Fannie Mae Places Ban on ‘Appraisal Cutting’

""Fannie Mae"":http://www.fanniemae.com is implementing a new policy this week regarding home appraisals. Effective Wednesday, September 1, lenders that sell loans to the GSE will be[IMAGE]

prohibited from making changes to appraisers' valuations â€" a practice that has become more widespread and is commonly referred to as ""appraisal cutting.""

Fannie Mae says through recent post-purchase reviews of loan files, cases were identified where the lender had reduced the opinion of market value in the appraisal report based upon underwriter judgment, automated valuation models, or other methodology. The practice has prompted the GSE to place a ban on so-called appraisal cutting.

In an ""updated policy guide"":https://www.efanniemae.com/sf/guides/ssg/sg/pdf/sel063010.pdf#page=571, Fannie says the lender is responsible for ensuring that appraisal reports are complete and that any changes to the report are made by the appraiser who originally completed the assessment.

If the lender has concerns with any aspect of the appraisal that result in questions about the reliability of the opinion of market value, Fannie Mae is directing the lender to first attempt to resolve its concerns with the appraiser directly

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by identifying the deficiencies found and providing justification for requesting correction of the deficiencies the lender believes make the report unreliable.

If the lender is unable to resolve its concerns with the appraiser, the lender must obtain a second appraisal prior to making a final underwriting decision on the loan.

""Any request for a change in the opinion of market value must be based on material and substantive issues and must not be made solely on the basis that the opinion of market value as indicated in the appraisal report does not support the proposed loan amount,"" according to Fannie's new policy.

The GSE adds, ""Lenders must pay particular attention and institute extra due diligence for those loans in which the appraised value is believed to be excessive or where the value of the property has experienced significant appreciation in a short time period since the prior sale.""

Fannie also states that lenders must only use appraisers who ""have the requisite knowledge to perform a professional quality appraisal for the specific geographical location and particular property types.""

The Uniform Standards of Professional Appraisal Practice (USPAP) allows an appraiser who does not have such knowledge and experience to accept an appraisal assignment by providing procedures with which the appraiser can complete the assignment, but Fannie Mae says it does not allow the USPAP flexibility.

In a ""new policy guide"": issued in late June, the GSE also outlined a number of other requirements surrounding appraisals, including situations in which an appraiser should choose to use either a foreclosure sale or a short sale as a comparable property, and excessive sales concessions which can artificially inflate the sales price of a property.