Appraisal Changes Coming for Fannie Mae Loans

Appraisal changes for measuring, calculating and reporting gross living area for Fannie Mae loans are going into effect April 1, 2022, according to an announcement last month.

Appraisers will be required to use American National Standards Institute – or ANSI – Measuring Standard for measuring, calculating and reporting gross living area and non-GLA areas of properties requiring interior and exterior inspections on loans sold to Fannie Mae.

According to Fannie Mae, “This policy update will standardize the method used to measure, calculate and report gross living area and non-GLA areas of subject properties. Valuations of residential property correlate strongly with GLA, yet to date there is substantial inconsistency in how appraisers determine it. Fannie Mae’s adoption of the ANSI standard for measuring, calculating and reporting square footage:

• Creates alignment across market participants.
• Provides a professional and defensible method for the appraiser.
• Allows transparent and repeatable results for consumers of appraisal reports.”

Previously, Fannie Mae’s Selling Guide has not required the use of a specific measurement standard. This change is being made to standardize the measuring method, however, it could cause problems in areas with older homes.

Michelle Czekalski Bradley, a Pennsylvania certified general appraiser and USPAP instructor, said, “This has the potential to cause some difficulty, for Pennsylvania in particular, because we have a rather old housing stock. This won’t be an issue where new homes are the predominant market, but areas like Pittsburgh, Harrisburg and Philadelphia, for example, have older homes that are going to have potential issues.”

Bradley explained, “A home where the second-floor ceiling is not more than 7 feet in height is not to be included in the room count and above-grade GLA totals. Many 100+ year old homes have this issue. For example, consider a typical post-WWII cape cod which has one bedroom on the first level and two bedrooms on the second level. Often the second floor has low and sloped ceilings that is typical of this style of home, yet that second floor may not meet ANSI standards for inclusion in above grade square footage totals, even though homebuyers perceive value to this second-floor level. Conformance with ANSI standards will require that the appraisal being reported with the size of the first-floor area, and the home will be reported as having one bedroom. This is obviously going to cause some concern to sellers and buyers alike. It is important to note that the second floor can be included separately, much like the basement is reported separately in an appraisal. Yet when a homebuyer receives the appraisal report, which states the home has one bedroom above grade, there will naturally be confusion.”

PAR Staff Attorney Brian Carter added, “Given that Pennsylvania has the fourth oldest average age of homes nationally, with 58% built before 1970 and the median age being 1962, this new rule could be disruptive on that fact alone.”

In addition, Fannie Mae said “many appraisers have voluntarily adopted ANSI Z765-2021 (American National Standards Institute) Measuring Standard since it first launched in April 1996, and several states already require appraisers to use it, including Alabama, Alaska, Colorado, Kentucky and North Carolina. In addition, the ANSI standard is currently used by the National Association of Home Builders and some tax assessors.”

Bradley said there isn’t “one definitive source” for determining square footage of gross living area. “Tax assessors measure or estimate differently, while appraisers have not previously been required to conform to any law or regulation for measuring square footage,” she said. “That leads to inconsistencies like some appraisers including the area for a two-story foyer and some appraisers do not. Many lenders currently utilize online sources to gather data regarding the homes, including viewing the reported square footage. Because tax assessors, real estate agents and homeowners, for example, all will measure in their own way, the available data is often inconsistent and causes confusion. Currently, only Fannie Mae has issued this requirement. As of yet, Freddie Mac, the VA, HUD and USDA have not issued a similar requirement. And this has the potential to cause even more inconsistencies.”

Fannie Mae noted that comparable sales may be measured differently because GLA for properties in MLS systems and assessor records may not be ANSI-compliant. Through research and an appraiser’s knowledge of the local market, appraisers will have to determine if the GLA provided through alternate sources should be adjusted, but that does not change the requirement to report subject above grade and below grade square footage to the ANSI standard.

When asked if Fannie Mae anticipated confusion for consumers about the how the reported square footage may differ between what is reported for Fannie Mae and to the MLS, the organization responded, “currently, there can be discrepancies between the square footage in an appraisal report and what is shown in the MLS or in other third-party data, such as public records. Our new policy for measurement is expected to result in more clarity for consumers, since we require the appraisal report to account for any square footage of the property that is not included in the GLA. Adjustments and commentary in the report should explain whether the non-GLA areas have more, less, or equal value to the GLA areas dependent on market reaction. Mortgage borrowers should always contact their lender if they have questions about their appraisal. Real estate professionals are often trusted advisors in the homebuying process and may be able to help with questions as well.”

Other items appraisers should consider when using the ANSI standard:

• Measurements are taken to the nearest inch or tenth of a foot, and the final square footage is reported to the nearest whole square foot.
• Staircases are included in the GLA of the floor from which they descend.
• Basement is any space that is partially or completely below grade.
• The GLA calculation does not include openings to the floor below, e.g., two-story foyers.
• Finished areas must have a ceiling height of at least 7 feet. In a room with a sloping ceiling, at least 50% of the finished square footage of the room must have a ceiling height of at least 7 feet and no portion of the finished area that has a ceiling height of less than 5 feet can be included in the GLA.
• If a house has a finished area that does not have a ceiling height of 7 feet for 50% of the finished area, e.g., some cape cods, in conformance with the ANSI Standard, the appraiser may put this area on a separate line in the Sales Comparison Grid with the appropriate market adjustment. The report will be ANSI-compliant and also acknowledge the contributing value of the non-GLA square footage.

Bradley and PAR President Christopher Beadling discussed the latest on appraisals and these changes in a webinar on Tuesday, March 15. You can view the webinar recording.