The Skinny on Fannie Mae Guidelines
By Charlie Elliott, Jr., MAI, SRA

If you are like me, you had heard a lot about the Fannie Mae Appraisal Guidelines before you actually knew for sure that they existed and, if so, from where they came.

As a young and inexperienced appraiser, like most other appraisers learning the trade, I took many courses and went to many professional trade association meetings for years before I realized that the Fannie Mae Appraisal Guidelines were actually directed to loan officers and not appraisers. Most, if not all of the courses which I was required to take, made little or no mention of the Fannie Mae Guidelines. I had been appraising for a number of years before I actually saw a copy of them.

It seems like back then, the guidelines were only a topic of conversation when the property or appraisal was out of compliance. The appraiser learned of the fine points of the guidelines through trial and error. Not to say that the appraiser was always or not even mostly wrong, because some properties fall outside the guidelines. It was a word of mouth sort of thing from the underwriter who was responsible for getting the loan package right before it could be sold to Fannie Mae on the secondary market. While I am sure that Fannie Mae made the guideline information available to appraisers there never seemed to be any concentrated effort to include it in appraiser coursework.

Perhaps this is because the underlying issue is the properties compliance and not the appraisal. At times I was not even sure that the underwriters directing the appraisers were shooting straight when they asked for changes, which they lay at the feet of the Fannie Mae Guidelines. Unless we considered the requested changes to be misleading, illegal or unethical, we usually just made whatever changes requested in order to keep the client happy.

More recently the Fannie Mae Guidelines have become more available to anyone interested in surfing the Web and downloading a copy. They are still directed to the lender, however, the lender has more options today with the Desktop Originator and other tools designed to streamline the process. Be that as it may, when the appraisal must comply with the guidelines it must, if the loan is to be sold to Fannie Mae.

This brings up another question: should the appraiser be expected to perform an appraisal which complies with the guidelines? The official answer is no. The appraisal is required to follow the Uniform Standards of Professional Appraisal Practice (USPAP). The Fannie Mae Guidelines were designed to screen out undesirable properties, not appraisals. Some underwriters see it as their duty to impose upon the appraiser the responsibility of making sure that the appraisal conforms to the guidelines. This is fine where the appraiser has not done a good job with the appraisal. It is not fine when the property is the exact case in point the guidelines are attempting to exclude.

Listed below are a few excerpts from the guidelines which most often cause the appraiser and the underwriter to be at odds:

• The appraiser should use comparable sales that have been settled or closed within the last 12 months.

• The appraiser must comment on the reasons for using any comparable sales that are more than six months old.

• For properties that are in established subdivisions or for units in established condominium or PUD projects, the appraiser should use comparable sales from within the same subdivision or project as the subject property if there are any available.

• For properties in new subdivisions or for units in new condominium or PUD projects, the appraiser must compare the subject property to other properties in its general market area as well as properties within the subject subdivision or project.

• The dollar amount of the net adjustments for each comparable sale should not exceed 15% of the sales price of the comparable.

• The dollar amount of the gross adjustments for each comparable sale should not exceed 25% of the sales price of the comparable.

• When adjustments exceed 25%, the appraiser must comment on the reasons for not using a more similar comparable.

Why does Fannie Mae impose these guidelines? The answer is simple; it wants to make sure that, if it becomes necessary to foreclose on the property, it will be marketable. Given this fact it further wants to make sure that the property will support the appraised value and the underlying loan. While the appraisal should reflect this, if it is based upon comparable sales which for various reasons aren’t supportive, then the market may not be as supportive as the appraiser envisioned.

The Fannie Mae Guidelines exist for the purpose of reducing the risk associated with making the loan. If the lender and/or the appraiser approaches the production of the appraisal as an exercise designed to assure that the property and the appraisal conform to the guidelines at all cost, the process is flawed. There are many properties out there which for any number of reasons do not meet the Fannie Mae Guidelines.

Why does Fannie Mae not train appraisers to appraise to the guidelines? Appraisers appraise many properties for many different clients some of whom have their own guidelines that differ from Fannie Mae. Freddie Mac and FHA are good example. Unless specifically informed, and this is rare, the appraiser never knows that the appraisal is to support a Fannie Mae loan. In addition, appraisers are required by law to conform to USPAP. Fannie Mae also does not want appraisers to force a property to conform if it is not of the quality which meets its requirements. After all, that is the reason for the guidelines.

The guidelines are just that, guidelines. They are not rules that absolutely must be followed come hell or high water. If they were, many perfectly good properties could not be financed, because of some little issue which falls outside the guidelines but is not material.

While this column was not intended to be a course in the Fannie Mae Guidelines, perhaps it will clear up some of the myths and misunderstandings that concern them.

Charlie W. Elliott, Jr., MAI, SRA, is President of ELLIOTT® & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889 or at charlie@elliottco.com or through the company’s Web site at www.appraisalsanywhere.com.