Chapter 18 — Exercises
Thirty-six items, graduated. Items marked † have worked solutions in the answers appendix; the rest are for your own practice, your study group, or your instructor. No answers appear in this file.
Everything computable here is computable from the chapter. Where a figure is not given, it is because you are supposed to notice that it is missing.
Recall and definitions
18.1 † Define appraisal, appraised value, and appraisal gap in one sentence each, without using the word "worth" in any of them.
18.2 When the contract price and the appraised value differ, which one is the basis for loan-to-value? State the rule, then state which direction it cuts and give a one-line example of each direction.
18.3 Name the four states of the reconciliation box on the Form 1004. Which of them mean the loan officer is finished with collateral, and which put work between the report and a closing? Say what that work is in each case.
18.4 Distinguish the effective date of an appraisal from the report date. Explain why the distinction matters to a file that sits idle for four months, and name the form that resolves it.
18.5 Name the three approaches to value. State which one decides the number on an owner-occupied single-family purchase, and give two situations in which one of the others becomes genuinely important.
18.6 On the standardized condition scale, which rating describes damage or deferred maintenance affecting safety, soundness, or structural integrity? What does that rating do to a conventional loan, and what does the value opinion have to do with it?
Applied reasoning
18.7 † A comparable has a 400-square-foot finished basement; the subject's basement is unfinished. State the direction of the adjustment, which property it is applied to, and the mnemonic that keeps you from reversing it. Then say what happens to the indicated value of the subject as a result.
18.8 The comparables in a grid sold for \$212 to \$219 per square foot, and the appraiser's gross living area adjustment is \$50 per square foot. A borrower emails you: "This proves he doesn't know what he's doing." Answer them in under 100 words, in language they will accept.
18.9 An appraisal reconciles at exactly the contract price. A colleague says this proves appraisers "just hit the number." Give the two legitimate reasons this outcome is so common, and then state the inference that runs the other way when a value comes in below contract.
18.10 A \$385,000 contract appraises at \$400,000. Explain, in three sentences, why the loan amount does not increase, what the borrower has actually gained, and why they are not permitted to borrow against it on this transaction.
18.11 Why does the appraiser report seller-paid financial assistance in the Contract section of the report? Work the Linden Street \$3,000 seller credit as a percentage of the \$385,000 contract price, and state whether a credit of that size is likely to have inflated the price. Then state the credit size at which you would expect the appraiser to comment.
18.12 † The automated findings offer value acceptance on a purchase. List four things the borrower is not getting as a result, and identify the one you must put in writing every single time.
Calculation
18.13 † The Cypress Court file, changed in one respect: the buyer is putting 25% down rather than 20%. Contract \$540,000, appraised value \$505,000.
(a) The planned loan and down payment. (b) The maximum loan and the required down payment after the appraisal. (c) The appraisal gap. (d) Explain why the gap is smaller than the \$28,000 in the chapter, and state the general rule that predicts it without recomputing anything.
18.14 An FHA purchase: contract \$298,000, appraised value \$291,500. The maximum base loan is 96.5% of the adjusted value (the lesser of price or appraised value). Compute the maximum base loan, the total investment the borrower must now make, and the increase over a 3.5% investment at the contract price. Verify your gap with the chapter's rule.
18.15 Read this grid excerpt and complete it. Subject: 2,050 sq ft, 4 bd / 2.5 ba, 2-car garage, condition C3, no deck. Contract price \$437,500.
ADJUSTMENT SUPPORT (from the report's addendum)
market conditions ........ +0.30% per month of elapsed time, applied to the
sale price and rounded to the nearest $100
gross living area ........ $55 per square foot
full bath $6,000 · half bath $3,000 · garage bay $5,000
below-grade finished area $30 per square foot
deck ..................... $4,000 condition C4 -> C3 ...... $9,000
room count ............... no separate adjustment where GLA captures it
COMP A COMP B COMP C
Sale price $432,000 $455,000 $409,000
Closed 2 months ago 4 months ago 6 months ago
GLA 1,980 sf 2,190 sf 1,910 sf
Bed / bath 4 / 2.5 4 / 3.5 4 / 2.5
Garage 2-car 3-car 2-car
Condition C3 C3 C4
Deck none 250 sf none
NET ADJUSTMENT ? ? ?
Net adj. % of price ? ? ?
Gross adj. % of price ? ? ?
