Loan Modification

HUD Dumps FHA Master Appraisals

By Peter G. Miller

Here’s a bit of news which benefits both home buyers and small builders: HUD no longer allows builders to use Master Appraisal Reports (MARs) to figure property values.

At first this may seem like insider mishmash, but if you want to buy a newly-built home or a condo with an FHA loan this change will be important.

It used to be that if you were a builder that you could get one appraisal for a single model and that appraisal would apply to all similar units for up to one year and sometimes even two years. This seems superficially reasonable, after all if a new-home project has 25 model “A” units then all are identical in terms of design, floor space, etc.

In 2009 HUD changed the FHA guidelines so that MARs were only good for 120 days.

Whatever the validity period, the MAR concept has been questionable from day one.

Why?

First, all units of the same model are not the same. They have different locations and different finishes. A first-floor condo and the exact same unit on the 12th floor will have different values. A new home facing a golf course will have a different value then the same model which faces the run-off pool for a hog farm. One unit may have real wood cabinets while another may have a cheaper finish.

Second, you could only use a MAR if you had five or more units. This is great news for large builders because it meant they did not have to get separate appraisals for each new home or condo unit they constructed. Small builders — even those building four copies of the same model — did not get the benefit of such an economy, meaning they had a higher cost than their larger competitors. In effect, HUD created an artificial advantage for large builders.

Third, values change. The idea that an appraisal could remain valid for a year or longer is untenable in most markets, whether values are moving up or down.

HUD explains that “historically, lenders and builders have used MARs to reduce appraisal costs and loan processing times and achieve consistency in value for the same model.” Assuming such assertions are true, an assumption which should not be made without caution, what about the interest of buyers and borrowers, folks who need appraisals to assure they are paying fair market value?

Now, however, HUD has dumped MARs altogether, saying that “the shortened
appraisal validity period largely removed the advantages of using MARs. As
economic instability continues to impact many segments of the economy and
the housing market in particular, the Department has determined that it is in
the best interest of the Insurance Fund to prohibit the use of MARs and to
require an appraisal be performed on each individual unit within a larger
housing project to determine the maximum mortgage amount of the property
to be security for the mortgage.”

Dumping MARs reduces risk to HUD. No less important, dumping MARs reduces risks for buyers and borrowers and evens the marketplace for small builders, considerations which should also count.

Full post as published by FHA Mortgage Guide on January 26, 2011 (boomark / email).