Fritz: All Fritz/All Fritz.zip/All Fritz/FILES/INFOTEXT/FANNIE.LZH/FANNIE.TXT

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     My fingers ache from typing all of this. Mail me a $5.00 bill and I'll send
     you the next revision on diskette, Postpaid. Thanks
     Randy Jones
     Box 23056
     San Antonio, Tx 78223

                        Section 102 Standard Appraisal Documents

     The property must have been appraised within the 12 months that precede the
     date of the note and mortgage.  When the appraisal report will be more than
     four months old on the date of the note and mortgage-regardless of whether
     the property was appraised as proposed or existing construction- the ap-
     praiser  must inspect the exterior of the property and  review current mar-
     ket data to determine that the property has not declined in value since the
     date of the original appraisal.  We require the appraiser to provide a cer-
     tification to that effect, based on his or her exterior inspection of the
     property and knowledge of current market conditions.  The inspection and
     the  certification must occur within the four months that  preceded the
     date of the note and mortgage. If the appraiser connot make the required
     certification, we require a new appraisal for that property.

     For proposed construction, the appraisal may be based on plans and
     specifications if the lender obtains a certification of completion before
     it delivers the mortgage to us.  This certification should be completed by
     the appraiser and must be accompanied by photographs of the completed
     improvements. The appraiser must certify that the improvements were
     completed in accordance with the requirements and conditions stated in the
     original appraisal report.  Minor items that do not affect livability may
     be incomplete as long as the lender has arranged for an adequate escrow to
     guarantee their completion.  (We consider funds equal to at least one an
     one-half times the cost to complete the items as a reasonable amount to
     escrow.)

     For existing construction, the improvements must be complete when the mort-
     gage is sold to us. The appraisal may be based on the "as is" condition of
     the property if minor conditions that do not affect the livability of the
     property exist-such as minor peeling paint or minor deferred maintenance-as
     long as the appraiser's estimate of value reflects the existence of these
     conditions. The lender must  review carefully the appraisal for a property
     appraised in an "as is" condition to assure that the property does not have
     any physical deficiencies or conditions that would affect its livability.
     If there are none, the lender does not need to require minor repairs to be
     completed before it sells the mortgage to us. When there are incomplete
     items or conditions that do affect the livability of the property-such as a
     partially completed addition or renovation-or physical deficiencies that
     could affect the soundness or structural integrity of the improvements, the
     property msut be appraised subject to the completion of the specific alter-
     ations or repairs.  In such cases, the lender must obtain a certificate of
     completion from an appraiser before it delivers the mortgage to us. The
     certification does not need to include photographs of the property unlesss
     those that accompanied the original appraisal report are no longer repre-
     sentative of the completed property.






     Generally, the original appraiser should complete the certification of com-
     pletion or value; however, the lender may use a substitute appraiser as
     long as it explains why the original appraiser was not used. The substitute
     appraiser  must review the original appraisal and certify that the ap-
     praiser's estimate of market value was reasonable on the date of the orig-
     inal appraisal report.

     Our appraisal report forms are designed to provide a concise format for
     presenting the appraiser's description and valuation. The appraiser must
     complete these forms in a way that will clearly reflect the results of his
     or her thorough investigation and analysis and provide the rationale for
     the estimate of market value. The appraisal report that should be used de-
     pends on the type of property that is being appraised. The appraiser must
     use the latest version of one of the following forms:

     Uniform Residential Appraisal Report (form 1004) for single-family proper-
     ties and de minimis PUD units. Form 1004 may also be used for PUD units if
     the appraiser includes an adequate description of the project and informa-
     tion about the owners' association fees and the quality of the project
     maintenance, and for two-family properties if the value of the second unit
     is relatively insignificant in relation to the total value of the property;

     Appraisal Report-small Residential Income Property (Form 1025) for two-to
     four- family properties; or

     Appraisal Report-Individual Condominium or PUD Unit (form 1073) for proper-
     ties that are units in condominium, PUD and cooperative projects.

     We also require certain exhibits to support each appraisal report:

     a. A Certification an Statement of Limiting Conditions (Form 1004B), when
     one is not already on file with the lender. (If the appraiser makes an ad-
     dition or deletion to this certification, he or she must reference the
     change in the "reconciliation" section of the appraisal report. Since we
     will not purchase a mortgage if the appraiser's changes to Form 1004B alter
     the definition of market value or conflict with any of our property and ap-
     praisal analysis underwriting guidelines, the lender should review care-
     fully any changes that were made.);
     b. A street map that shows the location of the subject porperty and of all
     comparables that the appraiser used;
     c. An exterior building sketch of the improvements that indicates the di-
     mensions. For units in condominium or cooperative projects, the sketch of
     the unit must indicate interior perimeter unit dimensions rather than exte-
     rior building dimensions. Generally, the appraiser must also include calcu-
     lations to show how he or she arrived at the estimate for gross living
     area; however, for units in condominium or cooperative projects, the ap-
     praiser may rely on the dimensions and estimate for gross living area that
     are shown on the plat. In such cases, the appraiser does not need to pro-
     vide a sketch of the unit as long as he or she includes a copy of the plat
     with the apprisal report. A floor plan sketch that indicates the dimensions
     is required instead of the exterior building or unit sketch if the floor
     plan is functionally obsolete, resulting in a limited market appeal for the
     property in comparison to competitive properties in the neighborhood;





     d. Clear, descriptive photographs that show the front,back, and a street
     scene of the subject property, and that are appropriately identified;
     e. Clear, descriptive photographs that show the front of each comparable
     property and that are appropriately identified. Generally, these pho-
     tographs should be originals; however, copies of photographs from a multi-
     ple listing service or from the appriaser's files are acceptable if they
     are clear and descriptive;
     f. Certifications of completion and value-either as a letter or as a form
     that provides the necessary information- if applicable;
     g. An Operating Income Statement (Form 216), which hs been jointly prepared
     by the applicant and the lender, and which includes the appraiser's com-
     ments on the reasonableness of the projected operating income, if the prop-
     erty is an investment property;
     h. A Single-family Comparable Rent Schedule (Form 1007), if the property is
     a single-family investment property; and
     i. Any other data-as an attachment or addendum to the appraisal report
     form-that are necessary to provide an adequately supported estimate of mar-
     ket value.


     Chapter 4. Property and Appraisal Analysis

     This chapter details our general requirements for underwriting the prop-
     erty/analysis aspects of mortgages made on one-to four-family properties.
     (Certain types of housing-cooperative units; energy-efficient properties;
     manufactured housing (or factory-built) units; condominium, PUD and de
     minimis PUD units; mixed-used properties; and properties affected by
     environmental hazards or substances-merit special consideration in the
     appraisal review, so we discuss specific requirements for them in chapter
     5.) Because the evaluation of a property is such a vital part of the risk
     analysis, we expect lenders to place as much emphasis on underwriting the
     property and reviewing the appraisal as they do on underwriting the
     borrower's creditworthiness.

     Because Fannie Mae holds the lender responsible for the accuracy of the ap-
     praisal, it is important for underwriters to understand their role in the
     appraisal process and their relationship to the appraiser.

     * The underwriter's role is to analyze the property based on the appraisal
     and to judge the property's acceptability as security for the mortgage re-
     quested.
     * The appraiser's role is to provide the lender with an adequately
     supported estimate of value and a complete, accurate description of the
     property.

     When the information or methodology of an appraisal requires additional
     clarification or justification, the underwriter must obtain from the ap-
     praiser any information that is necessary to make an informed decision con-
     cerning the property. Because it is essential for the lender to have an in-
     dependent, disinterested examination and valuation of the property, the
     lender must order the appraisal report, rather than allowing the borrower
     to do so. The appraiser must remain free of any outside influence in the
     valuation process. This is at the heart of a good underwriting system. We
     require appraisers to provide complete and accurate reports. The estimate





     of market value must represent the appraiser's professional conclusion,
     based on market data, logical analysis, and judgement.

     These requirements are intended to provide guidance to underwriters and ap-
     praisers as to the type of information that is needed to make a prudent un-
     derwriting decision. They are also designed to provide what we feel are
     minimum acceptable appraisal standards. We recognize the appraiser's analy-
     sis may not comply with our specific guidelines for every appraisal prob-
     lem. We allow the appraiser discretion to properly develop the value esti-
     mate. The appraiser must, however, provide sound reasoning in his or her
     appraisal report for working outside of our standards.


     Section 401- Appraiser Qualifications


     Fannie Mae does not approve appraisers. Therefore,lenders must not give any
     consideration to an appraiser's representation that he or she is approved
     or qualified by Fannie Mae. Lenders are responsible for the selection of
     appraisers and will be solely accountable for their performance. Lenders
     must take appropriate steps to ensure that an appraiser is qualified to
     perform appraisals for the particular types of property that the lender in-
     tends to refer to that appraiser.

     We recognize that, in some instances, a lender will approve an appraiser
     subject to the appraiser's work being reviewed and signed by a review re-
     quire review appraisers to sign appraisal reports.  However, when a review
     appraiser signs the appraisal, that individual is indicating            his
     or her concurrence with the contents of the appraisal report.  In addition,
     the review appraiser must indicate on the appraisal report form whether he
     or she personally inspected both the inside and the outside            of
     the subject property.

     Fannie Mae has the right, at any time, to refuse to accept appraisals pre-
     pared by specific appraisers or to notify a lender that we will no longer
     accept appraisals prepared by a given appraiser.  When we notify a lender
     that this is the case, we will allow the lender a certain amount of time to
     clear its mortgage pipeline - after that, it must not submit to us mort-
     gages secured by any proprties that were appraised by that individual.

     Section 401.01-Review of Qualifications

     When evaluating an appraiser's qualifications, a lender should review the
     appraiser`s education and experience, sample appraisals, professional af-
     filiations, and references from prior clients and employers.  The appraiser
     must be experienced in appraising the types of properties that the lender
     intends to use his or her services for, and should currently be active in
     appraisal work.  Before using an appraiser's services, the lender should be
     satisfied that the appraiser has demonstrated the ability to perform qual-
     ity appraisals.  For this reason, lenders should review actual samples of
     an appraiser's work to assure that the appraiser does not employ any of the
     appraisal practices that we list in 402.2 as unacceptable practices.






     While we do not require professional appraisal designations, they can be
     helpful to lenders in evaluating an appraiser's qualifications, particu-
     larly when the designation is from a nationally recognized organization
     that has formal experience, education and ethics requirements that are
     strongly administered.  If the lender considers an appraisal designation in
     its evaluation, it should be familiar with the appraisal organization's
     specific requirements to assure that the designation is evaluated appropri-
     ately.


     Section 401.2-Ongoing Review of Appraisals

     Lenders must continually evaluate the quality of the appraiser's work
     through the normal underwriting review of all appraisal reports, as well as
     through the spotcheck field review of appraisals as part of its Quality
     Control System.  Lenders must be satisfied that any appraisers they use for
     spotcheck field reviews are well qualified.

     Section 402-Reviewing the Appraisal Report


     Fannie Mae holds the lender responsible for the quality of the appraisal it
     uses to support the market value of a security property.  Therefore, the
     lender must make sure that it not only provides the appraiser with appro-
     priate information about the financing and sales data, but also that it has
     sufficient knowledge of our appraisal requirements to enable it to deter-
     mine that the appraiser has properly addressed our specific criteria and
     that the appraiser has not engaged in any unacceptable appraisal practices.

     The remainder of this Chapter is presented in the general order that the
     major topics appear in on the Uniform Residential Appraisal Report
     (Form1004), thus providing lenders with a usuable working reference that
     can be applied generally to all of our different appraisal report forms.
     The appraiser is responsible for completing Form 1004 in its entirety, ex-
     cept for the "Lender Discretionary Use" box that is located in the upper
     right- hand corner of the form.

