Last February we decided to offer our clients a free webinar on Fannie Mae’s (then) new 1004MC addendum. Participants “attend” the Webinar by logging onto a website where they can view and hear the presentation. Participants can also text in questions to the presenter and respond to the presenter’s questions with affirmative or negative symbols.

After delivering the 1004MC webinar to over 5,000 clients, I’ve learned that a number of misconceptions still exist about the new form. I’ll itemize the 10 most common questions, concerns and issues that I’ve gleaned from the participants.

1. One-unit housing trends in the neighborhood section of the report are submarket specific. Suppose the neighborhood consists primarily of two property types. Detached single-unit dwellings (all relatively homogenous in character) and condominium units. Your analysis indicates the detached units have been relatively stable but the condo units are declining. So how do you respond to “one-unit housing trends” in the neighborhood section of the form? Simple. If you are appraising one of the detached units you check “stable” and if you are appraising one of the condo units you check “declining.”
2. Neighborhood boundaries are not elastic. The polls I’ve taken during the webinar indicate that about 30% of appraisers think that Fannie Mae guidelines state that the comparables used on page 2 of the report in the Sales Comparison Analysis grid must come from within the subject neighborhood. Some appraisers even advocate setting the neighborhood boundaries after the comparables are chosen so that all of the comparables are “within” the defined neighborhood. The reality is that Fannie Mae guidelines refer to this practice as unacceptable.
3. Fannie Mae uses terms “neighborhood” and “market area” synonymously. To most appraisers these terms have different meanings. This is supported by the fact that each term has its own definition in the Appraisal Institute’s Dictionary of Real Estate. However, Fannie may does not distinguish between the two terms.
4. Active listings are not current listings. The 1004MC asks for active listings as well as current listings. Active listings are listings that were active at some point in time but have sold, expired or have been withdrawn by the property owner. In other words, historical listings. Current listings include only those that were offered for sale as of the effective date of the appraisal.
5. What if I don’t have enough comparable sales in the subject neighborhood to develop a meaningful market analysis? Do I expand the neighborhood boundaries to include more data on the 1004MC? The short answer is an emphatic NO. Fannie Mae is on record as stating that the 1004MC is neighborhood specific, the appraiser is free to develop additional analysis using sales from competing neighborhoods and that the appraiser is expected to provide support for the housing trends as noted in the neighborhood section of the report.
6. The 1004MC has little to do with value, everything to do with underwriting. If the appraiser checks the “declining” box after Property Values in the Neighborhood section of the report, Fannie Mae “requires the lender to offer financing at loan-to-value and combined-loan-to-value ratios that are five percentage points below the maximum rations allowed for the selected mortgage product.” In other words, the borrower will not be allowed to borrow as much as they may have wanted to. The 1004MC is intended to provide support for the appraiser’s reported One-Unit Housing Trends, thereby assisting underwriters and lenders with risk-management.
7. If appraising a condo, complete both top and bottom. Some appraisers think that if a condo is being appraised, only the bottom part of the 1004MC is required. This is not the case as both top and bottom sections of the form are to be completed. The rationale is that a neighborhood may include multiple condo projects with competing units. In that case, the data set for the grid on the top half of the page would include sales and listing data from multiple projects. The bottom part of the form is subject-project specific.
8. Median Sale Price as % of List Price may not be what you think it is. At first blush, you might think that this percentage is derived by simply dividing one line on the form by another. This is not the case, as the percentage is derived only from properties that have sold. The appraiser is to take the sales that were reported for a given period on the 1004MC and divide the sale price of each sale by its (most recent) listing price. The median of these percentages is then reported on the form.
9. Comparable sales at top of page two should match up with the 1004MC. It’s the same data set. The 1004MC simply asks for the sales to be broken down into the three periods. 
10. Comparable offerings at top of page two will not match up with 1004MC. Listings will not match as the 1004MC asks for listings that may have sold, expired or have been withdrawn.

• Define the neighborhood boundaries, resisting the temptation to artificially expand them.
• Identify comparable sales and listings within the neighborhood.
• Categorize comparable neighborhood sales and listings by date and complete gridded sections of the form
• Determine if sufficient data exists within the neighborhood to enable development of a meaningful market analysis.
• If data is insufficient, develop a broader-based analysis using data from competing areas and report the analysis in the summary section of the 1004MC or as an addendum.

If you have questions, feel free to Join the Discussion on Understanding the 1004MC Form. And, if you have not yet taken a Webinar, give it a try as we'll be offering additional topics in the near future.