Calling the current residential appraisal system "impaired," the National Association of Homebuilders (NAHB) has issued a white paper recommending improvements to "produce more credible valuations under all economic circumstances."
A Comprehensive Blueprint for Residential Appraisal Reform was produced by an Appraisal Working Group formed by NAHB in 2012. The paper maintains the current appraisal system suffers from "inconsistent and conflicting standards and guidance; inadequate and uneven oversight and enforcement; a shortage of qualified and experienced residential appraisers; and the absence of a robust and standardized data system."
The Group addresses the need for reform in four areas:
- Regulatory Framework and Oversight
- Data & Technology
- Professional Standards
- Practice, Process and Procedures
The paper says the current regulatory structure was constructed piecemeal. It consists of the Federal Financial Institutions Examination Council (FFIEC) which oversees state regulations, maintains the National Registry certified and licensed appraisers and monitors and reviews operations of the Appraisal Foundation (TAF), a private, non-profit organization.
TAF funds and oversees the Appraisal Standards Board (ASB), the Appraisal Qualifications Board (AQB) which establishes education and examination requirements for state certification and the recently formed Appraiser Practices Board (APB) which develops, interprets and amends the Uniform Standards of Professional Appraisal Practice (USPAP).
The paper recommends replacing this structure with a system which would establish ethics and uniform standards, monitor state appraisal boards, set licensing, certification, and educational requirements, support educational and training programs, create policies to ensure appraiser independence and establish a standards body to set data and technology standards.
Current appraisal reports were not designed to be read by anyone other than the lending institution that ordered the valuation "and potentially create more confusion than clarity." The Group suggests a website that would detail the appraisal process, practices, and procedures and cites the need for a redesigned report that is simpler, easier to read, and considers the information needs of all interested parties in real estate transactions.
While states should retain the primary responsibility for certifying and overseeing appraisers and their work and conducting any enforcement actions, federal policy should dictate that disciplinary actions are meted out in a consistent manner. States must have an independent appraisal board funded by license activities and fines which states may not commingle with general funds; board chairpersons must be appraisers.
Data and Technology
NAHB says that U.S. real estate is the largest asset class in the world and it is astounding that so little is known about it, especially in real time. A modern real estate data infrastructure must include mandatory registry of all real property with a unique identifier and a single data standard. There must also be a data exchange for real estate transactions that recognizes the existence of the mortgage-backed securities (MBS) markets.
Today appraisers generally obtain data from local Multiple Listing Services (MLS) and public record data and verify information with parties to the transaction. In recent years, MLS data has become less reliable and more recent efforts by the government sponsored enterprises (GSEs) and their regulator to aggregate data have been criticized as not being an open universally accessible database.
NAHB recommends the development of a "real estate data superhighway" that would consist of the following entities:
- A national real property registry (Terra.gov) which would serve as the official record of the structure and constraints of the land including land use, zoning and easements, condo documents, and new construction data and would incorporate green components in the data standards. Time stamped photographs, satellite images, floor plans, and other exhibits would be in permanent archives. The data would be available to any registered purchaser, securitizer or servicer.
- A National Collateral Valuation Repository (NCVR) would provide a transparent view into national property values in real-time replacing house prices indices that measure a limited number of markets with at least a six month lag time. Reporting of all real estate transactions would be mandatory in all jurisdictions. A National Property Identifier (NPID), once calculated, would be clear and globally unique.
- Real Estate Exchange (REX), a not-for-profit data exchange consortium comprised of commercial and private data providers and sources would promote the use of Interactive Valuation Models and other leading edge technologies to produce more credible appraisal reports and build risk engines based upon the open exchange of information.
- A standards body should be established with responsibility for setting the guidance for data and technology standards, ensuring that systems are adaptable and flexible.
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."
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.
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.
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.
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.
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.
Practices, Processes and Procedures
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.
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.
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.
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.
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.
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.
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.
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.