The current excess of appraisers is the inevitable result of cyclical forces.

The ups and downs persist due to the interaction of the five forces of friction:  practices, standards, education, regulation, and client expectation.

These five frictions reinforce and shield each other.  They tag-team a rampart against risk/valuation reform, bank safety, and movement toward unbiased and un-prejudiced results.

Of the five frictions, only a new, enlightened regulatory approach to public policy will make a difference.  Only FFIEC and related influential government agencies can make a difference.  What will this take?

Regulations are decided by administrative agencies.  But a “regulatory body” is made up of people with varying levels of competency and intensity.  The people behind the curtain of appraiser and “alternative” industry schemes themselves have but two groupings of competency.  One group of regulators has no real appraisal credential (other than as a reviewer/user).  The second group (of regulator individuals) have the same traditional obsolete education as other appraisers.  An  education which continues to emphasize a subjective approach: “pick comps,” “make adjustments,” and venture an “opinion.”

Legislators have no credentials, so must rely on regulators, with little or no valuation experience.

Thus, the legislators rely on regulators, in turn who rely on those trained in traditional, history-based appraisal education.  As currently enforced, required education has backward-looking, history-confined goals, procedures, and requirements.  The result is a whole complex, convoluted system that is outdated and obsolete, detached from today’s data/computation/logic-based/forecasting methods.

Current (outdated) education and quasi-governmental ‘standards’ (e.g. GSE’s) require opinion, not analytic results.  Current education/regulations require a mythical point-value, based on an questionable definition of market value. Perfect as a pro-cyclical mythical “value.”  Value is not price.  Value is not cost.  Thus, we have accusations of bias.

Contrarily:

Modern technology and econometric competence provide scientifically reproducible results.  Results which may be duplicated, audited, and objectively risk-scored.

Today’s technology and intelligence methods can provide many public policy benefits.  These include:

• Economic cycle moderation (moderation of the current “excess” of appraisers);
• Long-term (and ‘black swan’) risk loss inclusion in banking portfolio policy;
• Regular asset revaluation (current-value accounting) bank management;
• Appraiser diversity by discarding master-apprentice model of learning;
• Valuation unbiasedness, via objective analysis, not good intentions;

Outdated appraiser education leads the “frictions” parade.

Teachers in their 60’s, teach what they learned 30 years prior with material which had been written by other teachers 40 years prior to that.  Using structured turn-the-page class workbooks and teacher outlines ‘updated’ every 5 to 10 years, with no modern science of data even mentioned.  No probability, no risk measure, no reliability analysis.  Just a point value.  A point number opinion.  A ‘most probable’ value, where no probability function is even attempted.  Nor opined.  None.

No risk/reliability assessment – the one very thing users, auditors, and the public really need

This is the very thing needed for public policy, for bank safety, for economic stability, for diversity, for analytic (and personal) unbiasedness – continues to be blocked by obsolete education.  Entrenched education and appraisal practice as enforced by 60 or 70 disparate federal agencies, state agencies, and quasi-governmental controlled ‘GSE’ corporations.

The “excess of appraisers” is a result, not a cause of pro-cyclical policy.

Counter-cyclical policy must include modern, data-science based education and software.  It must include forward-looking forecasting to include long-term risk evaluation – not backward-looking of prior ‘market’ prices.

Over-regulation ensures stale and mired appraisal education.

(The next “Analogue Blog” installment will consider regulatory possibility, and some specific ideas).

We can defeat market dives every 12 to 15 years.  We can!