Residential Appraisals
Opportunities to Enhance Oversight of an Evolving Industry
Gao ID: GAO-11-653 July 13, 2011
Real estate valuations, which encompass appraisals and other estimation methods, have come under increased scrutiny in the wake of the recent mortgage crisis. The Dodd- Frank Wall Street Reform and Consumer Protection Act (the Act) mandated that GAO study the various valuation methods and the options available for selecting appraisers, as well as the Home Valuation Code of Conduct (HVCC), which established appraiser independence requirements for mortgages sold to Fannie Mae and Freddie Mac (the enterprises). GAO examined (1) the use of different valuation methods, (2) factors affecting consumer costs for appraisals and appraisal disclosure requirements, and (3) conflict-of-interest and appraiser selection policies and views on their impact. To address these objectives, GAO analyzed government and industry data; reviewed academic and industry literature; examined federal policies and regulations, professional standards, and internal policies and procedures of lenders and appraisal management companies (AMC); and interviewed a broad range of industry participants and observers.
Data GAO obtained from the enterprises and five of the largest mortgage lenders indicate that appraisals--which provide an estimate of market value at a point in time--are the most commonly used valuation method for first-lien residential mortgage originations, reflecting their perceived advantages relative to other methods. Other methods, such as broker price opinions and automated valuation models, are quicker and less costly but are viewed as less reliable and therefore generally are not used for most purchase and refinance mortgage originations. Although the enterprises and lenders GAO spoke with do not capture data on the prevalence of approaches used to perform appraisals, the sales comparison approach--in which the value is based on recent sales of similar properties--is required by the enterprises and the Federal Housing Administration and is reportedly used in nearly all appraisals. Recent policy changes may affect consumer costs for appraisals, while other policy changes have enhanced disclosures to consumers. Consumer costs for appraisals vary by geographic location, appraisal type, and complexity. However, the impact of recent policy changes on these costs is uncertain. Some appraisers are concerned that the fees they receive from AMCs--firms that manage the appraisal process on behalf of lenders--are too low. A new requirement to pay appraisers a customary and reasonable fee could affect consumer costs and appraisal quality, depending on how new rules are implemented. Other recent policy changes aim to provide lenders with a greater incentive to estimate costs accurately and require lenders to provide consumers with a copy of the valuation report prior to closing. Conflict-of-interest policies, including HVCC, have changed appraiser selection processes and the appraisal industry more broadly, which has raised concerns among some industry participants about the oversight of AMCs. Recently issued policies that reinforce prior requirements and guidance restrict who can select appraisers and prohibit coercing appraisers. In response to market changes and these requirements, some lenders turned to AMCs to select appraisers. Greater use of AMCs has raised questions about 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 for appraiser selection, appraisal review, and reviewer qualifications but that they generally do not directly examine AMCs' operations. Some industry participants said they are concerned that some AMCs may prioritize low costs and speed over quality and competence. The Act places the supervision of AMCs with state appraiser licensing boards and requires the federal banking regulators, the Federal Housing Finance Agency, and the Bureau of Consumer Financial Protection to establish minimum standards for states to apply in registering AMCs. A number of states began regulating AMCs in 2009, but the regulatory requirements vary. Setting minimum standards that address key functions AMCs perform on behalf of lenders would enhance oversight of appraisal services and provide greater assurance to lenders, the enterprises, and others of the credibility and quality of the appraisals provided by AMCs. GAO recommends that federal banking regulators, the Federal Housing Finance Agency (FHFA), and the Bureau of Consumer Financial Protection consider addressing several key areas, including criteria for selecting appraisers, as part of their joint rulemaking under the Act to set minimum standards for states to apply in registering AMCs. The federal banking regulators and FHFA agreed with or indicated they would consider the recommendation.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director:
William B. Shear
Team:
Government Accountability Office: Financial Markets and Community Investment
Phone:
(202) 512-4325
GAO-11-653, Residential Appraisals: Opportunities to Enhance Oversight of an Evolving Industry
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United States Government Accountability Office:
GAO:
Report to Congressional Committees:
July 2011:
Residential Appraisals:
Opportunities to Enhance Oversight of an Evolving Industry:
GAO-11-653:
GAO Highlights:
Highlights of GAO-11-653, a report to congressional committees.
Why GAO Did This Study:
Real estate valuations, which encompass appraisals and other
estimation methods, have come under increased scrutiny in the wake of
the recent mortgage crisis. The Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Act) mandated that GAO study the various
valuation methods and the options available for selecting appraisers,
as well as the Home Valuation Code of Conduct (HVCC), which
established appraiser independence requirements for mortgages sold to
Fannie Mae and Freddie Mac (the enterprises). GAO examined (1) the use
of different valuation methods, (2) factors affecting consumer costs
for appraisals and appraisal disclosure requirements, and (3) conflict-
of-interest and appraiser selection policies and views on their
impact. To address these objectives, GAO analyzed government and
industry data; reviewed academic and industry literature; examined
federal policies and regulations, professional standards, and internal
policies and procedures of lenders and appraisal management companies
(AMC); and interviewed a broad range of industry participants and
observers.
What GAO Found:
Data GAO obtained from the enterprises and five of the largest
mortgage lenders indicate that appraisals”-which provide an estimate
of market value at a point in time-”are the most commonly used
valuation method for first-lien residential mortgage originations,
reflecting their perceived advantages relative to other methods. Other
methods, such as broker price opinions and automated valuation models,
are quicker and less costly but are viewed as less reliable and
therefore generally are not used for most purchase and refinance
mortgage originations. Although the enterprises and lenders GAO spoke
with do not capture data on the prevalence of approaches used to
perform appraisals, the sales comparison approach”in which the value
is based on recent sales of similar properties”is required by the
enterprises and the Federal Housing Administration and is reportedly
used in nearly all appraisals.
Recent policy changes may affect consumer costs for appraisals, while
other policy changes have enhanced disclosures to consumers. Consumer
costs for appraisals vary by geographic location, appraisal type, and
complexity. However, the impact of recent policy changes on these
costs is uncertain. Some appraisers are concerned that the fees they
receive from AMCs”firms that manage the appraisal process on behalf of
lenders”are too low. A new requirement to pay appraisers a customary
and reasonable fee could affect consumer costs and appraisal quality,
depending on how new rules are implemented. Other recent policy
changes aim to provide lenders with a greater incentive to estimate
costs accurately and require lenders to provide consumers with a copy
of the valuation report prior to closing.
Conflict-of-interest policies, including HVCC, have changed appraiser
selection processes and the appraisal industry more broadly, which has
raised concerns among some industry participants about the oversight
of AMCs. Recently issued policies that reinforce prior requirements
and guidance restrict who can select appraisers and prohibit coercing
appraisers. In response to market changes and these requirements, some
lenders turned to AMCs to select appraisers. Greater use of AMCs has
raised questions about 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 for appraiser selection, appraisal
review, and reviewer qualifications but that they generally do not
directly examine AMCs‘ operations. Some industry participants said
they are concerned that some AMCs may prioritize low costs and speed
over quality and competence. The Act places the supervision of AMCs
with state appraiser licensing boards and requires the federal banking
regulators, the Federal Housing Finance Agency, and the Bureau of
Consumer Financial Protection to establish minimum standards for
states to apply in registering AMCs. A number of states began
regulating AMCs in 2009, but the regulatory requirements vary. Setting
minimum standards that address key functions AMCs perform on behalf of
lenders would enhance oversight of appraisal services and provide
greater assurance to lenders, the enterprises, and others of the
credibility and quality of the appraisals provided by AMCs.
What GAO Recommends:
GAO recommends that federal banking regulators, the Federal Housing
Finance Agency (FHFA), and the Bureau of Consumer Financial Protection
consider addressing several key areas, including criteria for
selecting appraisers, as part of their joint rulemaking under the Act
to set minimum standards for states to apply in registering AMCs. The
federal banking regulators and FHFA agreed with or indicated they
would consider the recommendation.
View [hyperlink, http://www.gao.gov/products/GAO-11-653] or key
components. For more information, contact William B.Shear at (202) 512-
8678 or shearw@gao.gov.
[End of section]
Contents:
Letter:
Background:
The Widespread Use of Appraisals and the Sales Comparison Approach
Reflect Their Relative Advantages for Valuations in Mortgage
Originations:
Recent Policy Changes May Affect Consumer Costs for Appraisals, while
Other Policy Changes Have Enhanced Disclosures to Consumers:
Conflict-of-Interest Policies Have Changed Appraiser Selection
Processes, with Implications for Appraisal Oversight:
Conclusions:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Board of Governors of the Federal
Reserve System:
Appendix III: Comments from the Federal Deposit Insurance Corporation:
Appendix IV: Comments from the Office of the Comptroller of the
Currency:
Appendix V: Comments from the National Credit Union Administration:
Appendix VI: Comments from the Federal Housing Finance Agency:
Appendix VII: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Enterprise Share of Total Mortgage Originations Excluding
Home Equity Loans (by Dollar Volume), 2006-2010:
Table 2: Percentage of Each Enterprise's First-Lien Mortgage Purchases
Originated Using Their Automated Underwriting Systems, 2006-2010:
Table 3: Percentage of Each Lender's First-Lien Mortgage Originations
for Which They Provided Valuation Data, 2006-2010:
Figure:
Figure 1: Appraisals as Part of the Mortgage Origination Process:
Abbreviations:
AMC: appraisal management company:
AVM: automated valuation model:
the Act: Dodd-Frank Wall Street Reform and Consumer Protection Act:
BPO: broker price opinion:
ECOA: Equal Credit Opportunity Act:
the enterprises: Fannie Mae and Freddie Mac:
FDIC: Federal Deposit Insurance Corporation:
Federal Reserve: Board of Governors of the Federal Reserve System:
FHA: Federal Housing Administration:
FHFA: Federal Housing Finance Agency:
FIRREA: Financial Institutions Reform, Recovery, and Enforcement Act
of 1989:
HARP: Home Affordable Refinance Program:
HUD: Department of Housing and Urban Development:
HVCC: Home Valuation Code of Conduct:
LTV: loan-to-value ratio:
NCUA: National Credit Union Administration:
OCC: Office of the Comptroller of the Currency:
OTS: Office of Thrift Supervision:
RESPA: Real Estate Settlement Procedures Act:
TILA: Truth in Lending Act:
UMDP: Uniform Mortgage Data Program:
USDA: Department of Agriculture:
USPAP: Uniform Standards of Professional Appraisal Practice:
VA: Department of Veterans Affairs:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
July 13, 2011:
The Honorable Tim Johnson:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Spencer Bachus:
Chairman:
The Honorable Barney Frank:
Ranking Member:
Committee on Financial Services:
House of Representatives:
Real estate valuations, which encompass appraisals and other value
estimation methods, play a critical role in mortgage underwriting by
providing evidence that the market value of a property is sufficient
to help mitigate losses if the borrower is unable to repay the loan.