     Section 402.01-Lender-Supplied Information

     The lender must tell the appraiser about all financing data and sales con-
     cessions for the property that will be, or have been, granted by anyone as-
     sociated with the transacction. Generally this can be accomplished by pro-
     viding the appraiser with a copy of the complete, ratified sales contract
     for the property that is to be appraised. If the lender is aware of addi-
     tional pertinent information that is not included in the sales
     contract, it should inform the appraiser. Information that must be dis-
     closed includes:

     * settlement charges;
     * loan fees or charges;
     * discounts to the sales price;
     * payment of condominum/PUD fees;
     * interest rate buydowns, or other below-market-rate financing;
     * credits or refunds of the borrower's expenses;





     * absorption of monthly payments;
     * assignments of rent payments; and
     * non-realty items that were included in the transaction

     The upper right-hand corner of the Uniform Residential Appraisal Report
     (Form 1004) contains a box titled "Lender Discretionary Use", which is in-
     cluded to encourage lenders to provide closing data to comparable sales re-
     porting services.  We do not require lenders to complete this section of
     Form 1004, but, if the lender does complete it, the lender should provide
     the specific contract information after the closing or loan settlement.

     Section 402.02-Unacceptable Appraisal Practices

     The following are examples of appraisal practices that we consider as unac-
     ceptable:

     * Inclusion of inaccurate factual data about the subject neighborhood,site,
     improvements, or comparable sales;
     * Failure to comment on negative factors with respect to the subject neigh-
     borhood, subject property, or proximity of the subject property to adverse
     influences;
     * Use of comparables in the valuation process even though the appraiser has
     not personally inspected the exterior of the comparables by, at least,
     driving them;
     * Selection and use of inappropriate comparable sales or the failure to use
     comparables that are locationally and physically the most similar to the
     subject property;
     * Use of data - particularly comparable sales data - that was provided by
     parties who have a financial interest in the sale or financing of the sub-
     ject property without the appraiser's verification of the information from
     a disinterested source. For example, it would be inappropriate for an ap-
     praiser to use comparable sales provided by the real estate broker who is
     handling the sale of the subject property, unless the appraiser verifies
     the accuracy of the data provided with another source and makes an indepen-
     dent investigation to determine that the comparables provided were the best
     ones available;
     * Use of adjustments to the comparable sales that do not reflect the mar-
     ket's reaction to the differences between the subject property and the com-
     parables, or the failures to make adjustments when they are clearly indi-
     cated;
     * Development of a valuation conclusion that isbased - either partially or
     completely - on the race, color, or national origin of either the prospec-
     tive owners or occupants of the subject property or the present owners or
     occupants of the properties in the vicinity of the subject property; and
     * Development of a valuation comclusion that is not supported by available
     market data.

     Section 403- The Subject Property

     The first section of the Uniform Residential Appraisal Report (Form 1004)
     is used to identify the subject property, to describe the property rights
     to be appraised, and to summarize financing data and sales concessions.
     The appraiser must identify the subject property by its complete property
     address and legal description; a post office box number is not acceptable.





     The appraiser should indicate the nearest intersection if a house number is
     not available.  When the legal description is lenghty, the appraiser may
     attach the full description as an addendum to the appraisal report, or may
     refer simply to its location in the public records.

     The appraiser must identify the property rights to be appraised as "fee
     simple" or "leasehold".  In addition, the appraiser must indicate whether
     the subject property is located in a PUD, de minimis PUD, condominum, or
     cooperative project.  [Note: The appraisal for units in PUD, condominum, or
     cooperative projects must be completed on an Apprisal Report-Individual
     Condominum or PUD Unit (Form 1073). The appraisal for units in a PUD can be
     completede on either Form 1073 or on the Uniform Residential Appraisal Re-
     port (Form 1004) as long as the appraiser includes an adequate description
     of the project and information about the owners'association fees and the
     quality of lthe project maintenance.

     The appraiser must state the total dollar amount of the loan charges and/or
     concessions that will be paid by the seller (or any other party who has a
     financial interest in the sale or financing of the subject property) and
     provide a brief description of the items on the appraisal report form.  If
     the appraiser knows that the appraisal will be used for a refinance trans-
     action, he or she should indicate that on the form.

     If the appraiser is completing one of our appraisal report forms that uses
     the phrase "To be completed by lender" to identify the top portion of the
     form-the Appraisal Report-Small Residential Income Property (Form 1025),
     the Appraisal Report-  Individual Condominum or PUD Unit (Form 1073), or
     the Loan Valuation summary for Second Mortgages (Form 219) - the appraiser
     must complete any information that the lender does not provide, including
     the above information related to the financing terms. If the lender did not
     provide a copy of the sales contract and the appraiser is not aware of the
     financing terms, he or she should include a statement to that effect.

     Section 404-Neighborhood Analysis

     The purpose of a neighborhood analysis is to identify the area - based on
     common characteristics or trends - that is subject to the same influences
     as the subject property.  The sales price of comparable properties in the
     identified area should reflect the positive and negative influences of the
     neighborhood.

     A neighborhood analysis should consider the influence of social, economic,
     government, and environmental forces on property values in the subject
     neighborhood.  However, neither the racial composition nor the age of a
     neighborhood is a reliable appraisal factor.  A property located in an
     older neighborhood can be as sound an investment as a property located in a
     new neighborhood, and a property located in a neighborhood inhabited pri-
     marily by members of one race can be as sound an investment as one located
     in a racially mixed neighborhood or in a neighborhood inhabited primarily
     by a different race.  The appraiser must be impartial and specific in de-
     scribing favorable or unfavorable factors in a neighborhood, and should
     avoid the use of subjective terms or phrases such as "pride of ownership",
     etc.






     Fannie Mae does not designate certain areas as being acceptable or unac-
     ceptable - in other words, Fannie Mae does not "red-line".  Locational fac-
     tors are fundamental to proper appraising and prudent underwriting, and
     there is nothing improper about underwriting on the basis of a realistic
     perception of risk in a given neighborhood. Redlining can occur when per-
     ceived property risks are based on improper locational factors - such as
     the arbitrary granting of unfavorable loan terms on the basis of geographic
     area - or when the perceptions of risk are derived from factors that do not
     predict risk - either reliably or not at all.  An example of a factor that
     is not predictive of risk is race - and racial redlining is illegal under
     Federal Law.  Other factors that serve as a proxy for race are equally im-
     permissible.  The appraiser, and the lender's underwriter, must be sensi-
     tive to these permissible factors and apply Fannie Mae's  guidlines in a
     consistent, equitable manner.  None of our property guidelines is intended
     to foster redlining - if any provision is interpreted to do so, it has been
     misunderstood.

     The appraiser should explain any changes that have occurred that might in-
     fluence the marketability of the properties within the neighborhood.  The
     appraiser also must comment if there is market resistance to a neighborhood
     because of the known presence of an environmental hazard or any other fac-
     tor.  The lender must be satisfied that the neighborhood will be acceptable
     to a sufficient number of buyers to support an active, on-going market for
     the property.

     Some lenders underwrite loans in urban areas on a block-by -block basis.
     Block- by-block underwriting and appraisal analysis are acceptable in cases
     in which rehabilitation has started - either in the block where the subject
     property is located or in facing blocks visible to the property - but has
     not yet spread to the rest of the neighborhood.  The acceptability of this
     type of appraising or underwriting is conditioned on the appraiser demon-
     strating that local conditions make it appropriate and that all essential
     factors are considered.

     Our appraisal report forms require the appraiser to address several impor-
     tant factors that are used to analyze the neighborhood`s impact on the
     property's marketability.  Some of the key factors are discussed in the
     following subsections.

     Section 404.01-Location

     We will purchase mortgages that are secured by residential properties in
     urban, suburban, or rural areas.  An "urban" location relates to a city, a
     "suburban" location relates to the area adjacent to a city, and a "rural"
     location relates to the country or anything beyond the suburban area.  We
     do not designate certain areas as being acceptable or unacceptable.

     To be eligible for purchase by Fannie Mae, a mortgage must be secured by a
     property that is residential in nature - based on the description of the
     subject property, zoning, and the present land use. We do not purchase
     mortgages on agricultural-type properties (such as farms, orchards, or
     ranches), on undeveloped land, or on land development -type properties.






     Lenders must give properties with outbuildings special consideration in
     their underwriting and appraisal review.  Properties with minimal outbuild-
     ings - such as a small barn or stable - that are of relatively insignifi-
     cant value in relation to the total appraised value of the subject property
     are acceptable if they are typical residential improvements and support the
     residential use for the location and property type.  For example, a prop-
     erty that has a small barn or stable is acceptable if the appraiser demon-
     strates through the use of comparable sales with similar improvements that
     the improvements are typical residential improvements for which an active,
     viable residential market exists. If the outbuildings do not represent typ-
     ical residential improvements for the location and property type, the typi-
     cal purchaser in the market would probably recognize minimal, if any, con-
     tributory value for them.  A property with an atypical minimal outbuilding
     is acceptable to Fannie Mae, as long as the appraiser's analysis reflects
     little (or no) contributory value for it.

     On the other hand, properties with significant outbuildings - such as a
     large barn, a storage area or facilities for farm- type animals, or a silo
     - must be reviewed with great care, regardless of whether the appraiser as-
     signs any value to the outbuildings because their existence will probably
     indicate that the property is agricultural in nature.

     All propeties must be readily accessible by roads that meet local stan-
     dards, and must have adequate utilities available and in service.  The ap-
     praiser must also consider the present or anticipated use of any adjoining
     property that may adversely affect the value or marketability of the sub-
     ject property.

     Certain aspects of the location of a property will require special consid-
     eration.  For example, propeties in resort areas that attract people for
     seasonal or vacation use are acceptable only if they are suitable for year-
     round use.  Any property that is not suitable for year -round occupancy -
     regardless of where it is located - is unacceptable.

     Section 404.2-Degree of Development and Growth Rate

     The degree of development of a neighborhood (which is referred to as
     "built-up" on the appraisal report forms) is the percentage of the avail-
     able land in the neighborhood that has been improved.  Areas that are less
     than 25% developed are not acceptable for maximum financing.  Areas that
     are between 25% and 75% developed are suitable for maximum financing if
     they show at least a stable or steady growth rate. Areas that are more than
     75% developed, are viable, and are not exeriencing declining property val-
     ues are acceptable for maximum financing.

     An area's degree of development may indicate whether a particular property
     is residential in nature.  Generally, we will not purchase a mortgage that
     is secured by a property in a rural area or any other area that is less
     than 25% developed if the value of the site exceeds 30% of the total ap-
     praised value of the security property.  However, if this higher site value
     is typical in the area (and market acceptance can be demonstrated through
     the use of comparable properties), we will purchase the mortgage. For exam-
     ple, if the typical single-family building site in a particular area -
     based on the zoning, the highest and best use of the land, and the present





     land use - is two acres in size, the mortgage will be eligible for purchase
     even if the site's value exceeds 30% of the property's total appraised
     value, as long as the appraiser demonstrates through the use of comparable
     sales that the property is a typical residential property for that particu-
     lar neighborhood.

     Because we do not purchase mortgages secured by agricultural -type proper-
     ties, undeveloped land, or land -developed - type properties, the lender
     must review carefully the appraisal report for properties that have sites
     larger than those typical for residential properties in the area. Special
     attention must be given to the appraiser's description of the neighborhood,
     zoning, the highest and best use determination, and the degree of compara-
     bility between the subject property and the comparable sales.  If the sub-
     ject property has a significantly larger site than the comparables used in
     the appraiser`s analysis, the subject property may not be a typical resi-
     dential property for the neighborhood.

