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Presentation on theme: "APPRAISING IN A POST-HVCC WORLD"— Presentation transcript:

by Daniel A. Bradley, SRA and Ross Acheson Version 2.11

2 SEMINAR OBJECTIVES By the end of this seminar, you will:
Discuss episodes of economic turmoil that led to the regulation of the appraisal profession Summarize key events that led to the recent mortgage, housing, and credit crisis and creation of the Home Valuation Code of Conduct (HVCC) Describe the appraisal-related provisions in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act

3 SEMINAR OBJECTIVES By the end of this seminar, you will:
Identify recent changes and clarifications to Fannie Mae appraisal requirements Detail recent FHA changes to ensure appraiser independence Recall alternatives to traditional mortgage lending appraisals, and some guidelines and requirements for these types of assignments Define appraisal best practices for promoting professionalism among appraisers

4 BEFORE WE BEGIN… Throughout this course, we will address some controversial issues which may engender strong opinions and emotions. You will have plenty of opportunities to discuss and participate. However: This is not a four-hour complaint session Please maintain a courteous tone, and keep your comments professional Please respect others’ opinions and views, even if you do not agree with them Remember, we are all in this together!

As we go through the course, we will discuss a number of problems and potential solutions There are no easy answers or one-size-fits-all solutions The idea is to make appraisers aware of and explore a number of options The answers may be different for everyone in this room Exploring the problem and becoming aware of solutions is a good first step

6 SECTION 1 A Brief History Lesson

For most of the 20th century, problems in the mortgage industry were almost non-existent. Why, you ask? Mortgage lending was done mostly by local banks and depository institutions Banks lent their own money, and so were concerned with the possibility of loss Institutions carefully scrutinized borrowers to make sure they were credit-worthy Lenders often valued and/or inspected properties personally

As the lending industry became more profitable, federally-regulated lenders (particularly S&Ls) began to take on riskier and riskier loans: High-end commercial developments Condominium projects Proposed subdivisions Foreign loans This culminated in the S&L Crisis of the 1980s.

9 FIRREA As a result of the Savings & Loan crisis, Congress passed the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) in 1989. This legislation bailed out the failed thrift institutions It created stricter lending requirements for federally-regulated institutions FIRREA required all appraisers completing appraisal work for federally-regulated financial institutions to be certified or licensed

10 FIRREA SAVES THE DAY! With the passage of FIRREA, poor lending practices in America were eradicated, once and for all. Our economy and financial system were saved! Or were they? As we are about to see, this was merely Act I in a drama that would play out 20 years later…

11 THE APPRAISAL WORLD Many appraisers like to romanticize the lending boom of , but… Mortgage brokers controlled 70-75% of the lending market Many brokers would only use appraisers who guaranteed values in advance “Comp checks” were a way of life Pressure was rampant from brokers, lenders, real estate agents, and others

12 HOW WIDESPREAD WAS IT? In 2006, October Research conducted a nationwide survey of appraisers on the topic of appraisal pressure. The results were quite dramatic. 90% of appraisers surveyed indicated they had been pressured in an effort to influence their appraisals This was a significant increase from a similar survey in 2003, in which 55% of appraisers reported being pressured

13 SOURCES OF PRESSURE The October Research survey also asked appraisers to indicate who was exerting this pressure. The leading sources of pressure were: Mortgage brokers - 71% Real estate agents – 56% Home sellers – 35% Mortgage lenders – 33% (Obviously, survey respondents were permitted to choose more than one.)

14 PUTTING IT IN WRITING Historically, appraiser pressure was implied. During the “boom” it became much more overt. Some clients, emboldened by years of successfully pressuring appraisers, even became willing to put their pressure tactics in writing! The following slide contains phrases taken from actual appraisal orders received by a number of real property appraisers, including the course author. These are all real!

“Please call loan officer with estimated value before scheduling” “I need a value of $150,000” (at the top of the page in 48-point type) “If minimum value is not possible, do not appraise the property” “I don’t want the appraisal to be done if the value won’t be at least $72K” “This is a comp request. Please contact me if you can reach $265K value”

Not all pressure on appraisers is value-related. Sometimes, parties pressure appraisers to: Ignore physical or functional deficiencies in a subject property Overlook FHA or VA repair items Ignore environmental concerns in a property or neighborhood Misrepresent the subject property’s current use or highest and best use Omit negative comments from reports “Tailor” reports to meet the client’s objectives

Mortgage loans were being made in record numbers: From subprime mortgage originations increased by a factor of almost 300%, from $332 billion to $1.3 trillion In 1997, the national mortgage denial rate was 29%; by it was 14% Bond rating agencies incorrectly rated subprime mortgage-backed securities with AAA ratings; investors gobbled them up, so lenders pooled and securitized even riskier loans

18 THE PERFECT STORM These factors led to a record number of loans being made, and a record amount of indebtedness for U.S. homeowners: Double-digit property appreciation rates Pooling and securitization of loans Outrageous profits for originating lenders, especially subprime lenders Use of exotic and controversial loan products such as interest-only loans and ARMs The belief that mortgage giants Fannie Mae and Freddie Mac were “too big to fail”

19 A RIPPLE EFFECT The causes and effects of the crisis are more varied and detailed than we have time to cover here, but here is a simplified version of what happened next: The value bubble burst, dropping property values in most areas of the country Foreclosures began occurring in record numbers MBS offerings became impossible to sell The resulting economic recession claimed property owners’ jobs and led to more foreclosures Lenders began to fail in large numbers




Against this backdrop, New York Attorney General Andrew Cuomo filed a lawsuit against First American Corporation and its AMC subsidiary, eAppraiseIT, in The suit claimed that: eAppraiseIT enabled Washington Mutual to hand-pick appraisers based on who would provide inflated values eAppraiseIT pressured appraisers to inflate values eAppraiseIT’s president knew of these actions, and had agreed to WaMu’s demands

24 ENTER FANNIE & FREDDIE November 2007: NY AG subpoenaed Fannie Mae and Freddie Mac to find out what they knew about loans they purchased from WaMu and others March 2008: HVCC signed between Fannie, Freddie, the NY AG, and Office of Federal Housing Enterprise Oversight (OFHEO) NY AG dropped investigation of Fannie/Freddie Original HVCC was to be effective 1/1/2009 HVCC was later revised, its implementation date changed to 5/1/2009, ending 10/31/2010

