Fannie Rules
By Charlie Elliott, Jr., MAI, SRA

In order to conduct our every day business, we come in contact with many pre-designed computer forms. Now, I do not know how many mortgage loan forms there are out there, but there are a lot. So many, in fact, that there is constant confusion as to which form is to be used for which project.

We, as appraisers, are in a position to narrow down the form-selection decisions somewhat. An example would be that a manufactured home must be on a manufactured-home form; a single family home should be on a single-family form; and a condominium goes on a multifamily family form. That is about as far as it goes relative to we appraisers being able to make a decision about which form to use. Lenders are in the drivers seat from there on.

Different categories of loans and the risk associated therewith can and do make a difference in what type of appraisal form must be used. An example would be that of which form should be used for a single-family house where the risk for the loan is considered low. We can deliver a complete appraisal with interior and exterior inspection, a limited appraisal with exterior and/or interior inspections or we can simply do an exterior inspection. There are forms for all of these services and they are all produced by Fannie Mae. Freddie Mac would say that it determines which forms must be used for its loans, but our experience has been that it just adopts the Fannie Mae forms as its own. FHA and VA would say the same, but here again, they have adopted the Fannie forms as their own, usually with addendums.

Now that all of us have gotten familiar with all of those forms, Fannie Mae informs us that they will be changing 11 of them. Fannie announced its intentions and revealed copies of test forms for all of the forms affected in November 2004. The new forms were tested by various appraisers and lenders, and in March 2005 a final version of the revised forms was released. The new forms are required for use effective Nov. 1, 2005. It is not unusual for such a rollout to be delayed, and some in the know say to expect the final deadline to be changed to sometime in early 2006.

In an attempt to address the magnitude to the changes listed below is a summary of the forms affected.
 

• Uniform Residential Appraisal Report (Form 1004)

• Exterior-Only Inspection Residential Appraisal Report (Form 2005)

• Manufactured Home Appraisal Report (Form 1004C)

• Individual Condominium Unit Appraisal Report (Form 1073)

• Exterior-Only Inspection Individual Condominium Unit Appraisal Report (Form 1075)

• Individual Cooperative Interest Appraisal Report (Form 2090)

• Exterior-Only Inspection Individual Cooperative Interest Appraisal Report (Form 2095)

• Small Residential Income Property Appraisal Report (Form 1025)

• Appraisal Update and/or Completion Report (Form 1004D)

• One-Unit Residential Appraisal Field Review Report (Form 2000)

• Two-to-Four Unit Residential Appraisal Field Review Report (Form 2000A)

Fannie says the changes are offered in part to further improve the property appraisal process that led to the Desktop Underwriter (DU). In revising the forms Fannie says that it consolidated a number of the forms in order to simplify its document requirements for lenders and appraisers.

From my prospective as an appraiser, changes in the forms are a mixed bag. There is some streamlining which the new forms offer. An example of this would be that the only form option for a single-family home with a complete inspection is that of the standard 1004 Form which is a complete appraisal. Likewise, the only reporting option for the exterior only inspection of a single family home is that of a 2055, which is a limited appraisal. In the past, these forms were more complicated and confusing relative to inspections. Also on the plus side, there is no longer a cost approach required on appraisals for Fannie. This is accomplished only at the option of the appraiser on an addendum.

Some of the lesser desirable qualities from my prospective have to do with the restrictive attributes of the new forms. Appraisers are not allowed to include assumptions within the appraisal, other than those included in the standard Assumptions and Limited Conditions, except for to-be-built properties. This is not necessarily a positive since many properties do not lend themselves to the one-size-fits-all form. There are appraisers who have expressed the opinion that Fannie is getting into the business of dictating appraisal standards through the use of the new forms, which is the sole responsibility of the Appraisal Standards Board of the Appraisal Foundation.

Also, it is the opinion of some that Fannie dominates the appraisal form design process, not only for appraisals used for its loans, but also for most, if not all loans. Technically, this is not true in that a lender is not required to use a Fannie Mae Appraisal form for say, an in-house loan. As a practical matter however, Fannie does exercise a tremendous amount of control over the appraisal forms used not only for its loans, but also for other loans. One of the problems is that it is not always know whether a loan will end up at Fannie when the appraisal is prepared. Since it may go there, for all practical purposes it must be on the Fannie form or the property may have to be re-appraised on its form if the loan is sold to it. So, in the end, given the large percentage of loans, which go to Fannie, most everyone will order all of their appraisals on its forms, regardless as to what the disposition of the loan will eventually be.

All in all, I find the new forms acceptable, even though the process of changing will come at considerable time and expense to appraisers and lenders alike. The new forms will be a boon to the software producers, as they get to produce a new product, which all appraisers and some lenders must buy.

Whether we like it or not, we will be using Fannie’s new appraisal forms come hell or high water next year, so we should get used to the idea and make the best of it.