About the author: Charles Baker is a president of AppraisalPros.com, Inc. based in Pasadena, CA. He is a certified-residential appraiser in Pasadena, CA, and specializes in high-end & custom residential property throughout Southern California. He has been practicing for over 20 years as an independent fee appraiser as well as staff & contract review appraiser for Foster-Ousley, Appraisal Enhancement Services, Hansen Quality and others.
Capitalizing on the vision of the Dodd/Crowley IVPI Proposal, this paper sets forth a working blueprint, an operational model for appraisal ordering, delivery, review and oversight.
By design, this blueprint seeks to accomplish the following:
Establish a universal appraisal ordering & delivery gateway - Reward quality
- Punish coercion
- Establish an effective rating system
- Provide flexibility in appraiser/client interaction
- Incorporate regulatory oversight, and
- Ensure compliance with the HVCC to “promote and preserve the Public Trust inherent in professional appraisal practice.”
The Home Valuation Code of Conduct as promulgated by the NYAG/GSE Agreement dated March 3, 2008 sets forth the establishment of the Independent Valuation Protection Institute (IVPI). By now, most appraisers have familiarized themselves with the HVCC agreement and the IVPI and have read and/or participated in the discussion.
I believe the mandate of the IVPI is to ensure compliance with the HVCC; to establish a framework and set of guidelines for appraiser-client interactions, appraisal ordering & delivery and regulatory oversight.
Bottom line, the IVPI can and should govern as a universal set of principals for all appraisers and end-users, whether they be GSE’s, private equity, estate, tax, or personal use.
As envisioned, an IVPI Certified Appraisal Report (ICA) will be the “gold standard” for HVCC compliance all the way through the supply chain from ordering to delivery.
The opinions expressed here are my own. My intention here is to get appraisers thinking about the mechanics of a solution . . . to put a "handle" on what so far is a nebulous and "slippery" concept and move the debate forward.
IVPI Appraisal & Review System
A plan for restoring
confidence in appraisals
(a white paper)
Dated: April 23, 2008
Charles Baker
AppraisalPros.com, Inc.
The IVPI Order Gateway
The IVPI Order Gateway, a secure on-line appraisal ordering application, will be the single point of contact to originate appraisal request.
Any licensed appraiser may join the panel to accept orders through the Gateway, subject to a review of qualifying criteria. A baseline IQS will be established for new panel members. (See IQS discussion below.)
A lender, client, M/B, TPO (third party originator), or end user creates a client account on the IVPI Gateway. (Client is used hereinafter to refer to all the above.) Lender supplemental standards are populated during account creation and communicated to the appraiser when the order is submitted to the Gateway. Client may create multiple sets of supplemental standards depending on the requirements of the end-user. Once the client account is created, all appraisal orders originate on the Gateway.
Client may select any of the following methods to order an appraisal depending on GSE, underwriting or regulatory requirements; ranked by level of transparency from most to least:
- Open-selection (legacy) method.
- Insta-panel method.
- Blind-firewall method.
By allowing the client to choose the method of appraiser selection, the Gateway can serve as a truly universal ordering and delivery portal adaptable to any appraiser-client relationship, intended user or intended use, while preserving the HVCC mandate.
Each method is detailed below:
1) Open selection (legacy) method. Client may contact & engage appraiser of his/her choice in a direct, open and competitive selection process.
- Benefits – existing business relationships are retained; appraiser / client interaction affords opportunities to discuss details of an assignment, educate clients & promote their services.
- Drawbacks – most susceptible to coercion & undue influence.
- Rebuttal to drawbacks – The client may require a greater review ratio for appraisals ordered using this method depending on end-user or GSE requirements. As with any method, appraisers may report coercion to the IVPI telephone hotline or through the Gateway, resulting in a “flagged” order and mandatory audit.
2) Insta-panel method. Client is given the ability to create an instantaneous, open & visible panel “on the fly” by querying the master appraiser database using a variety of selection criteria. The query generates an “Insta-panel”, a list of 5 appraisers that fit the client’s criteria. The client may accept the results of the query and select the panel, or reject it and perform another query based on the same or different set of criteria. Selection criteria may consist of performance based criteria, i.e.: cumulative IQS, average turn-time, borrower survey results, etc.; physical criteria, i.e.: location or proximity to property; fee schedule criteria; or education and experience based criteria, i.e.: designation, degree, CE hours, years experience, specialty experience, etc. For example, the client sits down and runs a query for an appraiser in zip code 91101 with 10 or more years experience with multi-family income appraisals ranked by fee (from highest to lowest). The client may choose that panel, or reject it and generate another panel. The client may also select an individual appraiser and create a panel built around the criteria that most closely matches the qualifications of the selected appraiser. By doing so, the client has a 1 in 5 chance their preferred appraiser will receive the assignment. But if not, the client can be assured the appraiser chosen will represent their needs.
