Underwriting: Improving Quality Through Checks and Balance

Written by Ralph Rosynek, as originally published in The Reverse Review.

Have you noticed your appraisal conditions increasing lately? Recent comments I have received indicate that many of us are experiencing changes in the report quality and content to which we have been accustomed. In attempting to determine the cause, I found a prevailing issue that prompted my comments for today.

It appears many of us who have fully embraced the AMC methodology have also failed to initially communicate our content and accuracy standards to newly engaged vendors. Additionally, existing relationships may not have been recently updated as to content needs.

Effectively communicating a “pre-delivery” checklist of items for the appraisal vendor to review prior to transmitting the report for use may be an excellent way to avoid unnecessary underwriting conditions. Layering this quality control component on the vendor also provides an additional resource level for the vendor to further determine the skills and knowledge level of their panel appraisers as well.

Gone are the days when an appraisal provided by an approved “roster” appraiser can be considered compliant and complete. Continuing economic and market impacts combined with HUD guidance, protocol changes, continuing education requirements, and varying state and local code changes have all created the need for the appraiser to remain on top of their game. Unfortunately, there still remains the voice of a scant few who believe that “we have always done it this way” as the basis for the preparation of the report.

Discussing needed appraisal elements and key concerns resulting from underwriting feedback is an excellent means of improving the quality of the appraisal report. Many of the current software applications utilized to produce the appraisal report include an audit and compliance feature provided the licensee maintains the database. Encourage the use of this check and balance on all of your reports. As you develop your discussion list, you may want to consider the following:

•    Do you have any appraiser identity, communication, or appearance requirements?

•    The appraisal must be completed by a certified residential or certified general appraiser. Trainees and license appraisers are not permitted to complete assignments for this client.

•    The loan number and FHA case number, including the ADP code, should be on the top right corner of every page.

•    Every report, regardless of property or assignment type, should include the appropriate statements relating to influences, terms and scope of the report, as well as interaction with any parties involved in the transaction.

•    It is not necessary to include well/septic/leech line/property line distances unless a potential problem is observed or required minimum distances are not met. A comment stating the subject meets HUD minimum property standards/requirements is sufficient.

•    If the subject has not been affected by a natural disaster, a report comment should be evident. If the subject property has been affected by a natural disaster, the report should include the specific disaster, the date and what portion of the property was affected.

•    Obtaining a copy of the condo association bylaws is suggested. The report should determine if the condominium is a condotel, confirm the Condo ID and show it approved in the FHA Connection.

•    A report comment regarding HOA advertising, website or signage promoting rentals, a check-in desk (registration) for the leased/rented units, or units in the project with less than 500 square feet should be addressed.

•    A statement regarding the current and prior listing history should be included in the report and for purchases, details of the contract seller and buyer and/or other owners of record noted.

•    If the subject is listed, the appraisal report should include the MLS number, date listed, original list price, price changes, dates of all price changes, final list price and days on market.

•    If the subject ownership recently changed, the report should provide the dates of these transfers along with the names of the parties involved.

•    Comparable sales information should be verified by two named sources.

•    If the market is declining or oversupplied, the report should include three sales closed within 90 days. If three sales can’t be provided, the report should include one listing for each sale used over 90 days.

•    All FHA assignments must include two listings and have three sales transferred within the past year in the 1-3 slots on the market grid.

•    All listings should be adjusted to reflect the typical list to sale/price ratio for the market. If the list to sale/price ratio is zero, support and a comment should be made within the report.

•    Comparable sales located in different towns or markets should be fully addressed. Comments should address the same level of first responders, tax bracket, similar amenities, employment opportunities, schools and why a potential purchaser would be just as inclined to purchase in either market.

•    Regardless of timeframe, the most recent prior transfer of the subject and all comparable properties must be reported. If no previous transfer is recorded, a report comment should state so.

•    If a recent previous sales history item is noted (three years for the subject and one year for the comparable properties), provide commentary and explanation regarding the reason for the previous sale and any differences in sale price.

•    All adjustments should be supported with commentary addressing the appraiser’s logic and rationale.

•    A detailed reconciliation of the estimate value by the sales comparison approach should be included in the report.

•    Commentary regarding the reliability and weight of each comparable property used (sales and listings) should include the logic and rational for the single point value elected within the adjusted and unadjusted range.

•    With the exception of condominiums, the cost approach method should be included on all reports.

•    The PUD section on page 3 of the 1004 should be completed for all PUDs regardless of HOA control or unit type.

•    All photos of the subject and comparables must be original. MLS photos can be used to supplement the report’s original photographs (provide left and right side, front and back photos).

•    Photos should include anything that might influence value or marketability such as deferred maintenance, special features, amenities, excessive personal items, adverse or beneficial views, recent upgrades or anything having a positive or negative effect on value.

•    Photos and report comments regarding any possible health and safety issues that might exist should be provided.

•    For detached accessory structures (shed, outbuilding, etc.) provide photos of the interior and exterior along with a comment describing how the structure is being used.

•    The sketch component of the report should detail all improvements with floor plan calculations and include all amenities as described with contributory value (i.e., sheds, barns, pools, decks, gazebos, basements, etc.).

•    All fields on the 1004MC addendum must be completed. If no information is available for a specific field, indicate N/A and provide a comment.

•    If REO, distressed or foreclosure properties are an influence in the subject market, a detailed commentary addressing the percentage/makeup of total market closed sales and active listings should be included.

•    The location map should reflect all properties noted in the report, including comparable sales, listings and rentals, clearly showing all physical boundaries.

•    A plat map of the subject site should also be included.

Certain property types are not eligible for HECM financing–provide a list of those items to your appraisal vendor.

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