FHA Changes Appraisal Requirements

By Paul Warkow
The FHA has revised its conditions for appraisals. Here are the 10 things that appraisers must do or provide for all FHA appraisals done after April 1, 2009. This will effect all FHA Long Island mortgage applications or any FHA mortgage throughout the country. They are:

1. The Market Conditions Addendum (Fannie Form 1004MC/Freddie Form 71). This is a form the appraiser must fill out to analyze current market conditions in the area where the house is located. Basically, the appraiser must comment as to whether or not the area is a declining market.

2. At least 2 comparable sales within 90 days of appraisal date. In some markets, compliance with this requirement may be difficult or not possible due to the lack of market data. In that case a detailed explanation is required.

3. A minimum of 2 active listings or pending sales in addition to the 3 closed comparables.

4. Bracketed listings using both dwelling size and sales price when possible.

5. Adjust active listings to reflect the List To Sales Price Ratio.

6. Adjust pending sales to reflect contract sales price when possible.

7. Include original list price and any revised list prices.

8. Reconciliation of adjusted values of active or pending sales with adjusted values of closed comparable sales. This requires the appraiser to make comparisons between current sales and closed sales. If already closed sales have a higher value than active or pending sales, the appraiser must determine if a market condition adjustment is appropriate. This means that if this is a declining market, the appraiser cannot just use the comps, but make adjustments based on a declining market.

9. Absorption Rate Analysis. This is a mathematical calculation. For example, suppose there were 36 sales in a 6 month period, the absorption rate is 6 sales per month (36/6).

10. Known or reported sales concessions on active and pending sales.

FHA also is restating its warning that Direct Endorsement Lenders are reminded that if the appraiser they selected provides a poor or fraudulent appraisal that leads FHA to insure a Long Island mortgage or any mortgage throughout the country at an inflated amount, the lender is held responsible equally with the appraiser for the integrity, accuracy and thoroughness of an appraisal submitted to FHA.

Essentially, the FHA is concerned that housing prices are still declining and they do not want unnecessary exposure when they secure a Long Island mortgage or any mortgage throughout the country. They want appraisal to be as conservative as possible. This may result lower housing prices as house prices are adjusted downward and almost be a self-fulfilling prophecy. We will have to see.

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