July 2008: To stabilize the mortgage, housing, and credit markets, the Federal Housing Finance Agency (FHFA) was created to regulate Fannie Mae and Freddie Mac September 2008: FHFA placed Fannie Mae and Freddie Mac in conservatorship This conservatorship means the federal government now controls GSE assets and operations, and stands behind approximately $5 trillion in GSE debt

It was an agreement - not a law or regulation Fannie Mae and Freddie Mac agreed that after May 1, 2009, they would only purchase mortgages from lenders who warrant compliance It established requirements and prohibitions for lenders when selecting appraisers and procuring appraisals The HVCC has been sunsetted, but many of its requirements live on, in the form of revisions to Fannie Mae and Freddie Mac selling guides

It was not a law or regulation It applied to lenders, not appraisers It did not tell appraisers how to appraise properties It did not mandate the use of AMCs by lenders It did not prohibit agents or brokers from communicating with appraisers It did not prohibit a lender from requesting an appraiser provide additional information or correct factual errors

28 HVCC: APPLICABILITY The HVCC applied only to one- to four-family mortgages sold to Fannie Mae and Freddie Mac. It did not apply to: FHA or VA loans Loans on properties of more than five units Commercial/industrial loans Non-lending appraisals, such as relocation, estates, divorces, eminent domain

29 WHAT DID HVCC DO? Prohibited lenders from influencing appraisals through coercion, intimidation, bribery, etc. Prohibited a lender from requesting that an appraiser provide estimated values or comparable sales at any time prior to the completion of an appraisal report Prohibited lenders from providing an appraiser with a desired value for the subject (except that a sales contract may be provided) Prohibited lenders from ordering second appraisals except in specific circumstances

30 WHAT DID HVCC DO? Prohibited lenders from accepting appraisals if the appraiser was selected, retained, or compensated by a third party (like a mortgage broker or real estate agent) which meant borrowers could no longer pay appraisers Lender loan production staff not allowed to select appraisers, order appraisals, or have substantive communication with appraisers regarding value If staff appraisers were used, the lender was required to separate the appraisers from loan production staff

Increased use of AMCs Commoditization of appraisals Lower fees for appraisers Good appraisers leaving the mortgage lending appraisal business Loss of appraiser relationships with mortgage brokers and certain lenders Anecdotal indications that borrowers may be paying more and/or waiting longer for appraisals


33 EFFECTS ON APPRAISERS Cannot market to mortgage brokers; previous marketing efforts and relationships are now meaningless Marketing to real estate agents can only result in non-mortgage-lending assignments AMCs can be large and bureaucratic; reaching a decision-maker can be difficult Lottery-type distribution of assignments does not favor more competent appraisers Lenders receive the benefits of using an AMC, while the appraiser pays, by receiving lower fees

34 AMCs AND FEES It is unfair to paint all AMCs with a broad brush, just as it is unfair to make broad, sweeping statements about appraisers. There are hundreds of AMCs throughout the U.S. Some pay lower-than-typical fees; yet others do not Many of them are serious about appraisal quality Many experienced and competent appraisers work for AMCs How much you charge for an appraisal is a business decision only you can make

AMCs have historically not been regulated at the federal level Practically anyone can own or operate one There are few restrictions on their business practices Reports of AMCs being owned or operated by debarred appraisers or convicted felons are common In 2009, a push to regulate these companies at the state level began

At this time, there are over 20 states that have passed laws regulating AMCs, including: Arkansas California Louisiana Nevada Florida Utah There are also at least 10 states with AMC regulatory bills pending

More and more competency

38 IVPI One of the requirements of the HVCC was the creation of the Independent Valuation Protection Institute (IVPI) An eight-page sample complaint form was posted on Freddie Mac’s website in late 2009 In May 2010, the FHFA announced that the IVPI would not be created Instead, complaints would be received directly by Fannie and Freddie and then forwarded to state authorities, as deemed appropriate

39 OH, THE IRONY! The seminal event that led to the eventual creation of the HVCC was an appraisal management company selecting appraisers because they would provide inflated appraisals, and pressuring appraisers at the behest of a lender The net result of the HVCC is that AMCs now have more power and control over the residential mortgage appraisal profession than ever before

The HVCC did not apply to FHA loans However, in September 2009, HUD issued Mortgagee Letter (ML ) which adopted some HVCC-like requirements These requirements went into effect 2/15/2010 In this letter, HUD reiterated the importance of appraiser independence

41 ML FHA lenders may not accept appraisals from appraisers selected, retained, or compensated by mortgage brokers or commission-based lender personnel FHA does not require use of AMCs The lender or AMC must not prohibit the FHA appraiser from recording the amount of the fee the appraiser was paid in the appraisal report The FHA appraiser must be compensated at a rate that is customary and reasonable for the market area

42 ML Commission-based lender personnel may not have substantive communication with the appraiser regarding valuation issues FHA lenders may not coerce the appraiser using payment or prospects of future business Lenders may not request the appraiser provide an estimated value or comparable sales any time prior to completion of the report Lenders may not provide the appraiser with an anticipated or desired value, or a proposed or target amount to be loaned to the borrower A purchase contract must be provided

43 ML FHA lenders may not remove an appraiser from an approved list without written notice to the appraiser, outlining a “substantive reason” Lenders may not request a second appraisal or AVM, although there are specific exceptions which may apply These requirements also apply to third parties working on behalf of lenders (AMCs) This ML also reminds appraisers of their USPAP obligations regarding geographic competency

44 ML These requirements were very similar to those specified in the HVCC Many appraisers mistakenly believed “the FHA adopted HVCC” These are FHA’s requirements; they have nothing to do with Andrew Cuomo or Fannie Mae, and these requirements remain in effect even though the HVCC is gone The Dodd-Frank Reform Act did not change any of these FHA requirements for appraiser independence

45 The Dodd-Frank Wall Street Reform and Consumer Protection Act
SECTION 2 The Dodd-Frank Wall Street Reform and Consumer Protection Act

46 H.R. 4173 H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act, was passed by the U.S. Senate on July 15, 2010 Signed by President Obama on July 21, 2010 Contains 2,319 pages The centerpiece of the bill was the creation of the Consumer Financial Protection Bureau within the Federal Reserve This Act is considered to be the most significant modernization of the appraisal regulatory structure since the passage of FIRREA in 1989

47 PROVISIONS OF HR 4173 Interestingly, the “short title” of this bill is the “Dodd-Frank Wall Street Reform and Consumer Protection Act”* Title XIV is the “Mortgage Reform and Anti-Predatory Lending Act” Subtitle F is “Appraisal Activities” There are six sections in Subtitle F Subtitle F runs from pages 2205 to 2250 * I wonder what the “long title” would be?

