While several less expensive alternatives exist, traditional appraisal reports are still required for nearly all residential loan originations. Recent legislation and regulations have required stepped-up oversight of the appraisal industry, though regulators have yet to implement many of the requirements. But regulators are being pressured to move forward with increased oversight of appraisal management companies.
Valuations obtained through broker price opinions and automated valuation models take less time and are less expensive than appraisal reports.
But appraisals are the most commonly used valuation method for first-lien residential mortgage originations because of their greater reliability.
So the Government Accountability Office has conducted a study to address increased scrutiny of real estate valuations in the wake of the recent mortgage crisis. The study, RESIDENTIAL APPRAISALS – Regulators Should Take Actions to Strengthen Appraisal Oversight, was released Thursday.
Data for the report was obtained from Fannie Mae, Freddie Mac and five of the biggest mortgage lenders.
Nearly all appraisal reports utilize the sales comparison approach, which bases the property value on recent sales of similar properties. Fannie, Freddie and the Federal Housing Administration all require the use of comparable properties in appraisals.
AMCs have become more prevalent as a result of regulations that prevent conflicts of interest in the appraiser selection process. But increased use of AMCs has raised questions about AMC oversight and their impact on appraisal quality. Of concern to some is that AMCs might give more priority to low costs and speed than to quality and competence.
Federal regulators, Fannie and Freddie say they hold lenders responsible for ensuring that AMCs’ policies and practices meet their requirements. But lenders generally aren’t directly examining the operations of the AMCs they use.
The GAO explained that the Dodd-Frank Wall Street Reform and Consumer Protection Act requires state appraiser licensing boards to supervise AMCs. The law also requires federal banking regulators, the Federal Housing Finance Agency and the Consumer Financial Protection Bureau to establish minimum standards for states to apply in registering AMCs.
But as of this month, the GAO said federal regulators had not completed rulemaking to set state standards.
Dodd-Frank expanded the role of the Appraisal Subcommittee — which oversees state appraiser regulatory programs, monitors the requirements addressing appraisal standards for federal financial institutions, maintains a National Registry of State certified and licensed appraisers, and monitors and reviews operations of the Appraisal Foundation. But the Appraisal Subcommittee has been hindered in meeting its responsibilities under Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 by several weaknesses.
“For example, ASC has not clearly defined the criteria it uses to assess states’ overall compliance with Title XI,” the report said. “In addition, Title XI charges ASC with monitoring the appraisal requirements of the federal banking regulators, but ASC has not defined the scope of this function — for example, by developing policies and procedures — and its monitoring activities have been limited. ASC also lacks specific policies for determining whether activities of the Appraisal Foundation (a private nonprofit organization that sets criteria for appraisals and appraisers) that are funded by ASC grants are Title XI-related.”
The GAO noted that it previously recommended consideration by federal regulators of key AMC functions in rulemaking to set minimum standards for registering these firms.
