THE NATION’S HOUSING : Lender May Change Rule on Appraisal

WASHINGTON — In a move with financial significance for millions of homeowners and sellers nationwide, the country’s largest lender may soon tell real estate appraisers to change the way they assign market values to residential properties.

Fannie Mae, the Federal National Mortgage Assn., has drafted a new rule that would instruct appraisers to examine the prices of actively listed but unsold homes on the market as part of the standard valuation process.

Under Fannie’s current rule, by contrast, appraisers need not look at the value of “comparable” homes on the market, only the contract prices of those already sold.

Fannie’s “Uniform Residential Appraisal Report” is the most widely used and influential appraisal form in the real estate market. It is employed not only in all Fannie Mae and Freddie Mac (Federal Home Loan Mortgage Corp.) financing transactions, but in many purely local, private bank or S&L; financings as well. Fannie’s rules set the basic parameters for millions of appraisals every year--and thus affect the size of loans available to borrowers, and indirectly, the prices sellers can command.

The change would have the most dramatic effect in markets that periodically experience rapid or sizable price fluctuations, up or down. In recent years such markets have included New England, the mid-Atlantic states, much of Florida, Texas, Arizona, New Mexico, Colorado, California, Oregon, Washington and Alaska.

Rather than basing current valuations on prices of sold homes, that may be six to 12 months out of date, the new Fannie Mae standard would require the appraiser to reflect more immediate pricing trends, as indicated by listings of similar homes actively for sale on the market.

In an area where prices had been declining or flat during 1990 and 1991, but have begun to turn around and head back up in 1992, the new report would enable appraisers to highlight that rebound in their valuations. Under existing rules, by contrast, appraisers have to base their calculations heavily on the prices of three “comparable” homes that have sold in the recent past.

In all probability those prices--negotiated while the market was in decline--would offer no hint of the upward swing in the market now under way.

As a result of the lower valuation, a purchaser’s maximum allowable loan amount on the house might well be lower than it otherwise could be.

Fannie Mae senior vice president Robert J. Englestad said that in a sagging market, where a house sells for $60,000 and three months later identical units carry listed asking prices of $55,000, “that tells you something important is going on there.”

If a lender was unaware of the plummeting asking prices--but looked solely at the higher appraisals of homes previously sold--the lender could agree to excessively large and risky mortgages.

While confirming that Fannie Mae has drafted the revised appraisal form, Englestad said that no final decision has been made yet to include current listing data. A new draft of the appraisal report should be circulated to private reviewers later this month, he said, and will be distributed for a four- to six-month “test period” in June. By next Jan. 1, the new form should be in use routinely in all 50 states.

Sources outside Fannie Mae who have reviewed the new form in detail say they would be surprised if the big lenders did not adopt the appraisal reforms.

Norman J. Goldberg, a New Jersey-based appraiser who heads the National Assn. of Realtors’ appraisal committee, said Fannie Mae’s changes “will be a tremendous improvement” for the entire real estate market.

“If you’re talking about reality in an appraisal,” he said, “you’ve got to somehow bring in current data on what’s going on.”

Independent appraiser Bruce Sokol of Nanuet, N.Y., whose practice is concentrated in the bedroom suburbs north of Manhattan, said the revisions would allow appraisers to “look at a house the same way any intelligent buyer does: You check the comparable listings (on the local multiple listing service), you check for comparable listings under contract, you look at how long comparable listings have been sitting around (unsold), etc. You don’t simply look back at what happened sometime last year.”

If Fannie Mae adopts the change, it will join the Employee Relocation Council (ERC) in incorporating current listing data in home appraisals. The ERC, which represents large employers and relocation brokers, requires appraisers to examine three “competing listings.”

The listing data includes not only price but any financing terms or concessions, location, physical condition, style or other factors that might affect its market value in relation to the house being sold or refinanced.

Distributed by the Washington Post Writers Group