48 SUBTITLE F – SECTION 1471 Amends Chapter 2 of the Truth in Lending Act
A creditor may not extend a higher-risk mortgage to a consumer without first obtaining a written appraisal on the property Appraisals on higher-risk mortgages must be performed by a licensed or certified appraiser who makes an interior property inspection If the higher-risk mortgage is a re-sale within 180 days, the lender must obtain a second appraisal One copy of each appraisal must be provided to the borrower, by the creditor, without charge

49 HIGHER RISK MORTGAGE What is a “higher-risk mortgage”?
A residential loan other than a reverse mortgage Not a “qualified mortgage” defined in Section 129C of TILA APR exceeds the “average prime offer rate for a comparable transaction” by 1.5 points or more if within FNMA loan limits, 2.5 points or more if exceeding FNMA loan limits, or 3.5 points or more for a subordinate lien residential mortgage loan

50 SUBTITLE F – SECTION 1472 This section is titled “Appraisal Independence Requirements” Amends Chapter 2 of the Truth in Lending Act Prohibits creditors from engaging in any act or practice that violates appraisal independence, when providing services in a credit transaction secured by the consumer’s principal dwelling Provides a specific list of acts or practices that violate appraisal independence

51 PROHIBITED ACTS Coercion, extortion, collusion, instruction, bribery, or intimidation of any person, AMC, firm, or other entity conducting or involved in an appraisal Mischaracterizing or suborning mischaracterization of the appraised value Seeking to influence an appraiser to encourage a targeted value in order to facilitate the making or pricing of the transaction Withholding or threatening to withhold payment for appraisal services rendered in accordance with the contract between the parties

52 EXCEPTIONS A mortgage broker, banker, real estate broker, AMC, or other person is not prohibited from asking an appraiser to: Consider additional appropriate property information, including the consideration of additional comparable sales Provide further detail, substantiation, or explanation for the appraiser’s value conclusion Correct factual errors in the appraisal report

53 MANDATORY REPORTING Any mortgage lender, mortgage broker, real estate broker, AMC, or other person involved in a real estate transaction, who believes that an appraiser is violating USPAP or any applicable laws, or is otherwise engaging in unethical or unprofessional conduct, is required to “refer the matter to the applicable State appraiser certifying and licensing agency” A creditor who knows that a violation of appraisal independence standards has taken place may not extend credit based on the appraisal unless reasonable diligence has been exercised

The Federal financial institution regulatory agencies may issue regulations that address appraisal report portability These regulations would ensure the portability of an appraisal report between lenders for consumer credit transactions secured by 1-4 family residence that is the borrower’s principal dwelling

“Lenders and their agents shall compensate fee appraisers at a rate that is customary and reasonable for appraisal services being performed in the market area of the property being appraised.” Evidence for fees may be established by government agency fee schedules, academic studies, and private sector surveys. “Fee studies shall exclude assignments ordered by known appraisal management companies.”

56 COMPLEX ASSIGNMENTS “In the case of an appraisal involving a complex assignment, the customary and reasonable fee may reflect the increased time, difficulty, and scope of the work required for such an appraisal and include an amount over and above the customary and reasonable fee for non-complex assignments.”

57 SUNSET OF HVCC “Effective on the date the interim final regulations are promulgated pursuant to subsection (g), the Home Valuation Code of Conduct announced by the Federal Housing Finance Agency on December 23, 2008 shall have no force or effect.”

58 SUBTITLE F – SECTION 1473 Amends the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 Requires the ASC to report the results of all audits of State appraiser regulatory agencies Permits the ASC to prescribe regulations limited to temporary practice, national registry, information sharing, and enforcement In order to prescribe regulations, the ASC must form an advisory committee of industry participants, including appraisers

59 SUPERVISION OF AMCs Provides the ASC with authority to monitor requirements established by the states for registration and supervision of AMCs Requires the ASC to maintain a national registry of AMCs that are subject to State regulation or are operating subsidiaries of Federally regulated financial institutions Federal agencies, including FRB, OCC, FDIC, NCUA, FHFA, and BCFP (Bureau of Consumer Financial Protection) shall jointly establish minimum requirements to be applied by states in registering AMCs

60 REQUIREMENTS FOR AMCs Register with and be subject to supervision by State appraiser certifying/licensing agency Verify that only licensed or certified appraisers are used for federally related transactions Require that appraisals coordinated by the AMC comply with USPAP Require that appraisals are conducted independently and free from coercion Nothing in this section shall prevent states from establishing additional requirements for AMCs

61 MORE ON AMCs An AMC that is a subsidiary owned and controlled by a financial institution regulated by a Federal financial institution regulatory agency shall not be required to register with a State An AMC that is owned by a person who has had an appraisal license refused, denied, cancelled, surrendered, or revoked shall not be registered by a State or included on the national registry Any person who owns more than 10% of an AMC shall be of good moral character and shall submit to a background investigation carried out by the State appraiser licensing/certifying agency

62 REGISTRY FEES FIRREA is amended to increase the national registry fee from $25 to $40 per appraiser per year; this can be adjusted to a maximum of $80 at the discretion of the ASC AMCs are also subject to national registry fees of $25 per appraiser working for or contracting with the AMC; this can be adjusted to a maximum of $50 at the discretion of the ASC If an AMC has been in business for less than 1 year, the registry fee is $25 multiplied by an appropriate number to be determined by the ASC

