FNMA Messages

[Michigander]

I believe that many appraisers incorrectly consider a 50-year old house with no updates as having an effective age of 15-years and C3 rating. We all see it. I would use the warning from the CU as a place to just ask the appraiser to explain themselves a bit more. Repurchase demands sometimes come from C-ratings as well, where the report states it is a C3 and all the comparable properties are C3, and some of those sales really are, but the subject is a solid C4 and misreported. It shouldn't be subjective, but many appraisers see it as such.

 

[hastalavista]

I am not an appraiser but I have been an UW and have reviewed appraisals for over 30 years.

I review appraisals for a major lender and I am starting to see a bunch of new warning messages from FNMA Collateral UW. I am looking at an appraisal where the subject is noted as being in C3 condition. The error message I have received is "The condition of C3 conflicts with the reported age". There is no deferred maintenance so it should not be a C4.

My understanding is that the age is not what drives the condition rating so why would FNMA have this error message out there affecting the scores. Now that FNMA gives full indemnification for loans that score 2.5 or lower I am noticing a lot more hits like this.

The funny thing is that the comps in the report have similar ages and C3 rating as well and the warning message is only firing for the subject?

Can anyone provide an appraiser's opinion on this one?

(my bold)

Yes.
Does the report indicate that there have been renovations/remodeling within the last 10-15 years? If so, is the level of renovation/remodeling consistent with the C3's "limited physical depreciation" requirement? If not, does the report provide an adequate summary of what renovations/remodeling occurred prior to that which results in the C3 rating? If the report does not indicate recent renovations in the CU module (within the condition rating of the report) but narrates it somewhere else, this may have triggered the warning flag.

If there has been recent renovations but they are not reported in the CU module, then you can ask the appraiser to reflect those updates within the CU module and that may eliminate the error.
If there has not been recent renovations that are consistent with the CU module, but the house has been renovated prior to that check-box range and the house meets the limited depreciation requirement, then it will be up to you (lucky you) to add a memo to the file reconciling the CU risk score vs. your finding.

And, as imperfect as CU is (I'm no big fan) this is one of the objectives of the process: Cookie cutters that fit the underwriting expectations pass through. Oddballs stick out. Oddballs require a human review to reconcile what a computer program cannot.


Good luck!

 

[Chase UW]

(my bold)

Yes.
Does the report indicate that there have been renovations/remodeling within the last 10-15 years? If so, is the level of renovation/remodeling consistent with the C3's "limited physical depreciation" requirement? If not, does the report provide an adequate summary of what renovations/remodeling occurred prior to that which results in the C3 rating? If the report does not indicate recent renovations in the CU module (within the condition rating of the report) but narrates it somewhere else, this may have triggered the warning flag.

If there has been recent renovations but they are not reported in the CU module, then you can ask the appraiser to reflect those updates within the CU module and that may eliminate the error.
If there has not been recent renovations that are consistent with the CU module, but the house has been renovated prior to that check-box range and the house meets the limited depreciation requirement, then it will be up to you (lucky you) to add a memo to the file reconciling the CU risk score vs. your finding.

And, as imperfect as CU is (I'm no big fan) this is one of the objectives of the process: Cookie cutters that fit the underwriting expectations pass through. Oddballs stick out. Oddballs require a human review to reconcile what a computer program cannot.


Good luck!

Can you help this non- appraiser out? At what actual / effective age does a home with no renovations graduate from a C3 to a C4?

 

[hastalavista]

I've highlighted (from Mike K's post) the significant drivers related to physical deterioration and effective age:



Here are some concepts:
Long Lived Items: A building component with an expected remaining economic life that is the same as the remaining economic life of the entire structure.
Foundation and roof structure would be examples of long-lived items.
Short-Lived Items: A building component with an expected remaining economic life that is a shorter than the remaining economic life of the entire structure.
Paint, appliances, wall/floor finishes, roof covering, HVAC, plumbing fixtures, etc., would be examples of short-lived items.

The condition ratings are largely based on Total Economic Life vs. Effective Age. Chronological Age, while a consideration, is not the driving factor. A home built today, if just maintained and not renovated, may have a Total Economic Life of 65 years. What this means is that at the end of 65-years, the expectation is that the long-lived items are in need of replacement.
Regular maintenance can slow down the "aging" process but not stop it. As time goes on, my effective age continues to get higher and my remaining economic life continues to get shorter.
Replacement of short-lived items can further slow down the aging process and actually set it back. Once items are replaced and I continue to maintain the home, my effective age may be reduced and my remaining economic life may be extended.
Renovation of short-lived and long-lived components significantly sets back the aging process. Once I renovate, I can turn my effective-age clock back significantly and I've extended the remaining economic life significantly.

