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Appraisal reform: who will call the shots?

Congressman Doug Barnard took the issue of appraisal reform into the big leagues under his watchful eye in Washington. His retirement from Congress leaves room for someone new to shepherd through the many changes that are still unwinding in the wake of the extensive legislative reforms.

It has been said that good appraisers are like good baseball umpires: the best ones do their jobs quietly and competently. Chances are if you notice them, it's because of a bad call.

Remarkably enough, three years after passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), the same can be said of appraisal reform. For although many important technical issues still await resolution, the biggest problems anticipated when the act was being debated--widespread appraiser scarcity, huge fee increases and regulator overkill--have by and large not materi- alized since passage. And, if the effects of these sweeping reforms haven't been so noticeable in a negative way by now, then perhaps the reforms represent a good call by the key players that pushed through this major overhaul of the appraisal system.

Much of the credit for this apparent success goes to a former banker, retiring U.S. Congressman Doug Barnard (D-GA), who, as chairman of the Subcommittee on Commerce, Consumer and Monetary Affairs of the House Government Operations Committee, crafted, negotiated and oversaw passage of FIRREA's Title XI--the real estate appraisal section of the statute.

Title XI's impact on the appraisal industry has been massive and unprecedented. In just three years since enactment, the number of the nation's state licensed and certified appraisers totals more than 60,000. State licensing and certification of appraisers is one of the requirements established by the statute.

Congressman Barnard's lengthy involvement with the issue of appraisal reform has led directly or indirectly to a revolution in the appraisal regulatory bureaucracy, resulting in more than 50 state, territorial and district appraisal boards, a non-profit Appraisal Foundation and the Appraisal Subcommittee (ASC). The Appraisal Subcommittee, an arm of the Federal Financial Institutions Examination Council (FFIEC), oversees implementation of Title XI on both the state and federal levels.

"We wanted this to be a state-driven system, consistent with how other professions are regulated," explained Peter Barash, former Barnard aide and currently president of Peter Barash Associates in Washington, D.C. "On the other hand, we wanted to create as much uniformity as possible, in recognition of the fact that these are national markets."

"It's true that this is a many-headed creation," added Edwin (Ted) Baker, executive director of the Appraisal Subcommittee. "It's clearly a state-federal partnership, and without the states working to keep it going, it could close down completely."

Barnard's oversight continues to contribute mightily to a smooth regulatory transition. The depth of the Congressman's interest and involvement with the appraisal reform issue has caused many to wonder what will happen once his retirement from the House takes effect in January. A significant number of important technical issues remain to be resolved. And while the regulatory framework created by Title XI was constructed specifically to handle these issues, the absence of Barnard's interest and oversight may leave a leadership void that no one else in Congress has the inclination to fill.

"There definitely will be a void," said David Bunton, executive vice president of the Appraisal Foundation. "|Barnard~ has been THE proponent of appraisal reform since the 1980s. It is important for the appraisal profession to have contacts on the Hill."

"|Appraisers~ need a good opportunity to expose members to the issues in a positive way," added Barash, who now represents appraisal firms. "We are aware we need to find advocates."

Will appraisal reform succeed?

Whereas prior to the Uniform Standards of Professional Appraisal Practice (USPAP) and Title XI, the lender had only to know the requirements of its supervisory/insuring agency or investing company to determine what qualifications an appraiser should have, today's picture is vastly different. As the diagram in Figure 1 illustrates, there are many players in the appraisal regulatory structure--a great number of whom either did not exist or had little to do with appraisals just three short years ago.

"This is a patchwork quilt," noted Baker.

The sheer number of new players and issues begs an answer to the question of "who calls the shots?" The ASC, as coordinator of the reform effort, is the natural candidate on administrative issues, but it must answer first to its controlling members--the Department of Housing and Urban Development (HUD) and the members of the FFIEC. The Appraisal Standards Board (ASB) and the Appraiser Qualifications Board (AQB) are the natural candidates on technical appraisal issues, but they lack enforcement power. Fannie Mae, Freddie Mac, HUD and VA, being the most experienced, are the natural candidates on lending-related appraisal issues, but they are not formally tied into the Title XI regulatory enforcement loop.

Thus, for the time being, troubling technical issues remain to be resolved for which everyone has an opinion, but no one has an authoritative answer.

Reform background--federal

While the work of the vast majority of appraisers has been done quietly and competently, a sufficient amount of evidence of faulty and fraudulent appraisals in the mid-1980s led Chairman Barnard's subcommittee to conduct a series of hearings and to conclude that poor quality appraisals were directly responsible for more than one-quarter of all bank and thrift failures at the time. In addition, Barnard's subcommittee determined that faulty and fraudulent appraisals were a factor in more than three-quarters of all failures.

