Government regulations should serve the public trust.  How can this not work?

Being government is not easy.  There are always trade-offs.  Sometimes, new regulations can solve problems; at other times they can embed old problems, or beget unintended consequences. Government regulations, by their very nature, can bog down progress.

Regulations follow some general principles regarding regulation of professions.  One such principle for  public protection and licensing is the need to reduce destructive price competition, where competence/quality/ethics and reputation should be prime drivers.  Licensing then allegedly assures professional competence.

A specific reason for appraiser licensing was the perceived bias of appraisers, in response to pressure from lenders for higher values to make loans.  New regulatory requirements for education, experience and standards generally replicated education and standards requirements of the main two real property professional organizations (now merged as the Appraisal Institute).  But licensing and enforcement was delegated to the states.  The state ‘boards’ in turn attempt to enforce subjective opinion ‘credibility’ (worthy of belief) standards as if they are hard statutes.  Effectiveness and fairness of state administrative enforcement is irregular, and is potentially in conflict with some state constitutions.  The current Appraisal Subcommittee is hamstrung in that the only real tool over state boards is to preclude all ‘federally-related loans.’

Licensing fees are a form of tax on appraisers performing valuations.  They place standards, education, ethical requirements, and a financial burden on appraisers.

On the other hand, competing valuation services (“automated” models, evaluations, broker price opinions, and appraisal waiver loans) are relatively free of taxes and bureaucratic burdens.  Only appraisers face a direct threat of loss of the ability to earn a living.  All these non-appraisal valuations provide a faster, lower price product, but with a lesser reliability (higher risk).  Current regulations, fees, and enforcement place a huge market disadvantage on actual appraisals done by appraisers, while subsidizing non-appraisal valuation competitors!

Regulation, well-intended, has helped perpetuate:

• Outdated appraisal practices, vulnerable to bias;
• A dearth of evolving, science/evidence-based education;
• Passive obstruction to transparent, reproducible valuation;
• Standards incompatible to analytic risk/reliability appraisal scoring.

Oversight of financial/bank collateral practices in the past 25 years has failed to disable the self-destruct nature of our lending and financial practices – when considered in the macro context.

Regulation places a legal, paperwork, bureaucratic overlay on the milieu of habits, standards, groupthink, client expectations, curriculum, and unregulated or ‘differently’ regulated valuation products and services.

In this series we have focused on the five frictions:  process, standards, education, client expectation, and regulation.  These frictions, jointly and separately impede the development of valuation processes focused on the true needs of clients and the public trust.

Regulations, waivers of regulations, and entire industries (AVMs and AMCs) have developed as workarounds to the simple basic process of valuation.  The embedding of these workarounds has also prevented improvements in the safety and sensibleness of our collateral risk world.

The segmentation of the valuation industry by product type neglects a basic fact:  all valuation follows a straightforward, and identical path:

• Data collection
• Predictor selection
• Predictive algorithms
• Results communication

Valuation ‘chores’ at each step are identical regardless of the provider.  For each and every step, the only issue is who does it and what tools do they decide to apply.

The next and last in this series details each of the four fundamental ‘chores’ of valuation.  And it will present the simple and doable key to truly answering the question:  How do we serve the public trust?

It may be that new and enlightened regulation is the only answer.  The old has failed.