AppraisingAmerica Online: FNMA APPRAISAL GUIDELINES, Federal National Mortgage Association Real Estate Appraisal Guidelines
| XI, Introduction (06/30/02) This Part -- Property and Appraisal Guidelines -- details our general requirements for analyzing the property appraisal aspects of conventional mortgages secured by one- to four-family properties. It also discusses special considerations for certain types of housing-units in condominium, PUD, and cooperative projects; manufactured (and other factory-built) homes; Community Living group homes; mixed-use properties; properties affected by environmental hazards; urban properties; affordable housing program properties; properties located in special assessment or community facilities districts; properties subject to leasehold interests (including those held by community land trusts); and energy-efficient properties -- that merit special consideration in the property and appraisal review. Because the evaluation of a property is such a vital part of the risk analysis, we expect a lender to place as much emphasis on underwriting the property and reviewing the appraisal as it does on underwriting the borrower's creditworthiness. We require the appraiser to provide complete and accurate reports; to report neighborhood and property conditions in factual and specific terms; to be impartial and specific in describing favorable or unfavorable factors; and to avoid the use of subjective, racial, or stereotypical terms, phrases, or comments in the appraisal report. The opinion of market value must represent the appraiser's professional conclusion, based on market data, logical analysis, and judgment. When the information or methodology of an appraisal requires additional clarification or justification, the lender's underwriter must obtain from the appraiser any information that is necessary to make an informed decision concerning the property. We require that the appraiser and the lender follow appropriate practices in the property valuation and underwriting processes. Our appraisal standards specifically prohibit the development of a valuation conclusion that is based on race, color, religion, sex, handicap, familial status, or national origin. The effectiveness of our property underwriting guidelines is dependent on the ability of a lender and its appraisers to avoid the use of potentially discriminatory practices in the property appraisal and underwriting processes. We hold the lender responsible for the accuracy of both the appraisal and its assessment of the marketability of the property; therefore, it is important for a lender's underwriters to understand their role in the appraisal process and their relationship to the appraiser. • The appraiser's role is to provide the lender with an accurate, and adequately supported, opinion of value and an accurate description of the property. • The underwriter's role is to review the appraisal report to assure that it is of professional quality and is prepared in a way that is consistent with our appraisal standards, to analyze the property based on the appraisal, and to judge the property's acceptability as security for the mortgage requested in view of its value and marketability. [Page : 1102 06/30/02] These requirements are intended to provide guidance to an underwriter and an appraiser about the type of information that is needed to make a prudent underwriting decision. They are also designed to provide our minimum acceptable appraisal standards. We recognize that our guidelines may not address every appraisal problem; therefore, we allow the appraiser discretion to properly develop the value opinion. The appraiser must, however, provide sound reasoning in his or her appraisal report for any decisions he or she makes that are not specifically covered by our guidelines. This Part XI consists of four Chapters: • Chapter 1 -- Appraiser Qualifications -- discusses the lender's responsibility for selecting appraisers and for reviewing their appraisals both initially and on an ongoing basis, the use of supervisory or review appraisers, and our right not only to refuse to accept appraisals prepared by specific appraisers, but also to refer unacceptable appraisal reports to the appropriate state appraiser licensing or regulatory boards for investigation and action. • Chapter 2 -- Appraisal (or Property Inspection) Documentation -- describes the various appraisal (or property inspection) report forms that are to be used to document an appraisal (or property inspection) and any required exhibits to them; discusses requirements related to the age of an appraisal (or property inspection) report; explains the types of appraisals needed for new, proposed, and existing construction; and references the various certifications that an appraiser must make. • Chapter 3 -- Special Appraisal Considerations -- discusses considerations that should be given to properties with unusual features, points out the need for properties to meet specific eligibility criteria in order for the mortgage to be delivered to us, and explains the detrimental effect that certain environmental conditions can have on a property's value. • Chapter 4 -- Reviewing the Appraisal Report -- discusses the requirements for analyzing a property and its appraisal. XI, Chapter 1: Appraiser Qualifications (06/30/02) [Page : 1103 06/30/02] It is essential that a lender obtain an independent, disinterested examination and valuation of the property that secures a mortgage it intends to sell to us; therefore, the lender must select the appraiser and order (and receive) the appraisal report for each mortgage transaction, rather than allowing the borrower or any other party who has an interest in the transaction (such as the property seller or the real estate broker) to do so. The lender must not attempt to apply pressure or otherwise unduly influence the appraiser to reflect certain results in his or her analysis or reporting. However, this does not mean that a lender cannot question the appraiser's findings or provide factual information (such as comparable market data) for further consideration by the appraiser. This approach will assure that the appraiser will remain free of any outside influence in the valuation process. We do not approve appraisers. Therefore, when selecting an appraiser, a lender must not give any consideration to an appraiser's representation that he or she is approved or qualified by Fannie Mae. Because a lender is solely accountable for the performance of the appraisers it selects, the lender must take appropriate steps to ensure that an appraiser is qualified to perform appraisals for the particular types of property and the property locations that it intends to refer to that appraiser. If a lender chooses to rely on a specific appraiser or appraisal service to review the qualifications of -- or even to select -- an individual to perform appraisals for the lender, the lender should establish appropriate qualifications to ensure that acceptable individuals are selected. We recommend that the lender require the appraiser or appraisal service that makes the selection to assume full responsibility for the quality of the appraisal. However, imposing this responsibility on the appraiser or appraisal service will in no way relieve the lender of its warranties related to the appraisal or the condition of the property. XI, 101: Selection of Appraisers (06/30/02) When evaluating an appraiser's qualifications, a lender should review the appraiser's education and experience, sample appraisals, professional affiliations, and references from prior clients and employers. Professional appraisal designations can be helpful to the lender in evaluating an appraiser's qualifications, particularly when the designation is from a nationally recognized organization that has formal experience, education, and ethics requirements that are strongly administered. If the lender considers an appraisal designation in its evaluation, it should be familiar with the appraisal organization's specific requirements to assure that the designation is evaluated appropriately. However, federal law prohibits a lender from selecting or hiring an appraiser based solely on the appraiser's membership in any particular appraisal organization or from not hiring an appraiser based solely on his or her lack of membership in any organization. [Page : 1104 06/30/02] The appraiser must be experienced in appraising the types of properties that the lender intends to use his or her services for, have access to the necessary data sources, and be currently active in appraisal work. Before using an appraiser's services, the lender should be satisfied that the appraiser has demonstrated the ability to perform quality appraisals. A lender must not assume that an appraiser is qualified simply based on his or her membership in, and professional designation from, an appraisal organization or the fact that he or she is state-licensed or -certified. XI, 101.01: Licensing and Certification Requirements (06/30/02) We require a lender to use appraisers that are state-licensed or -certified (in accordance with the provisions of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989) to appraise the properties that secure mortgages it intends to deliver to us. The lender (and any third-party originators it uses) must be aware of, and in full compliance with, state laws for licensing and certification of real estate appraisers. The lender must document that the appraisers it uses are licensed or certified as appropriate under the applicable state law, either by including the license or certification number with the appraiser's list of qualifications that the lender has on file or by retaining a copy of the license or certification in the file the lender maintains for the appraiser. The appraiser must note his or her license or certification number on the individual appraisal report forms. When a new appraisal is required for a mortgage that a lender delivers to us, the lender warrants that the property has been appraised by a state-licensed or -certified appraiser. Our appraisal report forms define the appraiser as the individual who personally inspected the property being appraised, inspected the exterior of the comparables, performed the analysis, and prepared and signed the appraisal report as the appraiser. This definition does not preclude an appraiser from relying on individuals who are not state-licensed or -certified to provide significant professional assistance (such as an appraiser trainee or an employee of the appraiser doing market data research or data verification) in the development of the appraisal. The state-licensed or -certified appraiser who signs the appraisal report must acknowledge in the report the extent of the professional assistance provided by others and the specific tasks performed by each such individual and must certify that the named individual(s) are qualified to perform the tasks. Under some state laws, a lender's use of an unlicensed or uncertified appraiser who is working as an employee or subcontractor of a licensed or certified appraiser will satisfy the state's licensing and certification requirement, as long as the appraisal report is signed by a state-licensed or -certified "supervisory" or "review" appraiser. If a lender is unable to make the required warranty regarding the use of a state-licensed or -certified appraiser because it is experiencing significant delays in obtaining appraisals as the result of a scarcity of state-licensed or -certified appraisers in the state or locality, it must document the individual mortgage file with a copy of an authorized temporary waiver of the [Page : 1105 03/20/95] appraiser licensing and certification requirements (or a copy of its letter requesting such a waiver). Requests for these temporary waivers should be directed to the Appraisal Subcommittee of the Federal Financial Institutions Examination Council. XI, 101.02: Knowledge and Experience Requirements (06/30/02) We expect a lender to use an appraiser who not only has the knowledge and experience that is required to perform a professional quality appraisal for the specific geographic location and the particular property type for which the lender needs an appraisal, but also has knowledge about, and access to, the necessary and appropriate data sources for the area in which the appraisal assignment is located. The Competency Rule of the Uniform Standards of Professional Appraisal Practice requires a state-licensed or -certified appraiser who does not have both the knowledge and experience required to perform an appraisal competently to disclose his or her lack of knowledge and experience to the client before accepting an appraisal assignment. This rule acknowledges that the background and experience of appraisers varies widely and that the lack of knowledge and/or experience can lead to inaccurate property valuations and inappropriate appraisal practices. The Uniform Standards allow an appraiser who does not have the appropriate knowledge and experience to accept an assignment as long as he or she • discloses the lack of knowledge and/or experience to the client before accepting the assignment; • takes all steps necessary or