However, recent turmoil in the mortgage market raised questions about
mortgage underwriting practices, including the quality and credibility
of some valuations. Some appraisers have reported that, during the mid-
2000s, loan officers and mortgage brokers pressured them to overvalue
properties to help secure mortgage approvals. In 2007, a lawsuit
brought by the New York State Attorney General alleged that a major
lender pressured an appraisal management company (AMC) to select
appraisers who would inflate property values.[Footnote 1] The
investigation into these allegations led to questions about what the
government-sponsored enterprises Fannie Mae and Freddie Mac (the
enterprises), which had purchased many of the lender's mortgages, had
done to ensure that the appraisals for the mortgages met the
enterprises' requirements.[Footnote 2] The outcome of that
investigation was an agreement--between the Attorney General, the
enterprises, and the Federal Housing Finance Agency (FHFA), which
regulates the enterprises--that included the adoption of the Home
Valuation Code of Conduct (HVCC). HVCC sets forth certain appraiser
independence requirements for loans sold to the enterprises.
Although the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Pub. L. No. 111-203) (the Act) declared HVCC no longer in effect, it
codified several of HVCC's provisions.[Footnote 3] In addition, the
enterprises have incorporated many of the other provisions into their
requirements. This report responds to a mandate in the Act that
directed us to study the effectiveness and impact of various valuation
methods and the options available for selecting appraisers, as well as
the impact of HVCC.[Footnote 4] As required by the mandate, we
provided you with a status report on our study in October 2010.
[Footnote 5] Our work focused on valuations of single-family
residential properties for first-lien purchase and refinance
mortgages. This report discusses (1) the use of different valuation
methods and their advantages and disadvantages; (2) policies and other
factors that affect consumer costs and requirements for disclosing
appraisal costs and valuation reports to consumers; and (3) conflict-
of-interest and appraiser selection policies and views on the impact
of these policies on industry stakeholders and appraisal quality. We
consider the impact of HVCC throughout this report.
To address these objectives, we analyzed proprietary data we obtained
from the enterprises, lenders, AMCs, and FNC, Inc. (a mortgage
technology company) on the use of different valuation methods and
appraisal approaches. We tested the reliability of the data used in
this report by conducting reasonableness checks on data elements to
identify any missing, erroneous, or outlying data. We also interviewed
enterprise, lender, AMC, and FNC representatives to discuss the
interpretation of various data fields. We concluded that the data we
used were sufficiently reliable for our purposes. We reviewed academic
and industry literature on the advantages and disadvantages of the
different valuation methods and appraisal approaches. We examined
federal regulations and policies, professional standards published by
industry groups, and internal policies and procedures of lenders and
AMCs to understand requirements and practices for using different
valuation methods, selecting appraisers, ensuring appraiser
independence, and disclosing costs and valuation reports to consumers.
Finally, we interviewed a broad range of appraisal and mortgage
industry participants and observers--including representatives of
appraiser groups, lenders, AMCs, and other participants in the
valuation process--to obtain their views on the use of different
methods and options for selecting appraisers, as well as the impacts
of recent policy changes, including HVCC, on industry participants and
appraisal quality.[Footnote 6] We also discussed these issues with
officials from the federal banking regulatory agencies--the Board of
Governors of the Federal Reserve System (Federal Reserve), the Federal
Deposit Insurance Corporation (FDIC), the National Credit Union
Administration (NCUA), the Office of the Comptroller of the Currency
(OCC), and the Office of Thrift Supervision (OTS)--as well as from the
enterprises, FHFA, and the Department of Housing and Urban
Development's (HUD) Federal Housing Administration (FHA). Appendix I
contains a more detailed description of our objectives, scope, and
methodology.
We conducted this performance audit from July 2010 to July 2011 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Background:
Composition of the Mortgage Market and Lending Channels:
The composition of the mortgage market has changed dramatically in
recent years. In the early to mid-2000s, the market segment comprising
nonprime mortgages (e.g., subprime and Alt-A loans) grew rapidly and
peaked in 2006, when it accounted for about 40 percent of the
mortgages originated that year.[Footnote 7] Many of these mortgages
had nontraditional or riskier features and were bundled by investment
banks into private securities that were bought and sold by investors.
The nonprime market contracted sharply in mid-2007, partly in response
to increasing default and foreclosure rates for these mortgages, and
many nonprime lenders subsequently went out of business.[Footnote 8]
The market segments comprising mortgages backed by the enterprises and
FHA had the opposite experience: a sharp decline in market share in
the early to mid-2000s, followed by rapid growth beginning in 2007.
[Footnote 9] For example, the enterprises' share of the mortgage
market decreased from about one-half in 2003 to about one-third in
2006. By 2009 and 2010, enterprise-backed mortgages had increased to
more than 60 percent of the market. Similarly, FHA-insured mortgages
grew from about 2 percent of the market in 2006 to about 20 percent in
2009 and 2010.
Lenders originate mortgages through three major channels: mortgage
brokers, loan correspondents, and retail lenders. Mortgage brokers are
independent contractors who originate mortgages for multiple lenders
that underwrite and close the loans. Loan correspondents originate,
underwrite, and close mortgages for sale or transfer to other
financial institutions. Retail lenders originate, underwrite, and
close loans without reliance on brokers or loan correspondents. Large
mortgage lenders may originate loans through one or more channels.
Appraisals and Other Valuation Methods:
Before originating a mortgage loan, a lender assesses the risk of
making the loan through a process called underwriting, in which the
lender generally examines the borrower's credit history and capacity
to pay back the mortgage and obtains a valuation of the property to be
used as collateral for the loan. (See figure 1.) Lenders need to know
the property's market value, which refers to the probable price that a
property should bring in a competitive and open market, in order to
provide information for assessing their potential loss exposure if the
borrower defaults.[Footnote 10] Lenders also need to know the value in
order to calculate the loan-to-value (LTV) ratio, which represents the
proportion of the property's value being financed by the mortgage and
is an indicator of its risk level.
Figure 1: Appraisals as Part of the Mortgage Origination Process:
[Refer to PDF for image: illustration]
Buyer agrees to purchase property:
Buyer applies for mortgage:
Lender originates mortgage:
* Review of borrower credit, income, and assets;
* Appraisal or other property valuation.
If underwriting requirements are met:
Lender originates mortgage.
Source: GAO; Art Explosion (images).
[End of figure]
Real estate can be valued using a number of methods, including
appraisals, broker price opinions (BPO), and automated valuation
models (AVM).[Footnote 11] An appraisal is an opinion of value based
on market research and analysis as of a specific date. Appraisals are
performed by state-licensed or -certified appraisers who are required
to follow the Uniform Standards of Professional Appraisal Practice
(USPAP).[Footnote 12] A BPO is an estimate of the probable selling
price of a particular property prepared by a real estate broker,
agent, or sales person rather than by an appraiser. BPOs can vary in
format and scope, and currently there are no national standards that
brokers are required to abide by in performing BPOs. An AVM is a
computerized model that estimates property values using public record
data, such as tax records and information kept by county recorders,
multiple listing services, and other real estate records.[Footnote 13]
These models use statistical techniques, such as regression analysis,
to estimate the market values of properties. The enterprises and
various private companies have developed a range of proprietary AVMs.
Lenders have several options open to them for selecting appraisers.
Lenders can select appraisers directly, using either in-house
appraisers, independent appraisers, or appraisal firms that employ
appraisers, or they can use AMCs that subcontract with independent
appraisers. AMCs perform a number of functions for lenders, including
identifying qualified appraisers in different geographic areas,
assigning appraisal orders to appropriate appraisers, following up on
appraisal orders, and reviewing appraisal reports for completeness and
quality prior to delivering them to lenders.
Appraisers consider a property's value from three points of view--
cost, income, and sales comparison--and provide an opinion of market
value based upon one or more of these appraisal approaches. The cost
approach is based on an estimate of the value of the land plus what it
would cost to replace or reproduce the improvements (e.g., buildings,
landscaping) minus physical, functional, and external depreciation.
[Footnote 14] The income approach is an estimate of what a prudent
investor would pay based upon the net income the property produces and
is of primary importance in ascertaining the value of income-producing
properties, such as rental properties. The sales comparison approach
compares and contrasts the property under appraisal (subject property)
with recent offerings and sales of similar properties.
The scope of work for an appraisal depends on a number of factors,
including the property type and the requirements of the mortgage
lender or investor. For example, the lender may require the appraiser
to provide an estimate of value using the income approach in addition
to the sales comparison approach for a property that will be rented,
or the lender may request that the appraiser provide a specific number
of sales of comparable properties and properties currently listed for
sale to better understand the subject property's local market.
Appraisals vary in type by the property being appraised (for example,
a single-family home or condominium unit) and the level of inspection
performed (exterior only or both interior and exterior).[Footnote 15]
Federal Oversight of Appraisals:
In response to losses the federal government suffered during the
savings and loan crisis of the mid-1980s, Congress enacted the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA).[Footnote 16] Title XI of this statute contains provisions to
ensure that certain real estate-related financial transactions have
appraisals that are performed (1) in writing, in accordance with
uniform professional standards, and (2) by individuals whose
competency has been demonstrated and whose professional conduct is
subject to effective supervision.[Footnote 17] The primary intent of
the appraisal reforms contained in Title XI is to protect federal
deposit insurance funds and promote safe and sound lending. Title XI
also created the Appraisal Subcommittee, which is responsible for
monitoring the implementation of Title XI.[Footnote 18] The subsequent
regulations implementing FIRREA exempt transactions that have
appraisals conforming to the enterprises' appraisal standards or that
are insured or guaranteed by a federal agency, such as FHA, the
Department of Veterans Affairs (VA), and the Department of Agriculture
(USDA).[Footnote 19]
The enterprises, whose activities are overseen by FHFA, include
appraisal requirements in the guides they have developed for lenders
that sell mortgage loans to them. These guides identify the
responsibilities of lenders in obtaining appraisals and selecting
appraisers, specify the required documentation and forms for different
appraisal types (including different levels of inspection), and detail
the appraisal review processes lenders must follow. In addition, the
enterprises issued appraiser independence requirements in 2010 that
replaced HVCC.