Congressman Barnard's hearings, summarized in 1986 in a two and one-half inch thick, 1,828 page subcommittee report, led the Georgia lawmaker to conclude that legislative action was needed. This attention, in turn, led the appraisal industry to conclude that it needed a self-regulatory organization (SRO), similar in scope to the Financial Accounting Standards Board (FASB), to set minimum standards for the industry. "Once the spotlight of Congress shown down on the industry, the appraisers decided it was time they got their own house in order," explained Bunton.

In 1987, eight major appraisal trade groups, along with the Mortgage Bankers Association of America (MBA), the American Bankers Association (ABA), and the former U.S. League of Savings Institutions formed the Appraisal Foundation, which operates today as the appraisal industry's SRO. The foundation supports two boards--the Appraisal Standards Board, which promulgates the Uniform Standards of Professional Appraisal Practice and the Appraiser Qualifications Board, which sets minimum acceptable experience, education and examination standards for states to follow when licensing and certifying appraisers.

The Appraisal Foundation, the AQB and ASB solicit feedback from a wide range of experts. Funded initially through dues and donations from its original members, the foundation is now a sponsorship organization funded primarily through its education and publication sales efforts and by federal grants from the Appraisal Subcommittee.

The Appraisal Subcommittee, was created by Title XI to serve an enforcement and oversight function in tandem with the Appraisal Foundation. The ASC is comprised of representatives appointed by members of FFIEC, as well as the Resolution Trust Corpo- ration (RTC) and, following the 1989 HUD Reform Act, HUD. In addition to overseeing state legislation, the ASC was charged with the role of coordinating federal agency enforcement regulations.

"The |statute~ assigns the ASC the role of 'monitoring,'" explained Baker. "I don't know if Barnard expected the ASC to take more responsibility, but I can't believe but that he did."

"I think," he continued, "there are issues |temporary practice, minimum experience for licensed appraisers, reciprocity and so forth~ which as we get closer to implementation, the ASC will find it has to decide on."

Initial confusion

In late 1990, as required by Title XI, the Federal Reserve Board (Fed), National Credit Union Administration (NCUA), Office of Thrift Supervision (OTS), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC) and RTC (together known as the federal banking agencies) issued essentially uniform appraisal regulations. These were mandated by Title XI in order to enforce lender adherence to minimum appraisal standards.

Initially, these regulations were met with confusion in the lending industry--particularly by mortgage banking subsidiaries of banks and thrifts who had traditionally adhered to secondary market appraisal standards. These regulations included supplemental standards that differed from those of HUD, the Department of Veterans Affairs (VA), Fannie Mae and Freddie Mac. Among these differing requirements were a 12-month sales history on the subject property, a certification of compliance with USPAP and a detailed examination of each of the three approaches to value--market, income and cost.

On HUD and VA loans, where the lender is not in control of who performs the appraisal, compliance with these standards was particularly difficult. However, in mid-1991, at the urging of MBA, the banking agencies agreed to exempt government-insured, Fannie Mae and Freddie Mac loans from their appraisal rules. This decision marked a major step in easing the regulatory transition for supervised mortgage bankers and their correspondents.

HUD had planned to publish similar regulations sometime in early 1992, incorporating USPAP, but did not do so, in part due to a controversial provision in the draft regulations unrelated to Title XI, which would implement Section 322 of the Cranston-Gonzalez National Affordable Housing Act of 1990. Section 322 instructed HUD to allow lenders to select their own qualified appraisers for Federal Housing Administration (FHA)-insured loans. Despite the fact that this provision was enacted in November 1990, as recently as August 1992 HUD had yet to even propose an implementing regulation.

HUD's Office of the Inspector General, in its Semiannual Report Number 26, dated September 30, 1991, went so far as to ask Congress to repeal Section 322, arguing that its implementation "would result in the end of HUD's rotational assignment of appraisers.

"Without this rotational assignment," the report advised Congress, "there is little protection of the government interest, and the Department of Veterans Affairs could no longer accept HUD value determination for converting loans for VA financing."

HUD's reluctance to implement Section 322 is illustrative of a larger technical issue that threatens to plague lender compliance with Title XI. This concerns interpretations of the concept of "appraiser independence."

Appraiser independence

While Title XI makes it clear that appraisers must be qualified, accountable and not subject to inappropriate pressure from lenders, it is unclear precisely how this maxim should be enforced. HUD and VA, for the time being, control the fee appraiser selection process directly, resulting in lender frustration when these appraisers produce minimal quality work. Fannie Mae and Freddie Mac, meanwhile, expect lenders to select top quality appraisers based on a thorough due-diligence review of the appraiser's experience and qualifications.