The increase in the registry fees is made with the intent of providing grants to State appraiser certifying and licensing agencies Many states are having budget troubles Some states are “sweeping” accounts of licensing agencies, and putting the money into the state’s general fund Many licensing agencies find themselves with no money for investigation and enforcement, even though they generate significant revenue in application and renewal fees

64 MORE POWER FOR THE ASC The ASC shall enforce minimum AQB requirements for “Trainee Appraiser” and “Supervisory Appraiser”, in states where these classifications exist The ASC shall have the authority to remove an appraiser or an AMC from the national registry on an interim basis, pending the outcome of disciplinary proceedings The ASC has the authority to impose sanctions against a State agency that fails to have an effective appraiser regulatory program

FIRREA is amended to state that membership in a nationally recognized appraisal organization may be considered as a criterion for appraiser selection; however, lack of membership may not be the sole bar against consideration for an assignment The ASC shall monitor each State’s policies, practices, and procedures and whether the State has adopted and maintained effective laws, regulations, and policies aimed at maintaining appraiser independence

If six months after this law is enacted, there is no national hotline to receive complaints of non-compliance with USPAP and complaints regarding improper influence of appraisers, the ASC shall establish such a national hotline The ASC shall refer complaints to appropriate governmental bodies, including State-appraiser licensing agencies, financial institution regulator, or other appropriate legal authorities The ASC has the authority to follow up complaint referrals to determine status and resolution

67 AVMs Defined as “any computerized model used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer’s principal dwelling.” Automated Valuation Models (AVMs) shall adhere to quality control standards Federal regulatory agencies shall promulgate regulations to implement quality control standards These AVM regulations will be enforced by the Federal financial institution regulatory agencies, the FTC, the BCFP, and State attorneys general

68 BROKER PRICE OPINIONS Defined as “an estimate prepared by a real estate broker, agent, or sales person that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property’s condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model” BPOs may not be used as the primary basis to determine the value of a piece of property for the purpose of a loan origination of a residential mortgage loan secured by a consumer’s principal dwelling

69 SUBTITLE F – SECTION 1474 This section amends the Equal Credit Opportunity Act (ECOA) A creditor must furnish a copy of all written appraisals and valuations, for a loan that is secured by a first lien on a dwelling, promptly upon completion, but in no case later than 3 days prior to loan closing The applicant may waive the 3-day requirement The lender may require the borrower to pay the cost of the appraisal, but must not charge the borrower for the copy of the written appraisal or valuation (including AVMs or BPOs)

70 SUBTITLE F – SECTION 1475 This section amends Section 4 of the Real Estate Settlement Procedures Act (RESPA) If an appraisal is coordinated by an AMC, the standard HUD-1 form may include a clear disclosure of: The fee paid to the appraiser by the AMC The administration fee charged by the AMC Note this says “may include” this disclosure; it does not say “must include”

71 DODD – FRANK WRAP-UP Obviously, there is more to this 2,319 page bill than can be covered in this course. The major appraisal-related reforms have been covered in this summary As the financial institution regulatory agencies promulgate regulations, this promises to be a changing landscape for the next few years The next 12 to 24 months will be very interesting for appraisers and regulators

72 FRB INTERIM FINAL RULE The first major regulation to be promulgated as the result of Dodd-Frank was the interim final rule issued by the Board of Governors of the Federal Reserve System (FRB) This was published in the Federal Register on 10/28/2010 The 60-day comment period on the interim final rule ended on 12/27/2010 This rule implements the Dodd-Frank amendments to the Truth in Lending Act (TILA)

73 LAWS NEED REGULATIONS Typically, after a new federal or state law is passed or amended, there are regulations that must be promulgated in order to implement the law A law is somewhat analogous to a skeleton, and the regulations are intended to put the flesh and muscle on the bones Regulations are typically more specific and detailed than the law they implement Many new regulations will be necessary in order to implement Dodd-Frank

74 INTERIM FINAL RULE Like Dodd-Frank, the interim final rule is lengthy and it is not possible to cover it all here The rule became effective at the end of the 60-day comment period (December 27, 2010) The implementation of the “customary and reasonable fee” portion of the rule was put off until April 1, 2011 We will summarize the appraisal-related provisions of this rule on the next several pages

This rule applies to “covered persons” including: Creditors AMCs Appraisers Mortgage brokers Realtors Title insurers Other firms that provide settlement services

The appraisal requirements specified in this rule apply to: Consumer credit transactions secured by the consumer’s principal dwelling Closed-end loans Home-equity lines of credit (HELOCs) This scope is broader than the FRB’s Appraisal Independence Rules that were promulgated in 2008, because HELOCs are included

77 VALUATION The rule uses the term “valuation” in many places, instead of “appraisal” This term “applies to an estimate of the value of the consumer’s principal dwelling whether or not a person applies USPAP in preparing such estimate.” A “valuation” is prepared by a “natural person” such as an appraiser or real estate agent As such, the term “valuation” would not apply to purely computer-generated AVMs

78 PROHIBITED ACTS Acts or practices that violate appraisal independence include: Causing or attempting to cause the value to be based on a factor other than the independent judgment of the appraiser, through coercing, extorting, colluding with, instructing, bribing, or intimidating a person involved in an appraisal Mischaracterizing or suborning mischaracterization of the appraised value of the property securing the extension of credit

79 MORE PROHIBITED ACTS Seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate a transaction Withholding or threatening to withhold timely payment for an appraisal report or services when the services were rendered in accordance with a contract If these prohibited acts seem familiar, it may be because they are almost identical to the prohibitions that appeared in the old HVCC

80 PROHIBITED A covered person may not provide an appraiser with a “specific value” or “predetermined threshold”, which includes predetermined minimum, maximum, or a range of values This is “substantially similar” to the FRB’s current provisions which prohibit a covered person from “telling an appraiser a minimum reported value of the consumer’s principal dwelling that is needed to approve the loan.”