FHA uses appraisals to determine a property's eligibility for mortgage
insurance. FHA's appraisal requirements are outlined in a handbook on
valuations and in periodic letters to approved lenders (called
mortgagee letters). FHA requires appraisals to include inspections to
assess whether the property complies with FHA's minimum property
requirements and standards. Appraisers must be state-certified and
must have applied to FHA to be placed on FHA's appraiser roster in
order to perform appraisals for FHA-insured loans. Lenders select an
appraiser from the FHA roster. VA and USDA have loan guaranty
programs, and USDA also has a direct loan program, with their own
appraisal requirements and processes.[Footnote 20] VA's appraisal
process is different from those of FHA and USDA in that VA assigns an
appraiser from its own panel of approved appraisers and has
established a fee schedule that sets a maximum fee that can be charged
to the borrower. USDA does not have a roster of appraisers or many
requirements beyond that lenders must use properly licensed or
certified appraisers.
For mortgages originated by federally regulated institutions but not
sold to the enterprises or insured or guaranteed by a federal agency,
Title XI of FIRREA places responsibility for regulating appraisals and
"evaluations" with the federal banking regulatory agencies.[Footnote
21] Federal banking regulators have responsibility for ensuring the
safety and soundness of the institutions they oversee, protecting
federal deposit insurance funds, promoting stability in the financial
markets, and enforcing compliance with applicable consumer protection
laws. To achieve these goals, the regulators conduct on-site
examinations to assess the financial condition of the institutions and
monitor their compliance with applicable banking laws, regulations,
and agency guidance. These agencies are OCC, which oversees federally
chartered banks; OTS, which oversees savings associations (including
mortgage operating subsidiaries);[Footnote 22] NCUA, which charters
and supervises federal credit unions; the Federal Reserve, which
oversees insured state-chartered member banks; and FDIC, which
oversees insured state-chartered banks that are not members of the
Federal Reserve System. Both the Federal Reserve and FDIC share
oversight with the state regulatory authority that chartered the bank.
The Federal Reserve also has general authority over lenders that may
be owned by federally regulated holding companies but are not
federally insured depository institutions.
As required by Title XI, federal banking regulators have established
appraisal and evaluation requirements through regulations and have
also jointly issued Interagency Appraisal and Evaluation Guidelines.
These regulations and guidelines address the minimum appraisal and
evaluation standards lenders must follow when valuing property and
specify the types of policies and procedures lenders should have in
place to help ensure independence and credibility in the valuation
process. Among other things, lenders are required to have risk-focused
processes for determining the level of review for appraisals and
evaluations, reporting lines for collateral valuation staff that are
independent from the loan production function, and internal controls
to monitor any third-party valuation providers. The federal banking
regulators have procedures for examining the real estate lending
activities of regulated institutions that include steps for assessing
the completeness, adequacy, and appropriateness of these institutions'
appraisal and evaluation policies and procedures.
Consumer Protection Statutes Relating to Appraisals:
Other laws that apply to appraisals for residential mortgages include
consumer protection statutes, such as the Truth in Lending Act (TILA),
which addresses disclosure requirements for consumer credit
transactions and regulates certain lending practices; the Equal Credit
Opportunity Act (ECOA), which addresses non-discrimination in lending;
and the Real Estate Settlement Procedures Act of 1974 (RESPA), which
requires transparency in mortgage closing documents.[Footnote 23]
Regulations implementing TILA and ECOA are issued by the Federal
Reserve and enforced by the federal banking regulators. RESPA
regulations are issued by HUD and enforced by HUD and the federal
banking regulators. Under the Dodd-Frank Act, most rulemaking
authority and some implementation and enforcement responsibilities for
these laws will be transferred to the Bureau of Consumer Financial
Protection to be established in the Federal Reserve System.[Footnote
24]
The Widespread Use of Appraisals and the Sales Comparison Approach
Reflect Their Relative Advantages for Valuations in Mortgage
Originations:
Available Data Indicate That Appraisals Are the Most Commonly Used
Valuation Method for Mortgage Originations:
Available data, lenders, and mortgage industry participants we spoke
with indicate that appraisals are the most frequently used valuation
method for home purchase and refinance mortgages. To determine the use
of valuation methods in mortgage originations, we requested data from
the enterprises and the five lenders with the largest dollar volume of
mortgage originations in 2010.[Footnote 25] The enterprises provided
us with data on the minimum valuation method and, when applicable, the
level of appraisal inspection they required for the mortgages they
purchased from 2006 through 2010 that were underwritten using their
automated underwriting systems.[Footnote 26] (Because these are
minimum requirements, lenders can and sometimes do exceed them.) The
lenders provided us with data on the actual valuation method and
appraisal inspection level for mortgages they made during the same
period, although they did not always have information for the earlier
years or for mortgages originated through their broker and
correspondent lending channels. Because the enterprise and lender data
were more complete for recent years, the following discussion provides
more detail on 2009 and 2010, a period in which mortgages backed by
the enterprises (along with FHA) dominated the market.[Footnote 27]
Data for the two enterprises combined show that, for first-lien
residential mortgages, the enterprises required appraisals for:
* 94 percent of mortgages they bought in 2009, including 92 percent of
purchase mortgages and 94 percent of refinance mortgages; and:
* 85 percent of mortgages they bought in 2010, including 86 percent of
purchase mortgages and 84 percent of refinance mortgages.
For the remaining mortgages processed through their automated
underwriting systems, the enterprises did not require an appraisal
because their underwriting analysis indicated that the default risk of
the mortgages was sufficiently low to instead require validation of
the sales prices (or loan amounts in the case of refinances) by an AVM-
generated estimate of value.[Footnote 28] In both 2009 and 2010, the
enterprises required interior and exterior inspections for roughly 85
percent of the appraisals for purchase mortgages and roughly 92
percent of the appraisals for refinance mortgages. The remaining
appraisals required exterior inspections only. Available enterprise
data for the preceding 3 years showed that appraisals were required
for almost 90 percent of mortgages (purchase and refinance
transactions combined), and the percentage of appraisals requiring
both interior and exterior inspections increased from approximately 80
percent to 86 percent, although the data covered a smaller proportion
of the enterprises' total mortgage purchases.
We also aggregated data from five lenders, which include not only
mortgages sold to the enterprises, but also mortgages insured by FHA,
guaranteed by VA or USDA, held in the lenders' portfolios, or placed
in private securitizations.[Footnote 29] These data show that, for the
first-lien residential mortgages for which data were available, these
lenders obtained appraisals for:
* 88 percent of the mortgages they made in 2009, including 98 percent
of purchase mortgages and 84 percent of refinance mortgages; and:
* 91 percent of the mortgages they made in 2010, including 98 percent
of purchase mortgages and 88 percent of refinance mortgages.
For mortgages for which an appraisal was not done, the lenders we
spoke with reported that they generally relied on validation of the
sales price against an AVM-generated value, in accordance with
enterprise policies that permit this practice for some mortgages with
characteristics associated with a lower default risk.
For both 2009 and 2010, the lenders reported that interior and
exterior inspections of the subject property were conducted for over
99 percent of the appraisals for purchase mortgages and about 97
percent of the appraisals for refinance mortgages. The remainder
involved exterior inspections only. Although data for the preceding 3
years were less complete, they showed roughly similar percentages to
those for mortgages made in 2009 and 2010. The higher percentages
reported by the lenders compared with those from the enterprises in
2010 may partly reflect lender valuation policies that exceed
enterprise requirements in some situations. For example, officials
from some lenders told us their own risk-management policies may
require them to obtain an appraisal even when the enterprises do not,
or they may obtain an appraisal to better ensure that the mortgage
complies with requirements for sale to either of the enterprises.
Additionally, FHA requires appraisals with interior and exterior
inspections for all of the purchase mortgages and most of the
refinance mortgages it insures, and most of the lenders we contacted
make substantial numbers of these mortgages.
The enterprises have efforts under way to collect more complete
proprietary data on the use of different valuation methods. In order
to obtain consistent appraisal and loan data for all mortgages they
purchase from lenders, the enterprises are currently undertaking a
joint effort, under the direction of FHFA, called the Uniform Mortgage
Data Program (UMDP). UMDP has two components related to appraisals.
The first component is scheduled to begin September 2011, when
appraisers will be required to use new standardized response options
in completing appraisal report forms. The second component will be a
Web-based portal that will facilitate the delivery of standardized
appraisal data to the enterprises, and the enterprises are planning to
fully implement UMDP by March 2012. According to officials from the
enterprises, UMDP will produce a proprietary dataset that will allow
the enterprises to work with lenders to resolve any concerns regarding
appraisal quality prior to purchasing mortgages. Additionally,
officials told us that the dataset would also allow them to assess the
impact of their valuation policies on appraisal quality and mortgage
risk.[Footnote 30] However, some appraisal industry stakeholders have
expressed concerns that in some circumstances the standardized
response options may be too limited to clearly and accurately
communicate information that is material to the appraisal.
Valuation Policies and Practices Generally Reflect the Advantages and
Disadvantages of Different Methods:
The enterprises, FHA, and lenders require and obtain appraisals for
most mortgages because appraising is considered by mortgage industry
participants to be the most credible and reliable valuation method.
According to mortgage industry participants, appraisals have certain
advantages that set them apart from other valuation methods. Most
notably, appraisals and appraisers are subject to specific
requirements and standards. The minimum standards for appraisals
included in USPAP cover both the steps appraisers must take in
developing appraisals and the information the appraisal report must
contain. USPAP also requires that appraisers follow standards for
ethical conduct and have the competence needed for a particular
assignment. For example, the appraiser must be familiar with the
specific type of property, the local market, and geographic area.
