Among those testifying at a hearing of the House Committee on Financial Oversight's subcommittee on Insurance, Housing, and Community Opportunity were William B. Shear, director, Financial Markets and Community Investment, Government Accountability Office (GAO) and Sara W. Stephens, president of the Appraisal Institute.  Shear restated GAO's earlier recommendations that federal regulators set minimum standards for registering Appraisal Management Companies (AMC) before a hearing on Thursday while Stephens countered that non-congressionally mandated regulations are threatening to hamstring and jeopardize the real estate appraisal profession altogether.

Shear presented results of a GAO study on appraisal oversight which confirmed that appraisals remain the most popular form of property valuation used by Freddie Mac, Fannie Mae (the GSEs) and major lenders.  While other valuation methods such as broker opinions and automatic valuation models (AVM) are quicker and less expensive, they are also considered less reliable and are not generally used for loan originations.   While GAO did not capture data on the prevalence of approaches used to perform appraisals, the sales comparison approach is required by the GSEs and FHA and is reportedly used in nearly all appraisals.

Charges of conflict of interest have changed the ways in which appraisers are selected and raised concerns about the oversight of AMCs which often manage appraisals for lenders, GAO said.  The Dodd-Frank Act reinforced earlier requirements and guidance about selecting appraisers and prohibiting coercion and this has encouraged more lenders to turn to AMCs.  This in turn has raised questions about the oversight of these firms and their impact on appraisal quality.

Federal regulators and the enterprises said they hold lenders responsible for ensuring that AMCs' policies and practices meet their requirements but that they generally do not directly examine AMCs' operations.  Some industry participants voiced concerns that some AMCs may prioritize low costs and speed over quality and competence. The Dodd-Frank Act requires state appraiser licensing boards to supervise AMCs and requires other federal regulators to establish minimum standards for states to apply in registering them. Setting minimum standards that address key functions AMCs perform on behalf of lenders could provide greater assurance of the quality of the appraisals those AMCs provide GAO said, but as of June 2012, federal regulators had not completed rulemaking for such standards.

The Appraisal Subcommittee (ASC) established in 1989 by the Title XI of the Financial Institutions Reform, Recover, and Enforcement Act (FIRREA) has been monitoring the appraisal function but its effectiveness has been limited by several weaknesses which include failing to both define the criteria it uses to assess state compliance with Title XI and the scope of its role in monitoring the appraisal requirements of federal banking regulators.

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. Not having appropriate policies and procedures is inconsistent with federal internal control standards that are designed to promote the effectiveness and efficiency of federal activities.

Appraisals and other types of real estate valuations have come under increased scrutiny following the mortgage crisis and Dodd-Frank codified several requirements for the independence of appraisers and expanded the role of ASC.  It also directed GAO to conduct two studies which were the source of Shear's testimony before the committee.

GAO recommends that federal regulators consider key AMC functions in rulemaking to set minimum standards for registering AMCs, that ASC clarify the criteria it uses to assess states' compliance with Title XI of FIRREA and develop specific policies and procedures for monitoring the federal banking regulators and the Appraisal Foundation.  ASC and regulators are either taking steps to implement these recommendations or considering doing so.

Although she was not speaking directly to the GAO report, Stephens in a written statement told committee members that, although appraising is the most heavily regulated activity within the mortgage and real estate sectors, regulatory agencies are planning to enact further changes that would threaten to tie the hands of appraisers, curtail innovation and increase regulatory burdens on appraisers and financial institutions.

Stephens was testifying directly against The Appraisal Foundation's creation of a new Appraisal Practices Board delving into appraisal practice matters without Congressional authorization. The Foundation does not have authority to codify appraisal methods and techniques, she said, and called it a dangerous and unjustified move.  "The regulatory burden for appraisers is on the cusp of being expanded exponentially."

"Appraisal methods and techniques require judgment by the appraiser. It is assumed that the appraiser has been thoroughly trained to judge appropriate situations. The choice of methods and techniques are the responsibility of the appraiser in the development of his/her scope of work" she said. For instance, whether to use reproduction cost or replacement cost or when and how to adjust for sales concessions are dependent on the actions of the marketplace and should not be mandated by a body such as the Appraisal Practices Board. Hard "rules of thumb" do not work within valuation because there always is an exception to the rule, she said.

The Appraisal Institute offered a long list of recommendations to Congress including that they

  • realign the appraisal regulatory structure with those of other industries in the real estate and mortgage sectors
  • Protect the independence of the appraisal standards-setting process and require that standards for federally related transactions be issued by an entity that does not develop or offer education for appraisers.
  • Establish limitations around the Appraisal Practices Board specifying that no tax dollars be used to fund the venture, voluntary guidance be truly voluntary, and meaningful oversight over the de facto regulatory action of the Foundation be established.
  • Reiterate that the Foundation does not have legislative authorization in the area of "methods and techniques" and "appraiser education."
  • Authorize the GSEs and other agencies to halt purchase or guarantees of loans in states that maintain deficient appraiser regulatory regimes and ensure that ongoing federal support for the GSEs or any replacement maintains consistent appraisal rules.

The Institute said states should be restricted from codifying voluntary guidance into state law or regulation and the Appraisal Standards Board prohibited from specifically referencing its works within the Uniform Standards of Professional Appraisal Practice and laws should be established to empower state boards to investigate and prosecute complaints involving appraisers.