Regulators Should Take Actions to Strengthen Appraisal Oversight

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Fed Report Scrutinizes Appraisal Processes

The Government Accountability Office released a report June 28 that scrutinized real estate valuations in the wake of the recent mortgage crisis. The report, Residential Appraisals — Regulators Should Take Actions to Strengthen Appraisal Oversight, was produced using data from Fannie Mae, Freddie Mac and five of the biggest mortgage lenders.

The report revealed that valuations received through broker price opinions and automated valuation models take less time and are less costly than traditional appraisal reports, but traditional appraisal reports are still mandated for almost all first-lien residential loan originations due to their greater reliability.

Almost all appraisal reports utilize the sales comparison approach, which bases the property value on recent sales of similar properties. Fannie, Freddie and the Federal Housing Administration all require the use of comparable properties in appraisals.

The report noted that appraisal management companies are becoming more prominent because of regulations that prevent conflicts of interest in the appraiser selection process. However, the expanded use of AMCs has caused doubt about their oversight and impact on appraisal quality — namely that they give higher priority to low cost and speed than quality and competence.

Federal regulators and Fannie and Freddie claim that they hold lenders responsible for ensuring that AMCs’ policies and practices meet their requirements; however, lenders typically don’t directly review the operations of the AMCs they use.

The Dodd-Frank Act requires state appraisal licensing boards to supervise AMCs. The law also mandates that federal banking regulators, the Federal Housing Finance Agency and the Consumer Financial Protection Bureau create minimum standards for states to apply in registering AMCs. However, the GAO indicated that federal regulators had yet to finish rulemaking to establish state standards.

Dodd-Frank broadened the role of the Appraisal Subcommittee, which oversees state appraiser regulatory programs, monitors requirements relating to appraisal standards for federal financial institutions, maintains a National Registry of state-certified and licensed appraisers and monitors and reviews operations of the Appraisal Foundation. However, the ASC has been restricted in meeting its responsibilities under Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the report noted.

“For example, ASC has not clearly defined the criteria it uses to assess states’ overall compliance with Title XI,” the report stated. “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.”

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