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July 31, 2007

Fannie Mae Addresses Declining Market Issues

Due to recent declining markets and the potential for “the overstatement of property values in appraisal reports,” Fannie Mae issued an announcement, Collateral Valuation Practices and Declining Markets, July 13. In the announcement, Fannie reiterated that it expects appraisers to “research, analyze and report on the factors in the neighborhood that may affect the market value or marketability of the properties in the market area.”

Since there is no standard industry definition of what constitutes a declining market, Fannie says it is within the appraiser’s and lender’s discretion to determine if the appraisal accurately reflects the current market conditions. The appraiser’s role is to provide the lender with an accurate and adequately supported opinion of value and an accurate description of the property.

At a minimum, the agency said, the appraiser is expected to u se the most recent and similar comparable sales available as part of the sales comparison approach. “Because excessive sales concessions can artificially inflate the sales price of a property, particular attention should be given to unusual sales or financing concessions in markets experiencing: d eclining property values, an over-supply of properties, or marketing times in excess of six months.”

Fannie Mae also said it expects appraisers to provide an objective assessment of the primary indicators of market conditions in a given neighborhood whether they are increasing, stable or declining. When indicators such as price changes, supply and demand, and market activity reflect a decline in property values, an over-supply of homes, and/or marketing times in excess of six months, Fannie Mae expects that the appraiser has considered these factors as part of his or her analysis, and accurately reflects this information in the appraisal report.

Other requirements that were reiterated include the need for the rationale for any trends and what, if any, impacts these trends have on the opinion of the market value for the subject property. “It is unacceptable for the appraiser to ignore these issues and not report the factual property value trends and market conditions.”

Fannie Mae also reiterated its stance that the lender has the sole responsibility for managing the appraiser relationship and general activities of the appraiser it selects.  “As such, the lender should verify that the appraiser provides an accurate, independent and adequately supported opinion of the value and property description, and has considered available public and non-public information concerning local trends in home prices.” 

Lender should have “appropriate business controls in place to ensure that no actions are taken by its employees, agents, or third-party originators that may compromise the accuracy of the appraisal report,” according to Fannie Mae. Such controls may include separating the appraisal ordering process, if possible, from those who have a financial interest, both internal and external, in the transaction. “It is unacceptable for a lender’s employee, agent, or third-party originator to apply pressure or unduly influence the appraiser to reflect certain results in his/her analysis or reporting.”

Also a new Desktop Underwriter message will be generated when it appears that a property may be located within a declining market. The new message is available in DU Version 5.7, released July 22.  The new DU message will appear on loan case files for properties located in areas that have been identified as experiencing a decline in property values, as well as markets in which it is difficult to assess home values.  

Based on the new DU message, the lender may request additional support from the appraiser if it determines that the appraisal does not accurately reflect current market conditions (e.g. the declining property values field is not checked when market conditions suggest otherwise). If the lender determines that the property is located within a declining market, the lender must ensure that current market conditions are identified and analyzed in the valuation process and described in the appraisal report.

The full announcement is available at Fannie Mae has published a Frequently Asked Questions document to provide additional guidance and insight into the information presented in this Announcement. The FAQs are available at

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