Furthermore, state licensing and certification requirements for
appraisers include minimum education and experience criteria and call
for successfully completing a state-administered examination. Also,
standardized report forms, including those developed by the
enterprises, provide a way to report relevant appraisal information in
a consistent format. However, some of these potential advantages
depend on effective oversight, and we have previously reported on
weaknesses in oversight of the appraisal industry. For example, in a
2003 report we noted that many state appraiser regulatory agencies
cited resource limitations as an impediment to carrying out their
oversight responsibilities.[Footnote 31] In addition, as previously
discussed, some appraisal industry participants have reported that
some lenders and mortgage brokers have pressured appraisers to inflate
property values in violation of appraiser independence standards. Even
in the absence of overt pressure, biased appraisal values may result
from the conflict of interest that arises where the appraiser is
selected, retained, or compensated by a person with an interest in the
outcome or dollar amount of the loan transaction.
In contrast with appraisals, BPOs do not have standard requirements
and are generally not considered a credible valuation method for
mortgage originations. According to some mortgage industry
participants, a key disadvantage of BPOs is that real estate brokers
and agents who perform them are not required to obtain training or
professional credentials in property valuation, and the BPO industry
lacks uniform standards. At least one industry group has developed
standards of practice for BPOs, which are reportedly used by some BPO
providers, but adherence to these standards is voluntary. Similarly,
the industry has not adopted standardized BPO forms, resulting in
differences in the content and quality of BPO reports, according to
some mortgage industry participants. Additionally, BPOs provide
somewhat different information than appraisals--a sales price or
listing price rather than the property's market value. The enterprises
do not permit lenders to use BPOs for mortgage originations, and
guidelines from federal banking regulators state that BPOs do not meet
the standards for an evaluation and cannot be used as the primary
basis for determining property values for mortgages originated by
regulated institutions.[Footnote 32]
Lenders and other mortgage industry participants we spoke with
identified advantages to BPOs that make them useful for property
valuations in situations other than first-lien purchase or refinance
mortgage transactions, such as monitoring the collateral in their
existing loan portfolios and developing loss-mitigation strategies for
distressed properties. In these circumstances, some mortgage industry
participants told us that leveraging real estate brokers' knowledge of
local sales and listings is an advantage because it helps them
determine probable selling prices. BPOs can be also performed cheaper
and faster than appraisals, which allows lenders to obtain more of
them and make decisions more quickly, particularly when dealing with
distressed properties. Lenders and AMCs we spoke with estimated that
BPOs cost from $65 to $125 and are generally completed in 3 to 5 days,
while appraisals can cost more than twice as much and take several
days longer to complete.
AVMs are generally not used as the primary source of information on
property value for first-lien mortgage originations, due in part to
potential limitations with the quality and completeness of the data
AVMs use. Data sources for AVMs include public records, such as tax
records and information kept by county recorders, and multiple listing
services. Assessed values for property tax purposes are not always
current and are themselves often generated from statistical models.
Information on property sales kept by county recorders is not
necessarily complete or consistent because disclosure and data
collection methods can vary by county.[Footnote 33] Similarly, data
from multiple listing services can be fragmented and inconsistent, in
part because real estate professionals enter the data themselves,
which may result in incomplete or inaccurate data. Incomplete data for
a particular geographic area will prevent an AVM from producing
reliable values for properties in those areas. Lenders have to
regularly monitor the accuracy and coverage of multiple AVMs to
determine which ones should be used for properties in various
locations. Some mortgage industry participants also told us that AVMs
tend to be less reliable in areas where properties are not
homogeneous--for example, a neighborhood with houses built at very
different times and on different sized lots (in contrast with a
suburban subdivision, which may have houses built at the same time and
in the same style). In addition, AVMs may not include information on
property conditions; rather, they may assume that all properties are
in average condition. While the enterprises permit lenders to use AVMs
for some mortgage originations (as discussed earlier), guidelines from
federal banking regulators state that AVMs generally do not meet the
standards for an evaluation and cannot be used as the sole basis for
determining property values for mortgages originated by regulated
institutions.
Despite these disadvantages, AVMs provide a fast, inexpensive means of
indicating the value of properties in active markets, and the
enterprises and lenders make use of AVMs for a number of purposes. In
addition to their use in a small percentage of mortgage originations,
representatives from the enterprises and some lenders and AMCs told us
they use values generated by AVMs as part of their quality control
processes. They said that when the appraised value varies
significantly from the value generated by an AVM, they conduct
additional analysis to examine the quality of the appraisal. Similar
to BPOs, AVMs may also be used to monitor collateral values in
lenders' existing loan portfolios. Furthermore, in circumstances where
AVMs are appropriate, they offer a number of advantages over
appraisals. AVMs are generally much quicker and cheaper than
appraisals, requiring only a few seconds to generate an estimate and
costing between $5 and $25, according to mortgage industry
participants we spoke with. Also, proponents of AVMs argue that this
technology delivers more objective and consistent appraisal values
than human appraisers, who may value properties differently and may be
subject to conflicts of interest or pressure from lenders to assess a
property at a specific value, as discussed later in this report.
The Sales Comparison Approach Is Required in Nearly All Appraisals
Because It Is Considered Reliable in Most Situations:
USPAP requires appraisers to consider which approaches to value--such
as sales comparison, cost, and income--are applicable and necessary to
perform a credible appraisal of a particular property. Appraisers must
then reconcile values produced by the different approaches they use to
reach a value conclusion. The enterprises and FHA require that
appraisals provide an estimate of market value at a point in time and
reflect prevailing economic and housing market conditions. They
require that, at a minimum, appraisers use the sales comparison
approach for all appraisals because it is considered most applicable
for estimating market value in typical mortgage transactions.[Footnote
34] They also require appraisers to use the cost approach for
manufactured homes but do not require the income approach for one-unit
properties unless the appraiser deems it necessary.[Footnote 35]
Consistent with these policies, valuation data we obtained from FNC
suggest that appraisers use the sales comparison approach in a large
majority of mortgage transactions, while the cost approach is used
less often--generally in conjunction with the sales comparison
approach--and the income approach is rarely used.[Footnote 36] FNC
captures data on appraisals conducted for a number of major lenders;
FNC's data represent approximately 20 percent of mortgage originations
in 2010.[Footnote 37] FNC's data for both purchase and refinance
transactions show the following:
* Nearly 100 percent of appraisals from 2010 used the sales comparison
approach. The percentage was the same for 2009 appraisals.
* Sixty-six percent of appraisals from 2010 used the cost approach,
generally in combination with the sales comparison approach, similar
to 65 percent for 2009 appraisals.
* Five percent of appraisals from 2010 used the income approach,
virtually always in combination with one or both of the other
approaches. The corresponding percentage for 2009 appraisals was 4
percent.
These percentages were roughly similar for purchase and refinance
mortgages. In addition, although FNC's data for the preceding 3 years
covered a smaller proportion of total mortgages, the percentages for
purchase and refinance transactions combined were generally comparable
to those described above.
Because the sales comparison approach involves an analysis of recent
sales of similar properties, it is generally viewed as the most
appropriate way to estimate market value in active residential
markets, according to industry guidance and research literature. When
appraisers use the sales comparison approach, they find recent sales
of comparable properties and make adjustments to the selling prices of
those properties based on any differences between them and the subject
property to estimate market value. In selecting comparable properties,
appraisers often consider locational attributes (including, but not
limited to, distance from the subject property), which may be critical
to a property's value. Properties used for comparison should also have
been sold relatively recently to reflect the current market. However,
one criticism of the sales comparison approach is that it may
perpetuate price trends in overheated (or depressed) markets. For
example, the use of comparable sales with inflated sales prices
(driven up by factors that increase consumer demand, such as expanded
credit availability) can lead to progressively higher market
valuations for other properties, which in turn become comparables for
future sales transactions. Also, in markets where there are few recent
sales of comparable properties, there may be insufficient information
to support a credible estimate of value.
The second approach to value--the cost approach--is mostly used in
addition to the sales comparison approach, and in specific
circumstances, such as valuing newly constructed properties or
manufactured homes, according to federal officials and appraisal
industry participants. To implement the cost approach, appraisers must
estimate how much it would cost to build a new or substitute property
in place of the subject property. In addition, they must value other
site improvements and the land and consider accrued depreciation.
According to some appraisal industry participants, some circumstances
in which the cost approach can be particularly useful exist more often
in rural areas. These circumstances include properties with unusual
features, such as additional structures or larger (or smaller) lots
than those of otherwise comparable properties. Using the cost approach
can provide additional information to appraisers to account for these
unusual features. Further, the cost approach can be important in
estimating the value of newly constructed homes because cost and
market value are usually more closely related when properties are new
(unless there are economic or functional factors that impact value).
However, the cost approach also has a number of disadvantages. As a
property ages, estimating the appropriate amount of depreciation
becomes more difficult and adds uncertainty to the estimate of value.
Additionally, while a common way to estimate land values is to review
recent sales of vacant lots close to the subject property, such sales
may be rare in many mature residential areas. The cost approach also
may not be appropriate for appraising certain types of properties,
such as high-rise condominium units, which are not built individually
but rather as part of a larger complex, and historic properties, which
have value not fully captured by the cost approach.
The third approach to value used in appraisals is the income approach,
which is an estimate of what a prudent investor would pay based upon a
property's expected net income (such as from rent). For residential
properties, the income approach is considered most useful when there
is an active rental market for comparable properties. However, in some
residential areas, rental properties are relatively rare, resulting in
limited data on which to base an estimate using the income approach.
Even when data on rents are available, they may not be equivalent. For
example, some rent amounts may include the cost of utilities or other
amenities, while others may not. In addition, some lenders told us
that the income approach is often not applicable when the intended use
of the subject property is as an owner-occupied home rather than as an
income-producing property.
Some mortgage industry stakeholders have argued that wider use of
other approaches--particularly the cost approach--could help mitigate
what they view as a limitation of the sales comparison approach. They
told us that reliance on the sales comparison approach alone can lead
to unsustainable market values and that using the cost approach as a
check on the sales comparison approach could help lenders and
appraisers identify when this is happening. For example, they pointed
to a growing gap between the average market values and average
replacement costs of properties as the housing bubble developed in the
early to mid-2000s. However, the industry data discussed previously
suggest that the cost approach was used in a substantial proportion of
mortgage originations in recent years. In addition, other mortgage
industry participants noted that a rigorous application of the cost
approach may not generate values much different from values generated
using the sales comparison approach. They indicated, for example, that
components of the cost approach--such as land value or profit margins
of real estate developers--can grow rapidly in housing markets where
sales prices are increasing.