appropriate to complete the assignment competently; and • describes in the appraisal report his or her lack of knowledge and/or experience and the steps he or she has taken to complete the assignment competently. We believe that it is important for a lender to use an appraiser who has both the appropriate knowledge and experience, rather than taking advantage of this flexibility. We further believe that the use of an appraiser who has both appropriate knowledge of specific geographic markets and experience in appraising specific property types will help to assure the accurate valuations and appropriate appraisal practices that are necessary for fair lending. A lender must not assume -- simply based on the fact that an appraiser is state-licensed or -certified -- that the appraiser is qualified and knowledgeable about a market area or is aware of the appropriate market data sources for the area and will be able to obtain access to them. If an appraiser is not knowledgeable about a particular location, is not experienced in appraising a particular type of property, or is not familiar with (or does not have access to) the appropriate data sources, a lender should not give the appraiser assignments in that market area or for that particular type of property. [Page : 1106 03/20/95] Because the experience and knowledge of appraisers varies widely, a lender that chooses to rely on a specific appraiser or appraisal service to review the qualifications of (or even to select) individuals to perform appraisals for the lender should establish appropriate appraiser qualification criteria and review procedures to assure that the third party takes all of the above issues into consideration in its selection process. XI, 101.03: Use of Supervisory or Review Appraisers (03/20/95) We allow an unlicensed or uncertified appraiser who works as an employee or subcontractor of a licensed or certified appraiser to perform a significant amount of the appraisal (or the entire appraisal if he or she is qualified to do so) -- as long as the appraisal report is signed by a licensed or certified "supervisory" or "review" appraiser and is acceptable under state law. In some cases, a lender may request that the appraisal reports prepared by a specific state-licensed or -certified appraiser be cosigned by his or her employer or contractor as a "supervisory" appraiser either because that is a tradition in the locality or because it wants to acknowledge the relationship between the appraiser and the employer or contractor. When a "supervisory" appraiser is used, the "supervisory" appraiser must certify that he or she directly supervises the appraiser who prepared the appraisal report, has reviewed the appraisal report, agrees with the statements and conclusions of the appraiser, agrees to be bound by some of the same certifications that the appraiser made, and takes full responsibility for the appraisal report. If an appraiser is performing a "review" function that is different from the one discussed above, he or she must prepare a separate review report and attach it to the appraisal report being reviewed. For instance, this approach would apply when a lender chooses to use an appraisal service and one of the conditions of the delegation is that the appraiser or appraisal service must assume responsibility for the appraisal. XI, 102: Ongoing Review of Appraisals (03/20/95) A lender must continually evaluate the quality of the appraiser's work through the normal underwriting review of all appraisal reports, as well as through the spot-check field review of appraisals as part of its quality assurance system. The lender may use our Residential Appraisal Field Review Report (Form 2000) for the spot-check appraisal component of its quality assurance system if it chooses to do so, but we do not require use of that form. The lender must be satisfied that any appraisers it uses for spot-check field reviews are well-qualified. The lender must have sufficient knowledge of our appraisal requirements to enable it to determine that the appraiser has properly addressed our specific criteria, the appraiser has developed objective and unbiased appraisals, and the appraiser has not engaged in any unacceptable appraisal practices. XI, 102.01: Objective and Unbiased Appraisals (03/20/95) A number of laws -- federal, state, and local -- prohibit discrimination in the appraisal of housing. We believe professional appraisers fully understand that discriminatory valuation and appraisal reporting practices are not only [Page : 1107 03/20/95] illegal, but also unethical. Unintentional discrimination, however, can occur as the result of what an appraiser states -- or fails to state -- in his or her appraisal report. A lender must make sure that the appraisers it uses describe the property and the neighborhood in factual, unbiased, and specific terms. The lender and the appraiser must assure that the integrity of the loan decision is not influenced by subjective, racial, or stereotypical terms, phrases, or comments in the appraisal report. An appraiser must not use subjective phrases or comments in the appraisal report. Examples of unacceptable terminology include "pride of ownership," "no pride of ownership," "lack of pride of ownership," "poor neighborhood," "good neighborhood," "crime-ridden area," "desirable neighborhood or location," and "undesirable neighborhood or location." Other subjective terminology that can result in erroneous conclusions being reached is equally unacceptable. Discrimination can also result when an appraiser makes unsupported assumptions or interjects personal opinion or perceptions about factors in the valuation process that may or may not affect the use and value of a property. We require the appraiser to consider all factors that have an effect on value and to be objective and unbiased in his or her development of the opinion of market value in the appraisal report. The appraiser and the lender must not make unsupported assumptions or interject personal opinions or perceptions about any factors, whether or not the factors affect the use and value of the property. We specifically prohibit an appraiser from basing (either partially or completely) his or her analysis and/or opinion of market value on the race, color, religion, sex, handicap, familial status, or national origin, of either the prospective owners or occupants of the property being appraised or the present owners or occupants of the properties in the vicinity of that property. Our appraisal report forms for one- to four-family properties are designed to provide for an objective and unbiased description and analysis of the neighborhood, site, and improvements. Factors that influence the value of the properties in the neighborhood must be identified and analyzed in the valuation process and described in the appraisal report. Failure to address and note adverse factors or conditions that affect value or marketability with respect to the neighborhood, site, or improvements is an unacceptable appraisal practice. We specifically require the appraiser to certify that he or she has taken into consideration in the valuation process the factors that have an effect on value and has not knowingly withheld any significant information from the appraisal report. We also require the appraiser to certify that he or she has no present or prospective personal interest or bias with respect to the participants in the transaction and that the analysis and/or the opinion of market value in the appraisal report was not based (either partially or completely) on the race, color, religion, sex, handicap, familial status, or national origin of either the prospective owners or occupants of the subject property or the present owners or occupants of properties in the vicinity of the subject property. [Page : 1108 03/20/95] We require the appraiser's comments to be stated in specific, factual terms that are supported by the information included in the appraisal report. Including an unsupported descriptive comment or drawing an unsupported conclusion from subjective observations is an unacceptable appraisal practice that may have a discriminatory effect. The appraiser's comments that address an unfavorable condition -- such as the existence of an adverse environmental or economic factor -- must discuss how the condition affects the value and/or marketability of the property being appraised and explain how the condition was taken into consideration in the valuation process. In such cases, we expect the appraiser's analysis to reflect and include comparable sales that are similarly affected, whenever possible. For example, if a property is located in an urban neighborhood that has vacant or boarded-up properties that affect the value and/or marketability of properties in the neighborhood, the appraiser needs to address these conditions in his or her analysis and appraisal report, and to use comparables sales from the same neighborhood (whenever possible) to assure that any effect of the vacant or boarded-up properties is taken into consideration in the development of the opinion of market value for the subject property. The appraiser would also need to address the reasons for the vacancies or boarded-up properties in factual terms (by providing data related to such things as demand/supply, foreclosure rates, tax sales, etc.) and discuss how this factor affects the market value and marketability of the property being appraised and other properties in the neighborhood. XI, 102.02: Unacceptable Appraisal Practices (01/29/02) Since we hold the lender responsible for the quality of the appraisals it uses to support the value of a security property, the lender should take appropriate action to assure that the appraisers it uses do not engage in unacceptable practices. The following are examples of appraisal practices that we consider as unacceptable: • Development of and/or reporting an opinion of value that is not supportable by market data or that is misleading; • Development of a valuation conclusion that is based -- either partially or completely -- on the sex, race, color, religion, handicap, national origin, or familial status of either the prospective owners or occupants of the subject property or the present owners or occupants of the properties in the vicinity of the subject property; or that is based on any other factor that local, state, or federal law designates as being discriminatory, and thus, prohibited; • Inclusion of inaccurate factual data about the subject neighborhood, site, improvements, or comparable sales; • Failure to comment on negative factors with respect to the subject neighborhood, subject property, or proximity of the subject property to adverse influences; [Page : 1109 01/29/02] • Failure to analyze and report any current agreement of sale, option, or listing of the subject property and the prior sales of the subject property and the comparable sales; • Selection and use of inappropriate comparable sales or the failure to use comparable sales that are locationally and physically the most similar to the subject property; • Creation of comparable sales by combining vacant land sales with the contract purchase price of a home that has been built or will be built on the land; • Use of comparable sales in the valuation process even though the appraiser has not personally inspected the exterior of the comparable properties by, at least, driving by them; • Use of adjustments to the comparable sales that do not reflect the market's reaction to the differences between the subject property and the comparable sales, or the failure to make adjustments when they are clearly indicated; • Use of data -- particularly comparable sales data -- that was provided by parties who have a financial interest in the sale or financing of the subject property without the appraiser's verification of the information from a disinterested source. For example, it would be inappropriate for an appraiser to use comparable sales provided by the real estate broker who is handling the sale of the subject property, unless the appraiser verifies the accuracy of the data provided with another source and makes an independent investigation to determine that the comparable sales provided were the best ones available; • Development of and/or reporting an appraisal in a manner or direction that favors either the cause of the client or any related party, the amount of the opinion of value, the attainment of a specific result, or the occurrence of a subsequent event in order to receive compensation and/or employment for performing the appraisal and/or in anticipation of receiving future assignments; and • Development of and/or reporting an appraisal in a manner that is inconsistent with the requirements of the Uniform Standards of Professional Appraisal Practice that were in place as of the effective date of the appraisal. XI, 103: Refusal to Accept Certain Appraisals (01/29/02) From time to time, we may refuse to accept appraisals prepared by specific appraisers or we may notify a lender that we will no longer accept appraisals prepared by a given appraiser. When we notify a lender that we will no longer accept appraisals from a particular appraiser, we will allow the