     Section 404.03-Property Values

     Maximum financing is acceptable when property values are stable or increas-
     ing.  If values are declining, the appraiser should comment on the reason
     for the decline and its effect on the property's marketability. Properties
     in such areas must be reviewed with great care.  The reasons for a decline
     in values and the probability of its continuance are key considerations in
     the property's acceptability.  The lender must not consider the use of max-
     imum financing in any instance in which proprty values are declining.

     Section 404.04-Demand/Supply and Marketing Time.

     An over-supply of housing is not desirable, since it indicates that proper-
     ties are selling slowly with a lot of competition.  A shortage of proper-
     ties or a balanced situation is preferred.  An over-supply of properties
     may be a neighborhood -wide or a city - wide problem.  In either case, the
     appraiser must comment on the reason for the oversupply and its effect on
     the property's value.

      Marketing time is the average time that it takes for a reasonably priced
     property to sell in the subject neighborhood.  When marketing time for a
     particular area is greater than six months, the appraiser must comment on
     the reason for the extended marketing period and its effect on the prop-
     erty's value.

     Section 404.05-Present Land Use

     Typically, dwellings best maintain their value when they are situated in
     neighborhoods that consist of other similar dwellings.  Therefore, a sin-
     gle-family property in a neighborhood with apartments and commercial or in-
     dustrial development may not have the stability required to sustain value
     over a long period of time. However, the negative impression of a property
     within a mixed -use neighborhood can be offset by factors that enhance the
     market value of the property through increased buyer demand.  Typical fac-
     tors include such things as easy access to employment centers and a high
     level of community activity.  Viable older neighborhoods frequently reflect





     a successful mixing of commercial service uses - such as grocery and other
     neighborhood stores or occasional multifamily properties.

     The appraiser should provide the relative percentages of the developed land
     in the neighborhood in the "Present Land Use" section of the appraisal re-
     port form, rather than simply referring to the zoning classifications. The
     appraiser should report separately the percentage of developed single- fam-
     ily sites, developed two- to four-family sites, etc.  Undeveloped land
     should be reported as vacant.  In addition, if there is a significant
     amount of vacant or undeveloped land in the neighborhood, the appraiser
     should include comments to that effect in the "Neighborhood Comments" sec-
     tion of the report to assure that he or she adequately describes the neigh-
     borhood.  If the present land use in the neighborhood is not one of those
     listed on the appraisal report form - such as parkland - the appraiser must
     also indicate in the "Neighborhood Comments" section the type of land use
     and its related percentage.  The total of the types of land uses must equal
     100%

     Section 404.06-Changes in Land Use

     Fannie Mae relies on the present land use, the predominant occupancy compo-
     sition, and the likelihood that either will change to determine whether a
     neighborhood is undergoing transition.  A "neighborhood in transition" de-
     scription must not be used to refer to the racial or ethnic composition -
     or the prospective racial or ethnic composition - of a neighborhood.

     The use of maximum financing must be carefully considered when the ap-
     praiser has indicated that an area is undergoing transition that could have
     a negative impact on property value.  For example, a neighborhood that is
     changing from a single-family use to a two- to four-family residential use
     could experience a negative effect on the marketability and values of prop-
     erties in the neighborhood.

     Properties also may change from owner-occupied to tenant-occupied, which
     can result in detrioration in the general appearance of the property and a
     consequent loss in value.  Owner -occupancy contributes greatly to the
     likelihood of longterm sustained value, since owners generally find it in
     their best interests to maintain their property. While many tenants take
     excellent care of property, deterioration can occur. A high vacancy rate in
     the neighborhood must also be considered in terms of its long range effect.

     Section 404.07-Price Range and Predominant Price

     The appraiser must indicate the price range and predominant price of prop-
     erties in the subject neighborhood.  The price range must reflect high and
     low prevailing prices of single-family however, isolated high and low ex-
     tremes should be excluded from the range. The predominant price is that
     which is the most common or most frequently found in the neighborhood.  The
     appraiser may state the predominant price as a single figure or as a range
     (if that is more appropriate).

     When the subject property has a sales price (or value) that exceeds the up-
     per price range, the propety is considered as an "overimprovement" for the
     neighborhood.  The property is considered as an "under-improvement" if its





     sales price (or value) is less than the lower price range.  If the subject
     property is an over-improvement, the loan terms generally should be more
     conservative because the property may not be acceptable to typical pur-
     chasers.  The appraiser must explain why the property is an over- or under-
     improvement and comment on the adjustments that were made in the "sales
     comparison analysis" adjustment grid to reflect that condition.

     The lender should consider whether a property in an urban area is among
     those being renovated.  Since demand for this type of property can be
     strong, the property should not be regarded as over- improved if there is a
     strong market interest, which is indicated by the existence of comparable
     properties.

     Section 404.08-Age Range and Predominant Age (also see Section 408.02)

     The appraiser must indicate the age range and predominant age of properties
     in the subject neighborhood.  The age range should refect the oldest and
     newest ages of single-family residential properties - however, isolated
     high and low extremes should be excluded from the range.  The predominant
     age is the one that is the most common or most frequently found in the
     neighborhood.  The appraiser may state the predominant age, rather than
     merely relying on the same properties he or she used to illustrate the
     price range and predominant price.

     The age of a property should be within the general age range of the negh-
     borhood.  Normally, neighborhoods are developed over a relatively narrow
     span of time so that most dwelling units will fall within a particular age
     range.  A property that has an age outside of the general age range must
     receive special consideration.  Unless there is strong evidence of long-
     term neighborhood stability, a new dwelling in an old neighborhood will
     carry some marginal risk. Conversely, an old dwelling in a newly developed
     area is generally acceptable if renovation will result in its conforming
     with the neighborhood.

     Older properties in neighborhoods in which the improvements have been main-
     tained in a way that sustains the properties' values are acceptable for
     maximum financing.  Because of their location, these properties frequently
     will have enough advantages over newer properties in outlying areas to cre-
     ate equal or greater market demand.  Certin older properties also may be in
     demand because of their unique architectural design or other factors.

     Section 404.09-Neighborhood Analysis Rating

     Our appraisal report forms provide neighborhood ratings that are designed
     to summarize principal items in a neighborhood that generally are consid-
     ered important by purchasers when they select a home.  If any rating is
     less -than- "average," the appraiser must comment on the reasons for the
     rating and its effect on the property's marketability and value.  Maximum
     financing should not be offered to a borrower unless the property is in a
     location with at least "average" overall neighborhood amenities, public
     services, and property conditions.  The appraiser should also explain any
     changes, either favorable or unfavorable, that have occurred (or are cur-
     rently underway) if they will affect the marketability of the proprties





     within the neighborhood.  There should be sufficient market demand for the
     neigthborhood to support an active market for the subject property.

     Two items of particular importance in determining whether a neighborhood
     will support an active market are discussed below:
     A. General appearance.  The general appearance of the properties in the
     neighborhood is a key factor.  The appraiser must consider the extent to
     which the properties are receiving proper maintenance.  Signs of mainte-
     nance and care ususally reflect a strong neighborhood with stable or in-
     creasing values.
      B.  Appeal to market.  Essentially, this is a summary rating of the extent
     to which all aspects of the neighborhood will appeal to the typical pur-
     chaser in the market.  An individual property by itself cannot overcome a
     generally prevailing reluctance of the market to invest in a neighborhood.
     On the other hand, a relatively weak property in a strong, viable neighbor-
     hood is likely to sustain its value, although it still must be carefully
     analyzed.

     The appraiser must rate the various aspects of a neighborhood by comparing
     the characteristics for the subject neighborhood to those for competing
     neighborhoods.  The appraiser must use the following ratings:

     *    Good, to indicate that the characteristics of the subject neighborhood
     are  outstanding and superior to those found in competing neighborhoods;
     *    Average, to indicate that the characteristics of the subject neighbor-
     hood are equal to those that represent the "norm" for that market area and
     that are considered acceptable in competing neighborhoods;
     *    Fair, to indicate that the characteristics of the subject neighborhood
     are inferior to those that are considered acceptable in competing neighbor-
     hoods; and

     *    Poor, to indicate that the characteristics of the subject neighborhood
     are substantially inferior to - or in such small supply when compared to -
     those found in competing neighborhoods to the point that single-family res-
     idential values are (or may be) affected adversely. A rating of "none" or
     "non-existent" is not acceptable.  For instance, if the subject property is
     in a rural location, and the norm for that location and the competing
     neighborhoods is that there is no public transportation, the appraiser
     should report the adequacy of public transportation as "average" since that
     is typical of competing neighborhoods.

     The appraiser must report neighborhood conditions in factual, specific
     terms.  The use of the ratings described above does not preclude the ap-
     praiser's reporting of typical, detrimental neighborhood conditions that
     affect the value or marketability of the subject property. For example, if
     the neighborhood is characterized by a lack of maintenance or the absence
     of local government services (which also might typical for competing neigh-
     borhoods), the appraiser should include a comment to that effect to provide
     an adequate description of the neighborhood in his or her analysis.

     Section 405-Site Analysis

     In order for a property to qualify for maximum financing, the site should
     be of a size, shape, and topography that is generally conforming and ac-





     ceptable in the market area. It must also have competitive utilities,
     street improvements, and other amenities. Since amenities, easements, and
     encroachments may either detract from or enhance the site's marketability,
     the appraiser must comment on them if the site is not typical for the
     neighborhood.

     Section 405.01-Zoning

     The appraiser is responsible for reporting the specific zoning classifica-
     tion for the subject property. The appraiser must include a general state-
     ment to describe what the zoning permits - "single-family," "two-family,"
     ect. - when he or she indicates a specific zoning such as R- 1, R-2, ect.
     The appraiser must also include a specific statement if the improvements do
     not represent a legal and conforming use of the land.

     We will not purchase a mortgage on a property if the improvements do not
     constitute a legally permissable use of the land.  We will purchase a mort-
     gage that is secured by a one-to four family property or a unit in a PUD or
     a de minimin PUD pro9ject if the property represents a legal, but non- con-
     forming use of hte land-as long as the appraiser's analysis reflects any
     adverse effect that the non-conforming use has on the property's value and
     marketability. However, we will purchase a condominium or cooperative unit
     mortgage from a project that represents a legal, but non- conforming, use
     of the land only if the project's improvements can be rebuilt to current
     density in the event of their partial or full destruction. (In such cases,
     the mortgage file must include a copy of the applicable zoning regulations
     or a letter form the local zoning authority that authorizes reconstruction
     to current density.)

     Section 405.02-Highest and Best Use

     The highest and best use of a site is that reasonable and probable use that
     supports the highest present value on the effective date of the appraisal.
     For improvements to represent the highest and best use of a site, they must
     be legally permitted, be financially feasible, be physically possible, and
     provide more profit than any ther use of the site would generate.  All four
     of these criteria must be met if the improvements are to be considered as
     the highest and best use of a site.

     A strict theoretical highest and best use analysis identifies the perfect
     improvements for a site - assuming that the site is vacant and available to
     be developed.  The appraiser's highest and best use analysis of the subject
     property should consider the property as it is improved. This treatment
     recognizes that the existing improvements should continue in use until it
     is financially feasible to remove the dwelling and build a new one, or to
     renovate the existing dwelling. If the use of comparable sales demonstrates
     that the improvements are reasonably typical and compatible with market de-
     mand for the neighborhood, and the present improvements contribute to the
     value of the subject property so that its value is greater than the esti-
     mated vacant site value, the appraiser should consider the existing use as
     reasonable and report it as the highest and best use. On the other hand, if
     the current improvements clearly do not represent the highest and best use
     of the site as an improved site, the appraiser must so indicate on the ap-





     praisal report. In such cases, we will not purchase a mortgage that is se-
     cured by the subject property.