Additional information would be needed to assess any differences
between the values appraisers generated using the different
approaches. Although the available data on appraisal approaches did
not include this information, enterprise officials told us that the
UMDP initiative will capture data on appraisal approaches and values
generated by these approaches, which may help them perform more in-
depth analysis of appraisals for the mortgages they purchase. However,
given uncertainty regarding the future role of the enterprises in the
mortgage market and the proprietary nature of the effort, the degree
to which data from the UMDP initiative will benefit the broader market
is unclear. FHFA officials told us that UMDP could be a potentially
important risk management tool for the enterprises and that they have
not made decisions about whether they will make any of the data
collected through the program available for wider use.
Recent Policy Changes May Affect Consumer Costs for Appraisals, while
Other Policy Changes Have Enhanced Disclosures to Consumers:
Consumer Costs for Appraisals Vary by Geographic Location, Appraisal
Type, and Property Complexity:
Lenders generally require consumers to pay for costs associated with
obtaining appraisals, which can include fees paid to appraisers and
appraisal firms for providing the appraisal and fees charged by AMCs
that lenders often use to administer the appraisal process. Mortgage
and appraisal industry participants we spoke with estimated that, for
a conventional mortgage, consumers pay an average of $300 to $450 for
a typical appraisal with an interior and exterior inspection,
depending on where the property is located.[Footnote 38] Appraisals
for properties in high cost-of-living areas and rural areas tend to be
more expensive than in low cost-of-living areas and urban areas,
according to mortgage industry participants and available
documentation. Some of these differences are evident--for example, in
the VA's appraiser fee schedule, which shows variation in fees by
state ranging from a low of $325 in Kentucky to a high of $625 in
Alaska. Industry fee information published in February 2010 by a real
estate technology company shows similar state-level variation, with
median fees ranging from $300 to $600.[Footnote 39] According to this
company's data, appraisal fees also vary substantially within states,
sometimes by more than $200.
Other factors that affect appraisal costs include the type of
appraisal product (e.g., level of inspection, scope of work) and the
size and complexity of the property, according to appraisers, lenders,
and AMCs we spoke with. For example, one lender said an appraisal with
an exterior-only inspection for a conventional mortgage may cost $100
to $150 less than an appraisal that also has an interior inspection.
Others told us that an appraisal for an FHA-insured mortgage, which
has additional inspection requirements, might cost $75 more than an
appraisal for a conventional mortgage.[Footnote 40] Complex properties
may require specialized experience or training on the part of the
appraiser and may require the appraiser to take more time to gather
and analyze data to produce a credible appraisal. A complex property
may have unique characteristics that are more difficult to value, such
as being much larger than nearby properties or being a lakefront or
oceanfront property, because there are likely few properties with
comparable features that have recently been sold. As a result,
appraisal costs are often higher for these properties and would be
passed on to the consumer. In addition, the extent to which data on
comparable sales are readily available and the number of comparables
required by the lender may affect appraisal costs.
Appraisers, lenders, and AMCs we spoke with told us that, in general,
neither the number of appraisal approaches (i.e., sales comparison,
cost, and income) used by an appraiser nor a lender's use of an AMC
affect consumer costs for an appraisal. USPAP requires appraisers to
use as many of the three approaches as are applicable for each
property. While using multiple approaches requires additional time and
effort on the part of the appraiser, appraisers typically do not
adjust their fees on this basis, according to appraisers we spoke
with. Instead, to the extent they are able to set their fees, they
will do so at a level that will cover their total time and effort
across all their assignments, including those requiring multiple
approaches. Similarly, mortgage industry participants we spoke with
told us that the amount a consumer pays for an appraisal is generally
not affected by whether the lender uses an AMC or engages an appraiser
directly. Rather, they said that AMCs typically charge lenders about
the same amount that independent fee appraisers would charge lenders
when working with them directly, and lenders generally pass on the
entire cost to consumers. Appraisers have reported receiving lower
fees when working with AMCs compared to when working directly with
lenders because AMCs keep a portion of the total fee. Appraisal
industry participants told us that the AMC portion is at least 30
percent of the fee the consumer pays for an appraisal. For example,
one AMC official told us that, for a $375 appraisal, the appraiser
would receive approximately $250, and the AMC would keep $125, $100 of
which would cover its costs and $25 of which would be pretax profit.
[Footnote 41]
According to lenders and AMCs we spoke with, consumer costs for
appraisals increased slightly in 2009, as a result of the enterprises
requiring appraisers to complete an additional form, called the market
conditions addendum. This form prompts appraisers to report on market
conditions and trends in the subject property's neighborhood,
including housing supply, sales price and listing price trends, seller
concessions, and foreclosure sales. Lenders and AMCs we spoke with
estimated that having appraisers complete the market conditions
addendum added between $15 and $45 to the cost of an appraisal. VA
also adopted this form and added $50 to the fees on its fee schedule.
In general, however, lenders, AMC officials, appraisers, and other
industry participants noted that consumer costs for appraisals have
remained relatively stable in the past several years and pointed to
several factors that could explain this stability. First, a number of
those we spoke with said that increased use of technology and greater
availability of data electronically has allowed appraisers to complete
some of their required tasks more quickly. Second, the supply of
appraisers relative to the demand for their services has helped to
hold consumer costs steady. Some lender and AMC officials said that
there is an oversupply of appraisers in some markets where fewer
mortgage loans are being originated, which has put downward pressure
on appraisers' fees. Third, AMCs compete with each other for lenders'
business, which keeps costs relatively stable.
How the New Requirement That Appraisers Be Paid Customary and
Reasonable Fees Will Affect Consumer Costs Is Unknown:
A provision in the Act that requires lenders to pay appraisers a
"customary and reasonable fee" may affect consumer costs for
appraisals, depending on interpretation and implementation of federal
rules.[Footnote 42] The Federal Reserve issued rules in October 2010
outlining two "presumptions of compliance" for lenders and their
agents, such as AMCs, to demonstrate they are meeting the Act's
requirements.[Footnote 43] Compliance with these rules became
mandatory on April 1, 2011. Under the rules, lenders and AMCs are
presumed to be in compliance with customary and reasonable fee
requirements if they pay appraisers an amount reasonably related to
recent rates of compensation for comparable appraisal services
performed in a given geographical market and make adjustments for the
specific circumstances of each assignment (including the type of
property, scope of work, and appraiser qualifications).[Footnote 44]
Alternatively, lenders and AMCs are presumed to comply with these
rules if they set fees by relying on objective third-party
information, such as fee schedules, studies, and surveys prepared by
independent third parties, including government agencies, academic
institutions, and private research firms. According to the Act, these
third-party studies cannot include fees paid to appraisers by AMCs.
[Footnote 45] However, a person may rebut either presumption with
evidence that the fee for a given transaction is not customary and
reasonable based on other information.
The effect of this change on consumer costs may depend on the approach
lenders and AMCs take in complying. Some lenders and AMCs told us
that, under the first presumption of compliance, they believe they can
continue to compensate appraisers at the rates they have been paying
them for recent assignments, relying in part on internal data from the
previous 12 months as evidence that those fees are customary and
reasonable.[Footnote 46] Assuming they were able to meet the
conditions for this presumption of compliance, consumer costs likely
would not change, according to representatives of these companies.
However, other lenders are taking steps to meet the requirement under
the second presumption of compliance. Some mortgage industry
participants told us that some lenders, including smaller ones, may
set appraiser fees at the level outlined in the VA appraiser fee
schedule, which uses information from periodic surveys of lenders to
set maximum fees that borrowers can be charged in each state. Other
lenders and industry groups are having fee studies done in order to
comply. Because these studies cannot include the fees AMCs pay to
appraisers, some industry participants, including some AMC officials,
expect them to demonstrate that appraiser fees should be higher than
what AMCs are currently paying. If that is the case, these lenders
would require AMCs to increase the fees they pay to appraisers to a
rate consistent with the findings of those studies. The expected
result would be an increase in appraisal costs for consumers, as well
as potential improvements in appraisal quality.[Footnote 47] However,
some lenders are evaluating the possibility of no longer using AMCs
and managing their own panels of appraisers, which would eliminate the
AMC administration fee from the appraisal fee that consumers pay. Some
regulatory officials and lenders told us that lenders can still
recover the cost of managing the appraisal process from the consumer
in other ways--for example, through higher application fees,
origination fees, or interest rates.
FHA instituted a policy requiring lenders to pay reasonable and
customary fees to appraisers in 1997. Initially, this policy required
that lenders charge consumers only the actual amount paid to the
appraiser but was changed several months later to allow lenders to
have consumers pay costs associated with services provided by AMCs, as
well as the fee paid to the appraiser. FHA limited the total costs to
consumers to the amount that was customary and reasonable for an
appraisal in the market area in which the appraisal was performed. In
2009, FHA released additional guidance on fee requirements, stating
that appraisers must be compensated at a rate that is customary and
reasonable for an appraisal performed in the market area of the
property and that AMC fees must not exceed what is customary and
reasonable for the appraisal management services they provide. FHA's
guidance places responsibility with the lender for knowing what is
customary and reasonable in the areas in which they lend and advises
appraisers not to accept assignments for which they believe the fees
are not reasonable. FHA officials told us they did not know whether or
how this change had affected consumer costs.
Policy Changes Limit Costs to Consumers Relative to Disclosed Cost
Estimates and Require That the Valuation Report Be Disclosed to
Consumers Prior to Closing:
RESPA requires that lenders disclose estimated appraisal costs to the
consumer along with estimates of other services that are required in
order to close the mortgage loan.[Footnote 48] These estimates, which
are included on a standard good faith estimate form, must be provided
within 3 days of receiving the consumer's application for a mortgage
loan, unless the lender turns down the application or the consumer
withdraws the application. Appraisals typically fall in the category
of third-party settlement services required and selected by the
lender. In the estimate provided to the consumer, the lender must
identify each third-party settlement service required, along with the
estimated price to be paid by the consumer to the provider of each
service. Subsequently, at loan closing, the lender must disclose the
actual costs for these services on the HUD-1 settlement form.[Footnote
49]
Changes to RESPA that took effect in 2010 require that actual costs
paid by consumers for third-party settlement services not exceed
estimated costs by more than 10 percent. If actual costs are higher
than this threshold, the lender is responsible for making up the
difference, providing lenders with a greater incentive to estimate
costs accurately. For each service, the lender is to disclose the name
of the third-party service provider and the amount they were paid. For
example, according to HUD guidance, when a lender uses an AMC to
engage an appraiser, the lender is required to disclose the name of
the AMC and the total amount paid to the AMC (but not how much the AMC
paid the appraiser). When a lender engages an appraiser directly, the
lender must disclose the name of the appraiser and how much the
appraiser was paid. The Act permits, but does not require, lenders to
disclose to the consumer separately the fee paid to the appraiser by
an AMC and the administration fee charged by the AMC at closing.