ADJUSTED SALE PRICE ? ? ?
(a) Compute every adjustment, the net adjustment, the net and gross percentages, and the adjusted sale price for each comparable. Show the arithmetic. (b) State the indicated range. (c) Which comparable deserves the most weight, and on what evidence? Write the one-sentence reconciliation the appraiser should have written. (d) Is \$437,500 supported? Answer in one sentence and say what would change your answer.
18.16 † Same grid as 18.15. The appraiser reversed the gross living area adjustment on Comparable B — the report shows +\$7,700 where it should show a subtraction.
(a) Compute the adjusted sale price as printed and as corrected. (b) By how much does the error move Comparable B's indication, and why is it twice the adjustment? (c) Does this qualify as a basis for a reconsideration of value? Name the category from §18.8, and say whether the correction helps or hurts the borrower.
18.17 The Linden Street counterfactual, at a different number. Suppose the day-16 appraisal had returned **\$378,000** rather than \$385,000. Using the frozen file — contract \$385,000, 95% LTV, loan \$365,750, down payment \$19,250, cash to close \$25,376.34, reserves after closing \$12,623.66, rate 6.625%, MI factor 0.58%, taxes \$385.00, insurance \$130.00 — compute:
(a) the maximum 95% loan (b) the required down payment and the cash gap (c) the new principal and interest, the new monthly MI, and the new PITI plus MI (d) the reserves remaining after closing, in dollars and in months (e) whether you would advise these borrowers to close, in two sentences
18.18 The Harlow Street file: \$215,000 contract, FHA, base loan 96.5% of adjusted value, required investment \$7,525, funded entirely by a \$10,000 forgivable down-payment assistance second. Suppose the appraisal returns \$210,500.
(a) The maximum base loan and the total required investment. (b) The cash gap, verified two ways. (c) Explain in three sentences why the sixth path — restructuring to a higher LTV — does not exist on this file.
18.19 † A \$620,000 contract, conventional, buyer has \$124,000 (20%) for the down payment. The appraisal returns \$598,000.
(a) The maximum 80% loan, the required down payment, and the gap. (b) If instead the buyer keeps the \$124,000 down and borrows \$496,000, what is the LTV? (c) Monthly mortgage insurance at an illustrative 0.32% annual factor. (d) Name the mortgage insurance band the loan lands in. Is there a cheap partial step to the band below, as there was on Cypress Court? Show why or why not.
18.20 Compute the cash gap in each case using the chapter's rule, then verify at least one of them the long way.
(i) 97% maximum LTV, price \$310,000, appraised value \$302,000 (ii) 80% maximum LTV, price \$1,150,000, appraised value \$1,090,000 (iii) 100% LTV (VA, no down payment), price \$389,000, appraised value \$381,000
State the pattern in one sentence, and say what case (iii) implies about zero-down borrowers.
Structure the deal
18.21 On Cypress Court, the sellers counter at \$530,000. Compute the buyer's required down payment, the increase over plan, the amount the seller gave up, and each side's percentage share of the \$28,000 gap. Would you advise the buyer to accept? Give the reason in one sentence, and name the one fact you would want before answering that the problem does not give you.
18.22 † Same file. The buyer has \$118,000 of verified liquid funds and nothing else.
(a) Which of the five options survive? Show the arithmetic that eliminates each one you eliminate. (b) What is the highest contract price this buyer can close at, and what does that leave them in reserves? (c) Recommend one path in writing, in under 120 words, and name the risk you are accepting.
18.23 A borrower is choosing between bringing \$28,000 more in cash (option 1) and restructuring to 85.54% LTV (option 6). Using the chapter's illustrative figures, state the monthly cost of option 6, then restate it the honest way — separating the part that is pure cost from the part that is principal. Finally, name the single file characteristic that removes option 6 entirely, and say how you would check for it in thirty seconds.
18.24 Your borrower won a \$465,000 house in a six-offer weekend. The findings offer value acceptance. They ask whether they should take it or pay for an appraisal anyway. Give your recommendation, the two facts that drive it, and the exact sentence you would put in the follow-up email.
Clear the condition
18.25 † Condition on the stip sheet: "Appraisal reflects gross living area of 2,610 sq ft; county records reflect 2,742 sq ft. Provide clarification."
Describe exactly what you submit, to whom, in what order, and over what time frame. Then list three things you must not include, and say why each one would damage the request.
