309: Affordable Housing Program Properties

Our standard appraisal policies and property underwriting guidelines apply to all mortgages we purchase, including those originated under affordable housing programs.  Our standards specifically prohibit redlining and other unacceptable appraisal practices, and support the valuation of residential properties in all markets.  The valuation of single-family properties that secure mortgages sold to us under affordable housing programs may present unique issues because of some of the features offered -- such as below-market-rate financing, subsidized second mortgages, grants, and tax abatements.

The appraiser's role does not change when appraising a property that is sold under an affordable housing program.  The appraiser is responsible for providing the lender with an accurate and adequately supported opinion of market value for the real property (based on our standard definition of market value) and a complete, accurate description of the property.  The appraiser's opinion of the market value for the property must reflect the normal consideration for the property as of the effective date of the appraisal.  Furthermore, the appraiser must adjust the comparable sales to reflect the effect of special or creative financing or sales concessions that were granted by any party associated with the sale of the property.

One of the options available for our community lending products -- Community Seconds -- has three components -- a low downpayment from the borrower, a conventional first mortgage, and a subsidized second mortgage.  (See Part VIII, Chapter 2, for more information.) When this option is used, it would not be uncommon, for example, for the first mortgage to have a market-rate of interest and a loan-to-value ratio of 70% combined with a below-market interest rate second mortgage that has a loan-to-value ratio of 25% and forgivable or deferred terms.  In such cases, buyers may be willing to pay a higher price for the property because of the special financing terms for the second mortgage.  To acknowledge this, the appraiser needs to compare the property being appraised to comparable properties that sold without special financing terms and to make appropriate adjustments to any of the comparable sales that were sold with special or below-market-rate financing.  To take this example further, assume that the security property for a Community Seconds transaction sold for $100,000 as part of a local affordable housing redevelopment effort that included several similar transactions in the same neighborhood -- and that the amount of the first mortgage is $70,000 and the amount of the subsidized second mortgage is $25,000.  If similar houses that had market-rate financing sold for $97,500, the appraiser (assuming that all other factors are equal) would need to adjust the comparable sales that had special financing to reflect the $2,500 premium that the buyer was willing to pay for the special financing package associated with the Community Seconds transaction.  The lender's underwriter would then make his or her underwriting decision based on the knowledge that the appraiser valued the real property at $97,500, rather than the sales price of $100,000.  Because we calculate loan-to-value ratios based on the lower of the sales price or the appraised value, the underwriter should keep in mind that the actual loan-to-value ratio for the first mortgage would be 72% ($70,000/ $97,500) and the combined loan-to-value ratio for the first and second mortgages would be 98% ($95,000/$97,500), rather than the 70% and 95% ratios that result when the sales price is used as the "value." For this reason, it is critical for the underwriter to separate the valuation of the property from the underwriting of the mortgage.