[Footnote 50] Some appraisers and federal and state regulatory
officials said requiring separate disclosures of AMC fees and
appraiser fees would benefit consumers by providing greater
transparency. However, other federal officials and lenders questioned
the value of separate disclosures for various reasons: the information
could be confusing to consumers, would come too late to inform
consumer decision making if provided at closing, and involves a small
part of total closing costs.
Regulations implementing ECOA require lenders to notify consumers of
their right to receive the valuation report associated with a mortgage
transaction and to provide it upon request. Alternatively, lenders can
routinely provide consumers with a copy of the report during the
mortgage origination process.[Footnote 51] The Act amended ECOA to
require lenders to provide consumers with a copy of the valuation
report no later than 3 days prior to loan closing for first-lien
mortgages secured by the consumer's principal dwelling and for all
types of valuations, including appraisals, BPOs, and AVMs.[Footnote
52] In 2009, the enterprises had adopted a similar requirement as part
of HVCC for appraisal reports associated with mortgages to be sold to
the enterprises. These policy changes enhance disclosures to consumers
by guaranteeing they receive information about the value of the
property prior to completing their mortgage transaction.
Conflict-of-Interest Policies Have Changed Appraiser Selection
Processes, with Implications for Appraisal Oversight:
Recent Policies Address Conflicts of Interest by Enhancing Appraiser
Independence Requirements:
Recently issued policies reinforce long-standing requirements and
guidance addressing conflicts of interest that may arise when parties
have an incentive to unduly influence or pressure appraisers to
provide biased values. Conflicts of interest arise when direct or
indirect personal interests bias appraisers from exercising their
independent professional judgment. These conflicts can arise in
several ways. Loan production staff and mortgage brokers are often
compensated on a commission based upon mortgage originations, which
may give them an incentive to pressure appraisers to provide values
that will allow loans to close. When lenders order appraisals from an
AMC they own or are affiliated with, the lender's loan production
staff may be able to influence AMC staff to pressure appraisers,
according to some mortgage industry stakeholders. Companies that
provide both valuation services and title services for the same
transaction may also have a potential conflict of interest because the
company stands to profit if the mortgage is approved and the borrower
subsequently purchases the company's title insurance at closing. Real
estate agents earn commissions based on a property's sales price,
which may give agents an incentive to influence an appraiser's opinion
of value. Borrowers may also want to influence appraisers to provide a
value that will allow their loans to be approved. Some appraisers may
acquiesce to these different sources of pressure because they want to
satisfy their clients, receive future assignments, or do not want to
be responsible for stopping the property transaction from going
through.
In order to keep appraisers independent and prevent them from being
pressured, the federal banking regulators, enterprises, FHA, and other
agencies have regulations and policies governing the selection of,
communications with, and coercion of appraisers. Examples of recently
issued policies that address appraiser independence include HVCC,
which took effect in May 2009; the enterprises' new appraiser
independence requirements that replaced HVCC in October 2010; and
revised Interagency Appraisal and Evaluation Guidelines from the
federal banking regulators, which were issued in December 2010 and
apply to federally regulated financial institutions. Additionally, the
Act broadly prohibits conflicts of interest in the valuation process
for all consumer credit transactions secured by a consumer's principal
dwelling. Provisions of these and other policies address some or all
of the following issues:
* Prohibitions against loan production staff involvement in appraiser
selection and supervision. Loan production staff are prohibited from
selecting, retaining, recommending, or influencing the selection of an
appraiser for a specific assignment. The reporting structure for
appraisers must also be independent of the loan production
function.[Footnote 53] A version of these requirements has been
included in the federal banking regulators' appraisal regulations
since 1990 and in FHA guidance since 1994. Similar prohibitions were
included in HVCC for loans sold to the enterprises and remain in
effect in the enterprises' current appraiser independence
requirements. For VA-guaranteed loans, VA assigns appraisers on a
rotational basis on behalf of lenders, removing loan production staff
and mortgage brokers from the process altogether.
* Prohibitions against third parties selecting appraisers. Appraisers
should be selected by the lender or its agent rather than by a third
party with an interest in the mortgage transaction. The federal
banking regulators include this requirement in their appraisal
regulations. In addition, the enterprises expressly prohibit borrowers
from selecting and retaining appraisers. The enterprises and FHA also
prohibit real estate agents and mortgage brokers from selecting
appraisers.
* Limits on communications with appraisers. While certain
communications between loan production staff and appraisers are
necessary, other communications that may unduly influence appraisers
are inappropriate. For example, according to the federal banking
regulators' guidelines, this includes communicating a predetermined,
expected, or qualifying estimate of value or a loan amount, or a
target LTV ratio, to an appraiser. Similarly, the enterprises and FHA
prohibit loan production staff from communicating with appraisers or
AMCs about anything that relates to or impacts valuation. All of these
requirements and guidelines permit lenders to request that an
appraiser (1) consider additional property information, including
additional comparable properties; (2) provide further detail,
substantiation, or explanation of the value conclusion; or (3) correct
errors in the appraisal report. VA permits lenders' staff to
communicate with appraisers about the timeliness of an appraisal
report, but only VA-approved appraisal reviewers may discuss valuation
matters with the appraiser.
* Prohibitions against coercive behaviors. Coercive behavior is
intended to influence appraisers to base property value on factors
other than the person's independent judgment. The federal banking
regulators' guidelines state that no lender or person acting on a
lender's behalf should engage in coercive actions, and the enterprises
and FHA expressly prohibit such actions. Examples of coercive actions
include withholding timely payment or partial payment for an appraisal
report; expressly or implicitly promising future business, promotions,
or increased compensation to an appraiser; and implying to an
appraiser that his or her current or future retention depends on the
valuation estimate.
A Number of Factors, Including HVCC, Increased the Use of Appraisal
Management Companies and Changed How Other Industry Participants
Operate:
Although industry-wide data on lenders' use of AMCs over time are
unavailable, appraisal industry participants told us that between 60
and 80 percent of appraisals are currently ordered through AMCs,
compared with less than half before HVCC went into effect in 2009.
[Footnote 54] According to these participants, this increased demand
for AMCs' services has resulted in a proliferation of new AMCs across
the country. Lenders and other mortgage industry participants
identified several factors that have contributed to a greater use of
AMCs. First, market conditions, including an increase in the number of
mortgages originated during the mid-2000s, put pressure on lenders'
capacity to manage appraiser panels. Second, as lenders expanded the
areas in which they originated mortgages, they found identifying
appraisers with the appropriate experience and familiarity with the
various locations to be increasingly burdensome. They also said it
would be difficult to predict where across the country they would need
appraisers at any given time. AMCs provided a practical solution to
these two issues. According to a number of lenders we spoke with, AMCs
can manage the valuation process and costs more efficiently than their
internal valuation departments. In particular, they told us that AMCs
are better equipped to handle the administrative effort of managing
appraiser panels, such as checking licenses, maintaining contact
information, placing and following up on appraisal orders, performing
initial quality control, and providing national geographic coverage.
In several of these cases, the lenders had already switched to using
AMCs years before HVCC went into effect. The third factor that
affected some lenders' use of AMCs was that HVCC required additional
layers of separation between loan production staff and appraisers.
According to some appraisal industry participants, some lenders may
have outsourced appraisal functions to AMCs because they thought using
AMCs allowed them to easily demonstrate compliance with the appraiser
selection provisions in HVCC. Several appraisal industry participants
told us that some lenders incorrectly believed they were required to
use AMCs in order to be in compliance with HVCC.
Some appraisers, mortgage brokers, and lenders told us that the
increased use of AMCs and the policy changes that banned mortgage
brokers from selecting appraisers disrupted the business relationships
they relied on and changed the ways they operate. Some of these
industry participants told us small appraisal firms went out of
business as lenders increased their reliance on AMCs. Having lost
their lender and mortgage broker clients, some appraisers said they
joined AMC panels to be able to make a living as appraisers but found
they were asked to perform the same amount of work for less money than
they had been making previously. Some appraisers also indicated that
some AMCs pressure appraisers to complete appraisal reports within
unreasonable time frames or try to guide the appraiser's value
conclusion--for example, by recommending the use of certain comparable
sales. Other appraisal industry participants told us that some
experienced appraisers decided to perform nonresidential appraisals or
left the appraiser profession altogether instead of working for lower
fees. In addition, several lenders told us they required mortgage
brokers to use only designated AMCs--a change that eliminated the
brokers' ability to communicate with appraisers. Some mortgage
industry participants, including mortgage brokers, also said that the
lack of communication with appraisers caused delays in receiving
appraisals because the brokers had to go through AMCs to correct
reports or have questions answered. In addition, mortgage brokers we
spoke with told us that it may be difficult to transfer appraisals to
another lender if a deal falls through because lenders often do not
accept appraisals that were not from their designated AMCs. In these
instances, a second appraisal would need to be ordered, but at the
borrower's or mortgage broker's expense.
Greater Use of Appraisal Management Companies Highlights Potential
Shortcomings in Existing Oversight and Has Raised Questions about
Appraisal Quality:
Although reliance on AMCs has increased, direct federal oversight of
AMCs is limited. Federal banking regulators' guidelines for lenders'
own appraisal functions list standards for appraiser selection,
appraisal review, and reviewer qualifications. For example, a lender's
criteria for selecting appraisers should identify appraisers who
possess the requisite education, expertise, and experience to
competently complete the assignment. In addition, a lender's appraisal
review policies and procedures should, among other things, establish a
process for resolving deficiencies in appraisals and set forth
documentation standards for the review. Similarly, the guidelines
state that a lender should establish qualification criteria for
appraisal reviewers that take into consideration education,
experience, and competence. The guidelines also require lenders to
establish processes to help ensure these standards are met when
lenders outsource appraisal functions to third parties, such as AMCs.