The Title XI banking agency regulations go further, however. These regulations require that only a supervised lender (a lender who is directly supervised by one or more of the federal banking agencies) or its agent "directly engage" the appraiser. This language is unclear and interpretations differ. To the extent that federal regulators narrowly interpret the term "agent" and broadly interpret "directly engage," supervised lenders must do all the work necessary to order and obtain the appraisals backing loans they purchase from independent mortgage bankers.

Interpretations on this and other issues related to the federal banking agency appraisal regulations differ from agency to agency and from region to region. When encountered, the Appraisal Subcommittee staff recommend that lenders bring interpretation and enforcement inconsistencies to the attention of their trade group(s) and/or the Appraisal Subcommittee, so they can be resolved.

De minimus: loophole or distraction?

The most contentious issue surrounding the implementation of Title XI is the question of de minimus transaction values--values below which obtaining a formal "appraisal" performed by a state licensed or certified appraiser is not required under federal banking agency regulations.

These agencies initially set the de minimus at $15,000, raised it to $50,000 and then, with the exception of the NCUA, raised it to $100,000. The ABA, on one side, insists the $100,000 de minimus level is necessary in order to provide banks, particularly small banks in rural areas, with the flexibility to do loans in areas where there are too few licensed or certified appraisers. The Appraisal Institute, a national appraiser trade association, on the other hand, has sued the FDIC over its $100,000 de minimus rule, contending it violates Title XI, threatens safety and soundness and exempts more than half the residential real estate in the nation from minimum appraisal requirements.

The Consumer Federation of America, a national network of 240 regional, state and local consumer advocacy groups, has supported the Appraisal Institute's contention with surveys and reports indicating that appraisal reform is not a burden to consumers or banks, and that a $100,000 level holds grave safety and soundness implications for banks and thrifts.

Congressman Barnard has been an outspoken critic of the de minimus concept as well, stating in an October 31, 1991 appearance before an ASC state regulators' conference that the "market valuation" alternative to an "appraisal" on transactions of less than $100,000 "totally guts the statute." HUD, VA, Fannie Mae and Freddie Mac have similarly indicated an unwillingness to consider allowing anything less than a fully qualified appraisal on all but some refinance transactions.

The de minimus argument is compounded by Title XI and regulatory requirements that mandate the use of certified, as opposed to licensed appraisers, on "complex" residential properties. "Complex" is defined as "atypical," but making the determination of what is "atypical" is found by many lenders and appraisers to be difficult without further regulatory guidance.

"We need to establish our own policies on simple and complex based on the markets we serve," one lender official noted. "The |agency~ guidelines are too ambiguous."

For all its rancor, the de minimus issue has very limited significance to most residential lenders, especially mortgage bankers. The secondary market will likely continue to require full appraisals performed by state licensed and certified appraisers. To lenders operating in the secondary market, a higher de minimus may be a competitive disadvantage vis-a-vis portfolio lenders. To supervised mortgage bankers, the only apparent advantage of a high de minimus level is some additional flexibility when dealing with banking agency and state auditors. This is particularly true with respect to an even higher commercial de minimus.

Reform background--states

Title XI charged the Appraisal Foundation with setting minimum licensing and certification requirements for states to follow. It also mandated that all federally related transactions (FRTs) be backed by appraisals performed by state licensed and certified appraisers as of July 1, 1991. FRTs, for purposes of appraisal regulation, include all loans regulated by a federal banking agency. Title XI also specifically requires Fannie Mae and Freddie Mac loans to use state licensed and certified appraisers as of the federal deadline. HUD, VA and Farmers Home Administration (FmHA) are not formally included by law, but are mandated to require licensed/certified appraisers by the Office of Management and Budget, once federal implementation kicks in January 1, 1993.

In general, certification is a higher appraiser classification than licensing, requiring more experience and education. Whereas Title XI and the banking agencies only formally recognize two classifications--licensing and certification, many states have adopted three levels--licensed, certified residential and certified general. The AQB recommends the three-level system, but many states still adhere to the two. The advantage of the three levels is that an appraiser can specialize in residential property and still become certified for "complex" transactions--a necessity in many areas where transaction values range from $250,000 to more than $1 million. Under the two-level systems, an appraiser must be fluent in commercial appraising in order to do a "complex" residential transaction.

The July 1, 1991 federal deadline for licensing and certification assumed that states would create appraiser regulatory standards and structures that matched those recommended by the AQB in time to license and certify enough appraisers to meet loan demand. By late 1990, however, it became clear that the deadline would not be met by a vast majority of states, and in April 1991 the ASC extended the compliance deadline to January 1, 1992. When it looked as if this date would not be met either, Congress extended it to January 1, 1993.