81 PERMITTED ACTS A person with interest in a transaction (lender, mortgage broker, real estate broker, AMC, consumer, etc.) is not prohibited from contacting an appraiser and asking him or her to: Consider additional, appropriate property information, including additional comparable properties Provide further detail or explanation of the appraiser’s value conclusion Correct errors in the appraisal report

82 COERCION Covered persons are prohibited from engaging in coercion, bribery, or other actions designed to cause anyone to base a valuation of a property on factors other than the person’s independent judgment The FRB final rule states that if a creditor is aware that coercion has taken place, or if the valuer has an interest in the property or the transaction, the creditor cannot engage in the transaction unless the creditor engages in “reasonable diligence” to determine that the valuation is sound

83 CONFLICTS OF INTEREST The rule states that a person who prepares a valuation or valuation management services may not have an interest in the property or the transaction Employment relationship does not, by itself, violate this prohibition A staff appraiser for a lender or an affiliated AMC may prepare valuations for the lender as long as adequate firewalls have been established between loan production and appraisal functions

84 MANDATORY REPORTING A creditor or settlement service provider who has a “reasonable basis” to believe that an appraiser has not complied with applicable laws or USPAP must report the failure to comply to the appropriate state licensing agency. The duty to report is limited to those failures that are likely to affect the value of the property A “reasonable basis” means the person has knowledge or evidence that would lead a reasonable person to conclude that a violation has occurred

The FRB’s rule also implements the “customary and reasonable” rates of compensation for fee appraisers, as specified in Dodd-Frank “…a creditor and its agent must pay a fee appraiser at a rate that is reasonable and customary in the geographic market where the property is located.” This rule specifies two presumptions of compliance (i.e., “benchmarks”); a lender or AMC is required to meet only one of the two

The fee is “reasonably related to recent rates paid for appraisal services in the relevant geographic market”, as long as the lender or agent has: Taken into account specific factors, including, for example, the type of property and the scope of work, and Not engaged in anti-competitive actions under state or federal law, such as price-fixing or restraint of trade

The creditor is presumed to comply if it establishes a fee “by relying on rates established by third party information, such as the appraisal fee schedule issued by the Veterans’ Administration, and/or fee surveys or reports that are performed by an independent third party” Such surveys and reports must not include fees paid by AMCs This language appeared almost verbatim in the Dodd-Frank Act.

88 SUMMARY OF C&R A creditor or its agent (AMC) is required to meet only one of the two benchmarks, which are again: A fee that is “reasonably related to recent rates paid for appraisal services in the relevant geographic market” A fee that is established by relying on third-party information, such as the fee schedule established by the Veterans’ Administration and/or independent fee surveys and reports which exclude AMC fees

89 FINAL WORD ON C&R According to the FRB rule, “a document signed by a fee appraiser indicating that the appraiser agrees that the fee paid to the appraiser is ‘customary and reasonable’ does not by itself create a presumption of compliance…or otherwise satisfy the requirement to compensate a fee appraiser at a customary and reasonable rate.” Lenders and AMCs have already begun asking for such statements in appraisal reports The rule clarifies that such statements do not create a presumption of compliance

90 FRB FINAL RULE This rule contains a number of additional provisions; not all of them pertain to appraisers The “customary and reasonable fees” section has received the most attention from appraisers As we discussed, however, there are other provisions that are just as important This rule contains a number of requirements that are similar or identical to the Home Valuation Code of Conduct; so the spirit of HVCC essentially lives on even though it is no longer in effect

The Dodd-Frank Act also required the federal bank regulatory agencies to issue revised Interagency Appraisal and Evaluation Guidelines; these were released 12/2/2010. The guidelines are intended to replace existing guidance, specifically 1994 Interagency Appraisal and Evaluation Guidelines (FIL-74-94) Financial Institutions Letters FIL , FIL , and FIL

92 WHAT IS INTERAGENCY? According to the Interagency Guidelines document, the guidelines were issued jointly by: Office of the Comptroller of the Currency (OCC) Board of Governors of the Federal Reserve Board (FRB) Federal Deposit Insurance Corporation (FDIC) Office of Thrift Supervision (OTS) National Credit Union Administration (NCUA)

93 REQUIREMENTS The Interagency Guidelines apply mostly to financial institutions; however, some of them apply indirectly to appraisers Borrowers’ ability to repay their loans remains the primary consideration in the lending decision An institution must implement policies and procedures for appraisals and evaluations Examiners will review appraisals and evaluations to ensure they are consistent with the Agencies’ regulations and the institution’s policies

94 INDEPENDENCE The institution should maintain standards of independence between loan production staff and the collateral valuation program Collateral evaluation employees (including those who order and review appraisals and evaluations) should have reporting lines separate from loan production staff Appraisers must be independent of loan production and collection processes Small institutions must demonstrate “prudent safeguards” to ensure independence

95 INFORMATION, PLEASE An institution may “exchange information with appraisers and persons who perform evaluations” including providing the appraiser with a copy of the purchase contract Consistent with the FRB’s final rule, an institution may not “directly or indirectly coerce, influence, or otherwise encourage an appraiser or a person who performs an evaluation to misstate or misrepresent the value of the property.” There are also lists of permitted and prohibited acts

96 PERMITTED ACTS An institution may request an appraiser or evaluator to: Consider additional information about the subject property, or additional comparable sales Provide additional support for the valuation Correct factual errors in an appraisal These permitted acts are consistent with the FRB’s final rule, as well as the now-retired HVCC

97 PROHIBITED ACTS Communicating a predetermined, expected, or qualifying estimate of value, or a loan amount, or target loan-to-value ratio Specifying a minimum value requirement for the property that is needed to approve the loan Conditioning a person’s compensation on loan consummation Failing to compensate a person because the property is not valued at a certain amount

98 MORE PROHIBITED ACTS Implying that the current or future retention of a person’s services depends on the amount of the appraisal or evaluation Excluding a person from consideration for future engagement because the reported market value does not meet a specified threshold Additionally, an institution should not use the threat of reporting a false allegation of USPAP to a state enforcement agency as a method of coercing or influencing an appraiser

An institution should ensure that: The person possesses “education, expertise, and experience” to complete the assignment The work performed by the appraiser is periodically reviewed by the institution The person is capable of being unbiased The person is independent and has no interest, financial or otherwise, in the transaction The appraiser is appropriately licensed or certified (does not apply to evaluations)