Officials from the federal banking regulators told us they review
lenders' policies and controls for overseeing AMCs, including the due
diligence they perform when selecting AMCs, performance expectations
outlined in contracts, and processes for assessing appraisal quality.
However, they told us they generally do not review an AMC's operations
directly unless they have serious concerns about the AMC, and the
lender is unable to address those concerns. Similarly, the enterprises
review lenders' policies and controls but not those of AMCs because
lenders are responsible for ensuring that AMCs meet the enterprises'
requirements. Officials from the enterprises said they do not review
AMCs directly because they do not have business relationships with
AMCs.
In light of the growing use of AMCs, a number of states enacted laws
beginning in 2009 to register and regulate AMCs operating within their
jurisdictions, according to officials from several state appraiser
regulatory boards. These officials told us that these laws typically
contained several common elements, including requiring AMCs to have
processes in place for adding appraisers to their panels, reviewing
appraisers' work, and keeping records of appraisal orders and
activities. However, they said that some states have not adopted such
laws, and existing state laws provide differing levels of oversight.
For example, while a number of states require AMCs to certify that
they have the above processes in place, Utah also requires AMCs to
provide a written explanation of those processes as a condition of
registering. Similarly, while some state laws do not specify
requirements for AMC appraisal reviewers, Vermont requires reviews
that address technical aspects of the appraisal to be performed by
appraisers with credentials equal to or greater than the minimum
required to perform the original appraisal assignment.[Footnote 55]
Some appraiser groups and other appraisal industry participants have
expressed concern that existing oversight may not provide adequate
assurance that AMCs are complying with industry standards and their
own policies and procedures, with negative impacts on appraisal
quality. Although they did not provide us with data to demonstrate a
change in quality, these participants suggested that the practices of
some AMCs for selecting appraisers, reviewing appraisal reports, and
establishing qualifications for appraisal reviewers--key areas
addressed in federal guidelines for lenders' appraisal functions--may
have led to a decline in appraisal quality:
* Selecting appraisers. Appraiser groups said that some AMCs select
appraisers based on who will accept the lowest fee and complete the
appraisal report the fastest rather than on who is the most qualified,
has the appropriate experience, and is familiar with the relevant
neighborhood. They said that, with many experienced appraisers
departing from the industry, less experienced appraisers, who are
often willing to accept lower fees, are left to perform most of the
work.
* Reviewing appraisal reports. According to some appraisal industry
groups, some AMCs' appraisal reviews overemphasize how close the
appraiser's value conclusion is to an expected value generated by an
AVM, at the expense of other important elements of the appraisal, such
as the appropriateness of the comparable sales. One group noted
instances in which AMCs told appraisers which comparable sales to use
when the appraisers' original value conclusions were not consistent
with AVM-generated values.
* Establishing qualifications for appraisal reviewers. Representatives
of an appraisal industry group told us that some AMC reviewers may
lack the expertise necessary to identify problems with quality. They
noted that in some states appraiser licensing and certification
requirements do not address qualifications for appraisal reviewers.
AMC officials we spoke with said that they have processes and
standards that address these areas of concern. Several AMC officials
told us they have vetting processes to select appraisers for their
panels, including minimum requirements for years of appraising
experience and education. When selecting appraisers for a specific
assignment, these AMCs indicated that they use an automated system
that identifies the most qualified appraiser based on criteria such as
the requirements for the assignment, the appraiser's geographic
proximity to the subject property, and performance metrics such as
timeliness and the quality of appraisers' work. The AMC officials we
spoke with said they allow appraisers to specify how much they will
charge for different types of appraisal assignments and, in some
cases, provide appraisers with the range of fees their peers on the
appraiser panel charge. These officials said they compare fees only
when two appraisers are equally qualified for an assignment, in which
case they might default to the appraiser with the lower fee. Further,
these officials said that when performing quality reviews on
appraisals, they run automated checks to identify any problems with
completeness and internal consistency. These reviews may also involve
comparing the appraiser's estimated value to a value generated by an
AVM. Appraisals flagged for potential problems, such as risk of
overvaluation, are manually reviewed by staff reviewers, who often
have backgrounds in underwriting or appraising. One AMC official told
us that their reviewers also provide coaching for less experienced
appraisers to help them improve the quality of their appraisal reports.
The enterprises and some lenders we spoke with told us that appraisal
quality had improved after HVCC was adopted, although they could not
specifically tie the quality improvements they observed to the use of
AMCs. Some industry participants noted that other market changes that
were occurring at the same time HVCC was implemented could have
contributed to an improvement in appraisal quality, such as the
enterprises' requirement in 2009 that appraisers also complete the
market conditions addendum form (as previously discussed in connection
with its impact on appraisal costs). Nevertheless, the enterprises
told us that variances between the values in the appraisal reports and
values produced by their proprietary AVMs decreased after HVCC went
into effect--in particular, for mortgages from third-party
originators, including mortgage brokers. In addition, officials from
one lender said that once HVCC went into effect, they required
appraisals for mortgages in their broker channel to be ordered through
AMCs and, on the basis of similar internal metrics that compare AVM-
generated values to appraised values, observed improvements in
appraisal quality. Officials from the enterprises told us that once
they have obtained data through UMDP and evaluated its quality, they
may be able to use the data to assess the appraisal quality of
individual AMCs and appraisers.
While views on the impact of AMCs on appraisal quality differ,
Congress recognized the importance of additional AMC oversight in
enacting the Act by requiring each state to register and regulate AMCs
and placing the supervision of AMCs with state appraiser regulatory
boards.[Footnote 56] In addition, the Act requires the federal banking
regulators, along with FHFA and the Bureau of Consumer Financial
Protection, to establish minimum standards for states to apply when
registering AMCs, including requirements that appraisals coordinated
by an AMC comply with USPAP and be conducted independently and free
from inappropriate influence and coercion.[Footnote 57] This
rulemaking also provides a potential avenue for reinforcing existing
federal requirements for key functions that may impact appraisal
quality, such as selecting appraisers, reviewing appraisals, and
establishing qualifications for appraisal reviewers. Federal
guidelines for lenders address these functions and require that
lenders take steps to ensure that AMCs comply with the guidelines when
lenders rely on AMCs to perform these functions. However, federal
regulators do not directly monitor AMCs' compliance with the
guidelines; direct oversight of AMCs will be instead performed by
state regulators, with the Appraisal Subcommittee monitoring state AMC
oversight. If state standards do not also address these functions,
state oversight of AMCs may not provide adequate assurance that these
functions are being properly carried out.
Conclusions:
Because appraisals provide an estimate of market value at a particular
point in time, they are affected by changes in the housing and
mortgage markets. In recent years, turmoil in these markets has
heightened attention on residential property valuations, and
appraisals in particular. The prominent role of appraisals in the
mortgage market underscores the importance of efforts to better ensure
appraisal quality. HVCC, the Act, and federal banking regulator
guidance have sought to address some of the factors that can affect
appraisal quality, including appraiser independence and compensation.
In addition, the enterprises are undertaking an initiative to collect
detailed and standardized appraisal data that could provide them with
greater insight into appraisal practices for the mortgages they
purchase.
Partly in reaction to appraiser independence requirements, lenders
have increasingly relied upon AMCs to perform certain functions.
Despite the increased use of AMCs, direct federal oversight of AMCs is
limited because the focus of regulators is primarily on lenders, and
state-level requirements for AMCs are uneven, ranging from no laws to
laws with specific standards for registering with the state. Some
appraisal industry participants have raised concerns that the
management practices of some AMCs may be negatively affecting
appraisal quality. Among the areas of concern are AMCs' practices for
key functions, including selecting appraisers for assignments,
reviewing completed appraisal reports, and establishing qualifications
for appraisal reviewers. The federal banking regulators have
emphasized the importance of these functions in guidelines that apply
to lenders' appraisal functions. The Act requires the federal banking
regulators and other federal agencies to set minimum state standards
for registering AMCs, which provides an opportunity for the regulators
to address these areas of concern and promote more consistent
oversight of these functions, whether performed by lenders or AMCs.
Doing so could help to provide greater assurance to lenders, the
enterprises, and federal agencies of the quality of the appraisals
provided by AMCs.
Recommendation for Executive Action:
To help ensure more consistent and effective oversight of the
appraisal industry, we recommend that the heads of FDIC, the Federal
Reserve, FHFA, NCUA, OCC, and the Bureau of Consumer Financial
Protection--as part of their joint rulemaking required under the Act--
consider including the following areas when developing minimum
standards for state registration of AMCs: criteria for selecting
appraisers for appraisal orders, review of completed appraisals, and
qualifications for appraisal reviewers.
Agency Comments and Our Evaluation:
We provided a draft of this report to FDIC, the Federal Reserve, NCUA,
OCC, and OTS, as well as FHFA, HUD, USDA, and VA, for their review and
comment. We received written comments from the Director of Risk
Management Supervision, FDIC; the Directors of the Divisions of
Banking Supervision and Regulation and Consumer and Community Affairs,
Federal Reserve; the Executive Director of NCUA; the Acting
Comptroller of the Currency; and the Acting Director of FHFA that are
reprinted in appendixes II through VI. We also received technical
comments from FDIC, the Federal Reserve, FHFA, HUD, and OCC, which we
incorporated where appropriate. OTS, USDA, and VA did not provide
comments on the draft report. The Bureau of Consumer Financial
Protection did not receive the draft report in time to provide
comments.
In their written comments, the federal banking regulators (FDIC, the
Federal Reserve, NCUA, and OCC) and FHFA agreed with or indicated they
will consider our recommendation to address specific areas as part of
joint rulemaking to develop minimum standards for state registration
of AMCs. In its written response, the Federal Reserve said that it
would consider our recommendation in developing rules to establish
minimum standards. It also cited various regulations and guidance it
and other agencies have issued related to appraiser independence since
the 1990s. While agreeing with our recommendation, OCC noted in its
written comments that improved oversight of AMCs by states does not
diminish federally regulated institutions' responsibility to ensure
that services performed on their behalf by AMCs comply with applicable
laws, regulations, and guidelines. Finally, FHFA in its written
response agreed that the joint rulemaking process should consider the
areas we mention in our recommendation. While it also noted that the
data in the report did not capture differences between the
enterprises' practices, it noted that the report discusses that
lenders may and do require appraisals beyond what is required by the
enterprises.
