The New FNMA Market Analysis Requirements: What Appraisers Need to Know
If you’re an appraiser, you’ve likely heard the buzz: Fannie Mae and Freddie Mac are rolling out new requirements for market analysis in residential real estate appraisals, effective for applications dated on or after February 4, 2025. While these changes aim to promote consistency and transparency, they also demand more rigor and detail in how we assess and report market conditions. Let’s break down what’s changing and what it means for your practice.
Neighborhood vs. Market Area: The New Definitions
First up, Fannie Mae and Freddie Mac are introducing standardized definitions for “Neighborhood” and “Market Area.” Why does this matter you ask? Because these terms often overlap in casual use but serve distinct purposes in an appraisal report.
Neighborhood: This refers to the physical and locational characteristics of the subject property’s immediate surroundings. Think of proximity to schools, parks, or other amenities.
Market Area: A broader concept encompassing the area where most competitive properties are located, and where the forces of supply and demand influence property values. This area could encompass the neighborhood or be larger or even possibly smaller.
By defining these terms more clearly, the agencies are ensuring appraisers provide consistent and objective descriptions. For us, this means sharpening our pencils (and our boundaries) when detailing the subject property’s location and its competitive market landscape.
A Deeper Dive into Market Trends
Gone are the days when a brief note about market trends would suffice. The new guidelines require appraisers to:
Analyze a minimum of 12 months of market data to determine the overall trend (increasing, stable, or declining).
Differentiate between overall market trends and adjustments made to individual comparable sales. This nuance acknowledges that broader market trends don’t always directly correlate with adjustments to specific comps.
Supporting Adjustments with Data
One of the most significant updates is the emphasis on market-derived time adjustments. It’s no longer enough to apply a percentage adjustment and move on. Appraisers must now:
Illustrate the methodology used to calculate time adjustments (this does not necessarily mean you have to utilize a visual illustration like a chart or a graph, but that is an option).
Use verifiable data sources, such as MLS data, public records, or price indices, to back up these adjustments.
Explain, in plain language, how they arrived at these conclusions.
Think of it this way: Instead of simply stating, “The market is appreciating at 5% per year,” we’ll need to show our work of how that conclusion was determined. Did we use regression analysis? A paired sales approach? The goal is to give lenders and reviewers confidence in our conclusions and ensure transparency in the valuation process.
Why These Changes Matter
While some may see these new requirements as extra work, they reflect a broader effort to enhance the integrity of the appraisal process. By requiring more detailed, data-supported analyses, Fannie Mae and Freddie Mac aim to reduce inconsistencies and improve public trust in appraisals.
Practical Tips for Appraisers
Brush up on your methods: Whether it’s regression analysis or matched-pair techniques, now’s the time to ensure you’re comfortable with the tools needed to support your conclusions. Take some classes or get some books on adjustment methodology if you feel like your skills might not quite be up to par.
Leverage technology: Software solutions can help you visualize trends and analyze data more efficiently. There are multiple software options out there specifically tailored for appraisers, along with utilizing programs like Excel or R.
Document everything: Keep a detailed record of your data sources, methodologies, and reasoning. The more transparent your process, the fewer questions you’ll face from underwriters and reviewers.
Stay informed: Policies like these often evolve. Make it a habit to review updates from Fannie Mae, Freddie Mac, and USPAP to ensure continued compliance.
Looking Ahead
These updates are a reminder that the appraisal profession is constantly evolving. By embracing these changes and honing our analytical skills, we not only meet new standards but also elevate the credibility of our work.
So, while February 2025 may be a few months off, it’s never too early to start adapting. After all, a more transparent and consistent appraisal process benefits everyone, from lenders to buyers to appraisers like us.