100 MORE ON SELECTION An institution or its agent must directly engage the appraiser Under certain circumstances, an institution can use an appraisal prepared for another institution The borrower or loan production staff is not permitted to recommend, select, or engage a person to perform an appraisal or evaluation An institution’s use of a borrower-ordered appraisal violates the Agencies’ appraisal regulations

The Agencies require that an appraisal must: Conform to generally accepted appraisal standards as evidenced by USPAP Appraisal must be an opinion of market value An AVM is not considered an appraisal for these purposes A BPO may not be used as the primary basis to determine the value of a property for the purpose of loan origination of a residential mortgage loan

The Agencies require that an appraisal must: Be written and contain sufficient information to support the institution’s lending decision Analyze and report appropriate deductions for proposed construction, partially leased buildings, non-market lease terms, unsold tract developments Be based on the definition of market value set forth in the regulation Be performed by licensed or certified appraisers

103 REPORTING The Interagency Guidelines state:
USPAP provides various report options, and an option that merely states, rather than summarizes or describes the information, may lack sufficient information and analysis “Generally, a report option that is restricted to a single client and intended user will not be appropriate to support most federally-related transactions.” This appears to prohibit a Restricted Use appraisal report for an FRT

For these transactions, an “evaluation” may be used in lieu of an appraisal: Transaction value equal to or less than $250,000 Business loan with a transaction value of $1,000,000 or less, under certain conditions Involves an existing extension of credit under certain conditions, such as There has been no material change in the market or the property, or No new monies are advanced

105 EVALUATIONS An evaluation must be consistent with safe and sound banking practices An institution should be able to demonstrate that an evaluation provides a reliable estimate of the collateral’s market value A valuation method that does not provide market value is not acceptable as an evaluation For example, a BPO provides a sales or list price, and cannot be used as an evaluation because it does not estimate market value

106 EVALUATION CONTENT An evaluation should, at a minimum:
Identify the property’s location Provide a description of the property and its current and projected use Provide an estimate of the “as is” market value Describe the methods used to confirm the property’s condition, and the extent to which an inspection was performed Describe the analysis performed and supporting information used in valuing the property

An evaluation should, at a minimum: Describe supplemental information considered when using an analytical method or technological tool Indicate all sources of information used in the analysis, including external data sources, property-specific data, photos, description of the neighborhood, and local market conditions Include information on the preparer, such as name and contact information, and signature

108 REFERRALS An institution should file a complaint with the appropriate state appraiser regulatory agency when it suspects that a state certified or licensed appraiser has failed to comply with USPAP or applicable state laws As of April 1, 2011, an institution must file such a complaint An institution must file a suspicious activity report (SAR) with FinCEN (Financial Crimes Enforcement Network) when suspecting fraud

Is this all? No. The guidelines establish many additional requirements for institutions, including: More information on transactions that are exempted from appraisal requirements Use of AVMs for collateral evaluation Loan workouts and restructuring Tax assessment valuations (TAVs) There is also a glossary of terms (Appendix D)

110 Recent Fannie Mae Revisions and Clarifications
SECTION 3 Recent Fannie Mae Revisions and Clarifications

Fannie Mae periodically releases Announcements to inform appraisers and loan originators of changes in FNMA requirements and policies These are similar to HUD Mortgagee Letters Not all of these announcements affect appraisers Can be found at Announcement SEL , released 6/30/10, outlines changes to appraisal-related policies

112 FNMA ANNOUNCEMENT 2010-09 Contents of this announcement:
Appraisal-related changes to Selling Guide Miscellaneous appraisal-related guidance Miscellaneous Selling Guide updates Other updates of non-appraisal related nature We will briefly address the appraisal-related issues in this section of the course.

113 INTERIOR PHOTOGRAPHS Effective 9/1/10, if an appraisal involves an interior inspection of the property, interior photographs are required to be included in the appraisal report Photos are to include kitchen, all bathrooms, the main living area Photos also should include recent remodeling and updates, as well as physical deterioration and deferred maintenance

Lenders are not permitted to arbitrarily change value opinions in appraisal reports If two appraisals are ordered, a lender may not simply average the two values If a lender finds an appraisal to be “deficient”, it has three options: Contact the appraiser to address the problems Obtain a desk or field review of the original appraisal Order a new appraisal

A request for a change in market value must be based on “material and substantive issues” It cannot be made solely on the basis that the value indicated in the appraisal does not support the proposed loan amount If a desk or field review is ordered, it must conform to USPAP and must be completed by licensed or certified appraisers in the state where the property is located A new appraisal must be based on the same level of inspection as the original appraisal

116 APPRAISER SELECTION These changes are considered mostly clarifications, although some minor revisions have been made Appraisers must have geographic competency Fannie Mae does not permit appraisers to obtain such competency during the assignment The lender is responsible for the appraiser’s qualifications and the quality of his or her work The Selling Guide has been updated to clarify that Fannie Mae does not require the use of an AMC; the lender is ultimately responsible for compliance

The appraiser is responsible for selecting appropriate comparable sales If foreclosure sales or short sales are used as comparable sales, the appraiser must: Identify and consider differences Consider the property condition Consider if the property has a stigma The appraiser must conduct proper research, and cannot simply assume that a short sale or foreclosure sale is equal to the subject property

118 VERIFICATION The appraiser must “state the specific data source and refrain from using broad categories, such as ‘public records’.” Some underwriters are interpreting this to mean the appraiser must put the document number and/or the MLS number in the report Regardless of the source, there must be sufficient data to understand conditions of sale, including financing concessions, physical characteristics, and whether the sale was arm’s-length A list of acceptable data and verification sources is provided on page 533 of the Selling Guide

For new construction, an appraiser can use the HUD-1 Settlement Statement from the builder’s file as a verification source for a comparable sale, if the sale is recent and not available from other sources The appraiser must also use one sale located outside the new subdivision, and another sale that can be either in or out of the subdivision The appraiser must verify these other sales from reliable data sources, other than the builder

120 COMMUNICATION An employee of a lender or authorized third party is not prohibited from requesting that an appraiser provide additional information or explanation, or to correct objective factual errors Loan production staff or commission-based personnel may not have “substantive communication” with an appraiser regarding issues that impact valuation It is “incorrect” for the appraiser to indicate that he or she is not permitted to communicate with the lender or AMC to correct errors or to address the lender’s concerns

