NAHB Calls for Broad Reform of Appraisal System

by devteam February 21st, 2013 | Share

Calling the current residentialrnappraisal system “impaired,” the National Association of Homebuildersrn(NAHB) has issued a white paper recommending improvements to “produce morerncredible valuations under all economic circumstances.”  </p

 ArnComprehensive Blueprint for Residential AppraisalrnReform was produced by an Appraisal Working Grouprnformed by NAHB in 2012.  The paper maintains the current appraisal system suffers from “inconsistent and conflictingrnstandards and guidance; inadequate and uneven oversight andrnenforcement;rna shortage ofrnqualified and experienced residentialrnappraisers;rnand the absence of a robust and standardized data system.” </p

The Group addresses thernneed for reform in four areas:</p<ul class="unIndentedList"<liRegulatory Framework andrnOversight</li<liDatarn& Technology</li<liProfessional Standards</li

  • Practice, Process and Procedures</li</ul

    Regulatory Framework</p

    Thernpaper says the current regulatory structure was constructed piecemeal.  It consists of the Federal FinancialrnInstitutions Examination Council (FFIEC) which oversees state regulations, maintains thernNational Registry certified and licensed appraisers and monitors and reviews operations ofrnthe Appraisal Foundationrn(TAF), a private, non-profit organization.</p

    TAFrnfunds and oversees the Appraisal Standards Board (ASB), the AppraisalrnQualifications Boardrn(AQB) which establishes educationrnandrnexamination requirementsrnfor state certification and the recently formed Appraiser Practices Board (APB)rnwhich develops, interprets and amends the Uniform Standards of ProfessionalrnAppraisal Practice (USPAP). </p

    The paper recommends replacingrnthis structure with a system which would establish ethics and uniformrnstandards, monitor state appraisal boards, set licensing, certification, andrneducational requirements, support educational and training programs, creaternpolicies to ensure appraiser independence and establish a standards body to setrndata and technology standards.</p

    Currentrnappraisal reports were not designed to be read by anyone other than the lendingrninstitution that ordered the valuation “and potentially create morernconfusion than clarity.”  The Group suggestsrna website that would detail the appraisal process, practices, and proceduresrnand cites the need for a redesigned report that is simpler, easier to read, and considers therninformation needs of all interested parties in realrnestate transactions.rn</p

    While states should retain thernprimary responsibility for certifying and overseeing appraisers and their workrnand conducting any enforcement actions, federal policy should dictate that disciplinary actions are metedrnout in a consistent manner.  States must havernan independent appraisalrnboard funded by licensernactivities and finesrnwhich states may not commingle with general funds; board chairpersons must be appraisers.rn</p

    Datarnand Technology</p

    NAHB says thatrnU.S. real estate is the largest asset class in the world and it is astounding that so little is known about it, especially inrnreal time.  A modernrnreal estate data infrastructure must include mandatory registry of all realrnproperty with a unique identifierrnand a singlerndata standard.rn There must also be a data exchange forrnreal estate transactions that recognizes the existence of the mortgage-backedrnsecurities (MBS) markets.</p

    Todayrnappraisers generally obtain data from local MultiplernListing Services (MLS) andrnpublic record data and verify information with parties to the transaction. rnIn recent years, MLS data has becomernless reliable and morernrecent efforts by therngovernment sponsored enterprises (GSEs) and their regulator to aggregate data have beenrncriticized asrnnot being an open universally accessiblerndatabase.</p

    NAHB recommends the developmentrnof a “real estate data superhighway” that would consist of thernfollowing entities:</p<ul class="unIndentedList"<liArnnational real property registry ( which would serve as the officialrnrecord of the structure and constraints of the land including land use, zoningrnand easements, condo documents, and new construction data and would incorporate green components inrntherndata standards. Timernstamped photographs, satelliternimages, floor plans, and other exhibits would be in permanentrnarchives.rnThe data would be available to any registered purchaser,rnsecuritizer or servicer.</li<liA National CollateralrnValuation Repository (NCVR) would provide a transparentrnview into national property values in real-time replacing house prices indices that measure arnlimited number of markets with at least a six month lag time.rnReporting of all real estate transactions wouldrnbe mandatory in allrnjurisdictions. A National Property Identifierrn(NPID),rnonce calculated,rnwould be clear and globally unique.</li<liReal Estate Exchange (REX), arnnot-for-profit data exchange consortium comprised of commercial andrnprivate data providers andrnsources would promote the use of Interactive ValuationrnModels and other leading edge technologies to produce more credible appraisalrnreports and build risk engines based upon the open exchange of information. </li<liArnstandards body should bernestablishedrnwith responsibility for setting the guidance for data and technology standards,rnensuring that systems arernadaptable and flexible. </li</ul

