Convertible Appraisal - Conventional and FHA

In today’s lending environment it’s challenging to know what type of appraisal to order from the very start. With values always in question and various programs available, the decision to go FHA or Conventional is sometimes a tossup.

Due to this ordering appraisals can sometimes be a guessing game. Do you order an FHA appraisal in hopes the property meets FHA minimum standards and that the value isn't high enough to go conventional? Or do you order the conventional appraisal through the third party then pray it comes in high enough to meet the GSE's guidelines?

What happens when the you order a conventional appraisal and value isn’t high enough for conventional but the property does meet FHA's guidelines? 

In the above situation you basically have two options:

1. If the appraiser is FHA approved, the appraiser or management company could charge an "upgrade fee" usually $100 - 200 to go back, reinspect the property to meet HUD's standards, rewrite the report for HUD and be on your way. If the management company or appraiser refuses to change or accept the upgrade you would have to order an entire new appraisal which is not cheap and can take several days to a week to complete.

2. If the original appraiser isn’t FHA approved you are forced order a full new appraisal and pay the additional full cost.

What if there was a better way?

What if there was a way to get both upfront?

There is a better way! We have the idea of a convertible appraisal. Essentially it’s an appraisal done by an FHA approved appraiser, the inspection, the report and all reporting requirements are completed as if it was FHA, but the only difference is that it doesn’t have to be FHA and doesn’t cost as much as an FHA product.

It’s an either or type situation. The scope of work from the appraisers prospective is:

"Appraisal for FHA or Conventional financed will be based on a final determination and underwriter approval"

It can either be FHA or Conventional. All it takes is a phone call and an e-mail. You can really have it your way!

MORE IMPORTANT NOW THEN EVER

As FHA adopts the HVCC this is going to be vital now more than ever before. No one wants to order two appraisals and pay for two for the same property. With the convertible appraisal no one has to ever!

There is no "upgrading" when it comes to most management companies. Changing the defined scope of work based on the original assignment means more money from your borrower and appraisal fees upwards of $600.00 for one appraisal. With the convertible appraisal this will not happen.

So what’s the advantage?

You will pay a little more upfront than a regular conventional appraisal. However, if the case ever arises where it needs to be switched, it won’t be an issue. The original scope of work was defined as an appraisal with conventional or FHA financing which means it’s just a few simple changes and you’re off to the closing tables.

The advantage is clear. With flexibility of Conventional or FHA it enables both the lender and the loan officer to offer the best product to the customer at the most affordable price.

FAQ:

Aren't FHA's values less?

No. FHA does have stricter property standards and require repairs before financing can take place. However, the comparable selection, listing, and general reporting requirements are very similar, and almost identical to a conventional appraisal.

What is the difference between an FHA and Conventional appraisal?

They are very similar. Except, FHA requirements are a little above the conventional reporting requirements. There are some required repairs by FHA that must be done.

How much extra is the Convertible Appraisal?
$15

FHA Announces Several Policy Changes. Adopts HVCC Guidelines

The Federal Housing Administration (FHA) today announced several significant policy changes that are intended to improve their exposure to risk.  The changes, effective January 1, include:

• Modification of Procedures for Streamline Refinance Transactions
• Adoption of Home Valuation Code of Conduct Guidelines (some not all)
  
• Updated Appraisal Validity Period
• New Appraisal Portability Regs
• New Requirement of Lenders to Submit of Audited Financial Statements for Review
• Adjustments to the Approval Process for Participation in FHA Loan Origination
• Increased Net-Worth Requirements for Lenders

Grabbing the attention of mortgage professionals was FHA's decision to adopt language from HVCC appraisal guidelines. The HVCC, which has been the subject of heated debate within the industry, was implemented by Fannie Mae and Freddie Mac on May 1, 2009. At that time the FHA decided not to adhere to the policy. This undoubtedly increased demand for FHA loan products as originators quickly learned of the multitude of problems associated with HVCC. The new requirements will prohibit any commissioned based lender staff member from ordering an FHA appraisal.

FHA will not require the use of AMCs or other third party organizations for appraisal ordering, if lenders do use AMCs and/or other third party organizations FHA-approved lenders must ensure that:

• FHA Appraisers are not prohibited by the lender, AMC or other third party, from recording the fee the appraiser was paid for the performance of the appraisal in the appraisal report.
• FHA Roster appraisers are compensated at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.  
• The fee for the actual completion of an FHA appraisal may not include a fee for management of the appraisal process or any activity other than the performance of the appraisal.  
• Any management fees charged by an AMC or other third party must be for actual services related to ordering, processing or reviewing of appraisals performed for FHA financing.
• AMC and other third party fees must not exceed what is customary and reasonable for such services provided in the market area of the property being appraised. 
  

