Everything Construction and Renovation Lenders Need to Know about Fannie Mae Temporary Flexibilities to Appraisal Requirements
Property inspections are becoming increasingly difficult for lenders to obtain due to the growing number of states adopting shelter-in-place and social distancing practices throughout the US in response to the COVID-19 crisis. On March 31, 2020, Fannie Mae announced temporary flexibilities to their appraisal requirements which specifically address concerns around new construction loans and Homestyle Renovation loans.
Land Gorilla has summarized the temporary changes from Fannie Mae and provided suggestions and options for lenders to continue making progress with their new construction and renovation programs in this unprecedented and rapidly changing environment.
Fannie Mae Temporary Flexibility Requirements Due To COVID-19
New Construction Loans
- For new construction properties FNMA has provided guidance on allowing desktop appraisals. See LL-2020-04 for details. A revised scope of work, statement of assumptions, limiting conditions, and certifications must accompany the form.
- Final Inspection Requirements: In addition to all other delivery requirements FNMA will accept a Completion of Construction Certification if a lender is unable to obtain an Appraisal Update and/or Completion Report (Form 1004D).
Homestyle Renovation Loans
- Renovation Draw Inspection Requirements: In lieu of a site inspection, FNMA will accept a Completion of Construction Certification letter accompanied by supporting evidence such as photographs, site videos, or other proof of completion, like paid invoices. All evidence must be of sufficient quality and scope to confirm the required work was sufficiently completed as outlined in the renovation contract. All evidence must be maintained in the renovation loan file. This option is available when an onsite inspector is unable to complete the inspection due to COVID-19.
- Loan Extensions: Lenders are advised to contact FNMA if they are having difficulty completing a renovation within the timeframe. FNMA requires inspections and other documentation to review and approve. FNMA will address these requests on a case by case basis. (Land Gorilla Notes: It is unclear if the required inspection is a current inspection or inspection to support previous activity. Consult with FNMA.)
- Final Inspection Requirements: Appraisal Update and/or Completion Report (Form 1004D) is still required when the work is completed. Recourse cannot be removed without a 1004D certification of completion. (Note that FNMA does not require that an appraiser complete the Appraisal Update scope of work on a 1004D for HomeStyle Renovation Loans and the use of the mention of the work Appraisal Update is based on the name of the form, FNMA requires that the Completion of Repairs scope of work be completed for recourse removal).
What Lenders Need To Consider
Lenders still need to stay vigilant about risk mitigation during the construction or renovation process. The more flexible requirements now allowing alternative supporting evidence in lieu of physical site inspections is certainly good news for lenders at this time. However, this is new territory for everyone and some of these new processes have hidden risk that lenders need to consider.
If a lender’s supporting evidence includes photographs taken by a homeowner or other point of contact, be aware that photos, even if used in conjunction with geolocation metadata, are not considered a reliable method for verifying the location. Editing metadata is easy and should not be relied on to confirm a property’s location. Today, simple programs like Photoshop can be used to fraudulently misrepresent the condition of the property. It’s critical that lenders exercise sound practices to avoid these types of situations.
In terms of final inspection requirements, at this time Fannie Mae has only loosened standards with New Construction loans, allowing for a Completion of Construction Certification and Builder Certification in lieu of Form 1004D (Appraisal Update/Completion Report). Lenders are still required to deliver a final inspection on Form 1004D (Completion Report) performed by an appraiser for a Homestyle Renovation loan in order to remove recourse.
Lenders need to consider a strategy that meets FNMA’s current guidelines, in addition to considering the liability of the obligations set forth in the homeowner contractor agreements and renovation loan agreements. The impact appears to be on delivery and recourse removal versus the lender’s inability to fund a draw. Lenders should consider opportunities to fund the final draw and rely on a remote inspection (more details on this are covered below), title update, executed draw request forms, final lien waivers, and phone conversations directly with the affected parties. Lenders should also work with FNMA on extending the loan until a final inspection by an appraiser can be performed in order to remove recourse.
Land Gorilla Recommendations
Temporary flexible requirements from Fannie Mae provides necessary relief regarding Construction and Renovation loan products for homeowners impacted by COVID-19. In order to support lenders that are looking to adopt sound changes during this time of crisis, Land Gorilla has provided the following recommendations regarding FNMA construction and renovation loan products.
Understand your obligations to fund draws (including the final disbursement)
FNMA provides model documents (samples) for Construction Loan Agreements, however most lenders adopt those supplied by their closing doc provider which means that this instrument lacks consistency. The Construction Loan Agreement (or Renovation Loan Agreement for HomeStyle Renovation) may include acknowledgements by the Builder/Contractor, however its intention is to outline the obligations between the lender and borrower. Land Gorilla recommends that lenders should review the Loan Agreements in use to best understand their obligations.
