As Fannie Mae Tightens Appraisals, Mortgage Note Buyers Prepare for Business

Real estate appraisers are scrambling to adapt to a major policy shift from Fannie Mae – and at DMO Direct Funding we’re getting ready for what could signal a major shift in business.

Part art, part science, real estate appraisal has always been a contentious field, especially as the rise of mortgage backed investments has driven extreme responses to even minor shifts in property values. As housing prices rose throughout the late 90s and earlier in this decade their associated investments skyrocketed in value, creating a cycle of new-construction, over-valuation and consumers buying on crushing debts just to keep up with the frenzied market – and we know how that ended up.

Fannie Mae’s new 1004MC form represents a major appraisal reform. It changes the basis of valuation from market value to the neighborhood’s median home value. You can still price your home at any amount you like, but if you stray from the approved appraisal process you won’t get FHA backing for the loan. While this initiative is clearly designed to counter market excesses, the collapse of the housing bubble means that neighborhood foreclosures might be able to kick property values too low to make selling worthwhile. In other words, we’ve exchanged one market-driven problem for another.

Seller funding is sure to emerge as an alternative. Institutions don’t have a choice, but individuals can’t sell their homes for next to nothing. The disadvantage is the added responsibilities and costs, including legal representation, due diligence and careful negotiation. Fortunately, mortgage note holders have alternatives. They can sell their mortgage notes, take an immediate payout and use it to drive the purchase of a new home – one which may well be cheaper then you except, even by 2009 standards.