Presented at the FHFA Appraisal Related Policies, Practices, and Processes February 11, 2021.
Many thanks to FHFA for providing this platform today.
FIRREA was enacted to ensure that a professionally trained and licensed real estate appraiser, with no compensation tied to the outcome of the transaction, acts independently to protect the public, and serves to maintain safety and soundness in housing finance.
Do we have that today? No, I don’t think we do. We have almost every single stakeholder working to diminish the role of the appraiser. During the last crisis, the credit side of the equation was ceremoniously dismissed with stated income, no doc loans. For this next crisis, it would seem that the weakest link is the appraisal process. Now we have “no doc” appraisals or waivers. We keep raising the de minimis. We have perverted the intent of FIRREA with appraisal exemptions for the vast majority of loans. In short, FIRREA has been gutted, as has the appraisal independence mandates in Dodd Frank.
The most impactful change to the appraisal profession would be to build a framework to allow and support appraisers in reporting the truth.
Appraisal Independence is the single most important tenet of the appraisal process. Without it you have nothing. All of the innovation in the world won’t fix the structural problems.
We have policies, practices, and procedures in place that encourage appraisers to evade the truth and mislead. Here are a few examples:
- Seller concession policies encourage appraisers to mislead. While seller concessions are well intended, in practice they harm not help, the affordable housing sector.
- We make 30 year loans on properties that may be underwater in 10 years or no longer structurally sound. When is the last time you have seen an appraiser report an economic life less than 30 years?
- We have lenders and AMCs creating blacklists of appraisers who kill deals.
- Automated collateral systems have created an avalanche of revisions and Reconsiderations of Value whereby the appraisers must respond to comps selected by a machine. Lenders who have compared the GSEs systems claim that 60% of the time the scores are diametrically opposed. That tells me that one is good and the other not, or they are both terribly wrong. Lenders inform me the scores seem somewhat random.
- The appraisal process has devolved into a single approach to value. We are in a frothy market today and we have removed two legs of the stool that could help identify speculative aspects of house prices. Each approach acts as a mathematical proof of the other.
- Some recent policy changes are directing appraisers to incorrectly approach HBU. This puts appraisers in harm’s way of choosing between violating Fannie policy or USPAP.
The GSEs are the de facto standards bearer of the mortgage appraisal process. This is a structural problem that must be corrected in order to achieve appraisal independence. You effectively have the fox guarding the henhouse. An independent entity needs to be established.
Appraisal data must be democratized within this entity. All stakeholders must have access-appraisers, lenders, regulators, rating agencies, investors, and PMI companies.
This entity needs to develop new reporting formats. This begins with a top down approach and the entire process needs to be rethought through a prism of collateral risk.
We need to stop blaming appraisers for the failures of a system that they did not create. We are sending signals to the appraisal community that they are incompetent, slow, useless. They are terribly underpaid, yet we don’t understand why we can’t attract new entrants? We set ridiculous barriers to entry for the privilege of being abused by the very stakeholders they serve. This too must change.
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