General Collateral Valuation Questions and Answers Readers with questions regarding Farmer Mac's Collateral Valuation Standards and Guidelines are invited to review the following material. If your question is not addressed here, you are welcome to post your question at the end of this section. How does Farmer Mac obtain appraisals or evaluations? A Seller (or an originator selling through a Seller) obtains the appraisal or evaluation. After the Seller has determined that the appraisal or evaluation is acceptable, it becomes part of the loan documentation submitted to Farmer Mac. Can a Seller use an appraisal initially prepared for a borrower? No. Farmer Mac requires collateral valuation information to be obtained by the Seller's engagement of the appraiser and will not rely on an appraisal that was initially prepared for the borrower. Why does Farmer Mac have standards and guidelines that differ from those in the Uniform Standards of Professional Appraisal Practice (USPAP)? USPAP is a general framework of ethical conduct and competent performance in professional appraisal practice. However, it does not address all of the requirements that may apply in agricultural and part-time farm property appraisals for use in lending. Farmer Mac receives loans from across the country, involving diverse property and market situations. Farmer Mac's Standards and guidance, which are in Chapter CV101, are necessary to address that diversity. Farmer Mac's Full-Time Farm and Specialized Agricultural Facility requirements include "Appraisals" and "Evaluations." what is the difference? Generally, an appraisal is provided by a qualified appraiser --- an individual who is a Certified General Real Estate Appraiser in those states or territories that have real property appraiser licensing or certification programs in compliance with the requirements of the Appraisal Sub-Committee (ASC) with experience valuing the type of property to be appraised. Evaluations are similar to appraisals, but may be provided by individuals who are not state certified or licensed as real property appraisers. An evaluation may be used when: The loan is for $500,000 or less, The security property does not have significant permanent plantings or structural improvements such as dwellings, outbuildings and specialized facilities, and The Loan-to-Value ratio does not exceed 55% (on a pro forma basis). Why does Farmer Mac require the engagement of a fee appraiser to be in writing? The first and best assurance of acceptable collateral valuation quality is the engagement process. Informing an appraiser, at the beginning of an appraisal assignment, about the property and property rights to be appraised, the intended use and intended users of the assignment results, and the standards and requirements that apply in the assignment significantly improves the quality and economy of the appraiser's work. This effort prevents misunderstandings and subsequent delay and cost to correct errors or omissions. Requiring written documentation, such as an engagement letter, ensures this critical communication step is accomplished. Sample Fee Appraiser Engagement Letters (Farmer Mac Form 1023A - Full-Time Farm and Specialized Agricultural Facility Property and Farmer Mac Form 1023B - Part-Time Farm Property) are included in the Forms section of the CV Supplement. Farmer Mac Form 1023D - Fee Appraiser Engagement Letter is specifically for use when engaging an appraiser in an appraisal consulting service related to an adverse loan performance situation. How is a Seller to know what type of valuation Farmer Mac requires for a given type of loan transaction? Farmer Mac encourages the use of sound judgment by Sellers when deciding on the type of valuation to obtain for a given set of circumstances, specifically to avoid excess or deficiency in the appraisal or evaluation. The type of valuation Farmer Mac requires differs according to the size of the transaction, the characteristics of the property and its market, and the intended use of the assignment results (e.g., new loan, servicing action, or purchase of seasoned loans) See Chapter CV101.3 for Full-Time Farm and Specialized Agricultural Facility requirements, Chapter CV201 for Part-Time Farm requirements, or CV301 for servicing action-related requirements. How old can an appraisal or evaluation be and remain acceptable for use in a Farmer Mac loan transaction? Farmer Mac will not purchase any new Full-Time Farm loan (or refinanced loan) secured by property with a date of valuation more than one year prior to the date of purchase by Farmer Mac. The age limit for a new Part-Time Farm loan (or refinanced loan) appraisal or evaluation is 6 months. Any appraisal or evaluation that is over these ages at the time the related new or refinanced loan is sold to Farmer Mac must be updated or a current appraisal or evaluation must be obtained. When Farmer Mac purchases a seasoned Full-Time Farm or Part-Time Farm loan (or a group of seasoned loans), the date of valuation in the appraisal report(s) associated with the loan(s) must not be over one year prior to the loan origination date(s). For guidance on this situation, see Chapter CV101.8 - General. When Farmer Mac commits to purchase loans or engages in a swap, the appraisal supporting the loan must have complied with the applicable standards or guidelines in effect at loan origination. (See Chapter CV101.8) Must the property offered or serving as collateral be valued "As Is" or can it be valued as if it is in some other condition? Generally, the property's value must reflect its actual physical, economic, and legal characteristics at the time of the appraisal. In some instances, the appraisal can be based on an extraordinary assumption or a