     Section 405.03-Utilities

     For a mortgage to be eligible for purchase, the securities property's util-
     ities must meet community standards and be accepted generally by area resi-
     dents. If public sewer and/or water facilities - those that are supplied
     and regulated by the local government - are not available, then community
     or private well and septic facilities must be available and utilized by the
     subject property.  If private community facilities are used, the owners of
     the subject property must have the right to access the system's facilities,
     which must be viable on an on- going basis. Generally, private well or sep-
     tic facilities must be located on the subject site. However, off-site pri-
     vate facilities are acceptable if the owners of the subject property have
     the right to access them and if there is an adequate, legally enforceable
     agreement for their maintenance. If there is market resistance to an area
     because of environmental hazards or any other conditions that affect well,
     septic, or public water facilities, the appraiser must comment on the haz-
     ards' effect on the subject property's marketability and value.

     Section405.04-Streets

     The property should front on a publicly  dedicated and maintained street
     that meets community standards and is accepted generally by area residents.
     If the property is on a community-owned or privately owned and maintained
     street, there must be an adequate, legally, enforceable agreement for main-
     tenance of the street. A street that does not meet city or state standards
     frequently requires extensive maintenance, and property values may decline
     if it is not regularly maintained. If a property fronts on a street that is
     not typical of those found in the community, the appraiser must comment on
     the effect of that location on the subject property's marketabilty and
     value.

     Section 405.05-The Lot

     The topography, shape, size and drainage of the lot are all equally impor-
     tant. Steep slopes that cause erosion, difficulty in maintaining a lawn, or
     difficult access to the property itself or to a garage are generally unfa-
     vorable conditions. Drainage must be away from the improvements to avoid
     the collection of water in or around them. The presence of sidewalks,
     curbs, gutters, street lights, and alleys depends on local custom - if they
     are typical in the community, they should be present on the subject site.
     The appraiser must comment on any adverse conditions and address their on
     the subject property's marketability and value.

     Section 405.06-Flood Hazard Area

     The appraiser must indicate whether or not the property is located in a
     special flood hazard area identified by the Federal Emergency Management
     Agency (FEMA). Special flood hazard areas are identified on Flood Insurance
     Rate Maps  (FIRM). These maps include areas that are within the 100-year
     flood boundary. (Note: A "100-year flood" does not mean that a flood will





     occur once in every 100 years, but rather that there is a 1% or greater
     chance that a flood level will be equal or exceeded in any given year.),

     Flood Insurance Rate Maps (Firm) can be obtained by contacting FEMA at the
     following address or telephone numbers.  FEMA requires that requests for
     more than five maps be in writing.

                                  Federal Emergency Management Agency
                                  Flood Map Distribution Center
                                  6930 (A-F) San Tomas Road
                                  Baltimore, MD 21227-6227

                                  1-800-638-6620, for the Continental U.S.;
                                  1-800-492-6605, for Maryland only;
                                  1-800-638-6831, for Alaska, Hawaii, Puerto
                                  Rico and Virgin Islands.

     If the appraiser indicates that the property improvements are located in a
     special flood hazard area - zones A, AE,AO, AH, A1- 30, A-99, V, VE, or V1-
     30 flood insurance is required.  If the land is in the hazard area, but the
     improvements are not, flood insurance is not required. When the appraiser
     determines thatr  a property is located in a Special Flood Hazard Area, he
     or she must indicate on the appraisal report form the map or  community-
     panel number and the specific flood zone.

          (Also see Part III- Improvement Analysis)

     Section 406-Improvement Analysis

     The appraiser must provide a clear, detailed, and accurate description of
     the improvements.  The appraiser should be as specific as possible, and
     should provide supporting addenda if necessary. Lenders should pay particu-
     lar attention to the following areas.

     Section 406.1-Conformity to Neighborhood

     The improvements should generally conform to the neighborhood in terms of
     age, type, design, and materials used for their construction.  If there is
     market resistance to a property because its improvements are not compatible
     with the neighborhood or with the requirements of the competitive market -
     because of remaining economic life; adequacy of plumbing, heating, or elec-
     trical services; design; quality; size; condition; or any other reason di-
     rectly related to market demand - the lender should underwrite the loan
     more carefully and, if appropriate, require more conservative mortgage
     terms.  However, the lender should be aware that many older neighborhoods
     have favorable heterogeneity in architectural styles, land use, and age of
     housing.  For example, older neighborhoods are especially likely to have
     been developed through custom building; this variety may be a positive mar-
     keting factor.

     In the appraisal and underwriting process, special consideration must be
     given to properties that represent special or unique housing for the sub-
     ject neighborhood.  Non-traditional types of housing - such as earth
     houses, geodesic domes, log houses, etc. - or atypical types of housing for





     the neighborhood - such as a contemporary dwelling in a housing market that
     consists of traditional dwellings - must be reviewed with care.  All prop-
     erties must meet all local building codes and zoning ordinances.  In addi-
     tion, the appraiser must be able to establish that an active, viable market
     exists in order for the property to be eligible for maximum financing.  If
     there is limited evidence of market acceptance, the lender must require
     more conservative mortgage terms. However, if the appraiser is not able to
     find any evidence of market acceptance and the characteristics of the prop-
     erty are so significant or so unique that he or she cannot establish a re-
     liable estimate of market value, we will not accept the property as secu-
     rity for any mortgage.

     We do not specify minimum size or living area requirements for properties.
     However, dwelling units of any type whould contain sufficient living area
     to be acceptable to typical purchasers or tenants in the subject market
     area.  There should be comparables of similar size to the subject property
     to support the general acceptability of a particular property type.

     Section 406.2-Actual and Effective Ages

     The relationship between the actual and effective ages of the property is a
     good indication of its condition.  A property that has been well-maintained
     will generally have an effective age somewhat lower than its actual age.
     On the other hand, properties that have an effective age higher than their
     actual age probably have not been well-maintained or may have a particular
     physical problem.  In such cases, the lender must pay particular attention
     to the condition of the subject property in its review of the appraisal.

     (also see section 404.8 and 407.2)

     We do not place a restriction on the age of eligible dwellings. Conse-
     quently, mortgages on older dwellings that meet our general requirements
     are acceptable.  The improvements for all properties must be of the quality
     and condition that will meet local building codes and must be acceptable to
     typical purchasers in the subject market area.

     Section 406.03-Insulation and Energy Efficiency
     (also see Sections 502 and 508)

     The Uniform Residential Appraisal Report (Form 1004) provides an area for
     the appraiser to state the "R" value for insulation if he or she is aware
     of it and to comment on the adequacy of the insulation.  Then, in the
     "sales comparison analysis" grid, the appraiser also should list the en-
     ergy-efficient items to reflect the overall contribution of these items to
     the market value of the subject property.

     An energy-efficient property is one that uses cost- effective design, mate-
     rials, equipment, and site orientation to conserve nonrenewable fuels. Spe-
     cial energy saving items should be recognized in the appraisal process. The
     nature of these items and their contribution to value will vary
     throughout the country because of climatic conditions and differences in
     utility costs.

     Section 406.4-Layout and Floor Plans






     Dwellings with unusual layouts, peculiar floor plans, or inadequate equip-
     ment or amenities generally have limited market appeal and should not be
     considered for maximum financing.  A review of the room list and floor plan
     for the dwelling unit may indicate an unusual layout - such as bedrooms on
     a level with no bath, or a kitchen on a different level from the dining
     room.  If the appraiser indicates that such inadequacies result in market
     resistance to the property, he or she should make appropriate adjustments
     to reflect this in the overall analysis. On the other hand, if market ac-
     ceptance can be demonstrated through the use of comparable sales with the
     same inadequacies, no adjustments are required.

     Section 406.05-Room List and Gross Living Area

     Both the Uniform Residential Appraisal Report (Form 1004) and the Appraisal
     Report - Individual Condominium or PUD Unit (Form 1073) contain a "room
     list" section to describe the subject property.  In addition, the Form 1004
     provides a column for the gross living area per level, as well as space for
     a summary of the total above-grade room count and the above-grade gross
     living area.

     The appraiser must be consistent when he or she calculates and reports the
     finished above-grade room count and the square feet of gross living area
     that is above-grade.  For units in condominum or cooperative projects, the
     appraiser should use interior perimeter unit dimensions to calculate the
     gross living area.  In all other instances, the appraiser should use the
     exterior building dimensions per floor to calculate a property's above-
     grade gross living area.  Only finished above-grade areas should be used -
     garages and basements (including those that are partially above-grade)
     should not be included.  We consider a level to be below -grade if any por-
     tion of it is below- grade - regardless of the quality of its "finish"or
     the window area of any room.  Therefore, a walk- out basement with finished
     rooms would not be included in the above- grade room count.

     Rooms that are not included in the above-grade room count may add substan-
     tially to the value of a property - particularly when the quality of the
     "finish" is high.  For that reason, the appraiser should report the base-
     ment or other partially below-grade areas separately and make appropriate
     adjustments for them on the "basement and finished areas below-
     grade" line in the "sales comparison analysis" adjustment grid.  To assure
     consistency in the sales comparison analysis, the appraiser should compare
     above-grade areas to above-grade areas and below- grade areas to below-
     grade areas.  However, if the appraiser needs to deviate from this approach
     because of the style of the subject property or of any of the comparables,
     he or she must explain the reason for the deviation and clearly describe
     the comparisons that are being made.

     Section 406.6-Infestation, Dampness, or Settlement

     If the appraiser indicates that there is evidence of dampness, woodboring
     insects, or settlement, he or she must comment on its effect on the subject
     property`s marketability and value.  The lender must provide either satis-
     factory evidence that the condition was corrected or submit a profession-
     ally prepared report, which indicates that - based on an inspection of the





     property - the condition does not pose any threat of structural damage to
     the improvements.

     Section 407-Improvement Analysis Rating

     Based on the factual data of the improvement analysis, the appraiser must
     express an opinion about the oncdition of the improvements. This opinion
     should be descriptive and should support the summary shown in the
     "improvement analysis" rating.

     Our appraisal report forms provide a summary of the principal factors about
     the improvements that have a bearing on the value and marketability of the
     subject property.  These factors are rated to indicate how the subject
     property compares to competing properties in the general market area.  The
     same ratings that we used in Section 404.9 to summarize the neighborhood
     analysis - good, average, fair, and poor - must be used to summarize the
     improvement analysis. A less-than-"average" rating indictes that the rated
     item is inferior to that in competing properties in the subject market area
     and, as such, will probably result in the subject property's meeting with
     buyer resistance. If any items are rated less-than-"average", the appraiser
     must comment on the reasons for the rating and on how they affect the mar-
     ketability and value of the subject property.  The lender's underwriter
     must consider the relative significance of the items rated as less- than-
     "average".  A property that has limited marketability is not eligible for
     maximum financing - to be eligible, the improvements should generally be
     rated as, at least, "average".

     The appraiser must report the condition of the improvements in factual,
     specific terms.  The use of ratings does not preclude an appraiser from re-
     porting the detrimental condition of improvements even if that condition is
     also typical for competing properties.  Any condition that may affect the
     value or marketability of the subject property must be reported to assure
     that the appraiser adequately describes the property.  For instance, the
     appraiser should note if a property is characterized by deferred mainte-
     nance or a lack of updating even if the same condition applies to competing
     properties in the neighborhood.

     Section 407.2-Remaining Economic Life

     The remaining economic life of a property is the estimated period over
     which the improvements will continue to contribute to the value of the
     property, or the estimated period in which the improvements increase the
     value of the property above that for the vacant site. Four basic forces in-
     fluence real property values - social standards, economic factors, govern-
     ment controls, and environmental conditions. Because these forces may re-
     sult in a change in the improvements` contribution to value, estimating the
     remaining economic life of a property can be difficult. There, if the ap-
     praiser should emphasize the overall quality and design of the improvements
     and the attitudes of typical purchasers in the subject market area.  The
     appraiser may state the remaining economic life as a single figure or as a
     range (when that is more appropriate).

