Modernizing Appraisals & Being Stuck in 1989
Modernizing Appraisals: It seems we’re stuck in 1989…
On November 16, 2016, the Housing and Insurance Subcommitte held a hearing on “Modernizing Appraisals: A Regulatory Review and the Future of the Industry.” Subcommittee discussed modernizing appraisals to benefit American consumers. The hearing focused on necessary changes to the appraisal industry.
Subcommittee Chairman Blaine Luetkemeyer (R-MO) explained:
“Appraisals are one of the cornerstones of the home-buying process. Issues that impact appraisers also impact nearly every American buying or selling a home, in rural and urban areas; in high- and low-income neighborhoods. Yet when it comes to the regulatory regime surrounding appraisals, it seems we’re stuck in 1989. Today’s hearing focused on a topic that isn’t often on television or in the newspapers yet is an important issue that impacts Americans across the country who are buying or selling homes. The last meaningful update of the appraisal structure was in 1989, and while the marketplace has evolved, the regulatory regime remains stuck in the past. Ultimately, our nation’s appraisal system is unnecessarily complicated and outdated. That complexity impacts homeowners and is, in part, responsible for delayed closings and increased consumer costs. Today’s hearing gave this Subcommittee an opportunity to examine the past and, more importantly, look to the future of appraisal standards in America. We can and will find a better way that increases consumer choice and maintains market confidence.”
David S. Bunton, President, The Appraisal Foundation, testified:
“Dodd-Frank benefited consumers by requiring lenders to provide a copy of the appraisal that was utilized in underwriting a loan. The CFPB went a step further and required lenders to provide borrowers with copies of all valuation products that were considered in conjunction with the loan application. Unfortunately, many borrowers were simply confused when receiving this information prior to closing. Some wondered why certain products reflected one opinion of value, while a different product showed another. And how was the appraisal fee the borrower paid actually applied to these various products?”
Bill Garber, Director of Government and External Relations, Appraisal Institute, told the Subcommittee in written testimony:
“Today, the number of real property appraisers in the United States is in decline, and concerns are being expressed by banks and real estate professionals alike about a potential shortage of appraisers. What is clear is that all appraisers are being choked by rules and regulations in nearly every facet of their business. Appraisers’ professional lives have become extremely complicated, more expensive and less productive due to a dated and archaic regulatory structure. As a result, consumers suffer from increased turnaround time, delays in loans and potential higher costs.
Real estate appraisers face a ‘layering effect’ of rules and regulations that creates a disincentive for potential entry into the profession, while also diminishing the profession’s profitability.
Presently, real estate appraisers pay for the operation and maintenance of the regulatory structure in a variety of ways, including imposing license renewal fees, course requirements, and mandates to purchase rules and regulations. After almost 27 years, it is time to make the appraisal regulatory structure and process more efficient and responsive to the needs of practitioners and consumers.”
NAHB believes in standardizing appraisal requirements throughout the housing finance system so all parties are operating under the same set of rules. NAHB Chairman Ed Brady testified that:
“The current appraisal system is impaired due to inconsistent and conflicting standards and guidance, inadequate and uneven oversight and enforcement, a shortage of qualified and experienced appraisers and the absence of a robust and standardized data system. Major reforms in appraisal practices and oversight are needed to ensure that appraisals accurately reflect true market values and do not contribute to price volatility. To improve the quality of valuations, it is necessary to strengthen education, training and experience requirements for appraisers of new home construction, particularly as it relates to energy-efficient, green building and other evolving new construction techniques.
Joan N. Trice, Chief Executive Officer and Founder, Clearbox, in her statement stated that the white paper entitled “Reengineering the Appraisal Process, Revisited” explores in greater detail solutions to bolster the appraisal profession. Some of the solutions offered in the white paper:
- The need to rebuild new appraisal forms:
The current forms do not address many of the data elements necessary for lenders, investors, insurers and rating agencies to perform adequate analysis of the underlying valuation and risk. There are also superfluous data points that need to be jettisoned. For example, it is doubtful that the identification of window type, such as double hung, is a meaningful data element for anyone. There are property characteristics however that are not collected that impact property risk. For example, the age of the roof, the age of the furnace, replacement windows, and other energy efficient items are not adequately addressed. In today’s lending environment we place the highest risk borrowers in the highest risk properties. If we addressed this systemic problem we can create meaningful solutions. One might be to calculate a “reserves for replacement” adjustment to offset a potentially catastrophic repair.
- A repository system, and a credentials registry of appraisers and AMCs such as Clearbox:
The mission of creating a database of all appraisals would be to monitor risk and contribute to a broader housing finance ecosystem that ensures safety and soundness. By stablishing data standards, improving the data collection and reporting by appraisers, and making available transactional level information, all stakeholders, including consumers, would benefit.
In addition to creating a repository for all appraisals, a credentials registry of appraisers should also be included. All actors in the transaction should be registered to monitor behaviors between appraisers, lenders, AMCs and so on. Access to these patterns of behavior helps to identify fraud and vulnerabilities to appraisal independence. Implicit in this credentials registry would be integration of an AMC Registry. All credentials would be validated at time of registry of a transaction. Such a system does exist at Clearbox. Clearbox is a credentials database of all licensed appraisers and all known AMCs. Each has been assigned a unique identifier.
Jennifer S Wagner, Managing Attorney, Mountain State Justice Inc., thanked Congress for “imposing stricter standards for appraisals under the Dodd Frank Act.” She added that “these new standards have dramatically reduced fraudulent appraisals, in turn saving tens of thousands of homeowners from foreclosure”, and urged to leave the requirements under the Dodd-Frank Act in place because they not just help consumers, but support honest appraisers and lending institutions. Mr. Stevan Pearce, (R-NM) read the statement by Ms. Wagner, which stated that “It is common knowledge that lax regulation of the mortgage and appraisal market led directly to the financial collapse of 2008. Prior to that collapse, unscrupulous mortgage brokers and lenders joined forces with a handful of appraisers to fraudulently inflate home values” and asked Joan Trice whether it is possible for a handful of appraisers to have caused hundred of billions of dollars in losses in home values. Watch the video clip below at 1:37:00 for this segment.
Modernizing Appraisals Witnesses Statements in PDF:
- Modernizing Appraisals: Witness Statement of Mr. James R. Park, Executive Director, Appraisal Subcommittee
- Modernizing Appraisals: Witness Statement of Mr. David S Bunton, President, The Appraisal Foundation
- Modernizing Appraisals: Witness Statement of Ms. Joan N. Trice, Chief Executive Officer and Founder, Clearbox
- Modernizing Appraisals: Witness Statement of Mr Bill Garber, Director of Government and External Relations, Appraisal Institute
- Modernizing Appraisals: Witness Statement of Mr. Ed Brady, Chairman of the Board, National Association of Home Builders
- Modernizing Appraisals: Witness Statement of Ms. Jennifer S. Wagner, Managing Attorney, Mountain State Justice, Inc.
“Modernizing Appraisals: A Regulatory Review and the Future of the Industry” Hearing