When a house has been thoroughly renovated, both long and short-lived components have been brought to a "new" condition. This is a C2; the only difference between a C1 and C2 is C1 is newly constructed, C2 is similar to newly constructed.
If an improvement has an estimated life of 65 years, once renovated to the C2 condition, it is like the clock restarts. This is the fountain of youth for a house. A C2 house with a chronological age of 75 could reasonably have an effective age of 1-5 years. What this means is, that after the major renovation, the house, if properly maintained afterward, should last for another 60-64 years.

In a C3 house, some (but not every) major component has been renovated and the structure ( a long-lived item) is well maintained. This is a trip to the anti-aging clinic. Most of my interior finishes have been redone, it is likely that my major components (kitchen/baths) have been renovated. I probably have a new roof, windows, and heating/cooling. A C3 house could reasonably have an effective age of 10-20 years. There is a wider range here, because not every component need be renovated and some components are more significant (a major kitchen renovation is more significant than refinishing/replacing the flooring) than others. So, my C3 house with a chronological age of 75 could reasonably have a remaining economic life of 45-55 years.

C4 means that some short-lived items (flooring, paint, maybe a bath renovation) have been replaced but many of the remaining components have not; they are near the end of their physical life (which means they are getting near to be replaced) but they still function adequately (they can still be used). This is someone who goes to the doctor readily and maybe walks 3-miles a week. The improvements have been maintained and there may be some minor repairs required. C4 homes (in my market) are entry level homes or homes that someone will purchase with the intention of upgrading/renovating some time in the future. Or, they could be a rental (I'm not going to pour a lot of money into the improvements because I cannot get it back in rent, but I want it clean and working so I can get top rent). So, my C4 house with a chronological age of 75 may have an effective age of 40-50 years and a remaining economic life of 15-25 years.

So, the "C" condition is directly related to remaining economic life. The level of improvements/renovations/remodeling will determine where on the scale of the "C" ladder a house will fall within.
While the definitions are designed to be objective, and appraisers can avail themselves to recognized & published tables summarizing what the projected Total Economic Life of an improvement is (based on the quality of materials; which is different than the condition of those materials), in the real world of residential appraisal, the estimation of effective age has a degree of subjectivity to it.
A. The appraiser looks at the house and relies on a published table for en estimate of total economic life. Assume that table indicates 65-years for a subject-like constructed home.
B. Based on the condition (how the property has been maintained) and on the level of renovations/upgrades (what has been replaced or renovated), the appraiser concludes the house is 35% through its total economic life; this means it has 65% remaining economic life.
C. 35% of 65 years is the effective age; "effective" because it reflects how old the improvement is based on the total economic life span. 35% x 65 = 23 years. Effective age is an economic concept when measured against total economic life. Remaining economic life is the estimate, in years, of how long the improvement, as-is, will continue to add contributory value to the land. Once there is no more economic life remaining, it is the improvement no longer contributes value to the land. One would either demolish the improvement or significantly renovate/remodel it to set-back the effective age clock.

There are ways to measure depreciation which are much more detailed than the above. But as I said, in most cases, this is how effective age is estimated for a typical residential appraisal.

There are other forms of depreciation that can effect remaining economic life: functional issues (a small, galley kitchen in a market that demands larger kitchens due to modern standards) would also reduce the remaining economic life of a property. But, if renovated/remodeled and it were financially feasible to do so, that functional issue would be corrected.

Does that help?

 

[Howard Klahr]

I am not an appraiser but I have been an UW and have reviewed appraisals for over 30 years.

I review appraisals for a major lender

The Uniform Appraisal Dataset went into effect back in Sept 2011. The definitions were established back then that describe the rating scale (see previous posts presenting such). Could you please tell me what qualifies you with your 30 years of appraisal review experience and your current position as a reviewer for a major lender to perform these reviews and yet not have an understanding of this rating system that has been in place for over 5 years?

 

[Chase UW]

I've highlighted (from Mike K's post) the significant drivers related to physical deterioration and effective age:

View attachment 30672

Here are some concepts:
Long Lived Items: A building component with an expected remaining economic life that is the same as the remaining economic life of the entire structure.
Foundation and roof structure would be examples of long-lived items.
Short-Lived Items: A building component with an expected remaining economic life that is a shorter than the remaining economic life of the entire structure.
Paint, appliances, wall/floor finishes, roof covering, HVAC, plumbing fixtures, etc., would be examples of short-lived items.

The condition ratings are largely based on Total Economic Life vs. Effective Age. Chronological Age, while a consideration, is not the driving factor. A home built today, if just maintained and not renovated, may have a Total Economic Life of 65 years. What this means is that at the end of 65-years, the expectation is that the long-lived items are in need of replacement.
Regular maintenance can slow down the "aging" process but not stop it. As time goes on, my effective age continues to get higher and my remaining economic life continues to get shorter.
Replacement of short-lived items can further slow down the aging process and actually set it back. Once items are replaced and I continue to maintain the home, my effective age may be reduced and my remaining economic life may be extended.
Renovation of short-lived and long-lived components significantly sets back the aging process. Once I renovate, I can turn my effective-age clock back significantly and I've extended the remaining economic life significantly.