     Generally, the mortgage term should not exceed the appraiser's estimate of
     the remaining economic life for the subject property. However, a remaining





     economic life that is less than the term of the mortgage may be acceptable
     if the improvements represent a fairly typical residential property for the
     neighborhood, rather than a speculative land or land -development -type
     property.  In such cases, the reason for the shorter remaining economic
     life must be the result of economic factors (which would increase the value
     of the site), rather than the result of the physical deterioration or con-
     dition of the improvements.  We will not purchase any mortgage that is se-
     cured by a property that does not have a minimum remaining economic life
     that is at least equal to one-half of the term of the mortgage.

     Because the Uniform Residential Appraisal Report (Form 1004) was designed
     to meet the needs of several different user groups, it also includes a
     space to insert the property's estimated remaining physical life.  The re-
     maining physical life of a property is the estimated period over which the
     improvements will physically last if they receive normal maintenance. For
     mortgages that will be sold to Fannie Mae, the appraiser does not need to
     report the remaining physical life - "N/A" may be inserted in that space.
     If the appraiser does report the remaining physical life, the lender does
     not need to consider it, because any related property deficiencies will be
     discussed in the sections of the appraisal report that address economic
     life, the improvement analysis, and comments on the property's condition.

     Section 407.03-Appraiser's Comments

     The appraiser must address any needed repairs or any physical, functional,
     or external inadequacies in the "Comments" section. In addition, the ap-
     praiser should also include comments related to general market conditions
     in the subject market area in the space provided for that purpose on the
     Uniform Residential Appraisal Report (Form 1004).

     Section 408-Valuation Analysis

     The valuation section of our appraisal report form enables appraisers to
     develop and report in concise format an adequately supported estimate of
     market value - based on the cost, sales comparison, and income approaches
     to value.  However, if the appraiser believes that additional information
     needs to be provided because of the uniqueness of the property or some
     other condition, he or she should provide the additional supporting data in
     an addendum to the appraisal report form.

     Section 408.01-Cost Approadh

     The cost approach to value assumes that a potential purchaser will consider
     a substitute residence that has the same use as the property that is being
     appraised.  This approach, then, measures value as a cost of production.
     The reliability of the cost approach depends on valid reproduction cost es-
     timates, proper depreciation estimates, and accurate site values.

     Since units in condominium and cooperative projects are integral parts of
     the total project, the cost approach is generally impractical for determin-
     ing the value of any given unit; therefore, the appraiser does not have to
     consider the cost approach when appraising these units.  Usually, the cost
     approach is a good indicator of value for newer or renovated properties
     that are one- to four-family residences or units in PUD or de minimis PUD





     projects.  However, as the effective age of a property increases, the reli-
     ability of the cost approach may decrease because the depreciation esti-
     mates may be subjective.  We will not accept appraisals that rely solely on
     the cost approach as an indicator of market value.

     A.  Determining the indicated value.  There are three principal types of
     depreciation - physical, functional, and external - that the appraiser must
     consider:

     Physical depreciation - traditionally referred to as physical deterioration
     - is a loss in value that is caused by deterioration in the physical condi-
     tion of the improvements.  Appraisers classify physical deterioration as
     "curable" or "incurable".  Curable physical deterioration refers to items
     of deferred maintenance - for example, painting or items currently in need
     of repair (such as broken stair rails). Incurable physical deterioration
     refers to other items that currently are not practical or feasible to cor-
     rect - for example, furnaces or roof shingles that have not reached the end
     of their economic life.

     Functional depreciation - traditionally referred to as functional obsoles-
     cence - is a loss in value that is caused by defects in the design of the
     structure - for example, inadequacies in such items as architecture, floor
     plan, or sizes and types of rooms  It also can be caused by changes in mar-
     ket preferences that result in some aspect of the improvements being con-
     sidered obsolete by current standards - for example, the location of a bed-
     room on a level with no bathroom, or access to a bedroom only through an-
     other bedroom.

     External depreciation - traditionally referred to as economic obsolescence
     - is a loss in value that is caused by negative influences that are outside
     of the site, such as economic factors or environmental changes - for exam-
     ple, shopping centers, expressways, or factories that are adjacent to the
     subject property.

     The appraiser arrives at the indicated value of a property by estimating
     the reproduction cost of new improvements, subtracting the amount of depre-
     ciation from all causes, and adding an estimate of the value for the site
     if it were vacant and available to be developed to its highest and best
     use.  The reproduction cost estimate should reflect the cost of construc-
     tion based on the current prices of producing a replica of the property be-
     ing appraised - including all of its positive and negative characteristics.
     Although the construction materials used for the estimate should be as sim-
     ilar as possible to those used for the subject property, they do not have
     to be exactly the same.

     If the appraiser's estimate of the value for the site is one that is not
     typical for a comparable residential property in the subject neighborhood,
     he or she must comment on how the variance affects the marketability of the
     subject property.
     B.  Appraiser's comments and adjustments.  In reviewing the appraisal re-
     port, the lender should make sure that the appraiser's analysis in the cost
     approach is consistent with comments and adjustments mentioned elsewhere in
     the report.  For example, if the neighborhood or site description reveals
     that the property backs up to a shopping center, the lender should expect





     to see an adjustment for external depreciation in the cost approach.  Simi-
     larly, if the improvement analysis indicates that it is necessary to go
     through one bedroom to get to another bedroom, the lender should expect to
     see an adjustment for functional depreciation.

     Section 408.2-Sales Comparison Approach

     The sales comparison approach to value - traditionally referred to as the
     market data approach - is an analysis of comparable sales, contract offer-
     ings, and current listings of properties that are the most comparable to
     the subject property.  However, we require the appraiser to report only the
     comparable sales in the appraisal report.  The comparable sales must be
     verified, analyzed, and adjusted for differences between the comparable
     properties and the subject property.  Because the appraiser's estimate of
     market value is no better than the reliability of the comparable data that
     is used, the appraiser must exercise due diligence to ensure the reliabil-
     ity of the comparable sales data that he or she uses.  When sales data is
     provided by a party that has a financial interes tin either the sale or fi-
     nancing of the subject property, the appraiser must reverify the data with
     a party who does not have a financial interest in the subject transaction.
     (Also see Section 402.2)

     A.  Selecting the comparables.  The appraiser must report a minimum of
     three comparable sales as part of the sales comparison approach.  The ap-
     praiser may submit more than three comparable sales to support his or her
     estimate of market value, as long as at least three are actual settled or
     closed sales.  Generally, the appraiser should use comparable sales that
     have been settled or closed within the last 12 months.  However, the ap-
     praiser may use older comparable sales as additional supporting data if he
     or she believes that it is appropriate.  The appraiser must comment on the
     reasons for using any comparable sales that are more than six months old.
     In addition, the appraiser may use the subject property as a fourth compa-
     rable sale or as supporting data if the property previously was sold (and
     closed or settled).  If the appraiser believes that it is appropriate, he
     or she also may use contract offerings and current listings as supporting
     data.

     For properties that are in established subdivisions or for units in estab-
     lished condominium, PUD or de minimis PUD projects (those that have resale
     activity), the appraiser should use comparable sales from within the
     subject property's subdivision or project if there are any available. Re-
     sale activity from within the subdivision or project should be the best in-
     dicator of value for properties in that subdivision or project.  If the ap-
     praiser uses sales of comparable properties that are located outside of the
     subject neighborhood, he or she must include an explanation with the analy-
     sis.

     For properties in new subdivisions or for units in new (or recently con-
     verted) condominium, PUD, or de minimis PUD projects, the appraiser must
     compare the subject property to other properties in the general market area
     as well as to properties within the subject subdivision or project.  This
     comparison should help demonstrate market acceptance of new developments
     and the properties within them.  Generally, the appraiser should select one
     comparable sale from the subject division or project, one comparable sale





     from outside the subject subdivision or project, and one comparable sale,
     which can be from inside or outside of the subject subdivision or project
     as long as the appraiser considers it to be a good indicator of value for
     the subject property.  In selecting the comparables, the appraiser should
     keep in mind that resales from within the subject subdivision or project
     are preferable to sales from outside the subdivision or project as long as
     the developer or builder of the subject property is not involved in the
     transactions.

     B.  Adjustments to comparable sales.  Each comparable sale that is used in
     the sales comparison approach must be analyzed for differences and similar-
     ities between it and the property that is being appraised.  The appraiser
     must make appropriate adjustments for location, terms and conditions of
     sale, date of sale, and the physical characteristics of the properties.
     "Time" adjustments must be representative of the market and should be sup-
     ported by the comparable sales whenever possible.  The adjustments must re-
     flect the time that elapsed between the contract date (or the date of the
     "meeting of the minds") for the comparable sale and the effective date of
     the appraisal for the subject property.

     Comparable sales must be adjusted to the subject property - except for
     sales and financing concessions, which are adjusted to the market at the
     time of sale.  The subject property is the standard against which the com-
     parable sales are evaluated and adjusted.  Thus, if an item in the compara-
     ble property is superior to that in the subject property, a minus (-) ad-
     justment s required to make  that item equal to that in the subject prop-
     erty.  Conversely, if an item in the comparable property is inferior to
     that in the subject property, a plus (+) adjustment is required to make
     that item equal to that in the subject property.

     The proper selection of comparable properties minimizes both the need for,
     and the size of, any dollar adjustments. Occasionally, there may be no sim-
     ilar or truly comparable sales for a particular property - because of the
     uniqueness of the property or other conditions. In such cases, the ap-
     praiser must use his or her knowledge and judgment to select comparable
     sales that represent the best indicators of value for the subject property
     and to make adjustments to reflect the actions of typical purchasers in
     that market.  Dollar adjustments should reflect the market's reaction to
     the difference in the properties, not necessarily the cost of the differ-
     ence.  Swimming pools, electronic air filters, intercom systems, elabo-
     rately finished basements, carpet and other special features generally do
     not affect value to the extent of their cost.  We have to establish guide-
     lines for the net and gross percentage adjustments that underwriters may
     rely on as a general indicator of whether a property should be used as a
     comparable sale. Generally, the dollar amount of the net adjustments for
     each comparable sale should not exceed 15% of the comparable's sales price.
     When the adjustments exceed 15%, the appraiser must comment on the reasons
     for not using a more similar comparable.  Further, the dollar amount of the
     gross adjustments for each comparable sale should not exceed 25% of the
     comparable's sales price.  The amount of the gross adjustment is determined
     by adding all individual adjustments without regard to the plus or minus
     signs.  When the adjustments exceed 25%, the appraiser must comment on the
     reasons for not using a more similar comparable.  Individual adjustments
     that are excessively high should be explained by the appraiser and reviewed





     carefully by the lender's underwriter.  In some circumstances, the use of
     comparables with higher-than -normal adjustments may be warranted, but the
     appraiser must satisfactorily justify his or her use of them.

     The appraiser must research the market and select the most comparable sales
     that are available for the subject property, and then adjust them to re-
     flect the market's reaction to the differences (except for sales and fi-
     nancing concessions) between the comparable sales and the subject property,
     without regard for the percentage or amount of the dollar adjustments.  If
     the appraiser's adjustments do not fall within our net and gross percentage
     adjustment guidelines, but the appraiser believes that the comparable sales
     used in the analysis are the best available, as well as the best indicators
     of value for the subject property, the appraiser simply has to provide an
     appropriate explanation.  If the extent of the appraiser's adjustments to
     the comparable sales is great enough to indicate that the property may not
     conform to the general market area, the lender's underwriter must give spe-
     cial consideration to the case.  An atypical property might require more
     conservative mortgage terms because it might not be appealing to a typical
     purchaser in the market area.