lender a certain amount of time to clear its mortgage pipeline. After that, it must not submit to us any mortgages secured by properties appraised by that individual. [Page : 1110 01/29/02] We may also refer unacceptable appraisal reports to the appropriate state appraiser licensing or regulatory boards for investigation and action. Our decision to make such referrals does not affect the lender's responsibility for managing the property valuation and appraisal review process. XI, Chapter 2: Appraisal (or Property Inspection) Documentation (06/30/02) [Page : 1111 06/30/02] The lender must disclose to the appraiser any and all information about the subject property that it is aware of, if the information could affect either the marketability of the property or the appraiser's opinion of the market value of the property. Specifically, the lender must make sure that it provides the appraiser with all appropriate financing data and sales concessions for the subject property that will be, or have been, granted by anyone associated with the transaction. Generally, this can be accomplished by providing the appraiser a copy of the complete, ratified sales contract for the property that is to be appraised. If the lender is aware of additional pertinent information that is not included in the sales contract, it should inform the appraiser. Information that must be disclosed includes: • settlement charges; • loan fees or charges; • discounts to the sales price; • payment of condominium/PUD fees; • interest rate buydowns, or other below-market-rate financing; • credits or refunds of the borrower's expenses; • absorption of monthly payments; • assignment of rent payments; and • nonrealty items that were included in the transaction. The lender must also disclose to the appraiser any information about an environmental hazard in or on the subject property or in the vicinity of the property that it obtains from the borrower, the real estate broker, or any other party to the transaction so the appraiser can consider any influence the hazard may have on the value and marketability of the property. XI, 201: Age of Appraisal (or Property Inspection) (06/30/02) The property must have been appraised (or inspected, if that is the level of property fieldwork recommended for a Desktop Underwriter-processed mortgage) within the 12 months that precede the date of the note and mortgage. When an appraisal report will be more than four months old on the date of the note and mortgage -- regardless of whether the property was appraised as proposed or existing construction -- the appraiser must inspect the exterior of the property and review current market data to determine whether the property has declined in value since the date of the original appraisal. [Page : 1112 01/29/02] • If the appraiser indicates that he or she believes that the property has declined in value, the lender must obtain a new appraisal for the property. • If the appraiser indicates that he or she believes that the property has not declined in value, the lender should request the appraiser to provide an update to the appraisal, based on his or her exterior inspection of the property and knowledge of current market conditions. The inspection and the appraisal update must occur within the four months that precede the date of the note and mortgage. These processes are an "update" of the original appraisal report, which means that they are an extension of the original appraisal report that changes the effective date of the opinion of value to reflect a current date. An update can be reported in different formats -- such as in an appraisal report form or in a letter. Regardless of how the appraisal update is reported, it is an appraisal that incorporates (usually by reference) information included in the original appraisal report. Generally, the original appraiser should complete the appraisal update; however, the lender may use a substitute appraiser. In such cases, the substitute appraiser must review the original appraisal and express an opinion about whether the original appraiser's opinion of market value was reasonable on the date of the original appraisal report. The lender should note in its files why the original appraiser was not used. When a property inspection report for a Desktop Underwriter-processed mortgage will be more than four months old on the date of the note and mortgage, the appraiser must reinspect the property and prepare a new Desktop Underwriter Property Inspection Report (Form 2075). XI, 202: Status of Construction (06/30/02) Generally, we require the improvements for the subject property to have been completed when the mortgage is delivered to us. However, we do make some exceptions to this and, in such cases, an appraisal report should be developed in accordance with the following criteria: • For new or proposed construction, an appraisal may be based on either plans and specifications or an existing model home, if the lender obtains a certification of completion before it delivers the mortgage to us. This certification should be completed by the appraiser, state that the improvements were completed in accordance with the requirements and conditions in the original appraisal report, and be accompanied by photographs of the completed improvements. When the completion of certain items that are included as part of the sales contract -- such as landscaping, a driveway, or a sidewalk -- or other minor items that do not affect the ability to obtain an occupancy permit has to be postponed for some reason, the lender may deliver the mortgage before these postponed items are completed if it represents and warrants that the postponed improvements will be completed [Page : 1113 06/30/02] within 180 days after the date of the mortgage note. The appraisal report must show both the cost of completing the postponed items and the "as completed" value of the property after completion of the postponed improvements, although no dollar-for-dollar adjustments should be made. The cost of completing any minor improvements must not represent more that 2% of the "as completed" appraised value of the property. - The lender must establish a "completion escrow" for the postponed improvements, by withholding from the purchase proceeds funds equal to 120% of the estimated cost for completing the improvements. However, if the contractor or builder offers a guaranteed "fixed price" contract for completion of the improvements, the funds in the "completion escrow" only need to equal the full amount of the contract price. - The lender and the borrower must enter into an escrow agreement that determines how the lender will manage and disburse funds from the escrow account. Once a certificate of completion is obtained, the lender must release the final draw from the escrow account (which should include any funds in excess of the amount needed to pay for completion of the postponed items). The final title report must not show any outstanding mechanic's liens or take any exceptions to the postponed improvements or the escrow agreement. If the final title report is issued before the completion of the improvements, the lender must obtain an endorsement to the title policy that ensures the priority of our lien. • For existing construction, an appraisal may be based on the "as is" condition of the property if minor conditions that do not affect the livability of the property exist -- such as minor deferred maintenance -- as long as the appraiser's opinion of value reflects the existence of these conditions. The lender must review carefully the appraisal for a property appraised in an "as is" condition to assure that the property does not have any physical deficiencies or conditions that would affect its livability. If there are none, the lender does not need to require minor repairs to be completed before it delivers the mortgage to us. When there are incomplete items or conditions that do affect the livability of the property -- such as a partially completed addition or renovation -- or physical deficiencies that could affect the soundness or structural integrity of the improvements, the property must be appraised subject to completion of the specific alterations or repairs. In such cases, the lender must obtain a certificate of completion from an appraiser before it delivers the mortgage to us. The certification does not need to include photographs of the property unless those that accompanied the original appraisal report are no longer representative of the completed property. [Page : 1114 06/30/02] Generally, the original appraiser should complete any required certification of completion; however, the lender may use a substitute appraiser. In such cases, the substitute appraiser must review the original appraisal and certify that the original appraiser's description of the property was accurate and the opinion of market value was reasonable on the date of the original appraisal report. The lender should note in its files why the original appraiser was not used. XI, 203: Appraisal (or Property Inspection) Reports (06/30/02) Our appraisal report forms recognize the Uniform Standards of Professional Appraisal Practice as the minimum appraisal standards for the appraisal industry. In addition, we have established our own separate appraisal requirements to supplement the Uniform Standards because we believe that this is necessary to assure that all of our specific concerns are addressed for any given appraisal. Our appraisal report forms are designed in a way that results in an appraiser's being in full compliance with our requirements if he or she provides all of the information required by the forms and presents the applicable data accurately and completely. The appraisal report forms we use provide a concise format for presenting both the appraiser's description of the subject property and the valuation analysis that leads to the opinion of market value. The appraisal report that should be used generally depends on the underwriting method and the type of property that is being appraised. The appraiser must complete our forms in a way that will clearly reflect the thoroughness of his or her investigation and analysis and provide the rationale for the opinion of market value. Although the scope or extent of the appraisal process is guided by our appraisal report forms, the forms do not limit or control the appraisal process. The appraiser's analysis should go beyond any limitations of the forms, with additional comments and exhibits being used if they are needed to adequately describe the subject property, document the analysis and valuation process, or support the appraiser's conclusions. The extent of the appraiser's data collection, analysis, and reporting must be determined by the complexity of the appraisal assignment. An appraiser may use computer software programs that are designed to reproduce our appraisal report forms -- including programs that have "expandability" features that allow increases in areas of the forms that call for the insertion of narrative comments. However, the sequence of the information -- as well as all of the specific information (including the instructions, entries, directions, etc.) -- must be exactly as it appears on the hard-copy of the form(s). A lender may accept an appraisal report that is transmitted electronically using facsimile (fax) machines, Internet connections, wireless transmissions, or any other types of transmissions that use public or private telephone lines -- as long as the appraisal report adequately identifies the appraiser and includes a reproduced signature of the appraiser whose name appears on the report, and the lender represents and warrants to us that the appraisal [Page : 1115 06/30/02] report was created by the appraiser identified on the appraisal report and that the appraisal report is the complete and unaltered report submitted by the identified appraiser. The lender may store any appraisal reports it receives (whether they are originally provided as paper documents or in electronic format) by using any photographic, electronic, optical, or other storage technology that enables it to retrieve and reproduce a complete and clear copy of an appraisal report (and its related addenda, photographs, and attachments) at any time in response to a request from us. Regardless of the transmission or storage method used, the lender will be responsible for the accuracy of the information and the integrity of the documents and for assuring that the appraisal was prepared in accordance with our appraisal guidelines. XI, 203.01: Manually Underwritten Mortgages (06/30/02) We have five different appraisal forms that can be used for manually underwritten mortgages, depending on either the type of property being appraised or the type of mortgage that is secured by the property. The appraiser must use our latest version of one of the following forms and include any other data -- either as an attachment or addendum to the appraisal report form -- needed to adequately support the opinion of market value: • Uniform Residential Appraisal Report (Form 1004), for one-family properties and units in planned unit developments (including those that have an illegal second unit or