When a house has been thoroughly renovated, both long and short-lived components have been brought to a "new" condition. This is a C2; the only difference between a C1 and C2 is C1 is newly constructed, C2 is similar to newly constructed.
If an improvement has an estimated life of 65 years, once renovated to the C2 condition, it is like the clock restarts. This is the fountain of youth for a house. A C2 house with a chronological age of 75 could reasonably have an effective age of 1-5 years. What this means is, that after the major renovation, the house, if properly maintained afterward, should last for another 60-64 years.

In a C3 house, some (but not every) major component has been renovated and the structure ( a long-lived item) is well maintained. This is a trip to the anti-aging clinic. Most of my interior finishes have been redone, it is likely that my major components (kitchen/baths) have been renovated. I probably have a new roof, windows, and heating/cooling. A C3 house could reasonably have an effective age of 10-20 years. There is a wider range here, because not every component need be renovated and some components are more significant (a major kitchen renovation is more significant than refinishing/replacing the flooring) than others. So, my C3 house with a chronological age of 75 could reasonably have a remaining economic life of 45-55 years.

C4 means that some short-lived items (flooring, paint, maybe a bath renovation) have been replaced but many of the remaining components have not; they are near the end of their physical life (which means they are getting near to be replaced) but they still function adequately (they can still be used). This is someone who goes to the doctor readily and maybe walks 3-miles a week. The improvements have been maintained and there may be some minor repairs required. C4 homes (in my market) are entry level homes or homes that someone will purchase with the intention of upgrading/renovating some time in the future. Or, they could be a rental (I'm not going to pour a lot of money into the improvements because I cannot get it back in rent, but I want it clean and working so I can get top rent). So, my C4 house with a chronological age of 75 may have an effective age of 40-50 years and a remaining economic life of 15-25 years.

So, the "C" condition is directly related to remaining economic life. The level of improvements/renovations/remodeling will determine where on the scale of the "C" ladder a house will fall within.
While the definitions are designed to be objective, and appraisers can avail themselves to recognized & published tables summarizing what the projected Total Economic Life of an improvement is (based on the quality of materials; which is different than the condition of those materials), in the real world of residential appraisal, the estimation of effective age has a degree of subjectivity to it.
A. The appraiser looks at the house and relies on a published table for en estimate of total economic life. Assume that table indicates 65-years for a subject-like constructed home.
B. Based on the condition (how the property has been maintained) and on the level of renovations/upgrades (what has been replaced or renovated), the appraiser concludes the house is 35% through its total economic life; this means it has 65% remaining economic life.
C. 35% of 65 years is the effective age; "effective" because it reflects how old the improvement is based on the total economic life span. 35% x 65 = 23 years. Effective age is an economic concept when measured against total economic life. Remaining economic life is the estimate, in years, of how long the improvement, as-is, will continue to add contributory value to the land. Once there is no more economic life remaining, it is the improvement no longer contributes value to the land. One would either demolish the improvement or significantly renovate/remodel it to set-back the effective age clock.

There are ways to measure depreciation which are much more detailed than the above. But as I said, in most cases, this is how effective age is estimated for a typical residential appraisal.

There are other forms of depreciation that can effect remaining economic life: functional issues (a small, galley kitchen in a market that demands larger kitchens due to modern standards) would also reduce the remaining economic life of a property. But, if renovated/remodeled and it were financially feasible to do so, that functional issue would be corrected.

Does that help?

Thank you so much for your time in sending this email. It is greatly appreciated and very informative. Have a great day.

 

[Mr Rex]

Actually only C1 & C2 have no deferred maintenance.

 

[JTip]

"at or near end of physical life"

Check out section E (M&S).....

7 yo carpet -C4

10 yo water heater - C4

Unless you are replacing items on an annual basis, you will never achieve C-3 for more than a couple years.

 

[Phil McDonald]

I have always interpreted the C3 definition note “The improvement is in its first stage of replacing short-lived building components…” to mean that an older property which is no longer in its first cycle of replacing short lived building components can never be a C3 and that the age of the property is a determining factor in the condition rating even if it has been recently updated because it is no longer in the first cycle of replacing short lived building components.

I suspect that this may be why CU is generating this error message based on the age of the property. It is good information to get from an UW posting about this error because many appraisers interpret this differently.

 

[jay trotta]

The Uniform Appraisal Dataset went into effect back in Sept 2011. The definitions were established back then that describe the rating scale (see previous posts presenting such). Could you please tell me what qualifies you with your 30 years of appraisal review experience and your current position as a reviewer for a major lender to perform these reviews and yet not have an understanding of this rating system that has been in place for over 5 years?

Agreed, but the UW came here for what Dennis provided and it would appear no one he works for could provide a similar explanation, Sad, but this provides US with an explanation as to why so many "stips" crop up. Yes 5 years later there is confusion on the Lenders/UW side.