- Benefits – independent selection of the appraiser is preserved as mandated by the HVCC while instilling a sense of control over the selection process on the part of the client.
- Drawbacks – the client loses control over individual appraiser selection.
- Rebuttal to drawbacks – client can “shop” appraisers and chose a panel of 5 that most closely matches his/her criteria. All communications to take place through the IVPI Gateway and will become a permanent part of the assignment record.
3) Blind order placement. Client is given limited or no selection criteria. Assignment is routed to the appraiser on a rotational basis. Client has no control over the selection of fees, experience, proximity or IQS of the appraiser or sub-set of appraisers and is at the mercy of the IVPI selection methodology. IVPI Gateway takes control of the screening, selection & placement of the order.
- Benefits – provides the greatest level of independence and lowest possibility for pressure.
- Drawbacks - most restrictive. Possible fair trade infringements/anti-trust issues. Prone to accusations of favoritism, manipulation, kick-backs, etc. on the part of appraisers, whether founded or not. Experienced appraisers will neither be helped nor harmed, but attempts to “level the playing field” by eliminating competition will stifle excellence and independence - true barometers of an effective HVCC. Established business relationships will suffer.
- Rebuttal to drawbacks – none.
I believe the most effective balance between the “firewall” mandate imposed by the HVCC and the preservation of established business relationships can be obtained by method #2, the “Insta-panel.”
Using methods #1 and #2, the client may view the IVPI quality score (IQS), average turn-time, geographic coverage area and list of fees, and other criteria of an individual or “panel” of appraisers. List may be sorted and organized by any criteria.
After the appraiser or “Insta-panel” is selected, the order is finalized and transmitted to the Gateway. As a condition-precedent to finalizing the order, the client must expressly agree to abide by terms of the Letter of Engagement and Broker Certification stipulating the client did not engage in improper appraiser influence or pressure to report a predetermined value, or violate USPAP. Appraiser may report undue pressure or influence through the IVPI Gateway at any time during the progress of the assignment or at any time thereafter.
Order is routed to appraiser for acceptance. Appraiser may accept, decline, or negotiate for a change in terms (price, turn-time, etc.) If appraiser is selected via method #1, IVPI will not interfere or monitor negotiations and they may take place via phone, email, in person, etc.
If appraiser is selected via methods #2 or #3, all communications must take place through the Gateway and are captured and retained with the file for audit purposes. Client will not know who the individual appraiser is during order assignment and negotiations.
The appraiser may, at any time, report an incidence of undue influence, coercion, etc. on the part of the client. An incident report will be transmitted to the IVPI and routed to the local review office. The report will be automatically flagged for review.
Method and delivery of payment for services will depend on which approach to appraiser selection is ultimately adopted. However, under all scenarios the client will ultimately be liable for payment. As a condition-precedent to the establishment of an IVPI account, the client must have an electronic form of payment on file: a credit card, Paypal account debit account, etc.
It is not the intent of this proposal to regulate fees. As is the case currently, appraisers compete on quality, price & turn-time. By rewarding quality first and foremost, this plan does not seek to interfere or act as an arbiter of fees.
The IVPI Quality Score (IQS)
Each appraiser on the IVPI panel will be tracked using a cumulative quality score: the IVPI Quality Score or IQS (see below). If the appraiser’s cumulative IQS falls below 2.5 (out of a possible 4.0) for example, he/she will not appear on the client’s panel (under ordering method #2, above) and will be removed from rotation (under ordering method #3). The score is computed using a weighted monthly average with the most recent work receiving the greatest weight. Scores older than one year will be excluded from computation of the IQS, but will remain with the file indefinitely. (These are suggested time frames only.)
How does tracking the appraiser’s IQS benefit the client and discourage coercion?
- Just as a higher FICO credit score benefits the borrower with more favorable loan terms, an appraisal report prepared by an appraiser with a high IQS will benefit the client with lower fees and/or more favorable discount points, etc. Currently, a typical rate sheet contains a schedule of conforming & jumbo loan limits, loan fees, interest rates and costs based on the borrower’s FICO score. A rate sheet under the new IVPI will also contain a schedule of loan fees, discount points or other incentives based on the appraiser’s IQS.
