HUD is adopting Fannie and Freddie's reporting requirements for declining markets. Per Mortgagee Letter 2009-09, as of April 1, 2009 appraisals for all FHA insured mortgages must include the Market Conditions Addendum. Be preparared for second appraisals and limits to cash-out refinances if your property is determined to be in a declining market. From HUD's letter:
"a declining market is considered to be any neighborhood, market area, or region that demonstrates a decline in prices or deterioration in other market conditions as evidenced by an oversupply of existing inventory or extended marketing times."
In addition to providing three recent comparables (properties similar to home being appraised that have recently closed in the area); appraisers are required to:
- At least two of the three recent sales (comparables/comps) must be within the last 90 days of the effective date of the appraisal.
- Include a minimum of two active listings or pending sales. The appraiser must insure the active listings and pending sales "have reasonable market exposure to avoid the use of over priced properties as comparables."
- Include the original list price, any revised prices and total days on the market.
- Adjust active listings to reflect list to sale price ratios for the market.
- Adjust pending sales to reflect the contract purchase price whenever possible or adjust pending sales to reflect list to sales price ratios.
- Include an absorption rate analysis to determine market trends.
- Known or reported incentives or sales concessions must be noted for any comp that's used on the appraisal.
To read the entire Mortgagee Letter, click here.