Despite the extensions, many states went ahead with mandatory licensing/certification in early 1992. This, combined with heavy refinance volume, created enormous confusion in the lending community. In a survey conducted by MBA this past spring, it was learned that many state appraisal boards were not sure whether they should mandate licensing for all appraisers, for no appraisers or just for federally related transactions.

Since those early months, however, a majority of the 25 lenders surveyed indicated few difficulties finding licensed and certified appraisers. Delays are reported to be normal for the current volume of business.

"The state laws were hell in the beginning of the year," one West Coast lender noted. "Now, it's much more clear where the states stand."

Reciprocity between states is still a problem, however, in some markets. The problem arises when appraisers are not easily able to use a license in one state to do work in another. But state regulators have established special networks for the sole purpose of resolving reciprocity disputes. These efforts appear to be succeeding.

"There is good progress |toward achieving reciprocity~ on at least a regional basis," said Bunton. "In New England, the Midwest and other regions, for example, the states are actively working with one another. Once we get these compacts together, it will be easier to achieve national reciprocity."

Questions surrounding the extent to which mortgage underwriters will be limited in how they review appraisal reports still exist among some state regulators. In an effort to address this issue for FHA-insured loans, HUD issued Mortgagee Letter 91-43, which provides an alternative form for direct endorsement approval of an FHA appraisal. The VA does not believe a comparable alternative is necessary for the Lender Appraisal Processing Program (LAPP).

Putting the state and federal efforts together

At the dawn of appraisal reform, most speculation centered on the state licensing/certification process possibly being too strict and eliminating too many good appraisers. Now, the problem may be just the opposite. In some markets, minimum standards for licensing are considered too low. In others, a slew of temporary practice and apprentice appraisers are allowed to continue appraising for as long as one licensed or certified individual signs off on their work. In states where, contrary to Title XI, "temporary practice" is not allowed by law, the ASC may require it be allowed by asserting a federal pre-emption.

For most lenders, the focus of appraisal compliance has been the Uniform Residential Appraisal Report (URAR)--what it includes, who signs it and so forth. Since release of the federal banking agency regulations in 1990, the lending and appraisal industries have become inundated with URAR addendums purporting to guarantee compliance with USPAP and the banking agency supplemental standards.

The creation of so many different addendums led to confusion and higher costs. Many in the appraisal industry sought a uniform addendum, endorsed by the ASB and ASC. Others thought revisions to the URAR itself were preferable. An Appraisal Industry Working Group, chaired by Fannie Mae and composed of agency, appraisal and lender organizations, began meeting on this in mid-1991. After numerous discussions and drafts, the group appeared close to approving a final revised URAR in August 1992.

This revised Uniform Residential Appraisal Report, among many other things, will eliminate the need to provide USPAP addendums, increase comment space and substitute a narrative neighborhood analysis for the rating grid currently in use.

Proposals to eliminate the cost approach and add a comparative listing grid were not agreed to due to a lack of consensus among the group members. According to high-ranking Fannie Mae officials, the agencies hope to have the revised URAR available for testing by September 1992.

Are today's appraisals better?

The ambitious appraisal reform process unleashed by Congressman Barnard appears to be working in part, but not in total. To the extent that Title XI was intended to be a method of assigning accountability to appraisers and lenders, the system will most certainly work, provided the fundamental issue of defining who is the accountable appraiser is ironed out.

To the extent that Title XI was intended to raise overall appraisal standards, however, the jury is still out. Many lenders in MBA's survey expressed fear that increased attention to the details of administrative appraisal compliance will come at the expense of better quality appraisals. This is particularly apt in cases where lenders adopt appraiser approval standards that are no more stringent than those of the states for fear of discriminating against inexperienced licensed individuals.

"There has not been enough time to tell whether appraisal quality is better," noted Barash. "The only way to do it would be to audit |appraisals~ six months or so from now."

Lenders' fear of compliance errors is magnified by the extent to which state and federal auditors strictly enforce obscure portions of their appraisal rules. Furthermore, coordination between the various state and federal agencies must evolve if Title XI is to truly succeed in yielding more than a "box checking" mentality in the lending industry.

In January 1993, just as federal regulators begin to enforce lender use of state licensed and certified appraisers, Congressman Barnard will leave the floor of the U.S. House of Representatives for the last time. It remains to be seen whether the grand appraisal reform system he envisioned will truly succeed without his leadership.

William H. Brewster is compliance officer for PaineWebber Mortgage Finance Inc. in Columbia, Maryland. Prior to that, he was assistant director of government agency relations with the Mortgage Bankers Association of America in Washington, D.C.
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Author:Brewster, William H.
Publication:Mortgage Banking
Article Type:Cover Story
Date:Sep 1, 1992
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