In the September and October 2011 AppraisalPort newsletters, I discussed the first report that was released by the United States Government Accountability Office (GAO) on real estate valuation methods. To refresh your memory, as part of the Dodd-Frank Act, the GAO was asked to study the various valuation methods and the options available for selecting appraisers, as well as the Home Valuation Code of Conduct (HVCC), which established appraiser independence requirements for mortgages sold to Fannie Mae and Freddie Mac. To conduct the study, the GAO gathered information from many of the stakeholders in the lending industry, including the five largest lenders, Fannie Mae and Freddie Mac (the enterprises), the Federal Housing Finance Agency (FHFA), the federal banking regulatory agencies, the Appraisal Subcommittee (ASC), and other businesses involved in the valuation process.
This report focuses on three main topics: the use of different valuation methods for single-family residential mortgages and the advantages and disadvantages of each method; policies on appraiser conflict-of-interest and selection and views on the policies’ impact on industry stakeholders and appraisal quality; and ASC’s performance of its Title XI functions that existed prior to the Dodd-Frank Act and challenges that it faces in implementing additional responsibilities under the act.
Part of the discussion of different valuation methods mentions that traditional appraisal reports are still mandated for almost all first-lien residential loan originations due to their greater reliability. Here are a couple of the paragraphs where the different valuation methods are discussed. They mention the appraisal as the most credible and reliable valuation method as well as the stringent requirements that appraisers must follow:
The enterprises, FHA, and lenders require and obtain appraisals for most mortgages because mortgage industry participants consider appraising to be the most credible and reliable valuation method, for a number of reasons. Most notably, appraisals and appraisers are subject to specific requirements and standards. In particular, USPAP outlines the steps appraisers must take in developing appraisals and the information appraisal reports must contain. It also requires that appraisers follow standards for ethical conduct and have the competence needed for a particular assignment. Furthermore, state licensing and certification requirements for appraisers include minimum education and experience criteria, and standardized report forms provide a way to report relevant appraisal information in a consistent format.
In contrast, other valuation methods such as BPOs and AVMs are not permitted for most purchase and refinance mortgage originations. The enterprises do not permit lenders to use BPOs for mortgage originations and permit lenders to use AVMs for only a modest percentage of mortgages they purchase. Additionally, the federal banking regulators’ guidelines state that BPOs and AVMs cannot be used as the primary basis for determining property values for mortgages originated by regulated institutions. However, the enterprises and lenders use BPOs and AVMs in a number of circumstances other than purchase and refinance mortgage originations because these methods can provide a quicker, less expensive means of valuing properties in active markets.
The issue of appraiser conflict-of-interest and selection is discussed in great detail. Also, the GAO still questions the lender supervision of AMCs and the priorities of some AMCs. Here is a summary of the GAO’s conclusions on that topic:
Conflict-of-interest policies have changed appraiser selection processes and the appraisal industry more broadly, raising concerns about the oversight of appraisal management companies (AMC), which often manage appraisals for lenders. Recent policies, including provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), reinforce prior requirements and guidance that restrict who can select appraisers and prohibit coercion. In response to market changes and these requirements, some lenders have turned to AMCs. Greater use of AMCs has raised questions about oversight of these firms and their impact on appraisal quality. Federal regulators and the enterprises said they hold lenders responsible for ensuring that AMCs’ policies and practices meet their requirements but that they generally do not directly examine AMCs’ operations. Some industry participants voiced concerns that some AMCs may prioritize low costs and speed over quality and competence. The Dodd-Frank Act requires state appraiser licensing boards to supervise AMCs and requires the federal banking regulators, the Federal Housing Finance Agency, and the Bureau of Consumer Financial Protection to establish minimum standards for states to apply in registering them. Setting minimum standards that address key functions AMCs perform on behalf of lenders could provide greater assurance of the quality of the appraisals that AMCs provide. As of June 2012, federal regulators had not completed rulemaking to set state standards.
Finally, the GAO document describes how the ASC’s role has changed due to 14 provisions in Dodd-Frank that give it a number of new responsibilities and authorities. Some of the tasks associated with these provisions are complex and challenging. The ASC is a small agency (10 employees) with limited resources and the GAO has found some weakness in getting tasks completed. Here is the summary from the report:
The Appraisal Subcommittee (ASC) has been performing its monitoring role under Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), but several weaknesses have potentially limited its effectiveness. For example, ASC has not clearly defined the criteria it uses to assess states’ overall compliance with Title XI. In addition, Title XI charges ASC with monitoring the appraisal requirements of the federal banking regulators, but ASC has not defined the scope of this function—for example, by developing policies and procedures—and its monitoring activities have been limited. ASC also lacks specific policies for determining whether activities of the Appraisal Foundation (a private nonprofit organization that sets criteria for appraisals and appraisers) that are funded by ASC grants are Title XI-related. Not having appropriate policies and procedures is inconsistent with federal internal control standards that are designed to promote the effectiveness and efficiency of federal activities.
The full report is 19 pages and contains much more detail on these topics than I can present here. I would recommend that all appraisers and anyone working with or for an AMC read the entire document, which is available here.
The content expressed in Collateral Vision consists of the opinions of its contributors and does not necessarily
reflect the opinions or official positions of FNC, Inc., its parent company, subsidiaries, or affiliates.