accessory apartment that we will consider as acceptable security) that secure either first or second mortgages. Form 1004 may also be used for two-family properties, if each of the units is occupied by one of the co-borrowers as his or her principal residence or if the value of the legal second unit is relatively insignificant in relation to the total value of the property (as might be the case for a basement unit or a unit over a garage). In addition, appraisals for units in condominium projects that consist solely of detached dwellings may be documented on Form 1004, if the appraiser includes an adequate description of the project and information about the owners' association fees and the quality of the project maintenance; • Small Residential Income Property Appraisal Report (Form 1025), for two- to four-family properties (including those that are located in PUD projects); • Individual Condominium Unit Appraisal Report (Form 1073), for one-family properties that are units in condominium projects; • Individual Cooperative Interest Appraisal Report (Form 1075), for one-family properties that are units in cooperative projects; or • Desktop Underwriter Quantitative Analysis Appraisal Report (Form 2055), for one-family principal residences and second homes (including units in condominium and PUD projects), provided the appraiser [Page : 1116 06/30/02] inspects both the interior and exterior of the property. (If the property secures a Streamlined Purchase Money Mortgage Option 1, only the exterior of the property needs to be inspected.) XI, 203.02: Desktop Underwriter-Processed Mortgages (06/30/02) We have three different streamlined appraisal forms that can be used for Desktop Underwriter-processed mortgages that are secured by one-family properties -- the Desktop Underwriter Quantitative Analysis Appraisal Report (Form 2055), the Desktop Underwriter Qualitative Analysis Appraisal Report (Form 2065), and the Desktop Underwriter Individual Cooperative Interest Appraisal Report (Form 2095). In addition, we have a fourth form -- the Desktop Underwriter Property Inspection Report (Form 2075) -- which an appraiser uses to document an exterior property inspection (but not to provide an opinion of market value) when we rely on the property valuation performed by Desktop Underwriter's proprietary automated valuation models. Our Small Residential Income Property Appraisal Report (Form 1025) should be used for Desktop Underwriter-processed mortgages that are secured by two- to four-family properties. When a mortgage is processed in Desktop Underwriter, the system will recommend the use of one of three levels of property fieldwork. Regardless of the recommended level, the lender remains responsible for the quality of the fieldwork and must manage the property appraisal (or inspection) process, select the appraiser, and order the appraisal (or property inspection) report. One of the following levels of property fieldwork and review will be recommended by Desktop Underwriter based on the results of its risk analysis for a mortgage: • The appraiser must perform both an interior and an exterior inspection of the property, and summarize the results of his or her analysis on the current version of either the Desktop Underwriter Quantitative Analysis Appraisal Report (Form 2055) or the Desktop Underwriter Individual Cooperative Interest Appraisal Report (Form 2095), depending on the type of property; • The appraiser should, at a minimum, perform only an exterior inspection of the property, and summarize the results of his or her analysis on the current version of either the Desktop Underwriter Quantitative Analysis Appraisal Report (Form 2055), the Desktop Underwriter Qualitative Analysis Appraisal Report (Form 2065) or, if applicable, the Desktop Underwriter Individual Cooperative Interest Appraisal Report (Form 2095); or • The appraiser should, at a minimum, perform only an exterior inspection of the property, and summarize the results of the inspection on the Desktop Underwriter Property Inspection Report (Form 2075). The level of fieldwork recommended by Desktop Underwriter represents our minimum documentation requirements for the property. The lender may choose either to obtain the minimum documentation we require or to [Page : 1117 06/30/02] ask the appraiser to provide additional documentation (based on the specific characteristics of the individual case). Desktop Underwriter's option of performing an appraisal based only on an exterior inspection of the property is predicated on the appraiser's ability to obtain sufficient information about the physical characteristics of the property from reliable sources. The appraiser's description of the physical characteristics of the property should be based on what he or she considers to be reliable data sources for the property and location. The appraiser should use the same type of data sources that he or she uses for comparable sales -- multiple listing service information, tax and assessment records, observations from prior inspections, previously prepared appraisal files, information provided by the property owner, etc. If the exterior inspection of the property does not provide enough information for the appraiser to perform the appraisal, the appraiser must also inspect the interior of the property. For example, the appraiser might choose to inspect the interior of the property if he or she cannot adequately view the property improvements from the street; is unable to reconcile significant discrepancies among available data sources with respect to size, condition, or other factors about the property; identified apparent physical deficiencies or adverse property conditions during the exterior inspection; needs additional information for a property that is undergoing rehabilitation; etc. XI, 204: Exhibits to Appraisal (or Property Inspection) Reports (06/30/02) We require certain exhibits to support each appraisal (or property inspection) report. The exhibits may vary depending on the underwriting method, the type of property, whether the borrower is purchasing the property as a residence or for investment purposes, or the type of property inspection performed. XI, 204.01: Manually Underwritten Mortgages (06/30/02) Unless we specify otherwise, we require the following exhibits for any appraisal report that is used for a manually underwritten mortgage: • A street map that shows the location of the subject property and of all comparables that the appraiser used; • An exterior building sketch of the improvements that indicates the dimensions. (For a unit in a condominium or cooperative project, the sketch of the unit must indicate interior perimeter unit dimensions rather than exterior building dimensions.) Generally, the appraiser must also include calculations to show how he or she arrived at the estimate for gross living area; however, for a unit in a condominium or cooperative project, the appraiser may rely on the dimensions and estimate for gross living area that are shown on the plat. In such cases, the appraiser does not need to provide a sketch of the unit as long as he or she includes a copy of the plat with the appraisal report. A floor plan sketch that indicates the dimensions is required instead of the exterior [Page : 1118 06/30/02] building or unit sketch if the floor plan is atypical or functionally obsolete, thus limiting the market appeal for the property in comparison to competitive properties in the neighborhood; • Clear, descriptive photographs (either in black and white or color) that show the front, back, and a street scene of the subject property, and that are appropriately identified. (Photographs must be originals that are produced either by photography or electronic imaging.); • Clear, descriptive photographs (either in black and white or color) that show the front of each comparable sale and that are appropriately identified. (We do not require photographs of comparable rentals and listings.) Generally, photographs should be originals that are produced by photography or electronic imaging; however, copies of photographs from a multiple listing service or from the appraiser's files are acceptable if they are clear and descriptive; • Certification of completion or appraisal update -- either as a letter or as a form that provides the necessary information -- if applicable; • An Operating Income Statement (Form 216) or a similar cash flow and operating income statement, if the property is an investment property (including a two- to four-family property in which the applicant will occupy one unit as a principal residence). Generally, the statement may be prepared by either the applicant or the appraiser (although the applicant for a Community Living mortgage must prepare the statement). (When the applicant prepares a Form 216, the appraiser's comments on the reasonableness of the projected operating income must be included on the form. When the appraiser prepares a Form 216, the lender must make sure the appraiser has operating statements; expense statements related to mortgage insurance premiums, owners' association dues, leasehold payments, or subordinate financing payments; and any other pertinent information related to the property.); • A Single-Family Comparable Rent Schedule (Form 1007), if the property is a one-family investment property (other than one that secures a Community Living mortgage); and • Any other data -- as an attachment or addendum to the appraisal report form -- that are necessary to provide an adequately supported opinion of market value. XI, 204.02: Desktop Underwriter-Processed Mortgages (06/30/02) The exhibits required for any appraisal or property inspection report that is used for a Desktop Underwriter-processed mortgage are based on the type of property inspection that Desktop Underwriter recommends: • If Desktop Underwriter recommends an exterior only inspection of the property -- using either the Desktop Underwriter Quantitative Analysis Appraisal Report (Form 2055), the Desktop Underwriter Qualitative Analysis Appraisal Report (Form 2065), or the Desktop Underwriter [Page : 1119 06/30/02] Individual Cooperative Interest Appraisal Report (Form 2095) -- the only exhibits we require are a street map that shows the location of both the subject property and the comparable sales and a photograph that shows the front scene of the subject property. When Forms 2055 and 2065 are used in connection with a one-family investment property, the Single-Family Comparable Rent Schedule (Form 1007) should accompany the appraisal report. • If Desktop Underwriter recommends an exterior only inspection of the property -- using the Desktop Underwriter Property Inspection Report (Form 2075) -- the only exhibits we require are a street map that shows the location of the subject property and a photograph that shows the front scene of the subject property. • If Desktop Underwriter recommends both an interior and exterior inspection of the property -- using either the Desktop Underwriter Quantitative Analysis Appraisal Report (Form 2055) or the Desktop Underwriter Individual Cooperative Interest Appraisal Report (Form 2095) -- we require all of the same exhibits that are used to support the appraisal forms for manually underwritten mortgages (as discussed in Section 204.01 above). XI, 205: Definition of Market Value (06/30/02) Our definition of market value is intended to assure that appraisals reflect an opinion of market value after adjustments for any special or creative financing or sales concessions -- such as seller contributions, interest rate buydowns, etc. -- have been made. The appraiser must certify that he or she used the following definition of market value: Market value is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. *Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions. Special or creative [Page : 1120 06/30/02] financing adjustments can be made to the comparable property by comparisons to financing terms offered by a third-party institutional lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing or concession but the dollar amount of any adjustment should approximate the market's reaction to the financing or concessions based on the appraiser's judgment. The asterisked section of the definition provides consistent interpretation for the appraiser. Specifically, we want to emphasize that the phrases "...those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions..." refer to all of the sellers in a specific market area. No distinction is made between a specific group of sellers, builders, developers, or individuals in the resale market -- they are all considered to be individual sellers in the market. To illustrate: When a property seller is paying part of the purchaser's settlement or closing costs -- or is paying for an interest-rate buydown or other below-market financing -- but virtually all of the other sellers in the market are not doing the same as a result of law or tradition, the appraiser would need to make an adjustment even if there are other groups of sellers -- such as builders -- who are also offering concessionary financing. The appraiser can adjust a comparable property that has special or creative financing or sales concessions by