- If the score of the appraisal being ordered comes back equal to or greater than the appraiser’s cumulative IQS, the client is awarded the incentive. If not, the incentive is revoked.
- Clearly, the impetus for selecting an appraiser (or “panel” of appraisers) with a high IQS is greater than the incentive for using an appraiser (or “panel”) that might be susceptible to pressure or coercion. If a client chose an appraiser with a lower IQS in the hopes that he/she might be susceptible to pressure it would be costly both to the client and the appraiser. The client would lose the discount or incentive and the appraiser might expose him/herself to a poor review.
- Incentives for using highly rated appraisers also accrue to the borrower as the possibility of incurring additional expenses for a field review upgrade would be reduced.
- Finally, the client benefits by using highly rated appraisers with respect to his/her ability to advertise & solicit business at favorable terms. Good for business all the way around.
IVPI Audit & Review Network
A network of satellite review appraisers will be established nationwide anchored by a regional review management team in each of the 100 largest MSA’s in the country. Each management office will also be staffed by a full or part-time representative from the state’s appraiser licensing board, ensuring regulatory authority and oversight on site.
Completed appraisals will be routed through the IVPI “back office” for review before delivery to the client. Identity of reviewer will be withheld from the client until delivery of the appraisal and review together. The review will be transmitted to the appraiser immediately upon completion for comment and/or rebuttal.
The appraisal / review “pipeline” will be limited to: appraisal, review, rebuttal & response. The appraiser will be given one opportunity to rebut the review and/or revise the report. The reviewer’s conclusion is final and the appraiser’s IQS will reflect the appraiser’s final work-product. In other words, the initial review may be rated a 1.5, for example, but upon receiving a satisfactory response, the reviewer may revise the score upwards. The appraiser’s IQS is populated with the final score only and the initial score is dropped.
Appraisers who fall out of the IVPI panel due to low IQS may do one of more of the following – take & pass IVPI approved coursework, wait until the IQS “weighting” is revised upwards due to the passage of time (as older scores are weighted less), accept assignments ordered by method #1, “direct selection (legacy) method”, or other remedial action.
A suggested IQS methodology follows (based on the Foster-Ousley and Hansen Quality rating system):
- 4.0 – REVIEW SUMMARY: CONCUR WITH VALUE: The appraisal report is complete and consistent with logical analysis and provides good support for the value conclusion. Appraisal conforms to USPAP without significant deficiencies or discrepancies.
- 3.0 – REVIEW SUMMARY: CONCUR WITH VALUE: The appraisal report contains minor discrepancies or deficiencies that do not have a significant effect on the value conclusion. Overall, the report conforms to USPAP.
- 2.0 - REVIEW SUMMARY: LOWER ESTIMATE OF VALUE: The appraisal report contains several deficiencies or discrepancies in violation of USPAP and clearly dictated a cut in value of between 5 and 10%.
- 1.0 - REVIEW SUMARY: LOWER ESTIMATE OF VALUE: The appraisal report contained numerous deficiencies or discrepancies in violation of USPAP and clearly dictated a cut in value of between 10 and 20%.
- 0.0 - REVIEW SUMMARY: LOWER ESTIMATE OF VALUE: The appraisal report contains major deficiencies and discrepancies in violation of USPAP and clearly dictated a cut in value of greater than 20%.
Review stages:
- Review Stage #1: Each report is audited for compliance with client-specific supplementary standards and USPAP by a licensed appraiser (licensed in the state where the property is located.) If the auditor/reviewer discovers obvious compliance issues, he/she may refer the report for further review - either a desk or field review. If the report is satisfactory, the report is scored either a 3.0 or 4.0.
- Review Stage #2: A representative sample of reports are referred to review, depending on lender-specific guidelines which might be a random sample of, say 20% of all reports, 20% of all reports per appraiser, or other ratio. All reports submitted by an appraiser whose cumulative IQS is 2.0 or below will subject to review. Reviews are to be conducted by licensed appraisers (licensed in the state in which the property is located) and based in the MLS coverage area where the property is located.
- Review Stage #3: A desk review may be upgraded to a field review if reviewer is unable to “score” the report. Reviewer to notify client via email or through Gateway. Client may elect to proceed with field review, or may choose to stop and accept the desk reviewer’s review report “as-is” resulting in an incomplete and unusable review report (and no IQS credit to the original appraiser.)