121 OTHER FNMA ISSUES Sales and financing concessions should be given particular attention to ensure they are accounted for; otherwise an inflated value may result Fannie Mae’s market value definition requires adjustments for special or creative financing or seller concessions of the comparable sales Personal property, including furniture, vehicles, boat docks, or art work may not be part of the security for a single-family mortgage, unless otherwise specified by Fannie Mae

122 1004 MC GUIDANCE The supply of active listings should be based on a specific date in time These numbers should be based on the last day in the applicable period described For example, for the “Current 3-month” period, the number of listings should reflect the last day in the period (this would be the effective date of the appraisal) It is not appropriate to use a cumulative number of listings for these periods This updated methodology is required as of 9/1/10

123 The Future: Take Back Your Profession
SECTION 4 The Future: Take Back Your Profession

124 WHERE WE STAND Now that HVCC is gone, residential appraising will not return to the way it was before; certain aspects of the HVCC will remain in place: HVCC-related revisions to the Fannie Mae and Freddie Mac Selling Guides are not rescinded The FHA prohibition on mortgage brokers ordering appraisals is unlikely to be reversed Millions of dollars have been invested in AMCs; they are not going to give up and go away Structural changes within lending institutions are not going to be undone

125 DECLINING NUMBERS According to the Appraisal Subcommittee, which maintains a registry of state licensed and certified appraisers in the U.S., the number of licensed and certified appraisers peaked in 2007, and has since been in decline. The Appraisal Subcommittee tracks the number of certified and licensed appraisers throughout the country, and updates it regularly The number of certified/licensed appraisers has decreased by approximately 5.5% since 2007, from 121,407 to 114,737

126 IF WE WAIT… Although your course author is not a professional prognosticator, there are some safe bets regarding the appraisal profession and mortgage industry over the next several years: Appraisers will continue to leave the profession until more sustainable numbers are reached, probably in the low ninety-thousands Supply and demand factors will cause fees to reach an equilibrium Who will accept a $150 fee when he or she is booked out for two to three weeks?

Many appraisers are finding themselves at a professional crossroads, as changes in the lending industry have caused many to re-examine their business models. Appraisers who depended heavily on mortgage brokers for appraisal work find themselves scrambling for new sources of business Some appraisers have left the profession altogether

The appraisal profession has historically had little power to effect changes beneficial to the profession and its members – why? Small industry – traditionally less than 100,000 members Lack of unity – no single organization represents the majority of appraisers Interests of the profession often run counter to bigger-money interests, namely the banking and real estate industries

Ways in which the appraisal profession can overcome its power problems: Strengthening existing associations Affiliation with a powerful organization (NAR®) Forming a new association Unionization Each option has inherent problems which would render it unlikely to happen.

130 UNLIKELY SOLUTIONS Strengthening an existing association or forming a new association takes time, money, and large numbers of appraisers participating, which has heretofore proven impossible Affiliation with a large group like NAR® leads to representation problems, plus if appraisers’ interests run counter to the larger organization’s plans… guess who wins? Unionization is unlikely to get enough appraiser members to be effective; appraisers tend not to run in packs

131 CASE IN POINT On March 8, 2010, the Appraisal Institute sent a letter to the Secretary of the Treasury, raising concerns about the use of BPOs in the Home Affordable Foreclosure Alternatives (HAFA) program Citing a growing fraud practice called “flopping”, AI asked the administration to revise HAFA guidelines to prohibit the use of BPOs for valuing properties in short sale situations “Flopping” involves the purchase of short sale properties at artificially low prices using deflated BPO valuations, then re-selling for profit

132 A QUICK RESPONSE NAR® wasted little time in responding to AI’s request letter On March 12, they sent a letter to the Secretary of the Treasury in support of the use of BPOs in valuing foreclosure and short sale properties In their press release, they stated that “an appraisal may not be the best tool” for these transactions They also stated that BPOs are widely accepted in the real estate industry, and there is no evidence that appraisers are less likely to engage in fraud than real estate agents

133 THE CONFLICT This example demonstrates the inherent conflict between what is good for the appraisal profession and the real estate industry The National Association of REALTORS® has over one million members They do have appraisers as members; however, appraisers make up only a small percentage of their membership When these interests conflict, the majority rules Appraisers cannot expect someone to stand up on their behalf if they are unwilling or unable to do it for themselves

134 NEVER SAY NEVER The possibility of the emergence of a large and powerful lobbying force for appraisers’ interests is unlikely, to say the least Of course, there are many who disagree with this statement, so you can never say never The reality is, the appraisal profession lacks political clout And, because it is not a big-money profession, it cannot purchase clout

135 APPRAISAL COALITIONS Appraisal coalitions have proliferated in a number of states These are grass-roots lobbying groups which try to create change at state and local levels Several coalitions have been successful in getting their states to pass AMC legislation, including AZ, IL, and NV To find out if there is an appraisal coalition in your state, visit

136 NOW, A MICRO VIEW If appraisers are unlikely to effect change at a national level, then what? Appraisers can change individually: The way they do business The types of clients they work for The types of services they provide How they market themselves and their services

137 DISCUSSION QUESTION What are some of the changes that an individual appraiser can make to position himself or herself better in the current climate? Be creative.

138 POSSIBLE SOLUTIONS Lower your expenses and overhead
Work for some of the better-paying AMCs Upgrade certification to general and do commercial appraisals Offer other appraisal services, such as appraisal review Work for non-FNMA lenders Develop an appraisal specialty, such as eminent domain Do REO and short sale appraisal work Find non-lending clients, like attorneys or private individuals Do forensic reviews or investigations for state appraisal agencies or lenders Solutions are as varied as the people in this room

Let’s take a closer look at some of the solutions in more depth. Where possible and practical, we will address some of the competency and regulatory issues related to these appraisal specialties.