FHA issued five new mortgage letters explaining the policy changes. Here are links to each mortgagee letter:
Mortgagee Letter 09-28: Appraiser Independence
Mortgagee Letter 09-29: Appraisal Portability
Mortgagee Letter 09-30: Appraisal Validity Periods
Mortgagee Letter 09-31: Strengthening Counter Party Risk Periods
Mortgagee Letter 09-32: Revised Streamline Refinance Transactions
Here are a few other notable changes...
(Excerpts taken directly from Mortgagee Letters)
Appraisals
In cases where a borrower has switched lenders, FHA did not allow a new appraisal to be ordered. Instead the first lender was required, at the borrower’s request, to transfer the case to the second lender.  This guideline generally slowed the loan process as the original lender often times was unwilling to transfer the case in a timely manner.
The new guideline, effective January 1, allows a second appraisal to be ordered by the second lender under the following limited circumstances:

1.    The first appraisal contains material deficiencies as determined by the Direct Endorsement underwriter for the second lender.
2.    The appraiser performing the first appraisal is on the second lender’s exclusionary list of appraisers.
3.    Failure of the first lender to provide a copy of the appraisal to the second lender in a timely manner would cause a delay in closing, posing potential harm to the borrower.

Potential harm includes events outside the control of the borrower such as loss of interest rate lock, purchase contract deadline, foreclosure proceedings, and late fees.
FHA also reduced the length of time that an appraisal could be considered valid for collateral underwriting. Previously, FHA considered an appraisal written within the last six months to be an acceptable property valuation.  Today's announcement reduces that period from six months to four.
Advertising
FHA-approved mortgagees must use their HUD registered business names in all advertisements and promotional materials related to FHA programs.  HUD registered business names include any alias or “doing business as” (DBA) on file with FHA.  FHA-approved mortgagees must keep copies of all advertisements and promotional materials for a period of two years from the date that the materials are circulated or used to advertise. 
Who can work with FHA and FHA originated loans
A lender or mortgagee shall not have any officer, partner, director, principal, manager, supervisor, loan processor, loan underwriter, or loan originator of the applicant mortgagee who is:

(1)  currently suspended, debarred, under a limited denial of participation (LDP), or otherwise restricted under part 25 of title 24 of the Code of Federal Regulations, 2 Code of Federal Regulations, part 180 as implemented by part 2424, or any successor regulations to such parts, or under similar provisions of any other Federal agency;

(2)  under indictment for, or has been convicted of, an offense that reflects adversely upon the applicant’s integrity, competence or fitness to meet the responsibilities of an approved mortgagee;

(3)  subject to unresolved findings contained in a Department of Housing and Urban Development or other governmental audit, investigation, or review;

(4)  engaged in business practices that do not conform to generally accepted practices of prudent mortgagees or that demonstrate irresponsibility;

(5)  convicted of, or who has pled guilty or nolo contendre to, a felony related to participation in the real estate or mortgage loan industry—

(i) during the 7-year period preceding the date of the application for licensing and registration; or
(ii) at any time preceding such date of application, if such felony involved an act of fraud, dishonesty, or a breach of trust, or money laundering;

(6)  in violation of provisions of the S.A.F.E. Mortgage Licensing Act of 2008 (12 U.S.C. 5101 et seq.) or any applicable provision of State law; or

(7)  in violation of any other requirement as established by the Secretary.
Streamline Refinance Transactions
At the time of loan application, the borrower must have made at least 6 payments on the FHA-insured mortgage being refinanced.

At the time of loan application, the borrower must exhibit an acceptable payment history as described below.

1)    For mortgages with less than a 12 months payment history, the borrower must have made all mortgage payments within the month due.

2)    For mortgages with a 12 months payment history or greater, the borrower must have:

a)    Experienced no more than one 30 day late payment in the preceding 12 months,

AND

b)    Made all mortgage payments within the month due for the three months prior to the date of loan application.

The lender must determine that there is a net tangible benefit as a result of the streamline refinance transaction, with or without an appraisal.  Net tangible benefit is defined as:

• reduction in the total mortgage payment (principal, interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens),
• refinancing from an adjustable rate mortgage (ARM) to a fixed rate mortgage,

OR

• reducing the term of the mortgage

If a credit score is available, the lender must enter the credit score into FHA Connection.  If more than one credit score is available, lenders must enter all available credit scores.

If subordinate financing is remaining in place, the maximum combined loan-to-value ratio is 125 percent.

• For streamline refinance transactions WITHOUT an appraisal, the CLTV is based on the original appraised value of the property.
• For streamline refinance transactions WITH an appraisal, the CLTV is based on the new appraised value.

Revised Streamline Refinance Transactions WITHOUT an Appraisal

The maximum insurable mortgage cannot exceed:

• The outstanding principal balance  minus the applicable refund of the UFMIP,

PLUS

• The new UFMIP that will be charged on the refinance.