comparing it to other properties that had financing terms offered by a third-party institutional lender -- as long as that lender is not already involved in the subject property or transaction. The appraiser should use his or her judgment in establishing the dollar amount for any adjustment to assure that it approximates the market's reaction to the financing or concession at the time of the sale. XI, 206: Certifications and Statements of Limiting Conditions (06/30/02) Each of our appraisal (or property inspection) report forms includes an appraiser's certification (and, if applicable, a supervisory appraiser's certification) and a statement of limiting conditions. Some forms include the limiting conditions and certifications as part of the form itself; others require the use of a separate document as an exhibit to the appraisal report. • The Statement of Limiting Conditions and Appraiser's Certification (Form 1004B) must be included as an exhibit for appraisals prepared on the Uniform Residential Appraisal Report (Form 1004), the Small Residential Income Property Appraisal Report (Form 1025), the Individual Condominium Unit Appraisal Report (Form 1073), or the Individual Cooperative Interest Appraisal Report (Form 1075). Form 1004B includes ten limiting conditions and nine appraiser's certifications, as well as a supervisory appraiser's certification. [Page : 1121 06/30/02] To acknowledge that the current version of the Form 1004B was used and to assure the lender that the appraiser is certifying to our current definition of value, the appraiser must insert "06/93" in the blank that references "Freddie Mac Form 439/Fannie Mae Form 1004B (Revised ____________)" in the "Reconciliation" section of the applicable appraisal report form. • A Statement of Limiting Conditions and Appraiser's Certification is included as part of the form for appraisals prepared on the Desktop Underwriter Quantitative Analysis Appraisal Report (Form 2055), the Desktop Underwriter Qualitative Analysis Appraisal Report (Form 2065), and the Desktop Underwriter Individual Cooperative Interest Appraisal Report (Form 2095). Each of these appraisal forms includes nine contingent and limiting conditions and eleven appraiser's certifications, as well as a supervisory appraiser's certification. • A Statement of Limiting Conditions and Appraiser's Certification is included as part of the form for property inspections prepared on the Desktop Underwriter Property Inspection Report (Form 2075). Because this form is not used to express the appraiser's opinion of market value, it includes only a few contingent and limiting conditions, five appraiser's certifications, and the supervisory appraiser's certification. The appraiser may not make a change or a deletion to the appraiser's certifications, although he or she may make additional certifications on a separate page or form. Acceptable additional certifications might include those required by state law, those related to the appraiser's continuing education or membership in an appraisal organization, or those related to the appraiser's compliance with privacy laws and regulations in the development, reporting, and storage of an appraisal and the information on which it is based. (An appraiser may not add additional limiting conditions.) The lender is responsible for reviewing any additional certifications made by an appraiser to assure that they do not conflict with any of our policies or with the standard certifications on our various appraisal forms or Form 1004B. XI, Chapter 3: Special Appraisal Considerations (06/30/02) [Page : 1123 06/30/02] Some types of properties require special consideration in the property and appraisal review processes to recognize the special contributions of unusual features, the detrimental effect of certain environmental conditions, or the need to meet specific criteria in order for a mortgage secured by the property to be eligible for delivery to Fannie Mae. Units in condominium, PUD, or cooperative projects also require special consideration because of the interrelationship between the property being appraised and other units within the development or project. We will purchase or securitize unit mortgages in condominium, PUD, or cooperative projects that meet our project eligibility criteria. To determine project eligibility, a lender often needs access to certain project information that is not always readily available -- such as information about the project's insurance coverage, legal documents, or budget; the payment status of owners' association (or cooperative corporation) fees; and the ownership and occupancy status of individual units within the project. For this reason, we allow the lender to rely on the appraiser, the owners' association (or cooperative corporation), the management company, the real estate broker, and the project developer as sources for information, although we expect the lender to make a diligent effort to ensure the accuracy of the information obtained from these sources. Project acceptance -- and the availability of financing -- often depends on the willingness of the owners' association, cooperative corporation, or management company to obtain and provide requested information. XI, 301: Units in Condominium Projects (06/30/02) A condominium project is one in which individual owners hold title to units in the project along with an undivided interest in the real estate that is designated as the common area for the project. Appraisals for condominium units that secure manually underwritten mortgages are usually documented on the Individual Condominium Unit Appraisal Report (Form 1073) or the Desktop Underwriter Quantitative Analysis Appraisal Report (Form 2055). However, we will accept appraisals of detached condominium units on the Uniform Residential Appraisal Report (Form 1004), if the appraiser includes an adequate description of the project and information about the owners' association fees and the quality of the project maintenance. Desktop Underwriter will specify the level of property analysis and review for Desktop Underwriter-processed mortgages that are secured by condominium units. The appraisal of an individual unit in a condominium project requires the appraiser to analyze the condominium project as well as the individual unit. The appraiser must pay special attention to the location of the individual unit within the project, the project's amenities, and the amount and purpose of the owners' association assessment since the marketability and [Page : 1124 06/30/02] value of the individual units in a project depend on the marketability and appeal of the project itself. XI, 302: Units in PUD Projects (06/30/02) A planned unit development (PUD) is a project or subdivision that consists of common property and improvements that are owned and maintained by an owners' association for the benefit and use of the individual units within the project. For a project to qualify as a PUD, the owners' association must require automatic, nonseverable membership for each individual unit owner, and provide for mandatory assessments. Zoning should not be the basis for classifying a project as a PUD. Appraisals for PUD units that secure manually underwritten mortgages are generally documented on the Uniform Residential Appraisal Report (Form 1004) or the Desktop Underwriter Quantitative Analysis Appraisal Report (Form 2055). To assure that all the specific eligibility criteria for a new PUD project are adequately addressed, it may be necessary to use an addendum to Form 1004 to provide information for appraisals related to attached units in new PUD projects (particularly when the developer is still in control of the owners' association). Desktop Underwriter will specify the level of property analysis and review for Desktop Underwriter-processed mortgages that are secured by PUD units. The appraisal of an individual unit in a PUD requires the appraiser to analyze the PUD project as well as the individual unit. The appraiser must pay special attention to the location of the individual unit within the project, the project's amenities, and the amount and purpose of the owners' association assessment since the marketability and value of the individual units in a project generally depend on the marketability and appeal of the project itself. XI, 303: Units in Cooperative Projects (06/30/02) When an appraiser evaluates a cooperative unit, he or she must develop an opinion of the market value of the cooperative interest. The cooperative interest is the cooperative shares or other evidence of an ownership interest in the cooperative corporation and the accompanying occupancy rights (excluding the cooperative interest's pro rata share of the debt service of the blanket mortgage). In other words, the cooperative interest is the equity portion that is over and above the pro rata share of the blanket mortgage(s). To determine the value of the cooperative interest, the appraiser must consider and report among other things, the information listed below on the Individual Cooperative Interest Appraisal Report (Form 1075) or the Desktop Underwriter Individual Cooperative Interest Appraisal Report (Form 2095). [Much of this information can be obtained from the Request for Cooperative Project Information (Form 1074), if the management agent, cooperative board, or project sponsor/developer uses this form to respond to the lender's or the appraiser's inquiries for project information. When Form 1074 is used, the appraiser may either transcribe the [Page : 1125 06/30/02] appropriate information to the applicable appraisal report or attach Form 1074 to the report as an addendum.] • The number of shares attributable to the unit and the number of shares issued and outstanding for the cooperative corporation; • The name of the lienholder, the lien position, and the amount and repayment terms of all project blanket financing; • The pro rata share of the blanket mortgage payments that are attributable to the unit, as determined by dividing the number of shares attributable to the unit by the total number of project shares; • The pro rata share of each lien that is attributable to the unit; • Any tax abatements or exemptions that are attributable to the unit, and their remaining term and provisions for escalation of real estate taxes. (The dollar amount by which the taxes will increase and the year in which the increase will occur should be shown); and • Any monthly maintenance fees (including utility charges if they are part of these fees), monthly special assessments, ground rent, or other fees for the use of the facilities that are attributable to the unit, and their type, amount, and term (if applicable). The appraiser must use reliable sources to obtain data on the cooperative project, the individual subject unit, and the comparable properties, and indicate the name of each source on the appraisal report (or in an addendum to it). The appraiser must address any factors that could result in an increase to the monthly debt service for the subject unit. For comparison purposes, the appraiser should indicate in the "sales comparison analysis" adjustment grid the dollar amount of the monthly assessments for each of the comparable sales. In many areas, there is limited experience with the cooperative form of ownership. The appraiser always must comment on the acceptance of housing cooperatives in the market area. The degree of acceptance is generally reflected in the availability of similar comparable sales data for cooperative units. If there is limited market acceptance of the cooperative form of ownership, or if it is a relatively new form of ownership in the market area, the appraiser must address any effect that has on the marketability and value of the unit that is being appraised. Because we are concerned about the marketability of the subject property, the appraiser must compare the subject unit to the general market area as well as to other units in the subject cooperative project. This comparison should help demonstrate market acceptance of cooperative units in the area. If the appraiser believes that the submission of more than the three required comparable sales is appropriate to support the opinion of market value, he or she should submit other comparable sales -- including contracts for sale -- as additional supporting data. Comparable sales must be from similar types [Page : 1126 04/30/02] of projects -- townhouses, mid-rise, high-rise, etc. -- that have similar common amenities and recreational facilities. Generally, when an appraiser appraises a unit in a cooperative project, he or she should use sales of cooperative units as comparables. However, the appraiser may use sales of condominium units as comparables if cooperative unit sales are not available, as long as he or she explains why those types of comparables were used. When there is a preference for condominium ownership in the subject market area, the appraiser must adjust the condominium comparables to reflect the reaction of the market to the cooperative unit. If the subject property is a unit in a new or recently converted cooperative project, the appraiser should select as comparables one closed or settled sale from the subject project (if one is available) and two closed or settled sales from outside of the project. If closed or settled sales are not available in the subject project, the appraiser should use comparable sales from competing projects. When the subject property is a unit in an established cooperative project -- one that has resale activity -- the appraiser should use as comparables two closed or settled sales from within the subject project (if available) and one closed or settled sale from a competing project. The appraiser must report the value of the cooperative interest, excluding its pro rata share of the blanket mortgage(s). This value reflects the market value for the cooperative interest of the unit. [To illustrate: When the indicated value of the unit encumbered by the blanket mortgage(s) is $100,000 and its pro rata share of the blanket mortgage(s) is $25,000, the value estimate that the appraiser should report for the cooperative interest of the unit is $75,000.] The appraiser certifies in the appraisal report that the pro rata share of the blanket mortgage(s) on the real estate has not been included in the opinion of the market value of the cooperative interest. XI, 304: Factory-Built Housing (04/30/02) Factory-built housing includes manufactured homes, modular homes, and other types of prefabricated housing. We purchase mortgages secured by factory-built housing that is designed as a one-family dwelling, assumes the characteristics of site-built housing, and is legally classified as real property. We require the factory-built home to be permanently affixed to a foundation system that is appropriate for the soil conditions of the site and designed to meet local and state codes. The appraiser must identify the type of factory-built housing that is to be appraised since that is an important criteria in defining the appropriate market area and in selecting comparable properties. • A manufactured home must be built (and installed) under the Federal Manufactured Home Construction and Safety Standards that HUD established in 1976, as they were in force at the time the home was [Page : 1127 04/30/02] manufactured. This can be verified by the presence of a HUD Data Plate/Compliance Certificate that is located inside the home. The appraiser must include as part of his or her appraisal report some of the information that is included on the certificate -- the manufacturer's name, the trade/model name, the year of manufacture, and the serial number. • A modular home must be built under the Uniform Building Code that is administered by the state agency that is responsible for adopting and administering building code requirements for the state in which the modular home is installed. • A factory-built home that is any other type of prefabricated, panelized, or sectional housing does not have to satisfy either HUD's Federal Manufactured Home Construction and Safety Standards or the Uniform Building Codes that are adopted and administered by the state in which the home is installed. The home must conform with local building codes in the area in which it will be permanently located. We do not have minimum requirements for width, size, roof pitch, or any other specific construction detail for manufactured homes, modular homes, or any other types of factory-built homes. Rather, each home must have sufficient square footage and room dimensions to be acceptable to typical purchasers in the subject market area. Since quality can account for large differences in the values of factory-built homes, it is important for the appraiser to become familiar with the features that affect the quality of a factory-built home so that the information can be included in the appraisal report (if needed) to support his or her opinion of value. The process of selecting comparable sales for factory-built housing is generally the same as that for selecting comparable sales for site-built housing. The appraiser must address both the marketability and comparability of a manufactured home by selecting comparable sales of similar manufactured homes -- comparing single-width homes to single-width homes, multiwidth homes to multiwidth homes, etc. If at least three comparable sales of similar manufactured homes are not available, the appraiser may use either site-built housing or a different type of factory-built housing as one of the comparable sales. When that is the case, the appraiser must use at least two comparable sales of similar manufactured homes, explain why site-built housing or a different type of factory-built housing is being used for the one comparable sale, and make (and support) appropriate adjustments in the appraisal report. An appraiser who is unable to locate sales of manufactured homes that are truly comparable to the subject property may decide that it is appropriate to use as comparables either older sales of similar manufactured homes or sales of similar manufactured homes that are located in a competing market so that he or she can establish a baseline for the "sales comparison analysis" and [Page : 1128 04/30/02] determine sound adjustments to reflect the differences between the comparable sales that are available and the subject property. The appraiser should analyze and report a sufficient number of comparable sales to support his or her opinion of value (which may require the use of more than three comparable sales in some cases). The appraiser must not "create" comparable sales by combining vacant land sales with the contract purchase price of the home (although he or she may use this type of information as additional supporting documentation). If the appraiser is unable to develop a reliable appraisal based on at least two comparable sales of similar manufactured homes, the mortgage is not eligible for delivery to us. We also require the appraiser to address both the marketability and comparability of modular homes and other types of factory-built housing. When the subject property is modular, prefabricated, panelized, or sectional housing, we do not require that one or more of the comparable sales be the same type of factory-built housing (although using comparable sales of similar types of homes generally enhances the reliability of the appraiser's opinion of value). We do expect the appraiser to include in the appraisal report the most appropriate comparable sales data to support his or her opinion of value for the subject property. XI, 305: Community Living Group Homes (04/30/02) The group home that secures a Community Living mortgage must maintain its residential nature and have no modifications that would make it unacceptable as a one- or two-family residence. The property appraisal for a one-family property should be documented on the Uniform Residential Appraisal Report (Form 1004), while the appraisal for a two-family property should be documented on the Small Residential Income Property Appraisal Report (Form 1025). The appraiser generally does not need to use other group home properties as comparable sales in developing the sales comparison approach to value because we expect the appraised value to reflect the value of the group home as a typical one- or two-family residence. The appraiser will not need to analyze and report comparable rental properties on the Single-Family Comparable Rent Schedule (Form 1007) since the room and board payments received under the contract with the state or local funding agency are not dependent on, or comparable to, market rents. However, we do expect the lender's underwriter to review the rent information that appears on our Operating Income Statement (Form 216) or a similar cash flow and operating income statement and to make any adjustments that are needed for any income and expense items that appear unreasonable for the market in which the group home is located. When the loan proceeds are used to fund repairs or rehabilitation to the group home property, the appraiser must have demonstrated competence and experience in evaluating properties for rehabilitation financing. • If the rehabilitation work has already been completed, the appraiser's opinion of value must reflect the completion of the improvements -- and [Page : 1129 05/06/99] the borrower must provide evidence showing that the work was paid for from the borrower's own funds. • If the rehabilitation work has not been completed, the appraiser must review the plans and specifications (and attach them to the appraisal report) and provide an opinion of the "as completed" value of the property. The "as completed" value must be supported by market data that demonstrates the contributory value of the repairs and renovations. We will not require a second appraisal after completion of the repairs or renovations -- as long as the appraiser provides a certification of completion stating that the work was completed in accordance with the plans and specifications. (If the original appraiser is not available to make the certification of completion, the lender may use a substitute appraiser provided that the appraiser reviews the original "as completed" appraisal so that he or she can certify that the property was completed in accordance with the plans and specifications.) XI, 306: Mixed-Use Properties (05/06/99) Although we will purchase or securitize mortgages that are secured by properties that have a business use in addition to their residential use -- such as a property with space set aside for a day care facility, a beauty or barber shop, a doctor's office, a small neighborhood grocery or specialty store, etc. -- we have special eligibility criteria for them. Therefore, the appraiser must provide an adequate description of the mixed-use characteristics of the subject property in the appraisal report and the lender must make sure that it considers these criteria and adequately addresses them. Specifically, for a mixed-use property to be acceptable, the following criteria must be met: • The property must be a one-family dwelling that the borrower occupies as a principal residence. • The mixed use of the property must represent a legal, permissible use of the property under the local zoning requirements. • The borrower must be both the owner and the operator of the business. • The property must be primarily residential in nature. • The market value of the property must be primarily a function of its residential characteristics, rather than of the business use or any special business-use modifications that were made. XI, 307: Properties Affected by Environmental Hazards (06/30/02) If the real estate broker, the property seller, the property purchaser, or any other party to the mortgage transaction informs the lender that an environmental hazard exists in or on the property or in the vicinity of the property, the lender must disclose that information to the appraiser and note the individual mortgage file accordingly. (We also require the lender to disclose such information to the borrower, and to comply with any state or local environmental laws regarding disclosure.) [Page : 1130 06/30/02] When the appraiser has knowledge of any hazardous condition (whether it exists in or on the subject property or on any site within the vicinity of the property) -- such as the presence of hazardous wastes, toxic substances, asbestos -- containing materials, urea-formaldehyde insulation, radon gas, etc. -- he or she must note the hazardous condition in the appraisal report and comment on any influence that the hazard has on the property's value and marketability (if it is measurable through an analysis of comparable market data as of the effective date of the appraisal) and make appropriate adjustments in the overall analysis of the property's value. We do not consider the appraiser to be an expert in the field of environmental hazards. The typical residential real estate appraiser is neither expected nor required to be an expert in this specialized field. However, the appraiser has a responsibility to note in the appraisal report any adverse conditions that were observed during the inspection of the subject property or information that he or she became aware of through the normal research involved in performing an appraisal. In rare situations, a particular environmental hazard may have a significant effect on the value of the subject property, although the actual effect is not measurable because the hazard is so serious or so recently discovered that an appraiser cannot arrive at a reliable opinion of market value because there is no comparable market data (such as sales, contract sales, or active listings) available to reflect the effect of the hazard. In such cases, the mortgage will not be eligible for delivery to us. We will purchase or securitize a mortgage secured by a property that is affected by an environmental hazard if the effect of the hazard is measurable through an analysis of comparable market data as of the effective date of the appraisal and the appraiser reflects in the appraisal report any adverse effect that the hazard has on the value and marketability of the subject property or indicates that the comparable market data reveals no buyer resistance to the hazard. To illustrate: We are frequently asked to address the eligibility of mortgages secured by properties