     C.  Sales comparison analysis adjustment grid.  The lender's underwriter
     should review thoroughly the "sales comparison analysis" adjustment grid.
     The sales comparison analysis provides many places in which an error can be
     made in the use of dollar adjustments.  A spotcheck must always be made of
     the adjustment calculations and the use of plus (+) and minus (-) signs.
     Errors in arithmetic may have a significant effect on the value conclusion
     and are, therefore, reason for the lender to contact the appraiser.

     The underwriter should pay particular attention to the following items. Be-
     cause a substantial variance raises questions about the validity of using a
     specific comparable sale, the appraiser should address the reason for a
     variance.

     1.  Proximity to subject property, and location.  The description of the
     comparable's proximity to the subject property must be specific (e.g., two
     blocks south).  Whenever possible, the appraiser should use comparable
     sales in the same neighborhood as the subject property because the sales
     prices of comparable properties in the neighborhood should reflect the same
     positive and negative locational characteristics.

     2.  Sales price.  The sales price of each comparable sale should be within
     the general range of the estimate of market value for the subject property.
     A $100,000 comparable sale for a $75,000 subject property would raise ques-
     tions about the validity of the comparable.

     3.  Sales or financing concessions.  The dollar amount of sales or financ-
     ing concessions paid by the seller must be reported for the comparables if
     the information is reasonably available.  Generally, sales or financing
     data for comparable sales - such as the mortgage amount, loan type, inter-
     est rate, term, and any fees or concessions the seller paid - is available.
     The appraiser should obtain this information from an individual
     who was a party to the comparable transaction (the broker, buyer, or
     seller) or from a data source that the appraiser considers to be reliable.
     We recognize that there may be some situations in which sales or financing





     information is not available because of legal restrictions or other disclo-
     sure-related problems  In such cases, the appraiser must explain why the
     information is not available - however, we will not accept an explanation
     that indicates that the appraiser did not make an effort to verify the in-
     formation.  In all other cases, the appraiser must provide the sales and
     financing concession information that was available (and verified) for the
     comparables.  If the appraisal report form does not provide enough space to
     discuss this information, the appraiser should make adjustments for the
     concessions on the form and explain them in an addendum to the appraisal
     report.

     Examples of sales or financing concessions include interest rate buydowns
     or other below-market rate financing; loan discount points; loan origina-
     tion fees; closing costs customarily paid by the buyer; payment of condo-
     minium or PUD association fees; refunds of (or credit for) the borrower's
     expenses; absorption of monthly payments; assignment of rent payments; and
     the inclusion of non-realty items in the transaction.  The amount of the
     negative adjustment to be made to each comparable with sales or financing
     concessions is equal to any increase in the purchase price of the compara-
     ble that the appraiser determines to be attributable to the concessions.

     The need to make negative adjustments and the amount of the adjustments to
     the comparables for sales and financing concessions are not based on how
     typical the concessions might be for a segment of the market area - large
     sales concessions can be relatively typical in a particular segment of the
     market and still result in sale prices that reflect more than the value of
     the real estate.  Adjustments based on mechanical, dollar -for-dollar, de-
     ductions that are equal to the cost of the concessions to the seller (as a
     strict cash equivalency approach would dictate) are not appropriate.  We
     recognize that the effect of the sales concessions on sales prices can vary
     with the amount of the concessions and differences in various markets.  The
     adjustments must reflect the difference between what the comparables actu-
     ally sold for with the sales concessions and what they would have sold for
     without the concessions so that the dollar amount of the adjustments will
     approximate the market's reaction to the concessions.

     Positive adjustments for sales or financing concessions ar not acceptable.
     For example, if local tradition or law results in virtually all of the
     property sellers in the market area paying a 1% loan origination fee for
     the purchaser, and a property seller in that market did not pay any loan
     fees or concessions for the purchaser, the sale would be considered as a
     cash equivalent sale in that market.  The appraiser should recognize compa-
     rable sales that sold for all cash or with cash equivalent financing and
     use them as comparables if they are the best indicators of value for the
     subject property.  Such sales can also be useful to the appraiser in deter-
     mining those costs that are normally paid by sellers as the result of tra-
     dition or law in the market area.

     4.  Date of sale/time adjustment.  We will accept more than three compara-
     ble sales as part of the appraisal report, but at least three of them must
     be actual settled or closed sales.  The appraiser should provide the date
     of the sales contract and the settlement or closing date for each compara-
     ble sale.  Unless the appraiser believes that the exact date is necessary
     to understand the adjustments, only the month and year of the sale need to





     be reported.  If the appraiser does not report both the contract date and
     the settlement or closing date, he or she must identify the reported sale
     date as either the "contract date" or the "settlement or closing date".  If
     the appraiser reports the contract date only, he or she must state whether
     the contract resulted in a settlement or a closing.

     5.  Above-grade room count and gross living area. Only finished above-
     grade areas should be included in the calculation of the gross living area.
     The appraiser should report the basement and other partially below-grade
     areas separately and adjust for them accordingly. The room count and gross
     living area should be similar for the subject property and all comparables.
     For example, a four bedroom comparable sale generally is not acceptable to
     support the value of a two bedroom subject property. The appraiser must ad-
     dress large differences between the subject property and the comparable
     sales, since they raise doubts about the validity of the comparables as
     good indicators of value.

     6.  Over-improvements.  In some instances, the improvements can represent
     an over-improvement for the neighborhood, but still be within the neighbor-
     hood price range - such as a property with an inground swimming pool, a
     large addition, or an oversized garage in a market that does not demand
     these kinds of improvement.  The appraiser must comment on such over-im-
     provements and indicate their contributory value in the "sales comparison
     analysis" adjustment grid. Because an over-improved property may not be ac-
     ceptable to the typical purchaser, the lender's underwriter must review ap-
     praisals on this type of property carefully to ensure that the appraiser
     has reflected only the contributory value of the over-improvement in his or
     her analysis.

     D.  Appraiser's comments and indicated value.  The appraiser's comments
     should reflect his or her reconciliation of the adjusted (or indicted) val-
     ues for the comparable sales and identify the comparable(s) that were given
     the most weight in arriving at the indicted value for the subject property.

     Section 408.03-Income Approach

     The income approach to value is based on the assumption that market value
     is related to the market rent or income that a property can be expected to
     earn.  It use generally is appropriate in neighborhoods of single-family
     properties when there is a substantial rental market, and it is an impor-
     tant approach in the valuation of a two- to four-family property. However,
     it generally is not appropriate in areas that consist mostly of owner-occu-
     pied properties since adequate rental data generally does not exist for
     those areas.  We will not accept an appraisal if the appraiser relies
     solely on the income approach as an indicator of market value.

     To arrive at the indicted value by the income approach, the appraiser mul-
     tiplies the estimated market rent for the subject property by a gross rent
     multiplier.

     *    Estimated market rent is based on an analysis of comparable rentals in
     the neighborhood.  After appropriate adjustments are made to the compara-
     bles, their adjusted (or indicted) values are reconciled to develop an es-
     timated monthly market rent for the subject property.






     *    The gross rent multiplier is determined by dividing the sales prices
     of comparable properties that were rented at the time of sale by their
     monthly market rent, which is then reconciled to create a single gross rent
     multiplier (or a range of multipliers) for the subject property.

     When the property being appraised is a single-family property that will be
     used as an investment property, the appraiser must prepare a Single-Family
     Comparable Rent Schedule (Form 1007) in addition to the appropriate ap-
     praisal report form.  This form is not required for a two- to four-family
     property since the Appraisal Report - Small Residential Income Property
     (Form 1025) provides substantially the same information.  When the ap-
     praiser is relying on the income approach, he or she should attach the sup-
     porting comparable rental and sales data, and the calculations used to de-
     termine the gross rent multiplier, as an addendum to the appraisal report
     form.

     Section 408-Final Reconciliation

     The reconciliation process that leads to the estimate of market value is an
     on-going process throughout the appraiser's analysis. In the final recon-
     ciliation, the appraiser must reconcile the reasonableness and reliability
     of each approach to value and the reasonableness and validity of the indi-
     cated values and the available data, and then must select and report the
     approach or approaches that were given the most weight.  The final recon-
     ciliation must never be an averaging technique.

     If the appraiser has provided a comprehensive and logical analysis of the
     neighborhood and the property, the lender's underwriter should be able to
     reach a sound conclusion on the adequacy of the property as security for
     the mortgage.

     Section 410-Appraiser's Certification

     We will not purchase a mortgage unless the appraisal is based on our Certi-
     fication and Statement of Limiting Conditions (Form 1004B), as it was re-
     vised in July, l986.  To acknowledge that the current version of Form 1004B
     was used and to assure the lender that the appraiser is certifying to our
     current definition of value, the appraiser must
     *    check the box in the "Reconciliation" section of the Uniform Residen-
     tial Appraisal Report (Form 1004) that references "Freddie Mac Form 439
     (Rev. 7/86), Fannie Mae Form 1004B (Rev. 7/86)....; or

     *    check the box at the bottom of the Appraisal Report - Small Residen-
     tial Income Property (Form 1025), the Appraisal Report - Individual Condo-
     minium or PUD Unit (Form 1073), or the Loan Valuation Summary for Second
     Mortgages (Form 219), that references the Freddie Mac Form 439/Fannie Mae
     Form 1004B, and correct any references to the outdated version of  Form
     1004B by striking the earlier revision date and replacing it with a "07/86"
     date.

     Section 410.01-Definition of Market Value






     Fannie Mae's definition of market value is intended to assure that ap-
     praisals reflect an estimate of market value after adjustments for any spe-
     cial or creative financing or sales concessions - such as seller contribu-
     tions, interest rate buydowns, etc. - have been made.

     The appraiser must certify hat he or she uses the following definition of
     market value (which is stated in the 07/86 version of Form 1004B):

     Market value is the most probable price which a property should bring in a
     competitive and open market under all conditions requisite to a fair sale,
     the buyer and seller, each acting prudently, knowledgeably and assuming the
     price is not affected by undue stimulus.  Implicit in this definition is
     the consummation of a sale as of a specified date and the passing of title
     from seller to buyer under conditions whereby: (1) buyer and seller are
     typically motivated; (2) both parties are well informed or well advised,
     and each acting in what he considers his own best interest; (3) a reason-
     able time is allowed for exposure in the open market; (4) payment is made
     in terms of cash in U.S. dollars or in terms of financial arrangements com-
     parable thereto; and (5) the price represents the normal consideration for
     the property sold unaffected by special or creative financing or sales con-
     cessions* granted by anyone associated with the sale.

     (also see section 408.4)

     *Adjustments to the comparables must be made for special or creative fi-
     nancing or sales concessions.  No adjustments are necessary for those costs
     which are normally paid by sellers as a result of tradition or law in a
     market area; these costs are readily identifiable since the seller pays
     these costs in virtually all sales transactions.  Special or creative fi-
     nancing adjustments can be made to the comparable property by comparisons
     to financing terms offered by a third party institutional lender that is
     not already involved in the property or transaction.  Any adjustment should
     not be calculated on a mechanical dollar for dollar cost of the financing
     or concession but the dollar amount of any adjustment should approximate
     the market's reaction to the financing or concessions based on the ap-
     praiser's judgment.

     The asterisked section of the definition provides consistent interpretation
     for appraisers.  Specifically, we want to emphasize that the phrases "...
     those costs which are normally paid by sellers as a result of tradition or
     law in a market area; these costs are readily identifiable since the seller
     pays these costs in virtually all sales transactions..." refer to all of
     the sellers in a specific market area. No distinction is made between a
     specific group of sellers, builders, developers, or individuals in the re-
     sale market - they are all considered to be individual sellers in the mar-
     ket.  To illustrate:  When a property seller is paying part of the pur-
     chaser's settlement or closing costs - or is paying for an interest-rate
     buydown or other below-market financing - but virtually all of the other
     sellers in the market are not doing the same as a result of law or tradi-
     tion, the appraiser would need to make an adjustment even if there are
     other groups of sellers - such as builders - who are also offering conces-
     sionary financing.






