals. Based on the comments, appraisers tend to fall into one of three camps:

• The unfamiliar – those who rarely or never have been engaged to perform a hybrid appraisal;
• The skeptic – those who are uncomfortable with the scope of work, usually due to concerns about the reliability of the property data; and
• The fan – typically the most experienced and knowledgeable appraisers who appreciate the efficiency and profitability of hybrid appraisal assignments.

In August 2024, we published the Advancing Collateral Valuation blog that addresses the reliability of the property data and specifically answers questions about property data collection like what, how, and who. More importantly for the skeptic, we share empirical data around performance measures based on extensive analyses. The results demonstrate consistency between the data collected in property data collections versus data collected in appraisals in four critical areas:

These objective measures help ensure property data collection meets the stringent standards required to execute our mission safely and soundly.

For appraisers who want to learn more about property data collection, the Uniform Property Dataset (UPD) defines what data and exhibits must be collected and delivered to the appraiser. 

The Selling Guide covers the requirements and qualifications for property data collectors. Lenders must ensure that data collectors are selected in accordance with Fannie Mae requirements, vetted through an annual background check, professionally trained, and they must also possess the essential knowledge to competently complete the property data collection. Additionally, upon completing data collection, they must sign certifications affirming that the data was objectively captured, is free from personal bias, and is accurate and reliable. 

While the evidence shows that UPD-compliant property data is consistent with appraisal data, there may be exceptional cases where the property data contains errors or is difficult for the appraiser to validate. Our expectation is that appraisers make a good faith effort to validate the property data and then rely on the best available descriptive data which could be an alternate source. Having made the good faith effort, appraisers are protected from liability in regard to the property data by Limiting Condition 3 in the 1004 Hybrid appraisal form (and similar language in the hybrid condo form): 

 “3. The appraiser has relied on data provided by third-parties in this appraisal report. Such data may include, but is not limited to, flood maps, multiple listing real estate services, tax assessment records, public land records, satellite imagery, virtual street views, property data services, surveys, engineering reports, and property data aggregations. After examination of the data and data sources, the appraiser has used only the data he or she considers reliable. The appraiser makes no guarantees, express or implied, regarding the accuracy of this data.”

Hybrid appraisal assignments, while relatively rare compared to traditional appraisals, are an opportunity for appraisers to diversify their business. Particularly for appraisers who would prefer to spend their time on valuation analysis, hybrid appraisals can be a way to increase profitability by reducing time spent on lower skill activities such as scheduling, driving, inspecting, and photographing. 

Given the robust control environment and the strong empirical results, appraisers should be comfortable consuming third-party property data as part of their hybrid appraisal scope of work.