that are located in neighborhoods affected by radon gas or the presence of hazardous wastes. In such situations, we expect the appraiser to reflect any adverse effect or buyer resistance that is demonstrated and measurable through the available comparable market data. Therefore, when a property is located in a neighborhood that has a relatively high level of radon gas or is near a hazardous waste site, we expect the appraiser to consider and use comparable market data from the same affected area because the sales prices of settled sales, the contract sales prices of pending sales, and the current asking prices for active listings will reflect any negative effect on the value and marketability of the subject property. Although our guidelines expressly require the appraiser to include in the appraisal report comments about any influence that an environmental hazard has on the value and marketability of the property and to make [Page : 1131 03/20/95] appropriate adjustments to the overall analysis of the value of the property, we expect the lender to oversee the performance of the appraisers it employs. The lender must make the final decision about the need for inspections and the adequacy of the property as security for the mortgage requested. We expect the lender to exercise sound judgment in determining the acceptability of the property. For example, since we require the appraiser to comment on the effect of a hazard on the marketability and value of the subject property, the appraiser would have to note when there is market resistance to an area because of environmental hazards or any other conditions that affect well, septic, or public water facilities. When the lender has reason to believe that private well water that is on or available to a property might be contaminated as the result of the proximity of the well to hazardous waste sites, the lender is exercising sound judgment if it obtains a "well certification" to determine whether the water meets community standards. XI, 308: Urban Properties (03/20/95) The valuation of properties in urban locations that are undergoing rehabilitation may also present some unique property valuation and underwriting issues. For example, some lenders underwrite mortgages in urban areas on a block-by-block basis. Block-by-block underwriting and appraisal analysis is acceptable in cases in which rehabilitation has started in the block in which the subject property is located (or in facing blocks that are visible to the property), but has not yet spread to the rest of the neighborhood. This enables the appraiser and the lender's underwriter to place weight on the positive influences of the rehabilitation efforts. To a large extent, a block-by-block analysis simply focuses on the appraiser's definition of the neighborhood. Urban locations that are undergoing rehabilitation may involve relatively small neighborhoods (perhaps limited to a block or just a few blocks) because of the level of rehabilitation and buyer demand for properties that are being improved. In such cases, it is appropriate for the appraiser to emphasize the sales of properties that are undergoing rehabilitation (or that have been rehabilitated) in the immediate neighborhood (which is the block in which the property is located or facing blocks that are visible to the property). We expect the appraiser to demonstrate that local market conditions make block-by-block analysis appropriate, by illustrating that market evidence indicates that the rehabilitation of the properties in the neighborhood (or the general revitalization of the neighborhood) is a trend, not an isolated occurrence. If there is a lack of truly comparable sales in the neighborhood -- either because of the level of rehabilitation or the relatively low number of sales transactions -- the appraiser may need to analyze and use as comparable sales not only less similar properties from the subject neighborhood, but also properties from competing neighborhoods. XI, 309: Affordable Housing Program Properties (03/20/95) [Page : 1132 03/20/95] Our standard appraisal policies and property underwriting guidelines apply to all mortgages we purchase, including those originated under affordable housing programs. Our standards specifically prohibit redlining and other unacceptable appraisal practices, and support the valuation of residential properties in all markets. The valuation of single-family properties that secure mortgages sold to us under affordable housing programs may present unique issues because of some of the features offered -- such as below-market-rate financing, subsidized second mortgages, grants, and tax abatements. The appraiser's role does not change when appraising a property that is sold under an affordable housing program. The appraiser is responsible for providing the lender with an accurate and adequately supported opinion of market value for the real property (based on our standard definition of market value) and a complete, accurate description of the property. The appraiser's opinion of the market value for the property must reflect the normal consideration for the property as of the effective date of the appraisal. Furthermore, the appraiser must adjust the comparable sales to reflect the effect of special or creative financing or sales concessions that were granted by any party associated with the sale of the property. One of the options available for our community lending products -- Community Seconds -- has three components -- a low downpayment from the borrower, a conventional first mortgage, and a subsidized second mortgage. (See Part VIII, Chapter 2, for more information.) When this option is used, it would not be uncommon, for example, for the first mortgage to have a market-rate of interest and a loan-to-value ratio of 70% combined with a below-market interest rate second mortgage that has a loan-to-value ratio of 25% and forgivable or deferred terms. In such cases, buyers may be willing to pay a higher price for the property because of the special financing terms for the second mortgage. To acknowledge this, the appraiser needs to compare the property being appraised to comparable properties that sold without special financing terms and to make appropriate adjustments to any of the comparable sales that were sold with special or below-market-rate financing. To take this example further, assume that the security property for a Community Seconds transaction sold for $100,000 as part of a local affordable housing redevelopment effort that included several similar transactions in the same neighborhood -- and that the amount of the first mortgage is $70,000 and the amount of the subsidized second mortgage is $25,000. If similar houses that had market-rate financing sold for $97,500, the appraiser (assuming that all other factors are equal) would need to adjust the comparable sales that had special financing to reflect the $2,500 premium that the buyer was willing to pay for the special financing package associated with the Community Seconds transaction. The lender's underwriter would then make his or her underwriting decision based on the knowledge that the appraiser valued the real property at $97,500, rather than the sales price of $100,000. Because [Page : 1133 03/20/95] we calculate loan-to-value ratios based on the lower of the sales price or the appraised value, the underwriter should keep in mind that the actual loan-to-value ratio for the first mortgage would be 72% ($70,000/ $97,500) and the combined loan-to-value ratio for the first and second mortgages would be 98% ($95,000/$97,500), rather than the 70% and 95% ratios that result when the sales price is used as the "value." For this reason, it is critical for the underwriter to separate the valuation of the property from the underwriting of the mortgage. XI, 310: Properties in Special Assessment or Community Facilities Districts (03/20/95) Alternative methods for raising the capital necessary to satisfy utility and infrastructure requirements are sometimes used in the development of new residential communities. Generally, this involves the creation of local districts -- special assessment districts or community facilities districts -- that have the authority to assess homeowners for the cost of developing utility services and various infrastructure facilities (roads, sewer services, schools, police and fire protection services, libraries, etc.). We expect the lender to know whether or not a property is located in one of these districts and to be aware of the effect that assessments levied by the district could have on property values and the marketability of the subject property. The lender's appraiser, therefore, must give special consideration to the valuation of properties located in these districts. XI, 310.01: Special Assessment Districts (06/30/02) Special assessment districts (which may also be called special tax districts or municipal utility districts) provide a specific service to homeowners living in a designated area. They are most often established to provide water or other utilities in areas that are not served by existing city or municipal utility services. The need for these districts arises when an existing utility service does not have sufficient capacity (or may not find it economically feasible) to provide services for newly created subdivisions that are located beyond its current operating area. State law governing the establishment of special assessment districts varies greatly, as does the financial strength of the individual districts. The districts are granted the authority to assess owners of properties within their boundaries for funds that will be used to cover their operating costs and debt service. Special assessment districts that are established to serve newly developing subdivisions with utilities often base their financial plans (and the amount of the assessment charged to each property owner) on the expected number of properties in the area to be served. The district then depends on the continuation of development to maintain its budget expectations. If, for any reason, development stops short of the degree of development that the district anticipated in preparing its budget, the district can become financially distressed and may need to impose an additional assessment on the existing homeowners. When the property being appraised is located in a special assessment district, the lender should request the appraiser to report on any special [Page : 1134 06/30/02] assessments that affect the property. If the special assessment district is experiencing financial difficulty and that difficulty has an effect on the value or marketability of the subject property, the appraiser must reflect that in his or her analysis and note it in the appraisal report. To assure that the reaction of the market to the potential liabilities that may arise within a financially troubled special assessment district is reflected in his or her analysis, the appraiser should consider current and expired listings of properties for sale within the district and any pending contract sales and recent closed sales within the district. There may be some instances in which the financial difficulty of a special assessment district is so severe that its actual effect on the value and marketability of a property is not measurable because there is no comparable market data available to enable the appraiser to arrive at a reliable opinion of market value. When this is the case, a mortgage secured by a property in that district will not be eligible for delivery to us -- at least until such time as an active market develops that will enable the appraiser to demonstrate the value and marketability of the subject property. XI, 310.02: Community Facilities Districts (06/30/02) Some jurisdictions have passed legislation that creates community facilities districts and permits them to levy a special tax to fund the capital costs of a wide variety of public improvements, as well as the ongoing operation and maintenance costs of a limited number of public services. Proceeds of the special tax are used to support the sale of tax-exempt bonds for the various capital improvements -- roads, sewer services, schools, police and fire protection services, and libraries -- that are allowed under the legislation. The assessment that will be used to repay the tax-exempt bonds becomes an ongoing responsibility of the property owner (similar to state and local property taxes). The assessment lien (and the obligation to pay the assessment) passes with the title to the property when ownership of the property is transferred. The term of the assessment obligation can be quite lengthy (up to 40 years -- unless the assessment is prepaid). In some cases in California, prepayment estimates can range from $20,000 to $40,000 for a single-family property, depending on the extent of the improvements that were financed, the size of the dwelling, and the year it was purchased. Such legislation generally requires full disclosure of the special assessment to any purchaser of a property located in a community facilities district. Therefore, a lender originating mortgages in community facilities districts should disclose to the appraiser any information