Mortgage Firms Define Market Value
In an attempt to bring order out of the confusion over appraisals for residential property, two of the nation’s largest secondary mortgage market concerns have decided to change the definition of market value required for the appraisal of houses whose mortgages meet their standards.
The definition change becomes effective July 1 and is being adopted by the Federal National Mortgage Assn. (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac). The announcement came during the annual seminar here of the National Assn. of Real Estate Editors, an organization of journalists specializing in residential and commercial real estate.
Under the new definition, market value is defined as the “most probable price which a property should bring,” rather than the “highest price which a property will bring” in the old definition.
“Our market value definition is being revised to ensure that the appraiser develops a market value which reflects the value only of the real property, not one which includes the value of special or creative financing or sales concessions,” said Leady W. Seale Jr., vice president/mortgage operations at Freddie Mac. “These financing adjustments will be made to the comparable property sales on the basis of the market’s reaction, not on a mathematical calculation or a dollar-for-dollar basis.”
Seale added that the change in the market value definition recognizes that the market value of a property generally falls within a range. Since the appraised value is an estimate, it should not necessarily be at the highest part in the range, he added.
According to spokesmen at both Freddie Mac and Fannie Mae, the market value defintion requires no significant change in the way appraisals are made. Most corporations said the effect of financing or sales concessions have always been an essential factor in arriving at the estimated value of a house and that this change in the definition highlights the importance of such effects and more clearly demonstrates the appraiser’s responsibility in adjusting for them.
This is important to consumers because the two firms are major buyers of home loans originated by the more than 10,000 mortgage lenders in the nation, according to Leland Brendsel, acting president and chief executive office of Freddie Mac.
His organization helps increase the availability of mortgage money by purchasing mortgages from lenders and selling them as mortgage participation certificates to investors or pledging them as collateral for Freddie Mac collateralized mortgage obligations.
During a tour of the Fannie Mae headquarters in northwest Washington by the editors and writers, David O. Maxwell, chairman and chief executive officer, said the market value definition change reflects the reality of today’s housing market and should help bring more uniformity to the appraisal process. In this respect, it should have an impact similar to that of the standardized loan documents of the 1970s, he added.
Maxwell, who served as chairman and chief executive officer of Ticor Mortgage Insurance Co. in Los Angeles from 1973 to 1981 when he left to join Fannie Mae, said that last year’s net earnings of $37 million were a dramatic improvement over the firm’s losses of $57 million in 1984.
Chartered in 1938 as a government corporation, Fannie Mae became a private corporation in 1970--the same year that Freddie Mac was started by the savings institutions which own its preferred stock.
Freddie Mac’s Brendsel said he expects the firm to purchase $65-$70 billion worth of mortgages this year, up from $44 billion in 1985.
Michael Lea, the firm’s chief economist, said that mortgage interest rates have probably reached their lowest point and will begin to “creep up” at the end of summer and the beginning of fall. He said he doesn’t expect a big increase in mortgage interest rates.
Another Washington-based organization, the Mortgage Bankers Assn. of America, timed the release of 10 consumer brochures to coincide with the April 24-27 real estate writers seminar.
The brochures answering questions most commonly asked about qualifyig for a loan, early pay-offs, 15-year loans, settlement costs, second mortgages and other subjects, will be distributed through members of the association or can be obtained free to anyone who sends a stamped, self-addressed business size envelope to MBA Consumer Brochures, P.O. Box 65170, Washington, D.C. 20035-5170.
“The 10 brochures are a timely benefit for the hundreds of thousands of consumers who are reacting to the lowest mortgage interest rates in eight years by buying a house or refinancing a high interest mortgage,” according to Warren Lasko, executive vice president of the association.
The titles of the brochures are: “Refinancing Your Mortgage,” “What Happens After You Apply for a Mortgage,” “Closing the Loan,” “Letting Your Equity Work for You,” “How to Save Half on Interest Costs,” “A Consumer’s Guide to Smart Mortgage Shopping,” “Self Test,” “How to Own Your Home in 12-19 Years,” “Housing as an Investment” and “Choosing the Mortgage That Is Right for You.”
Virginia H. Knauer, special adviser to the President for Consumer Affairs and director of the Office of Consumer Affairs, said in a prepared statement that the information contained in the brochures “is necessary for sound mortgage decisions,” especially in the wake of financial deregulation and a “proliferation of competing mortgage products, some with very attractive features that were not available a few years ago.”
