The body of a letter to the U.S. House Committee on Financial Services about systems reform.
Appraisal reform or Appraisal industry reform? It is critical to understand that ‘appraisal’ does not equal ‘valuation’, or risk analysis, or anything else. It is a precise definition of a nebulous product.
The current U.S. House Committee on Financial Services is asking the question: “What’s Your Home Worth? A Review of the Appraisal Industry.”
I believe it is critical that there be clarity on what an ‘appraisal’ is and what it is not. The definition is revealed in the (Congressionally mandated) standards of the Appraisal Foundation, under the Appraisal Subcommittee. What is not an appraisal may be called a valuation, an evaluation, a Broker Price Opinion, an AVM (Automated Valuation Model), a CMA (Competitive Market Analysis), or even the homeowner’s opinion.
An ‘appraisal’ is precisely defined in USPAP (Uniform Standards of Professional Appraisal Practice).
Appraisal practice is provided only by appraisers, while valuation services are provided by a variety of professionals and others.
To review the industry, it is important that the Committee distinguishes between the various valuation services. The only thing that counts in the long run is long term risk – to homeowners, consumers, taxpayers – from the next (current?) economic downturn.
And now, Fannie Mae is intending a ‘bi-furcated’ valuation, where the licensed/certified appraiser is relieved of the responsibility of inspecting and quantifying the property. A second, non-licensed person goes into the home, takes pictures, and makes only ‘factual’ observations about effective age, obsolescence, safety issues, adjacent influences, remodeling, maintenance, and other elements of appeal. The partial-scope appraiser simply sits at a desk, and enters the data provided into the proposed new form. Presumably a non-licensed, unregulated ‘inspector’ can be hired by the lender to do the viewing much faster and cheaper. This concept appears to be a hybrid of service partly by an appraiser, and partly by “others”.
No one views the comparable sales. No one observes neighborhood nuances.
What is important for the public trust is risk. The risk that consumers and homeowners will again lose their homes. That taxpayers will again pay the price of ignoring the risk of the “black swan” – the inevitable downturn in the economy, and in home prices.
The Appraisal Foundation was “Authorized by Congress as the Source of Appraisal Standards and Appraiser Qualifications.” The intent of USPAP is to promote and maintain a high level of public trust. Given the worst real economic turndown (ten years ago) since the great depression, it appears this experiment failed. Homeowners and consumers suffered. Some perpetrators gained immensely, with the artificial playing field allowing them to game the system for their own gain. Few of them suffered repercussion or penalty.
What is missing, I believe, are some simple underlying truths and needed policy:
- Market price does not equate to property value, even in the short run.
- Property price is a small part of the collateral security equation.
- Collateral risk requires more:
-
- Reliability measures for every valuation (by appraisers or others);
- Fundamental value to replace the mis-named “market value”;
- Revaluation on an annual basis — easily accomplished given data science technology.
The loan appraisal ‘profession’ has been decimated. Layers of regulation place a burden on appraisal that is not placed on other forms of valuation. Innovation has been stymied in the same manner. AMCs (Appraisal Management Companies) succeed when they are able to employ the cheapest, fastest bidder — who hits the required number in an ongoing manner. Integrity and ethics have no value.
And this is perhaps my main personal issue—I teach modern data science methods to appraisers. The bureaucratic hoops necessary to teach one class in the United States require 54 state/province approvals, plus the Appraisal Foundation. This requires about 120 separate and different ‘approval’ forms. Sometimes months are required for the state boards to meet and grant approval.
Each jurisdiction requires forms and fees. Total fees for one class, for two years, is over $7,000, requiring some 70 separate payments. Administrative burden to start and continue ‘approval’ to teach a single class costs several times this amount.
Education provided by of our professional organizations has been reduced to teaching for money. Innovation and research in valuation data science is effectively halted.
There is resistance to change on many fronts. It may require a clear public policy to effect the change. A change enabled by the merge of technology and human competence.
The solution is prognostic:
- Judgment based, point-value “market value” appraisals have limited future usefulness;
- Automated, bifurcated, “kinda-sorta-appraisals” give partial collateral results, and higher risk;
- The answer is the proper blend of computer/algorithmic power and human input/competence.
It is my hope that the Subcommittee on Housing, Community Development and Insurance consider long-term impact. The existing regulatory burden, a proven failure, may insure a repeat of the past.
Thank you for reading.
George Dell, SRA, MAI, ASA, CRE, Appraisal Foundation certified USPAP Instructor.
June 19, 2019 @ 2:49 am
Nice article but another example of preaching to the choir. We appraisers know our profession is in jeopardy, and we can do very little about it. We have to abide by USPAP but lenders do not, even though at one time they thought they wanted to. No all they want is a quick dollar amount put on a property that a “millenium” buyer is purchasing, “quick, quick before I change my mind an go to a different bank that has better coffee coupons on their website” is the thinking. The GSE backing the loan will take it in the shorts again, as will the taxpayer when foreclosures hit the fan…after all, why should the GSE’s care? It’s not really their money they are handing out like free candy samples, it’s the taxpayers, and Congress does not care, they just want to appease the lenders, who want to appease the buyers, and the Realtors are loving it. They get to have a share in valuing a property that they list and sell, remember the adage of the fox guarding the hen house? Oh well, I just hope that I’ll still be around when the next big wave of foreclosures comes…2008 all over again!
June 19, 2019 @ 6:27 am
For many years the mortgage industry has not permitted appraisers to have a staff licensed appraiser trainee complete the inspection portion of the appraisal and then turn it over to the certified appraiser for analysis. Now they are pushing to have non-licensed individuals who need no other qualification other than completing a two hour on-line webinar do the measuring, photographing, and reporting of condition and market characteristics of a property. To the best of my knowledge, they still will not allow a licensed trainee do the inspection for the appraiser. IMO his is another step towards getting experienced appraisers and certified appraisals completely out of the residential mortgage transaction process.
Fannie says they still want experienced appraisers to complete the analysis but I question that position. Will that analysis be composed of filling out a grid with C-4s, Q-3s, and arbitrary numeric “adjustments” with no basis in fact? Will number hitters prevail in the new system? Or will the analysis portion of the report require that the appraiser show the data and methodology used to determine value? Time will tell.
If the appraisal profession is to prevail in the long run it is time to press the GSEs and mortgage conglomerates on a set of standards for the future. Otherwise, the profession will become obsolete, at least in the mortgage arena. It may already be too late. Where is the Institute, the Foundation, the Society, RAC, and others who represent residential appraisers? It’s time to step up and be part of the process instead of allowing the GSEs and mortgage industry to ride roughshod over the profession.
June 22, 2019 @ 5:29 am
Nice letter George. Albeit, I think bifurcation is an improvement. Appraisers are analysts. We should only do the analysis part of the valuation. The inspectors I have hired over the years are WAY more qualified than appraisers to tell all about the subject. As always, people automatically assume the worst people will be doing a job. Maybe better people will be doing the job:) as fir residential, as you write in one of your articles on the subject, if 95% of reports hit the sale price or higher, why would anyone pay a $1 for an Appraisal when they already know the answer for free! The 5% ‘at risk’ is easy to self-insure with the fees saved on the 95%.