Thanks to Dave Towne of Towne Appraisals for sending this document:
Per the Dodd-Frank law, the General Accounting Office (GAO) was required to produce a report concerning appraisals. It has been released. You can access a copy at this link: http://www.gao.gov/new.items/d11653.pdf
What GAO Found
Data GAO obtained from the enterprises and five of the largest mortgage lenders indicate that appraisals—which provide an estimate of market value at a point in time—are the most commonly used valuation method for first-lien residential mortgage originations, reflecting their perceived advantages relative to other methods. Other methods, such as broker price opinions and automated valuation models, are quicker and less costly but are viewed as less reliable and therefore generally are not used for most purchase and refinance mortgage originations. Although the enterprises and lenders GAO spoke with do not capture data on the prevalence of approaches used to perform appraisals, the sales comparison approach—in which the value is based on recent sales of similar properties—is required by the enterprises and the Federal Housing Administration and is reportedly used in nearly all appraisals.
Recent policy changes may affect consumer costs for appraisals, while other policy changes have enhanced disclosures to consumers. Consumer costs for appraisals vary by geographic location, appraisal type, and complexity. However, the impact of recent policy changes on these costs is uncertain. Some appraisers are concerned that the fees they receive from AMCs—firms that manage the appraisal process on behalf of lenders—are too low.
A new requirement to pay appraisers a customary and reasonable fee could affect consumer costs and appraisal quality, depending on how new rules are implemented. Other recent policy changes aim to provide lenders with a greater incentive to estimate costs accurately and require lenders to provide consumers with a copy of the valuation report prior to closing.
Conflict-of-interest policies, including HVCC, have changed appraiser selection processes and the appraisal industry more broadly, which has raised concerns among some industry participants about the oversight of AMCs. Recently issued policies that reinforce prior requirements and guidance restrict who can select appraisers and prohibit coercing appraisers. In response to market changes and these requirements, some lenders turned to AMCs to select appraisers.
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 for appraiser selection, appraisal review, and reviewer qualifications but that they generally do not directly examine AMCs’ operations. Some industry participants said they are concerned that some AMCs may prioritize low costs and speed over quality and competence.
The Act places the supervision of AMCs with state appraiser licensing boards 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 AMCs. A number of states began regulating AMCs in 2009, but the regulatory requirements vary. Setting minimum standards that address key functions AMCs perform on behalf of lenders would enhance oversight of appraisal services and provide greater assurance to lenders, the enterprises, and others of the credibility and quality of the appraisals provided by AMCs.
Because appraisals provide an estimate of market value at a particular point in time, they are affected by changes in the housing and mortgage markets. In recent years, turmoil in these markets has heightened attention on residential property valuations, and appraisals in particular. The prominent role of appraisals in the mortgage market underscores the importance of efforts to better ensure appraisal quality. HVCC, the Act, and federal banking regulator guidance have sought to address some of the factors that can affect appraisal quality, including appraiser independence and compensation. In addition, the enterprises are undertaking an initiative to collect detailed and standardized appraisal data that could provide them with greater insight into appraisal practices for the mortgages they purchase.
Partly in reaction to appraiser independence requirements, lenders have increasingly relied upon AMCs to perform certain functions. Despite the increased use of AMCs, direct federal oversight of AMCs is limited because the focus of regulators is primarily on lenders, and state-level requirements for AMCs are uneven, ranging from no laws to laws with specific standards for registering with the state. Some appraisal industry participants have raised concerns that the management practices of some AMCs may be negatively affecting appraisal quality.
Among the areas of concern are AMCs’ practices for key functions, including selecting appraisers for assignments, reviewing completed appraisal reports, and establishing qualifications for appraisal reviewers.
The federal banking regulators have emphasized the importance of these functions in guidelines that apply to lenders’ appraisal functions. The Act requires the federal banking regulators and other federal agencies to set minimum state standards for registering AMCs, which provides an opportunity for the regulators to address these areas of concern and promote more consistent oversight of these functions, whether performed by lenders or AMCs. Doing so could help to provide greater assurance to lenders, the enterprises, and federal agencies of the quality of the appraisals provided by AMCs.
Recomendation for Executive Action
To help ensure more consistent and effective oversight of the appraisal industry, we recommend that the heads of FDIC, the Federal Reserve, FHFA, NCUA, OCC, and the Bureau of Consumer Financial Protection— as part of their joint rulemaking required under the Act—consider including the following areas when developing minimum standards for state registration of AMCs: criteria for selecting appraisers for appraisal orders, review of completed appraisals, and qualifications for appraisal reviewers.
Click HERE for the complete GAO Report