Danger of 1004MC
1004MC : Danger!
If you conduct appraisals for residential lending, you are familiar with the 1004MC.
Many appraisers rely upon the data which populates the form for conclusions (e.g., trends for Property Values and Prices, relationship between Supply & Demand, etc.) which are later communicated on page 1 of a Fannie Mae appraisal report form. Of course, the data and analysis in the 1004MC are, in part, used by the appraiser in analysis in the Sales Comparison Approach.
What could go wrong with this scenario?
The correct answer is plenty, resulting in the appraiser communicating misleading opinions and conclusions.
What danger might there be in depending upon the data in the 1004MC as support for certain conclusions (i.e., Overall Trend) and opinions both in the 1004MC and in the neighborhood section on page 1 of a Fannie Mae appraisal report form?
There are instructions located at the top of the 1004MC form. If the appraiser places all reliance upon the first part of the first sentence (The appraiser must use the information required on this form as the basis for his/her conclusions…) and ignores the latter part of the sentence (… and must provide support for those conclusions regarding housing trends and overall market conditions as reported in the ‘Neighborhood’ section appraisal report form), the appraiser’s conclusions and opinions may be misleading.
Unthinking reliance upon must use without support for those conclusions may result overall trends that are not credible.
The very first sentence in the 1004MC is, “The purpose of this addendum is to provide the lender/client with a clear and accurate understanding of the market trends and conditions prevalent in the subject neighborhood.”
Do your appraisals provide the client and other intended users with a clear and accurate understanding of the market trends and conditions?
It is understood that a conclusion is supported and is credible. How might the data which populates the 1004MC, and which the appraiser relies, result in incredible conclusions?
There are two parts to the answer.
First, a frequent complaint from appraisers is that there are too few sold or active comparable properties within the defined neighborhood on page 1 of your appraisal report.
Don’t expand your neighborhood boundaries on the 1004MC only to fill out this form, while being inconsistent within the rest of your report. If the results of your neighborhood search are limited to four sales for the period 7-12 mos., one sale for 4-6 mos., and two sales for 0-3 mos., will limited data provide adequate support for your conclusions?
The appraiser cannot offer a credible opinion with limited data and inconclusive results.
Second, differences exist between the subject and the various properties profiled in the 1004MC.
These differences may be significant and adversely affect your conclusions. Using the data from the example above assume that the four sales (7-12 mos.) all have 2000 SF/GLA and all sold for $200,000; the 1 sale (4-6 mos.) has 2200 SF/GLA and it sold for $200,000; the 2 sales (0-3 mos.) both have 2500 SF/GLA and sold for $200,000.
Analyzing this detailed data beyond the sale price indicates a declining price trend. The appraiser who relies solely on the sale price and adhering only to the instruction: “The appraiser must use the information required on this form as the basis for his/her conclusions”, would respond to “Median Comparable Sale Price”/“Overall Trend” by marking the “Stable” box.
By reporting this information, the appraiser would be incorrect in the 1004MC as well as on page 1 of the Fannie Mae form.
Appraisal Board Member T.J. McCarthy observed, “I think that appraisers make a huge mistake when they feel that they have to follow the development and reporting instructions that Fannie has laid out. Isn’t that our (appraisers) job?”
And, “…guidelines are great but not when they become so rigid that they turn into requirements that could produce a misleading report. The state Board will not have any sympathy for an appraiser who tells us that’s how Fannie wants me to do it.”
Board Member Maureen Sweeney advises that appraisers should “Be very careful when one is only looking at the micro-market that is ‘required’ by Fannie Mae, especially when the macro-market is not considered or analyzed. It can lead to very bad results. We are appraisers who are trained and asked to analyze the neighborhood market. We need to start writing reports like that!”
My personal observation, as a practicing residential appraiser, is that I always have to include data and analysis which is more macro than micro in order to provide credible support for my opinions.
It is noted that the micro results are profiled in the 1004MC.
What to do?
Fannie Mae is aware that the data contained in the 1004MC may not be adequate to support credible conclusions.
In Fannie Mae’s Appraisal and Property Report Policies and Forms Frequently Asked Questions (FAQs) updated in March of 2009, the question was posed:
“What should the appraiser do if there is not enough data to present a meaningful analysis?”
The response from Fannie Mae:
“In those situations, the appraiser must complete the form with the information he or she has for defined neighborhood/area— the lack of data may speak to what is occurring in that area. Additional analysis can be addressed in the summary/conclusion section of the form on data in nearby areas for competitive properties. In any event, the appraiser must provide support for his or her conclusions regarding housing trends as noted in the Neighborhood section of the appraisal report.”
What does this all mean?
The appraiser must be certain that his or her opinions and conclusions are well supported. This requires that the appraiser, first, recognize when the available raw data is so limited that arriving at credible conclusions are not possible within your 1004MC and within the Market Description section on page 1 of the Fannie Mae form.
Following this recognition, the appraiser is obligated to expand above and beyond the 1004MC; do not limit yourself to what fits in the box.
Research and analyze in order to arrive at a supported conclusion.
The 1004MC is but a single tool available to the appraiser. It must be used carefully and thoroughly if the results are to be credible.
Anything less than credible is not an option.
By Lee Lansford – Illinois Appraiser Newsletters – September 2011 issue
- Hybrid Assignments, the Consequences - February 7, 2019
- Bankers Concerned About Appraisals - October 18, 2017
- Third Party Blues - July 19, 2017
I like your analysis. The 1004MC has many faults and is almost never a great indication of market movement in a market. Even when there is enough data median sales price has so many factors built into it that it doesn’t typically represent a “micro market” very well. I typically use a good sampling in the market and the price per square foot trends. Honestly the 1004MC should be filled out to the best of the ability of the appraiser and then present the statistics of the market in a different format to present the conclusions.
An appraisal report that addresses the requirements of USPAP and FNMA requires multiple trend studies and a reconciliation that acknowledges each study. Giving “zero weight” to the 1004MC data set and greater weight to those trend studies deemed germaine and reflective of the market does rise above the threshold of the guiding documents. Creating rules and regulations is the job of regulators. Distilling disparate information and a rationale reconciliation is what the Appraiser is paid to do.