that it becomes aware of regarding special assessments on a given property. The lender also should caution its appraisers in general about the need to be aware of whether or not the subject property and the comparable sales are located within (or affected by) a community facilities district since properties subject to an assessment by one of these districts often compete against properties that are either subject to a significantly different special assessment or to no assessment at all. The appraiser must consider the reaction of the market (if [Page : 1135 06/30/02] any) to the assessment for the applicable community facilities district in his or her analysis by analyzing similarly affected comparable sales, and should note the effect of the assessment in the appraisal report. XI, 311: Properties Subject to Leasehold Interests (06/30/02) When a mortgage is secured by a leasehold estate (or is subject to the payment of "ground rent"), the borrower has the right to use and occupy the real property under the provisions of a lease agreement (or ground lease) for a stipulated period of time, as long as the conditions of the lease are met. (When the lease holder is a community land trust, there may be significant restrictions on both the purchase and resale of the property; therefore, we provide more detailed guidance on appraising this type of leasehold estate in Section 312 below.) The valuation of a property that is subject to a leasehold interest may require a complex analysis, so an appraiser should develop (and attach as an addendum to the appraisal report form) a thorough, clear, and detailed narrative that identifies the terms, restrictions, and conditions of the lease agreement or ground lease and discusses what effect, if any, they have on the value and marketability of the subject property. In developing the sales comparison approach to value, the appraiser generally should use as comparable sales properties that have similar leasehold interests. When there are a sufficient number of closed comparable sales of properties with similar leasehold interests available, the appraiser should use them in its analysis of the market value of the leasehold estate for the subject property and report them in the "sales comparison analysis" grid on the applicable appraisal report form. However, if not enough comparable sales with the same lease terms and restrictions are available, the appraiser may use sales of similar properties with different lease terms or, if necessary, sales of similar properties that were appraised as fee simple estates -- as long as he or she explains why the use of these sales is appropriate. In such cases, the appraiser must make an appropriate adjustment on the "sales comparison analysis" grid to reflect the market reaction to the different lease terms or property rights appraised. XI, 312: Leaseholds Held by Community Land Trusts (06/30/02) Community land trusts are typically nonprofit organizations that acquire land for a variety of reasons -- such as to facilitate homeownership among lower-income individuals and families or to maintain a permanently affordable housing stock in a given community. To reduce development costs to an affordable level, a community land trust uses grants, gifts, and subsidy dollars to acquire land (and then retains ownership of that land). The sales price for the improvements situated on the land does not include the subsidy amount used to acquire the land, which means that a borrower will pay a lower purchase price for his or her home (often less than the leasehold interest in the property). The trust offers the borrower a long-term (typically 99 years), renewable ground lease. Because of the affordable terms that it offers, a community land trust usually includes in its ground [Page : 1136 06/30/02] lease restrictions on borrower eligibility, as well as on the resale of the property improvements. In selecting an appraiser to provide an opinion of value for a leasehold held by a community land trust, the lender must make sure that the appraiser is knowledgeable and experienced in the appraisal techniques -- direct capitalization and market derivation of capitalization rates -- that are necessary to appraise this type of property. When a leasehold interest is held by a community land trust, the appraiser must analyze the property subject to the ground lease. Since the community land trust typically subsidizes the sales price to the borrower, that price may be significantly less than the market value of the leasehold interest in the property. The resale restrictions (as well as other restrictions) that may be included in the ground lease can also affect the value of the property. However, we have developed a ground lease rider that the lender and the borrower must execute to remove such restrictions from the community land trust's ground lease (see Part VIII, Section 302). The land records for the subject property must include adoption of the terms and conditions that are incorporated in this ground lease rider. In view of these concerns, it is important that the appraised value of the leasehold interest in the property be well supported and correctly developed. The appraiser must use a three-step process to develop his or her opinion of value -- (1) determine the fee simple value of the property by using the sales comparison analysis approach to value, (2) determine the applicable capitalization rate (and convert the income from the ground lease into a leased fee value by using the market-derived capitalization rate), and (3) determine the leasehold value by reducing the fee simple value by the leased fee value. When this appraisal technique is used, there is no need to document the actual land value of the security property. The appraiser must develop the opinion of value for the leasehold interest under the hypothetical condition that "the property rights being appraised are the leasehold interest without the resale and other restrictions that our ground lease rider removes when we have to dispose of a property acquired through foreclosure." The lender should advise the appraiser that he or she must include the following statement in the appraisal report: This appraisal is made on the basis of a hypothetical condition that the property rights being appraised are the leasehold interest without resale and other restrictions that are removed by the Uniform Community Land Trust Ground Lease rider. XI, 312.01: Determining the Fee Simple Value (06/30/02) In determining the fee simple value of the subject property, the appraiser should generally use as comparables sales of similar properties that are owned as fee simple estates. However, if this is not possible, the appraiser may use sales of properties that are subject to other types of leasehold [Page : 1137 06/30/02] estates -- as long as he or she makes appropriate adjustments (based on the terms of their leases) to reflect a fee simple interest. When the community or neighborhood has sales activity for other leasehold estates held by a community land trust, the appraiser should discuss them in the appraisal report, but should not use them as comparable sales since, in all likelihood, the sales prices will have been limited by restrictions in the ground lease (and thus the sales transaction would not be comparable to the hypothetical condition -- no restrictions -- on which we require the appraisal of the subject property to be based). XI, 312.02: Determining the Capitalization Rate (06/30/02) When the community has an active real estate market that includes sales of properties owned as fee simple estates and sales of properties subject to leasehold estates (other than those held by community land trusts), the appraiser can use the most direct method for determining the capitalization rate -- extracting it from the market activity (with all things being equal). To extract the capitalization rate, the appraiser should divide the annual ground rent for the properties subject to leasehold estates by the difference in the sales prices for the comparable sales of properties owned as fee simple estates and the comparable sales of properties subject to leasehold estates. If there are no available comparable sales of properties subject to leasehold estates (other than those held by a community land trust), the appraiser may develop a capitalization rate by comparing alternative low-risk investment rates (such as the rates for long-term bonds) and selecting a rate that best reflects a "riskless" (safe) rate. XI, 312.03: Determining the Leasehold Value (06/30/02) To determine the leasehold value of the subject property, the appraiser must first convert the annual income from the community land trust's ground lease into a leased fee value by dividing the income by the market-derived capitalization rate. The appraiser should then reduce the estimated fee simple value of the subject property by this leased fee value to arrive at his or her opinion of the leasehold value of the subject property. Example: Assume that the annual ground rent from the community land trust's ground lease is $300, the market-derived capitalization rate is 5.75%, and the estimated fee simple value of the subject property is $100,000. • $300 annual rent/5.75% capitalization rate = $5,217.39 (rounded to $5,200) • $100,000 fee simple value -- $5,200 leased fee value = $94,800 (leasehold value) Because our appraisal report forms do not include space to provide all of the details required for appraising a property subject to a leasehold held by a community land trust, the appraiser will need to attach an addendum to the appraisal report to provide any information that cannot otherwise [Page : 1138 06/30/02] be presented on the appraisal report form. On the actual appraisal report form, the appraiser should indicate "leasehold" as the property rights appraised, provide the applicable ground rent paid to the community land trust, show the estimated fee simple value for the property in the "sales comparison analysis" grid, and report the "leasehold value" as the indicated value conclusion. The appraiser should also check the box for "subject to the following repairs, alterations, or conditions" and add the following at the end of that statement: "See attached addendum for development of capitalization rate and an expanded discussion of the comparable sales used and considered." XI, 313: Energy-Efficient Properties (06/30/02) A lender may consider a newly constructed dwelling as energy-efficient if it is built in compliance with qualifying energy conservation programs that the National Association of Home Builders (NAHB) classifies as meeting the NAHB Thermal Performance Guidelines or if it is constructed in a manner that meets or exceeds the standards established by the Council of American Building Officials (CABO) 1992 Model Energy Code. New construction -- as well as existing homes -- may also be qualified as energy-efficient through an appraiser's or an energy consultant's development of an energy-efficient rating using either a rating form from the Energy Rated Homes of America or Part 1 of our Energy Addendum (Form 1004A). The appraiser must include an evaluation of the energy-efficient characteristics of the property and an overall rating -- of "high" "adequate," or "low" -- for the energy efficiency of the dwelling in the applicable appraisal report form. The lender may take the energy savings into consideration when evaluating the borrower's debt-to-income ratio, if the property receives an overall rating of "high" (as discussed in Part X, Section 302.08). Generally, a dwelling must include features from each of the following three major categories to receive a "high" rating: A. Insulation and infiltration. We require insulation with adequate "R" values and infiltration barriers in the form of the following: • Insulation in ceilings, roofs, or attic floors that are over conditioned spaces, in exterior walls, under floors that cover unheated areas, around slabs, around heating or cooling ducts or pipes that run through unconditioned spaces, around the sill area, and around the water heater; • Special fireplace devices or features, such as combustion-air and -flue dampers, and a fire door; • Sealing of the sole plate and penetrations of the exterior shell; and • Dampers for exhaust fans. B. Windows and doors. We require either double- or triple-pane windows or storm windows, and either storm doors or insulated doors. We also require caulking and weatherstripping around windows and door areas and at the sill area. [Page : 1139 06/30/02] C. Heating and cooling systems. We require the following types of heating and cooling systems: • New efficient heating and cooling systems, or appropriate modifications to an existing system; • Zoned heating and/or air conditioning; • Automatic set-back thermostats; or • Solar equipment or design. Regardless of the method used for qualifying a dwelling as energy-efficient, the appraiser must consider the reaction of the market to the energy-efficient improvements (or proposed alterations) and reflect their contributory value in the "sales comparison analysis" adjustment grid. This adjustment must be based on the appraiser's analysis of compara |