by Calculated Risk on 7/13/2009 08:00:00 PM

There have been quite a few complaints about the new appraisal rules from real estate agents, homebuilders and mortgage brokers.

Last Friday Freddie Mac updated their appraisal guidelines and clarified that the appraiser is not required to use distressed sales (REOs, short sales):

The appraiser’s selection of comparable sales is crucial to providing an accurate opinion of value based on market data. With respect to comparable sales, the appraiser must choose appropriate comparable sales, and certify that the comparable sales chosen are those most similar to the subject property. In underwriting the appraisal, the underwriter must consider whether any adjustments are supported and are reasonable. The amount and number of any adjustments must also be considered. Typically, the higher the amount of the adjustments or the number of adjustments the more likely the comparable sales might not be representative of the subject property. Freddie Mac does not have requirements about what comparable sales the appraiser is to use. For example, we do not require appraisers to use Real Estate Owned (REO), foreclosure or short sales. However, if the appraiser determines that these are representative of the properties available to typical purchasers for the market in which the property is located, appraisers must consider their use.

My favorite paragraph in the bulletin is:

To determine that a Mortgage is eligible for sale to Freddie Mac, a Seller/Servicer must conclude that the Borrower is creditworthy (acceptable credit reputation and capacity) and the Mortgaged Premises (collateral) are adequate for the transaction. Credit reputation, capacity and collateral are often called the “three Cs” of underwriting; if one of these components is not acceptable or if there is excessive layering of risk across components, the Mortgage is not eligible for sale to Freddie Mac. Sellers must accurately evaluate and determine a Borrower’s ability to repay the Mortgage.

Imagine that.