hypothetical condition, but the use of these requires the Seller's prior written agreement. (See Chapters CV101.4, CV101.5 and 101.9B) Does Farmer Mac require that the appraiser or evaluator inspect the property? Yes. In most situations, Farmer Mac expects the property information will be based on or confirmed by an on-site property inspection. However, when circumstances preclude an on-site inspection, such as a lack of peaceful access, the appraiser or evaluator can complete the work on the basis of an extraordinary assumption about the property information, subject to the Seller's prior written agreement. (See Chapters CV101.4, CV101.5, CV101.6 and CV101.9B) How does Farmer Mac expect environmental issues to be identified and handled? The Seller is to obtain a borrower or property owner-completed Environmental Disclosure (Farmer Mac Forms 1010A or 1010B), a copy of which the appraiser is to review in the process of the property inspection, sign, and include in the appraisal report. While Farmer Mac does not consider an appraiser's observations equivalent to those of an environmental expert, taken together, the information provided on Forms 1010A or 1010B helps resolve environmental issues early in the loan decision-making process. Does Farmer Mac require specific information about irrigation water? When a property includes irrigated land, the borrower is required to provide the Seller with irrigation water source, cost, capacity, and stability information, using Farmer Mac Form 1013A (for a Full-Time Farm or Specialized Agricultural Facility property) or Form 1013B (for a Part-Time Farm property). Equivalent forms may be used. A copy of the borrower or property owner completed and signed form should be provided to the appraiser, preferably prior to the on-site inspection. Why does Farmer Mac require information about the income producing capacity of a Full-Time Farm or Specialized Agricultural Facility property in the appraisal report? Property income is an important factor in analyzing the borrower's sources of repayment capacity, and can be a significant part of the property market analysis in an appraisal. An appraiser must analyze property income to identify its effect on the property's value and develop that analysis from the perspective of the market. This is particularly helpful as it eliminates the effect of management in the valuation and aids in identifying risk. The appraiser's estimate of property income producing capacity should appear in the Highest and Best Use section of the report, as part of the economic characteristics considerations (See CV 101.4 (D) (1) - Research and Analysis Requirements, Subject Property). Why does Farmer Mac require the appraiser's estimates of "cost new" and "remaining economic life" ( REL) for those improvements that have contributory value in an appraisal? When improvements are contributing to value, Farmer Mac expects the Seller to assess the durability of that contribution and the adequacy of hazard insurance on those improvements. For a Full-Time Farm property appraisal, the appraiser's estimates of "cost new" and "remaining economic life" should appear within the cost approach section in a narrative report or in the Executive Summary page or cost approach sections when the Uniform Agricultural Appraisal Report (UAAR, AgWare 2000 or later version) is used. If an appraiser uses a different form set, the estimates should appear in the cost approach section of the form package. How can a Seller and appraiser determine what information is required in an appraisal report? The requirements are stated in Chapters CV101.4 and CV101.5 (Full-Time Farm program), CV101.6 (Specialized Agricultural Facilities), or CV201 (Part-Time Farm program). Generally, the report, which is typically a Summary Appraisal Report, must include the information necessary to reasonably ensure that intended users of the appraisal understand the report and the appraiser's support for his or her opinions and conclusions. The appraisal report is to include a summary of information about the subject property and its market sufficient for an intended user of the appraisal that is not familiar with the property and its location to: Find and distinguish the subject property from all other real estate, Recognize and understand the subject property's legal, physical, and economic characteristics that are significant in its market, and Understand the value-related geographic, demographic, and economic characteristics of the subject's location and market. Will Farmer Mac accept electronic versions of an appraisal or evaluation report? Farmer Mac prefers an electronic version (Adobe PDF) of the appraisal or evaluation report, plus one paper copy. The appraiser or evaluator and Seller (or the Seller's originator) should make arrangements for the electronic file transmission during the assignment engagement process. In specific situations, such as an appraisal report for use in connection with adverse loan performance servicing actions (See Chapter CV301), Farmer Mac requires a PDF version of the appraisal report. If the appraiser is not able to produce a PDF file, Farmer Mac will accept an unbound paper copy of the appraisal report that Farmer Mac will use to produce the PDF file. Farmer Mac will accept, but does not require, an electronic version of the entire appraisal report for use in routine loan servicing actions or loan origination transactions. Typically, these electronic appraisal report files are received in PDF format. By prior arrangement, Farmer Mac can accept electronic versions of an appraisal report produced using the UAAR 2000 or later form software by AgWare, Inc. Contact David Snook at (707-422-6734) to make the appropriate arrangements.