140 REO AND SHORT SALES Throughout the country, foreclosures and short sales continue to dominate the market Some areas are more active than others, but no area of the country is immune Both foreclosures and short sales provide business opportunities for appraisers Short sales typically need an appraisal before the lender gives approval Small, local banks often order their own appraisals, and do not go through AMCs

141 FANNIE MAE REOs Fannie Mae requirements for REO appraisals include:
As-is and as-repaired values Three listing comparables included, with adjustments Do not use REO sales unless they represent the current market Itemized list of repairs with estimated cost of each Supplemental REO addendum must be included in report

142 HUD REOs HUD REO appraisals are not ordered by lenders or HUD offices; they come from Management and Marketing (M&M) contractors. To find the HUD M&M contractor that is responsible for your state, go to: There are special requirements for HUD REO appraisals, which may be found in Appendix A of HUD Handbook

143 HUD REO REQUIREMENTS Before inspecting the property, the appraiser must be provided with a Property Condition Report from the M&M contractor The M&M contractor is responsible for ensuring the utilities are turned on The intended user of a HUD REO appraisal is the M&M contractor, the lender (under certain circumstances) and HUD/FHA Properties are to be appraised “as-is” Appraiser must provide a repair list, with an itemized cost to cure

144 DIVERSIFICATION Common sources of non-mortgage appraisal assignments include: Relocation companies Trust companies Attorneys State highway agencies Utility companies REO companies Private individuals

145 COMPETENCY ISSUES Many of these types of assignments require specialized knowledge and skill sets. Assignments for highway departments require competency in eminent domain work, and familiarity with standards and guidelines (assignment conditions) issued by state and federal agencies. Assignments for attorneys may involve expert witness testimony, which makes some appraisers uncomfortable.

These types of assignments typically require advanced skills. During the recession, the number of relocations decreased significantly, making these assignments more scarce. Worldwide ERC revised the report form for relocation appraisals; this form was released in May 2010 Additional information is available on the Web at

147 NEW ERC FORM The new ERC Summary Appraisal Report form is now 7 pages long The old 2003 version of this form was retired as of 12/31/2010 Changes to the form were intended to keep up with changing market conditions and USPAP reporting requirements The 7 months between the form’s release and its mandatory use was intended to allow software vendors to make the form available

148 EMINENT DOMAIN Eminent domain appraisal assignments are diverse, challenging, and potentially lucrative. Highway departments, airport authorities, and utilities often engage appraisers Property owners (condemnees) and their attorneys also engage appraisers Appraisers must be aware of any laws and/or regulations that apply in the development and reporting of these appraisal assignments Remember also the COMPETENCY RULE

149 DIVORCES AND ESTATES Attorneys and private individuals often engage appraisers for these types of assignments. Many of these appraisals are on typical, non-complex single-family homes, and require no special competency However, for non-complex properties, the attorney or owner may hire the low bidder Expert testimony may (or may not) be required Be wary of situations when the attorney assures you that testimony will not be required – before you even undertake the assignment

150 MARKET VALUE Many litigation appraisal assignments have market value as their objective. Be sure to use the definition of value (market or otherwise) that is appropriate for the assignment Many courts and jurisdictions have their own definition of market value USPAP requires you to cite the source of the definition in your report Use of the pre-printed definition from the Fannie Mae URAR form is not appropriate

151 PRIVATE INDIVIDUALS Assignments for private individuals may require patience and the ability to explain appraisal issues and standards to people who have limited (or no) understanding of appraisal practice Even if private individual clients like your work, they may not have any follow-up business to give you Diversification is not a panacea It may be difficult to replace all your traditional mortgage lending work with appraisals from other sources

152 FORENSIC REVIEWS The term “forensic” has several meanings; its most common involves the establishment of facts or evidence in a court of law. As our society becomes more litigious, lawsuits against appraisers are filed regularly In appraisal cases, both plaintiffs and defendants need experts to prepare reports and testify These experts are usually appraisers with an advanced knowledge of USPAP, appraisal theory, and techniques

153 STATE AGENCY REVIEWS Many states use certified appraisers as reviewers or investigators when pursuing disciplinary cases against appraisers. Find out if your state is one of them These assignments generally pay very well A high level of knowledge and good expert witness skills are a must Some states do not require their reviewers to follow STANDARD 3 of USPAP As a bonus, you are helping the profession

154 Summary: Best Practices for Maintaining Your Professionalism
SECTION 5 Summary: Best Practices for Maintaining Your Professionalism

In summary, rather than provide a list of negative exhortations (“Don’t do this, don’t do that”), we believe it is preferable to provide positive reinforcement. The next five slides highlight some appraisal “best practices.” These can help appraisers improve business and income, cultivate new business opportunities, protect an ethical reputation, and limit professional liability.

Treat your ethical reputation like what it is – your most important professional possession You have only one reputation – it takes years to nurture and build it, but just one bad decision to destroy it Never compromise your ethics for an appraisal fee, or the promise of future appraisal business Avoid cutting corners for low-fee clients Associate yourself with professionals; rightly or wrongly, we are judged by the company we keep

157 2. BE A PROFESSIONAL If you wish to be treated as a professional, you must look and act the part Dress and conduct yourself professionally Continuously improve your knowledge and skills Treat other appraisers as professionals, even though they may be your competition Bad-mouthing another professional to a client or member of the public is not how a professional should act

As stated previously, there are non-lender clients out there who really want to know what a property is worth These assignments often require more knowledge and specialized skills To many clients, ethical and competent performance is more important than a low fee or a fast turn-around time Find these clients – it may take some searching – and cultivate opportunities to service them

159 4. KNOW USPAP USPAP sets forth ethical standards and performance requirements for appraisers This is the “measuring stick” that is used in judging whether an appraiser’s work meets the recognized standards of the profession If you complete every assignment in compliance with USPAP, you will be able to defend yourself against whatever is thrown your way USPAP knowledge can be a gateway to other opportunities, such as forensic appraisal or review work

160 5. GET INVOLVED Appraisers often grouse about a perceived lack of ethics by their peers, but are unwilling to do anything about it except complain If you receive an appraisal report you believe to be fraudulent or misleading, turn it over to the appropriate authorities If you are competent in appraisal review, contact your state enforcement agency and offer your services as a reviewer or investigator We cannot expect anyone else to keep our professional “house” clean – we must do it ourselves

161 THE END Thank you for being a McKissock student!
Please fill out the evaluation form. We value your input! We hope you enjoyed the course, and if you have any questions, please don’t hesitate to call us at


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