     The appraiser can adjust a comparable property that has special or creative
     financing or sales concessions by comparing it to other properties that had
     financing terms offered by a third party institutional lender - as long as
     that lender is not already involved in the subject property or transaction.
     The appraiser should use his or her judgment in establishing the dollar
     amount for any adjustment to assure that it approximates the market's reac-
     tion to the financing or concession at the time of the sale.

     Section 410.2-Certifications

     The appraiser must agree to a number of certifications, which are contained
     in detail in the Certification and Statement of Limiting Conditions (Form
     1004B).  Those certifications are summarized below.

     1.   The appraiser must certify that he or she has no present, or contem-
     plated future, interest in the subject property, and his or her employment
     or payment for making the appraisal is not contingent on the appraised
     value of the property.

     2.   The appraiser must certify that he or she has no personal interest or
     bias with respect to the subject matter of the appraisal report or to the
     participants in the sale, and that he or she will not base - either par-
     tially or completely - the "estimate of market value" in the appraisal re-
     port on the race, color, or national origin of either the prospective own-
     ers or occupants of the subject property or of the present owners or occu-
     pants of the properties in the vicinity of the subject property.

     3.   The appraiser must certify that he or she has personally inspected the
     inside and outside of the subject property and the outside of all compara-
     ble sales listed in the appraisal report; believes, to the best of his or
     her knowledge, that the information in the appraisal report is true and
     correct; and has not knowingly withheld any significant information.

     4.   The appraiser must certify that he or she has included all contingent
     and limiting conditions - which were imposed by the terms of the assignment
     or developed as the result of his or her opinions, analyses, and conclu-
     sions - in the appraisal report.

     5.   The appraiser must certify that he or she has performed the appraisal
     in conformity with, and subject to, the requirements of the Code of Profes-
     sional Ethics and Standards of Professional Conduct of the appraisal orga-
     nizations with which the appraiser is affiliated.

     6.   The appraiser must certify that he or she has personally prepared all
     of the conclusions and opinions concerning the real estate that were set
     out in the appraisal report (unless he or she signed the report only as a
     "Review Appraiser"), agrees that no one else may change any item in the ap-
     praisal report, and indicates that he or she will not be responsible for
     any unauthorized changes.

     Section 410.3-Contingent and Limiting Conditions

     The appraiser`s certifications are subject to a number of conditions.  The
     specific contingent and limiting conditions appear in the Certification and





     Statement of Limiting Conditions (Form 1004B); however, they are summarized
     below.

     1.   The appraiser will not be responsible for matters of a legal nature
     that affect the property being appraised, or the title to it.  Since the
     property is appraised on the basis of it being under responsible owner-
     ship, the appraiser assumes that the title is good and marketable and will
     not render any opinions about the title.

     2.   The appraiser has made no survey of the property; therefore, any
     sketch in the report shows approximate dimensions and is included only to
     assist the reader of the report in visualizing the property.

     3.   The appraiser will not give testimony or appear in court because he or
     she made an appraisal of the property in question, unless specific arrange-
     ments to do so have been made beforehand.

     4.   The appraiser has distributed the value of the property between the
     land and the improvements on the basis of the existing use of the property.
     These separate valuations must not be used in conjunction with any other
     appraisal and are invalid if they are so used.

     5.   The appraiser has assumed that there are no hidden or unapparent con-
     ditions of the property, the subsoil, or the structures that would make the
     property more or less valuable.  The appraiser will not be responsible for
     any such conditions that do exist or for any engineering that might be re-
     quired to discover whether such factors exist.

     6.   The appraiser obtained the information, estimates, and opinions that
     were expressed in the appraisal report from sources that he or she consid-
     ers to be reliable and believes them to be true and correct.  The appraiser
     does not assume responsibility for the accuracy of such items that were
     furnished by other parties.

     7.   The appraiser will not disclose the contents of the appraisal report
     except as provided for in the Bylaws an Regulations of the professional ap-
     praisal organizations with which he or she is affiliated.

     8.   The appraiser must provide his or her prior written consent before all
     (or any part) of the content of the appraisal report - including conclu-
     sions about the property's value; the appraiser's identity and professional
     designations; and references to any professional appraisal organizations or
     the firm with which the appraiser is associated - can be used for any pur-
     poses by anyone except the client specified in the report; the borrower if
     he or she paid the appraisal fee; the mortgagee or its successors and as-
     signs; mortgage insurers; consultants; professional appraisal organiza-
     tions; any state or federally approved financial institution; or any de-
     partment, agency, or instrumentality of the United States or any state of
     the District of Columbia.  The appraiser's written consent and approval
     must also be obtained before the appraisal (or any part of it) can be con-
     veyed by anyone to the public through advertising, public relations, news,
     sales or other media.






     9.   The appraiser has based his or her appraisal report and valuation con-
     clusion for an appraisal that is subject to satisfactory completion, re-
     pairs, or alterations on the assumption that completion of the improvements
     will be performed in a workmanlike manner

     Chapter 5.  Special Considerations

     This chapter addresses special underwriting and appraisal requirements that
     apply only to certain types of mortgages or properties.  Unless we indicate
     otherwise, our normal requirements also apply to these mortgages or proper-
     ties.

     Section 501-Special Underwriting Considerations

     Some types of mortgages or properties may require a slightly modified ap-
     proach to underwriting because they require different documentation or have
     features that are not usually considered during the normal course of under-
     writing.

     Section 501.04-Second Mortgages

     The lender must use our standard underwriting documentation, unless we have
     given prior approval for the use of equivalent forms. The following varia-
     tions to our standard documentation also are acceptable:

     *    Either the Second Mortgage or Home Improvement Loan Application (Form
     1012) or the Residential Loan Application (Form 1003) is acceptable.

     *    An "in-file" credit report is acceptable for all mortgages if the pub-
     lic records are reviewed.  The review may be made by the credit reporting
     agency, the title company, or the lender. If a check of the public records
     is not made, an "in-file" credit report is acceptable only for mortgages
     that have unpaid balances of $30,000 or less.  When discrepancies that
     cannot be satisfactorily verified or explained arise, we require a standard
     factual data credit report;

     *    Loan Valuation Summary for Second Mortgages (Form 219) may be used for
     single-family mortgages that have an unpaid balance of $15,000 or less. Our
     regular appraisal report forms must be used for single-family mortgages
     that have balances over $15,000, for two- to four- family properties, and
     for units in condominium or PUD projects.

     Section 502-Special Appraisal Considerations

     Some types of properties require special consideration in the appraisal
     process to recognize the special contributions of unusual features, the
     detrimental effect of certain environmental conditions, the interrelation-
     ship between the property being appraised and other units within the devel-
     opment or project, or the need to meet specific criteria in order for a
     mortgage on the property to be eligible for delivery to Fannie Mae.

     Units in condominium, PUD, or cooperative projects require special consid-
     eration because of the interrelationship between the property being ap-
     praised and other units within hte development or project. We will purchase





     unit mortgages in condominium, PUD or cooperative projects that meet our
     project eligibility criteria. To determine project eligibility, a lender
     often needs saccess to certain project information that is not always read-
     ily available- such as information about the project's insurance converage,
     legal documents, or budget, the payment status of owners' association (or
     cooperative corporation) fees; and the ownership and occupancy status of
     individual units within the project. For this reason, we allow the lender
     to rely on the appraiser, the owner's association (0r cooperative corpora-
     tion), the management company, the real estate broker, and the project de-
     veloper as sources for informan, althought we expect the lender to make a
     diligent effort to ensure the accuracy of the information obtained from
     these sources. Project acceptance-and the availability fo financing- often
     depends on the owners' association's) or cooperative corporation's) or the
     management company's willingness to obtain and provide requested informa-
     tion.

     When an appraiser evaluates a cooperative unit, he or she must estimate the
     market value of the cooperative interest. The cooperative interest is the
     ownership interest of the shares that are attributable to the cooperatvie
     unit, excluding the unit's pro rata share of the blanket mortgage's debt
     service. In other words, the cooperative interest is the equity portion
     that is over and above the por rata share of the blanket mortgage(s). de-
     termine the value of the cooperative interest, the appraiser must include
     the following information on the Appraisal Report-Individual Condominium or
     PUD Unit (Form 1073), or in an addendum to the appraisal report form:

     *    The number of shares attributable to the unit;
     *    The name of the lienholder and the lien position of all project blan-
     ket financing;
     *    The pro rata share of the blanket mortgage payments that are at-
     tributable   to the unit, as determined by dividing the number of the
     unit's shares by the total number of project shares;
     *    The  pro rata share of each lien that is attributable to the unit;
     *    Any tax abatements or exceptions that are attributable to the unit,
     and their remaining term and provisions for escalation of real estate
     taxes. (The dollar amount by which the taxes will increase and the year in
     which the increase will occur should be shown); and
     *    Comments about any mechanics' liens that have been filed against the
     project.

     The appraiser must use reliable sources to obtain data on the cooperative
     project, the individual subject unit, and the comparable properties, and
     indicate the name of each source on Form 1073 (or on an addendum to it).
     The appraiser must comment on the adequacy and reasonableness of the coop-
     erative corporation's budget - including the working capital and replace-
     ment reserves funds - and address any other factors that could result in
     the subject unit's monthly debt service increasing.  For comparison pur-
     poses, the appraiser should indicate in the "sales comparison analysis" ad-
     justment grid the dollar amount of the monthly assessments for each of the
     comparable sales.

     In many areas, there is limited experience with the cooperative form of
     ownership.  Appraisers always must comment on the acceptance of housing co-
     operatives in the market area.  The degree of acceptance is generally re-





     flected in the availability of similar comparable sales data for coopera-
     tive units.  If there is limited market acceptance of the cooperative form
     of ownership, or if it is a relatively new form of ownership in the market
     area, the appraiser must address any effect that has on the marketability
     and value of the unit that is being appraised.

     Because Fannie Mae is concerned about the marketability of the subject
     property, the appraiser must compare the subject unit to the general market
     area as well as to other units in the subject cooperative project.  This
     comparison should help demonstrate market acceptance of cooperative units
     in the area.  If the appraiser believes that the submission of more than
     the three required comparable sales is appropriate to support the estimate
     of market value, he or she should submit other comparable sales - including
     contracts for sale - as additional supporting data. Comparables must be
     from similar types of projects - townhouses, mid- rise, high-rise, etc. -
     that have similar common amenities and recreational facilities.

     Generally, when an appraiser appraises a unit in a cooperative project, he
     or she should use sales of cooperative units as comparables.  However, the
     appraiser may use sales of condominium units as comparables if cooperative
     unit sales are not available, as long as he or she explains why those types
     of comparables were used.  When there is a preference for condominium own-
     ership in the subject market area, the appraiser must adjust the condo-
     minium comparables to reflect the market's reaction to the cooperative
     unit.

     If the subject property is a unit in a new or recently converted coopera-
     tive project, the appraiser should select as comparables one closed or set-
     tled comparable sale from the subject project (if one is available) and two
     closed or settled comparable sales from outside of the project.  If closed
     or settled sales are not available in the subject project, the appraiser
     should use comparable sales from competing projects.  When the subject
     property is a unit in an established cooperative project - one that has re-
     sale activity - the appraiser should use as comparables two closed or set-
     tled comparable sales from within the subject project (if available) and
     one closed or settled comparable sale from a competing project.