18.26 Condition: "Appraisal made subject to repair of roof. Provide Form 1004D certification of completion." The property is a purchase, the seller occupies it, and your rate lock expires in 19 days.
(a) List every step between today and a cleared condition, with an owner for each. (b) Identify which steps are lending steps and which are not. (c) Build a day-by-day plan that clears the condition before the lock expires, and name the step most likely to blow it. (d) State who you would expect to pay for the repair and for the re-inspection, and say why that is a negotiation rather than a rule.
18.27 Condition: "Appraisal effective date exceeds the investor's age limit at the anticipated note date. Provide update." Name the form, say who normally must perform it, state precisely what it does and does not do, and give the one question you ask your underwriter before you order anything.
Read the document and find the problem
18.28 † This grid excerpt contains three errors. Find all three, state the correct figures, and say which of them is a legitimate basis for a reconsideration of value.
Subject: 1,860 sq ft, 3 bd / 2.0 ba, condition C3, 2-car garage.
Stated adjustment support: GLA $55/sq ft; market conditions +0.30%/month,
rounded to the nearest $100; condition C2 -> C3 $7,000.
COMPARABLE 1
Sale price $402,000
Closed 2 months before the effective date
Gross living area 1,940 sq ft adjustment +$4,400
Condition C2 adjustment +$7,000
Date of sale / time -2 months adjustment +$2,400
────────────────────
NET ADJUSTMENT +$11,400
ADJUSTED SALE PRICE OF COMPARABLE $413,400
18.29 An appraisal report's neighborhood narrative includes a sentence describing the "changing character" of the area and refers to the demographics of nearby residents. The value supports the contract price and there are no repair conditions.
(a) What do you do, in what order, in the next two hours? (b) What do you not do? (c) Who is the appropriate recipient of this information inside your company, and who outside it? (d) Explain why "the value is fine, so it doesn't matter" is the wrong analysis.
18.30 [Loan File extension] Build the Chapter 18 page of your Loan File workbook for the Linden Street file: order date, delivery date, effective date, appraised value, condition and quality ratings, reconciliation state, and appraisal gap. Then:
(a) Rewrite Chapter 1's open question Q3 — will an appraisal support \$385,000? — as a closed finding, in the form an underwriter would accept. (b) Write the two new questions the appraisal opens that were not open before it arrived. (c) Carry your answer to 18.17 into the workbook as a counterfactual page, and write the one sentence you would say to these borrowers if that had been the real number.
Write it
18.31 † Write the email described in §18.10, step 7: to the Cypress Court borrowers, after the call, containing the four numbers and all five options, in plain English, under 200 words. No jargon a first-time buyer would have to look up. Do not promise an outcome.
18.32 Write the reconsideration of value cover memo for the Cypress Court file, including the factual correction, two closed comparable sales with a stated reason for each, and the NOT REQUESTED paragraph. Then write the two-sentence note you send your processor telling them where it goes and where it must not go.
Judgment
18.33 † Your branch manager, whose bonus depends on closed units, says: "Just text the appraiser the address of that Rosewood sale. It's public information. You're not telling him what to do."
Answer in writing, in under 150 words. Name what the rule actually prohibits and what it permits, say specifically what you will do instead, and state what you would do if the instruction were repeated as a direction rather than a suggestion.
18.34 A borrower tells you they believe the appraisal came in low because of their national origin. You have read the report carefully and your professional judgment is that it is well supported: the comparables are close, recent, and lightly adjusted.
(a) Describe exactly what you do in the next four hours, in order. (b) State what you write down and what you do not write down. (c) Explain, in two sentences, why your own reading of the report is not the relevant question.
NMLS-style
18.35 Which of the following may a loan officer provide directly to an appraiser?
I. The fully executed purchase contract II. A list of permitted improvements with dates and invoices III. A range of values that would allow the loan to close IV. A note that the assignment is one of several the appraiser may receive this month V. Homeowners association documents for a condominium project
18.36 † Sort the following four items by (a) who produces them, (b) whether an inspection is involved, and (c) whether federal law restricts their use as the primary basis for determining the value of a consumer's principal dwelling:
appraisal · automated valuation model (AVM) · broker price opinion (BPO) · comparative market analysis (CMA)
Then state, for a higher-priced mortgage loan, what Regulation Z's appraisal requirements call for and the circumstance in which a second appraisal is required.