New Fannie Mae rules.

There are some new rules for Fannie Mae loans coming down the Pike, effective April 1, 2009. I do not see these as radical changes. Do you?

One: The first one requires that the appraiser review the sales contract. That seems pretty simple on the face of it: the appraiser needs to know the terms of the sale. Why would this be a big deal to a lender? The answer: concessions. If a buyer is getting money back toward repairs or closing costs, this should be known to the lender. Home mortgage lending is not supposed to pay for the Mercedes in the garage along with the house. If the contract is changed after the appraisal, the lender needs to know that, too. The lender, and their investors, should be informed about what they are lending on.

In my experience, it is standard operating procedure for the appraiser to have the Purchase and Sales Agreement in hand. However, when I was a new agent, in the early ‘90s, I frequently saw “side agreements” where the seller gave money back toward repairs or asked for a rent-back. These agreements were intentionally written outside the Purchase and Sales agreement in order to avoid the eye of the lender’s underwriter. Somewhere along the line, this practice stopped.

Two: The second change is asking appraisers to explain why they are not choosing homes in the same neighborhood as the home in question to be the comparable. I can remember appraisers needing to “explain” their comparable homes choices for several properties over the years. Most of the properties were odd, in one way or another.

Examples:
A two-family home in a community that doesn’t have many two-family homes.

A single family home in a community that is largely two- and three- family homes.

A home that was unusually small or unusually large for the town.

Homes built on hills, so the bedrooms are in the basement, but not really.

Sure, there is room for corruption in the old system. An appraiser can go all the way across town to a better area to inflate the value of a home. I did not see this happening with my clients, even at the market peak; the appraisers had no trouble finding examples of other homes selling at the high price-level my buyers were paying. Those homes were nearby and true comparable homes.

Three: The third change involves repair escrows. That’s the practice of lending additional funds subject to repairs that will enhance the value of the home. A buyer gets $350,000 toward the purchase and also borrows another $30,000 to repair the roof and foundation (subject to reappraisal showing sufficient increase in value.) My buyers have always found that type of loan too cumbersome to deal with. Mostly, if the home needed that much work, they either put less down or did not buy it.

This last change is the one that may shake things up a bit. There are a lot of properties where the owner is selling mid-repair. These homes will need extensive work. Will this new rule make it harder to finance these properties back to life?

Below are all the rules. Thank you, Eric from Mortgage Master.

Requirement to Provide the Sales Contract to the Appraiser Selling Guide, Part XI, Chapter 2: Appraisal (or Property Inspection) Documentation Fannie Mae requires the lender to ensure that it provides the appraiser with all appropriate financing data and sales concessions for the subject property that will be, or have been, granted by anyone associated with the transaction. Typically this information is contained in the sales contract; however, Fannie Mae currently does not require that the lender provide the appraiser with the sales contract. Fannie Mae is adding the requirement that lenders must provide the appraiser with the sales contract and all addenda, therefore ensuring that the appraiser has been given the opportunity to consider the financing and sales concessions in the transaction and their effect on value. If the sales contract is amended during the process, the lender must provide the updated contract to the appraiser.

Requirement Regarding the Appraiser’s Selection of Comparable Sales
Selling Guide, Part XI, Section 406.02: Selection of Comparable Sales
The Selling Guide states that when a property is located in an area in which there is a shortage of truly comparable sales—either because of the nature of the property improvements or the relatively low number of sales transactions in the neighborhood—the appraiser may need to use as comparable sales properties that are not truly comparable to the subject property or properties that are located in competing neighborhoods.
If the appraiser utilizes comparable sales outside of the subject’s neighborhood when closer comparable sales appear to be available, Fannie Mae is adding a requirement that the appraiser provide an explanation as to why he or she used the specific comparable sales in the appraisal report. This will add transparency to the appraiser’s selection of comparable sales and may assist the lender in underwriting the appraisal.
Refer to the “Neighborhood Boundaries and the Selection of Comparable Sales” section of this Announcement for an additional clarification of this section of the Selling Guide.

Repair Escrows for Existing Construction
Selling Guide, Part XI, Section 202: Status of Construction; and Section 405.08: Property Condition
The following clarifications apply to both of the above referenced sections of the Selling Guide as they pertain to postponed improvements. Furthermore, Fannie Mae is explicitly stating that completion or repair escrows are permitted under certain circumstances for existing properties.
If the appraiser reports the existence of minor conditions or deferred maintenance items that do not affect the livability, soundness, or structural integrity of the property, the appraiser may complete the appraisal “as is” and these items must be reflected in the appraiser’s opinion of value. The lender is not required to ensure that the borrower has had this work completed prior to delivery of the loan to Fannie Mae.
If there are minor conditions or deferred maintenance items to be remedied or completed after closing, the lender may escrow for these items at their own discretion and still deliver the loan to Fannie Mae prior to the release of the escrow as long as the lender can ensure that these items do not affect the livability, soundness, or structural integrity of the property. Minor conditions and deferred maintenance items include, but are not limited to, worn floor finishes or carpet, minor plumbing leaks, holes in window screens, or cracked window glass. Minor conditions and deferred maintenance are typically due to normal wear and tear from the aging process and the occupancy of the property.
When there are incomplete items or conditions that do affect the livability, soundness, or structural integrity, the property must be appraised subject to completion of the specific alterations or repairs. These items include, a partially completed addition or renovation, or physical deficiencies that could affect the soundness or structural integrity of the improvements including but not limited to cracks or settlement in the foundation, water seepage, active roof leaks, curled or cupped roof shingles, or inadequate electrical service or plumbing fixtures. In such cases, the lender must obtain a certificate of completion from the appraiser before it delivers the mortgage to Fannie Mae.