    Professional Standards</p

    At present USPAP is the generally accepted appraisal standard and is required for appraisers in federally related transactions and by State Appraiser Certification and Licensing Boards; federal, state, and local agencies; appraisal services; and appraisal trade associations.  However many appraisers do not fully grasp USPAP and it has changed every two years since 2006. “It is a complex document that often conflicts with practical application.”</p

    Appraiser career and educational paths are not clear and the number of credentialed appraisers is down significantly.  Appraiser licensing and credentialing is another area of concern.  At present the AQB sets minimum credential standards. Some states establish more stringent standards and are consequently not inclined to approve reciprocal licenses.</p

    The paper recommends a clear and simple road map of professional standards with a clear and practical path for attaining training and skills, education and credentials. Colleges and universities should offer programs that allow a student to graduate with a degree that satisfies the educational component for a licensed appraiser and mentorship programs should be available.  There are areas of expertise in appraising that minimum licensing requirements do not address and appraisal guidelines should be developed in areas such as new construction.</p

    A clear path to obtain a license with mandatory recertification every five years would address the complaint that the current stock of appraisers is not well trained or well educated.  A recertification program should be subject to continuing education, reexamination and peer review. A background check should be required annually and a record of disciplinary actions should be available to anyone engaging an appraiser.  Reciprocity should be automatic provided the appraiser license status is in good standing.  </p

    In establishing standards, the key principles in USPAP should be reaffirmed but standards must be streamlined to be clear and readily understood. They should be broadly written and best practices developed delineating minimum reporting requirements.</p

    USPAP is currently a copyrighted document. It should be available universally online free of charge in a searchable format, as well as in hard copy.  The objective should be to clarify, simplify, and illuminate.</p

    Practices, Processes and Procedures</p

    GSE form reports have essentially transformed appraisers into form fillers. The GSE’s rules tend to short circuit the flexible application of USPAP standards and lenders have created overlay rule sets that have exacerbated the problem.</p

    Appraisal theory posits three approaches to value-Cost, Income and Sales Comparison but two of these were diminished when the GSEs began to require only the Sale Comparison Approach.  This contributed considerably to the real estate bubble. The practice of asking appraisers to produce a single point of value is also fundamentally flawed.</p

    Many have argued that the definition of market value should be reexamined. The flaws in the definition went mostly unnoticed during stable economic times, but there remain problematic defects. The definition resides in a regulatory vacuum, devoid of monitoring and with archaic appraisal practices that reinforce the reporting of sale price rather than market value.</p

    The white paper says that establishment of a single set of rules is paramount. The GSEs’ de factor appraisal authority must be eliminated and a reformed regulatory framework should develop a single set of rules accessible through a web portal with new reporting requirements, templates and guidance.</p

    All three approaches to value should be considered based on the scope and type of project. There also should be a re-examination of the definition of market value and appraisers should be asked to report a range of values which would promote appraiser independence.</p

    The industry should promote the use of Interactive Valuation Models (IVM).  One of the advantages of the Internet is access to large datasets, yet current appraisal practices dictate that appraisers report very limited data. IVMs would introduce the concept of large dataset analysis, when possible.</p

    The paper suggests rethinking the role of the appraiser – does the inspector need to be the same person as the appraiser and the analyst?  Require appraisals to be ordered at the time of application, not near the end of the process.  There should also be a timely dispute resolution process that allows borrowers to appeal appraisals that do not meet USPAP standards or are based on inaccurate data or assumptions.</p

    The paper concludes that the current patchwork appraisal system cannot continue indefinitely.  A key consideration must be to establish stability and restore confidence in the system that determines the value of mortgage collateral.

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  • About the Author


    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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