Review homeowner agreements that are in use
The Homeowner Contractor Agreements for HomeStyle Renovation loans will be a form controlled by the lender will most likely be consistent for all loans. For new construction many lenders utilize a homebuilder acknowledgement form that is designed to supersede the contract between the homeowner and homebuilder to address specific concerns related to the construction loan (for example how disbursements, change orders and inspections requirements are agreed upon). Lenders that are not utilizing a homebuilder acknowledgement form will need to review each homebuilder contract individually to understand any obligations that could impact the project.
Draw disbursements for New Construction
Unlike HomeStyle Renovation, FNMA does not purchase construction loans prior to substantial completion and the lender is responsible during construction to administer draws. Land Gorilla recommends abiding by industry best practices and conducting progress inspection, either on site or remotely, and reserving virtual inspection (borrower self-certification) for extreme circumstances. Consider developing a cascading approach to inspections such as reviewing the state or county’s ‘shelter in place’ policy and then determining if an onsite inspection or remote inspection is appropriate. Work with borrowers and homebuilders to know their inspection options and communicate with kindness. We also recommend a similar process when requesting your title endorsements from the title company. If they are impacted or non-responsive, consider using a title update instead (title updates are not insurance like endorsements) as they provide more detail then a typical endorsement to help protect the lender’s legal interest in the property. Collecting lien waivers can also be impacted in Texas, Mississippi and Wyoming which all require notarization of the waiver. We recommend using Notarize for online notary when possible, it’s safer and faster than a traditional notary. Avoid wet signatures when they are not necessary, use digital electronic signatures when possible if you are not already doing so.
Draw Disbursements for HomeStyle Renovation Loans
FNMA has provided more flexibility when inspections are not possible. Similar to our recommendations for new construction, consider developing a cascading approach to inspections such as reviewing the state or county’s ‘shelter in place’ policy and then determining if an onsite inspection or remote inspection is appropriate. In instances where a remote inspection is not feasible FNMA has provided flexibility for homeowners to self certify that the work is completed, but not without documenting the process with photos, videos, invoices and executed certification form. Work with borrowers and homebuilders to know their inspection options and communicate with kindness. Title updates may also be impacted, you can check a list of impacted areas on AFX’s county closure list. If you cannot obtain a title update due to county closure then consider alternative strategies such as contacting the title company or requesting lien waivers further down the payment chain (subcontractors and suppliers) if possible. Note that collecting lien waivers can also be impacted in Texas, Mississippi and Wyoming which all require notarization of the waiver. We recommend using Notarize for online notary when possible, as it’s safer and faster than a traditional notary. Lastly avoid wet signatures when they are not necessary, use digital electronic signatures such as hellosign or docusign.
Final Disbursements, Recourse Removal and Loan Extensions For HomeStyle Renovation Loans
The strategy for HomeStyle Renovation loans is not like New Construction where FNMA has removed the 1004D requirement to certify the completion and update the appraisal. FNMA still requires that the lender obtain a 1004D Completion Report, along with a title update and certificate of occupancy if applicable. Traditionally, a lender would conduct a ‘final disbursement’ process and resolve all the requirements with the final disbursement. It’s important to note that the final disbursement and recourse removal are not required to happen concurrently. Use extreme caution when facing obligations to fund the final disbursement without a 1004D Completion Report and consider using a remote inspection and requesting the original appraiser review it to get indication if they agree the work is done. Let the appraiser know the situation and that they will be contacted for the 1004D (Completion Report) once it’s safe for all parties. Note that an appraiser is not obligated to help but this is worth considering as an option. If you are nearing the end of the loan term stated in the Renovation Loan Agreement you will need to request an extension. FNMA has provided more flexibility here and will require documentation along with a remote inspection to demonstrate the current situation. At this time FNMA has not allowed a substitution for the 1004D (Completion Report) to remove recourse.
About Land Gorilla Remote Inspections
Land Gorilla recently introduced Remote Inspections to address this very problem lenders are currently encountering with site inspections. This is not to be confused with ‘Virtual Inspections’ that are conducted by homeowners without inspectors.
Land Gorilla’s patent-pending Remote Inspections involves a Land Gorilla inspector that conducts a live video conference with the homeowner and verifies location during the live video stream against third-party location services. It also validates the homeowner’s identity and records the entire interior/exterior of the property in a recorded video. A full inspection report is then delivered to the lender using the video footage with additional fraud prevention measures. Security standards are in place to prevent malicious actors from providing fraudulent or spoofed data to lenders.
Land Gorilla Remote Inspections not only offer the same safeguards as traditional onsite inspections, but include additional safeguards that are absent with traditional site inspections. Customers find that Land Gorilla Remote Inspections are not only a safe alternative, but can be completed more efficiently with a Quality Control audit that includes the video of how the inspection was conducted.
To learn more and get started with Remote Inspections, click here. If you have additional questions around the recent temporary flexibility requirements from Fannie Mae, contact us.