- Review Stage #4: A field review may be triggered under one of the following scenarios: a) referral from a Stage #1 auditor; b) a Stage #2 supplementary-standard, or c) a Stage #3 field review upgrade.
- Review Stage #5: If at any time during Stages 1–4 an auditor / reviewer has reason to believe significant USPAP violations have occurred the appraiser and report will be referred to the state regulatory liaison staffed at the regional review office for further action.
Completion & delivery of report
Upon completion of audit and/or review, the following occurs:
- Appraisal and review report(s) delivered to client
- Appraiser’s cumulative IQS is updated with score of current report.
- Client is notified if the IQS of the appraisal report met or exceeded the cumulative IQS of the appraiser. If so, the client is awarded the incentive and/or discount points. If not, the incentive is revoked. For example, if the appraiser turns in a 2.5 report and their cumulative IQS up till that point was 3.0, the client loses the incentive. It’s likely the appraiser loses future business from that client as well.
- The VPI Vault is populated with original order, all written correspondence, original appraisal, review appraisal and any/all rebuttals & rebuttal responses.
- Borrower receives notification of completion of appraisal & review. Borrower completes a short on-line survey regarding the timeliness, professionalism, courtesy, etc. of the appraiser. Once completed (and all fees are confirmed as paid), borrower is presented with a link to download the report(s). If no review was done, borrower notification occurs upon delivery of appraisal to client.
IVPI Insurance & buy-back
The IVPI will insure appraisals and offer buy-back provisions in the event of appraisal-related losses. Such provisions to be scaleable based on level of review (audit, desk or field) and the IQS of the report. For example: appraisals that have been subject to the scrutiny of a full field review will be insured to a greater extent with the fewest of exclusions as compared to those subject only to an audit. In addition, appraisals receiving the highest score will be eligible for greater insurance protection. Appraisals subject only to an audit will receive the lowest level of insurance.
The IVPI Insurance Protection to be underwritten by a nationwide insurance guarantee corporation. The IVPI portfolio of insured products (appraisals) will be audited on a quarterly basis by Fitch, Moody’s, etc. Insurance rates to be adjusted accordingly.
The IVPI may elect to perform post-funding reviews of its own volition to boost its rating and lower rates.
IVPI Corporate Structure
The establishment of the IVPI Gateway, appraiser panel management and the review network; the development of policies & procedures; and the establishment of a regulatory oversight framework will require a substantial commitment from the GSE’s, federal & state governments and from appraisers. A private or quasi-public for-profit model is deemed the most favorable to facilitate raising capital, recruiting qualified reviewers, management and IT personnel and retaining a qualified board of directors. A few thoughts on the IVPI corporate structure:
- Organized as a publicly traded company; traded on the OTC exchange.
- Free to go to the marketplace and raise capital.
- Every IVPI panel appraiser & reviewer given right to purchase 1000 shares of preferred stock at $0.20 par value (for example.) If 20,000 appraisers signed up nationwide this would provide an influx of $4,000,000 in start-up capital.
- Additional ownership incentives for appraisers – i.e.: stock options, vesting, etc.
- Board of directors to be elected by shareholders, to consist of a mix of licensed appraisers and business leaders.
- Preferred stockholders to be given preferential voting rights.
- Dividends paid to shareholders.
- A public company will be better positioned to compete against current and prospective appraisal management solutions.
- Quarterly audits by outside insurance rating agency (favorable ratings likely to positively impact stock price benefiting appraisers / shareholders, etc.)
Conclusion
The goal of this proposal is to establish the IVPI Certified Appraisal (ICA) report as the industry standard - certified as compliant all the way through the “supply chain” from ordering to completion.
As appraisers, we now have a window of opportunity to create & implement a real solution to the problems of the past. This “white paper” is a collection of my ideas, my vision to create a system for producing the best appraisals and most competent appraisers in history.
The choice is ours to make:
THE PAST THE FUTURE
Pressure & Coercion Independent & Unbiased
Incompetence Quality first
“Skippy” Professional
Puppet Expert
Cut throat fees Just & fair compensation
Public suspicion & scorn Deserving of the Public Trust
Thank you for reading.
About the author: Charles Baker is a president of AppraisalPros.com, Inc. based in Pasadena, CA. He is a certified-residential appraiser in Pasadena, CA, and specializes in high-end & custom residential property throughout Southern California. He has been practicing for over 20 years as an independent fee appraiser as well as staff & contract review appraiser for Foster-Ousley, Appraisal Enhancement Services, Hansen Quality and others.
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