     The final adjustment to value must be indicated and explained in the
     "Reconciliation" section of the appraisal report form.  The appraiser must
     report two values:  (1) the unit value, encumbered by the blanket mort-
     gage(s), and (2) the unit value, excluding the unit's pro rata share of the
     blanket mortgage(s).  The second value reflects the market value for the
     unit's cooperative interest.  [To illustrate: When the indicated value of
     the unit encumbered by the blanket mortgage(s) is $100,000 and the unit's
     pro rata share of the blanket mortgage(s) is $25,000, the value estimate
     for the unit's cooperative interest is $75,000.]  The appraiser must cer-
     tify in the appraisal report that "the pro rata share of the blanket mort-
     gage(s) on the real estate has not been included in the market value esti-
     mate of the cooperative interest of the unit."

     Section 502.02-Units in PUD Projects

     A planned unit development (PUD) project is one that consists of common
     property and improvements that are owned and maintained by an owners' asso-





     ciation, corporation, or trust for the benefit and use of the individual
     units within the project.  For a project to qualify as a PUD, the owners'
     association, corporation, or trust must require automatic, nonseverable
     membership for each individual unit owner, and provide for mandatory as-
     sessments.  Zoning should not be the basis for classifying a project as a
     PUD. Appraisals for PUD units must be documented on the Appraisal Report-
     Individual Condominium or PUD Unit (Form 1073). However, the appraiser may
     document the appraisal for a PUD unit on the Uniform Residential Appraisal
     Report (Form 1004) if her or she includes on the form (or in an addendum to
     it) an adequate description of the project and information about the own-
     ers' association fees and the adequacy of the project maintenance.The ap-
     praisal of an individual unit in a PUD requires the appraiser to analyze
     the PUD project as well as the individual unit.  The appraiser must pay
     special attention to the location of the project, the location of the indi-
     vidual unit within the project, the project`s amenities, and the amount and
     purpose of the owners' association assessment since the marketability and
     value of the individual units in a project generally depend on the mar-
     ketability and appeal of the project itself.

     Section 502.03-Units in De Minimis PUDs (effective 8/1/88)

     A de minimis PUD is a planned unit development project that has a rela-
     tively minimal amount of common property and  improvements. Because of the
     limited nature of the common property and  improvements, they have little
     or no effect on the value of the property that secures the unit mortgage.

     Appraisals for de minimis PUD units should be documented on the Uniform
     Residential Appraisal Report (Form 1004). The appraisal of an individual
     unit in a de minimis PUD requires the appraiser to analyze the project as
     well as the individual unit. The appraiser must pay special attention to
     the location of the project, the location of the individual unit within the
     project, the project's amenities, and the amount and purpose of the owners'
     association assessment to make sure that he or she addressses the specific
     eligibility requirements that we have for de minimis PUDs since the lender
     msut be able to warrant that the project meets those criteria. Specifi-
     cally, the appraiser should comment on whether the project meets these cri-
     teria:

     The project meets either our definition of a de minimis PUD project or the
     definition that FHLMC uses;

     The project must not include any multi-dwellings units that represent the
     security for a single mortgage;

     The project must not have been created by the conversion of an existing
     building; and

     The project must not have any common areas-other than greenbelts, private
     streets and parking, open tennis courts, tot- lots and playgrounds and re-
     tention areas (for water, storm drainage, etc.)- and must not be subject to
     additional phasing or annexation that would result in the inclusion of any
     common areas within the project- other than greenbelts, private sterets and
     parking, open tennis courts, tot lots and plagrounds, and retention areas.






     502.04 Units in Condominium Projects

     A condominium project is one in which individual owners hold title to units
     in the project along with an undivided interest in the real estate that is
     designated as the common area for the project.

     Appraisals for condominium units must be documented on the Appraisal Re-
     port-Inividual Condominium or PUD Unit (Form 1073). The appraisal of an in-
     dividual unit in a condominium project requires the appraiser to analyze
     the condominium project as well as the individual unit.  The appraiser must
     pay special attention to the location of the project, the location of the
     individual unit within the project, the project's amenities, and the amount
     and purpose of the owners' association assessment since the marketability
     and value of the individual units in a project depend on the marketability
     and appeal of the project itself.

     502.05 Manufactured (or Factory-Built Housing Units)

     Because we have specific eligibility criteria for mortgage secured by manu-
     factured (or factory-build) housing units, the appraiser should make sure
     that he or she considers these criteria and adequately addresses them in
     the appraisal report.

     A manufactured housing unit must be legally classified as real estate, must
     be permanently affixed to a foundation, and must assume the characteristics
     of site -built housing.  It must also have been built under the Federal
     Home Construction and Safety Standards that were established by HUD in
     June, l976.  Other factory -built housing - such as prefabricated, panel-
     ized, modular, or sectional housing - needs to assume the characteristics
     of site-built housing and to meet local zoning and building codes.

     We do not have minimum requirements for width, size, or roof pitch for man-
     ufactured housing units.  Each unit must have sufficient square footage and
     room dimensions to be acceptable to typical purchasers in the subject mar-
     ket area.  The wheels, axles, and trailer hitches must be removed when the
     unit is placed on its permanent site.  We require both perimeter and pier
     foundations to have footings that are located below the frost line. When
     piers are used, they must be placed where the unit manufacturer recommends.
     Anchors must be provided if state law requires them.  The foundation system
     must have been designed by an engineer to meet the soil conditions of the
     site.

     The appraiser must address both the marketability and comparability of man-
     ufactured housing units.  The materials and construction of the improve-
     ments must be acceptable in the subject market area.  The appraiser should
     also comment on the sufficiency of the unit's living area, interior room
     size, storage, adequacy of roof pitch and overhangs, and the compatibility
     of the exterior finish.  In addition, the appraiser must address the mar-
     ketability and value of manufactured housing units in the subject market
     area in comparison to the marketability of site-built housing in the area.

     Single-width manufactured housing units must be located in a Fannie Mae-
     approved project; a multi-width unit may be located on an individual lot or





     in any project (although, in certain areas, our regional office may require
     subdivision approval for units located on individual lots).

     The appraiser should use as comparable sales similar manufactured housing
     units - comparing single-width units to single-width units and multi-width
     units to multi-width units.  If comparable sales of similar units are not
     available, the appraiser may use site-built housing as comparable sales, as
     long as he or she explains why that is being done. When there is a prefer-
     ence for site-built housing in the subject market area, the appraiser must
     adjust the site-built comparables to reflect the market's reaction to manu-
     factured housing units.

     When the subject property is another kind of factory- built housing, the
     appraiser should use sales of similar factory-built housing as comparables
     if they are available.  If they are not available, the appraiser may use
     sales of comparable site-built housing, as long as he or she provides an
     explanation for doing so and makes appropriate adjustments to reflect any
     market preferences for site-built housing.

     Section 502.06-Mixed-Use Properties


     Although we will purchase mortgages that are secured by properties that
     have a business use in addition to their residential use - such as a house
     in which day care is provided or a professional office - we have special
     eligibility criteria for them.  Therefore, the appraiser should make sure
     that he or she considers these criteria and adequately addresses them in
     the appraisal report.  Specifically, a mixed-use property

     *    must be a single-family dwelling;

     *    must represent a legal, permissible use of the property under the lo-
     cal zoning requirements; and

     *    Must not have any existing (or plans for) special use modifications
     that would requie a significant expenditure to convert back if the property
     were again used solely for residential purposes.

     Section 502.07-Energy-Efficient Properties

     When a lender is giving special underwriting consideration to a borrower
     because the property that secures his or her mortgage is energy efficient,
     the lender can use either of two methods to qualify the dwelling as energy-
     efficient:  development of an energy-efficiency rating by the appraiser or
     reliance on the dwelling having been constructed in compliance with quali-
     fying energy conservation programs.

     A.  Development of appraiser's energy-efficiency rating.  This method of
     determining energy-efficiency can be used for both new construction and ex-
     isting homes.

     The appraiser must include an evaluation of the energy-efficient character-
     istics and an overall rating - of high, adequate or low - for the
     dwelling's energy efficiency in the appraisal report. Appraisers may use an





     Energy Addendum Residential Appraisal Report (FHLMC Form 70A) to develop
     the rating.  Part I of this form, which consists of a checklist and the
     rating, is used to justify the use of increased ratios in the underwriting
     process, while Part II is sometimes used to determine the constribution of
     energy-efficient items to the property's value.  A rating of "high" is re-
     quired to justify consideration in the credit underwriting process. Gener-
     ally, a dwelling must contain features from each of the following three ma-
     jor categories to receive a "high" rating.

     1.   Insulation and Infiltration.  We require insulation with adequate "R"
     values or infiltration barriers:

     *    Insulation in ceilings, roofs, or attic floors that are over condi-
     tioned spaces, in exterior walls, under floors that cover unheated areas,
     around slabs, around heating or cooling ducts or pipes that run through un-
     conditioned spaces, around the sill area and around the water heater.

     *    Caulking or weatherstripping around window and door areas and at the
     sill area;

     *    Special fireplace devices or features such as combustion-air and flue
     dampers, and a fire door;

     *    Sealing of the sole plate and penetrations of the exteior shell; and

     *    Dampers for exhaust fans.

     2. Windows and Doors.  We require the following features:

     *    Double- or triple-pane windows, or storm windows; and

     *    Storm doors, or insulated doors.

     3.   Heating and Cooling Systems.  We require the following types of sys-
     tems:

     *    New effcient heating and cooling systems, or appropriate modifications
     to an existing system:
     -    New efficient systems include such things as a high efficiency oil or
     gas furnace with an Annual Fuel Utilization Efficiency (AFUE) rating of 80%
     or higher; a high efficiency heat pump with a Seasonal Energy Efficiency
     Ratio (SEER) measure of 9.0 or greater and a Heating Seasonal Performance
     Factor (HSPF) of 7.0 or greater; and a central air conditioner with a SEER
     rating of 9.0 or greater;

     -    System modifications include such things as a flame retention oil
     burner; vent dampers for oil and gas furnaces; pilotless ignition for gas
     furnaces; and a secondary condensing heat exchanger for gas and oil fur-
     naces;

     *    Zoned heating and/or air conditioning;

     *    Automatic set-back thermostats; and






     *    Solar equipment or design.
     B.  Reliance on qualifying energy conservation programs.  This method for
     qualifying a dwelling as energy-efficient applies to new construction only.
     Homes that are built in compliance with energy conservation programs that
     the National Association of Home Builders (NAHB) classifies as meeting the
     NAHB Thermal Performance Guidelines may be accepted as energy-efficient. In
     such cases, the Energy Addendum - Residential Appraisal Report (FHLMC Form
     70A) is not needed to justify higher qualifying ratios, although the ap-
     praiser and the lender may find Part II of the form useful in determining
     the property's value.

     Regardless of the method used for qualifying a dwelling as "energy effi-
     cient", the appraiser must consider the market's reaction to energy- effi-
     cient improvements (or proposed alterations) and reflect their contributory
     value in the "Sales comparison analysis" adjustment grid on the appraisal
     report form.  This adjustment should be based on the appraiser's analysis
     of comparable properties. However, if adequate comparables are not avail-
     able, the appraiser may develop an analysis of the present worth of the es-
     timated savings in utility costs.  To do this, the appraiser may use a pro-
     cedure that is similar to the one used in Part II of the Energy Addendum-
     Residential Appraisal Report (FHLMC Form 70A).

     Section 502.08 Enviornmental Hazards

     If the appraiser has knowledge of any hazardous condition (whether it ex-
     ists on the subject property or on any site within the immediate vicinity
     of the property) that affects the value of the subject property such as the
     presence of hazardous wastes, toxic substances, asbestos-containing materi-
     als, urea-formaldehyde insulation, radon air pollution, etc. - he or she
     must comment on the hazard's influence on the property's value and mar-
     ketability and make appropriate adjustments in the overall analysis of the
     property`s value.