Revised Streamline Transaction WITH an Appraisal

The maximum insurable mortgage is the lower of:

1)    Outstanding principal balance minus the applicable refund of UFMIP, plus closing costs, prepaid items to establish the escrow account and  the new UFMIP that will be charge on the refinance;
OR
2)    97.75 percent of the appraised value of the property plus the new UFMIP that will be charged on the refinance.

Discount points may not be included in the new mortgage.  If the borrower has agreed to pay discount points, the lender must verify the borrower has the assets to pay them along with any other financing costs that are not included in the new mortgage amount.
Further Changes Currently Being Considered:
Modify Mortgagee Approval and Participation in FHA Loan Origination

Lenders seeking approval to originate, underwrite, or service an FHA loan must meet the eligibility criteria for a supervised or non-supervised mortgagee. Mortgagees with this approval status must assume liability for all the loans they originate and/or underwrite. Loan Correspondents (mortgage brokers) will continue to be able to originate FHA-insured loans through their relationships with approved mortgagees; however they will no longer receive independent FHA approval for origination eligibility.
These policy changes will require the FHA approved mortgagee to assume responsibility and liability for the FHA insured loan underwritten and closed by the approved mortgagee. These changes align FHA with the GSEs and will potentially increase the number of loan correspondents (mortgage brokers) who are eligible to originate FHA-insured loans while providing for more effective oversight of loan correspondents through the FHA approved mortgagees.

Increase Net-Worth Requirements for Mortgagees

The FHA plans to propose to increase the net worth requirement for approved mortgagees to meet industry standards. The requirement is currently at $250,000 and has not been increased since 1993. HUD is proposing an initial increase of approximately $1,000,000 that would be in place within one year of the enactment of this rule. To maintain consistency with industry standards, HUD may propose that the net worth requirements be increased further in future years to a level comparable to those required by GSEs and other market institutions. These changes will help to ensure that FHA lenders are sufficiently capitalized to meet potential needs, thereby permitting HUD to mitigate losses and decrease risks to the FHA insurance fund.

Local Appraiser = Most Accurate Value Possible

For the labor day weekend me and my wife decided to take a vacation to the west coast, for the destination good old San Francisco, CA. As we picked up our rental car and drove into the bay area I was immediately struck by the unique architecture and construction techniques. Personally as an appraiser I have been allot of places and seen over 100,000 homes, however I have never seen properties built like this in person. Its one thing to see them on an appraisal or in a photo but you really dont understand what your looking at until your standing right in front of it.

Homes right on the edge of a cliff, half way up a mountain and on a 45 degree angle and not just one rows of them. There were homes built on stilts, homes built literally on top of each other. There was an endless variety of homes and just when I thought I have seen it all we drove down Lombard Street. Lombard steet the famous "windy street" was a humorouse experinces as there is homes built literally on the most windy street in the world.

Right from the start I knew something was different about the city and it was more complex than first glance. As we got more and more into the city and stayed  longer I realized how much real estate does different area to area. This makes me even more think about how important it is to have local appraisers experienced with the area complete appraisals.

Homes on hills, in front of trolley stops, on top of the hill, on the bottom, some on flat land, some on slopped, some with views and some without. I knew it would be EXTREMELY complex to even try and accurately value a property in San Francisco with out YEARS of experience. There are just too many variables, literally 1,000's and its too much to account for from an inexperienced appraiser.

Even though appraising is a step by step process and a science, there is certain point where you just need to know what’s going on. The only way to accurately value to the property would be to really know the market area and really understand the market area which is something you get from experience, research and training.

After much contemplation it made me really think about all of the controversy surrounding the HVCC and the need for accurate appraisals and local appraisers within the market area completing the report.

I sent an e-mail to my operations manager re-emphasizing the fact that the appraisals must be assigned to local appraisers and that reviews must be ordered on questionable appraisals.

The reason is simple, bad decisions get made with bad appraisals and the most accurate appraisal possible is vital to the success of all business. When I say all business I really do mean ALL. The real estate appraisal business affects EVERYONE. From the taxes you pay on your house, the bridge you crossed to get to work, the toll you paid, the road, the hotel, your gym membership EVERYTHING had an appraisal some where along the line or something similar to an appraisal. Everyone wants to know what’s its worth or what’s its going to be worth an appraisal is the most effective way for someone to get an accurate assessment of there property.

At the end of the day everyone knows want to know what its worth and what they can expect. An accurate appraisal is the really only way to know for sure exactly what your getting, and when money is involved especially big money knowing the most accurate value of the collateral is the only way to know for sure.

Dont be cheap get an appraisal that’s done right the first time and save everyone time and money. Buy Coester.