We are sending copies of this report to the appropriate congressional
committees, the Chairman of FDIC, the Chairman of the Federal Reserve,
the Acting Director of FHFA, the Secretary of Housing and Urban
Development, the Chairman of NCUA, the Acting Comptroller of the
Currency, the Acting Director of OTS, the Secretary of Agriculture,
the Secretary of Veterans Affairs, the Bureau of Consumer Financial
Protection, and other interested parties. In addition, the report is
available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staff members have any questions about this report,
please contact me at (202) 512-8678 or shearw@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. GAO staff who made key
contributions to this report are listed in appendix VII.
Signed by:
William B. Shear:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
This report focuses on valuations of single-family residential
properties for first-lien purchase and refinance mortgages. We examine
(1) the use of different valuation methods and their advantages and
disadvantages; (2) factors that affect consumer costs and requirements
for disclosing appraisal costs and valuation reports to consumers; and
(3) conflict-of-interest and appraiser selection policies, and views
on the impact of these policies on industry stakeholders and appraisal
quality. We also consider the impact of the Home Valuation Code of
Conduct (HVCC) throughout the report.
To describe how often different valuation methods are used, we
analyzed valuation data from various sources for mortgages originated
in calendar years 2006 through 2010. We requested aggregated data on
valuations for mortgages originated in these years from Fannie Mae and
Freddie Mac (the enterprises), the five largest lenders (as determined
by the dollar volume of total mortgage originations in 2010), six of
the largest appraisal management companies (AMC) (as identified by
industry trade associations), and three private vendors of mortgage
and valuation technology. In response to our request, we obtained
proprietary data from the enterprises, five lenders (Ally Financial,
Inc.; Bank of America, NA; J.P. Morgan Chase Bank, NA; CitiMortgage,
Inc.; and Wells Fargo Bank, NA), four AMCs (CoreLogic, Landsafe, LSI,
and PCV/Murcor), and one private vendor (FNC, Inc.). Data from each
group of entities provide a partial picture of the valuation methods
used in purchase and refinance mortgage originations and overlap with
each other to a certain degree. The datasets we assembled are unique
and therefore difficult to cross-check with other known sources to
check their reliability. However, we were able to corroborate some
data elements through interviews, and we used each of the datasets we
assembled and other proprietary data we obtained to corroborate the
other datasets. As a result, we believe that these data are
sufficiently reliable for the purpose of this report, keeping in mind
the following limitations. Because some of the entities compiled the
requested information differently or were reporting information that
is not a part of their normal data collection and retention apparatus,
our datasets contain various degrees of inconsistency, missing data,
and other issues. The data from the enterprises presented in this
report only include mortgages originated using their own automated
underwriting system. As a result, the data do not reflect mortgages
that (1) lenders originated using manual underwriting; (2) lenders
originated using their own, enterprise-approved automated underwriting
systems; or (3) were originated using the automated underwriting
system of one enterprise but purchased by the other enterprise. Data
from the lenders often did not include information on mortgages
originated through their broker or correspondent channels. In
addition, data from the early part of the 5-year period we examined
were limited, in part because (according to officials from some of the
lenders) mergers with other financial institutions and data system
changes prevented them from accessing these data. For these reasons,
we have characterized our results in a manner that minimizes the
reliability concerns (e.g., by focusing on 2009 and 2010) and
emphasizes the points on which the data are corroborated. Our
interviews with federal agencies, lenders, AMCs, appraisers, and other
industry stakeholders provided clarification of data elements and
additional perspectives on the use of different valuation methods in
mortgage transactions. Given these and other steps we have taken, we
believe the data are sufficiently reliable for the purposes used in
this study.
The enterprises provided us with data on the minimum valuation method
they required for mortgages they purchased. Table 1 shows the
percentage of total mortgage originations (by dollar volume) that
enterprise purchases accounted for in each of the years we examined.
Table 1: Enterprise Share of Total Mortgage Originations Excluding
Home Equity Loans (by Dollar Volume), 2006-2010:
Fannie Mae:
2006: 19%;
2007: 29%;
2008: 39%;
2009: 45%;
2010: 39%.
Freddie Mac:
2006: 14%;
2007: 21%;
2008: 26%;
2009: 27%;
2010: 25%.
Source: GAO analysis of data from Inside Mortgage Finance.
[End of table]
As previously noted, the data from the enterprises used in this report
cover mortgages that were originated using their automated
underwriting systems and therefore represent only a portion of the
total mortgages they purchased. Table 2 shows the percentage of the
enterprises' mortgage purchases each year that were originated using
their automated underwriting systems, excluding certain refinance
mortgages originated under the Home Affordable Refinance Program.
Table 2: Percentage of Each Enterprise's First-Lien Mortgage Purchases
Originated Using Their Automated Underwriting Systems, 2006-2010:
Fannie Mae:
2006: 49%;
2007: 52%;
2008: 54%;
2009: 58%;
2010: 59%.
Freddie Mac:
2006: 27%;
2007: 24%;
2008: 26%;
2009: 34%;
2010: 28%.
Source: GAO analysis of data from the enterprises.
Note: These data exclude certain refinance mortgages originated under
the Home Affordable Refinance Program.
[End of table]
The five lenders cited previously provided us with data on the
valuations they obtained for mortgages they made. These lenders
accounted for about 64 percent of mortgage originations in 2009
(excluding home equity loans) and 66 percent in 2010. As discussed
earlier, the lender data did not cover all of their mortgage
originations. Table 3 shows the percentage of each lender's mortgages
for which they provided valuation data.
Table 3: Percentage of Each Lender's First-Lien Mortgage Originations
for Which They Provided Valuation Data, 2006-2010:
Wells Fargo:
2006: 85%;
2007: 97%;
2008: 98%;
2009: 99%;
2010: 99%.
Citi:
2006: 66%;
2007: 84%;
2008: 91%;
2009: 99%;
2010: 98%.
Bank of America:
2006: 0%;
2007: 0%;
2008: 37%;
2009: 35%;
2010: 44%.
Chase:
2006: 0%;
2007: 0%;
2008: 14%;
2009: 30%;
2010: 24%.
Ally:
2006: 0%;
2007: 0%;
2008: 0%;
2009: 11%;
2010: 7%.
Source: GAO analysis of lender data.
Note: Bank of America, Chase, and Ally officials told us they could
not access data from earlier years due to mergers with other financial
institutions or data system changes.
[End of table]
The four AMCs cited previously provided us with data on the valuations
they provided to lenders. For many appraisals, some AMCs were unable
to identify whether the appraisals were for mortgage originations (as
opposed to other purposes, such as servicing and portfolio management
or removal of mortgage insurance) and, if they were, whether they were
for home purchases or refinancing existing mortgages. In addition, two
of the six AMCs we spoke with did not provide us with data. As a
result, the AMC data we obtained represented a small but undetermined
portion of the mortgage market and were of limited use for purposes
other than corroborating other datasets.
FNC, Inc. is a mortgage technology company that, among other things,
provides software platforms for lenders, appraisers, and other
participants in the mortgage origination process. It captures
appraisal data electronically that pass through its systems and uses
the information to build analytical tools for its clients, which
include several national lenders, as well as various regional and
community lenders. The share of the mortgage market for which FNC
captures data has increased over time, reaching about 20 percent in
2010. We interviewed knowledgeable FNC officials about their processes
and data controls to assess data reliability. In general, FNC was able
to provide us with valuation data for approximately 80 percent of the
appraisals it identified as being for purchase or refinance mortgages.
These data provide some insight into how often different appraisal
approaches are used, though they may not be representative of the
mortgage market as a whole.
To identify the potential advantages and disadvantages of the
different valuation methods, we reviewed relevant research studies and
articles that examine the strengths and limitations of the different
valuation methods and the potential effects on the reliability of
appraisals. We also interviewed representatives from the federal
banking regulatory agencies (the Board of Governors of the Federal
Reserve System, the Office of the Comptroller of the Currency, the
Office of Thrift Supervision, the Federal Deposit Insurance
Corporation, and the National Credit Union Administration), federal
agencies with mortgage insurance or guarantee programs (the Department
of Housing and Urban Development's Federal Housing Administration, the
Department of Veterans Affairs, and the Department of Agriculture),
the enterprises, appraisal industry groups, AMCs, mortgage lenders
(including the five cited previously), mortgage industry associations
(including those representing smaller and rural lenders), as well as
other individual industry stakeholders and researchers.
To examine the factors that affect appraisal costs, we reviewed
federal and lender policies on fees, including fee schedules. We
interviewed the aforementioned lenders and AMCs and representatives
from mortgage and appraisal industry associations to identify the
factors that may affect valuation costs, including any that may have
caused changes in consumer costs over time. Because our interviews
with individual lenders and AMCs focused on larger companies, the
views they expressed may not be representative of these industries as
a whole. To examine disclosures to consumers, we (1) reviewed and
summarized statutes and policies, such as the Real Estate Settlement
Procedures Act, that govern the disclosure of costs and valuation
documentation to consumers and (2) interviewed federal officials and
lenders to ensure our understanding of these requirements. To assess
how HVCC affected appraisal costs and disclosures, we reviewed the
relevant provisions in HVCC; analyzed information we obtained to
identify any changes in costs that may be attributable to HVCC; and
interviewed lenders and appraisers, among other industry stakeholders.
To determine how federal policies, including HVCC, have addressed
potential conflicts of interest and affected appraiser selection
policies, we reviewed statutes, regulations, guidance, and federal
banking regulators' examination procedures covering appraiser
independence requirements. We interviewed federal banking regulators,
lenders, appraisers, AMCs, state regulatory officials, and other
mortgage industry participants to discuss changes in policies and
their impact on the appraisal process, industry participants, and
appraisal quality. In addition, we interviewed the enterprises,
lenders, and AMCs about the policies and procedures they have in place
to assess and help ensure appraisal quality.
We conducted this performance audit from July 2010 to July 2011 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the Board of Governors of the Federal
Reserve System:
Board of Governors:
of the:
Federal Reserve System:
Washington, DC 20551:
July 6, 2011:
Mr. William B. Shear:
Director, Financial Markets and Community Investment:
U.S. Government Accountability Office:
Washington, D.C. 20548:
Dear Mr. Shear:
Thank you for the opportunity to comment on the Government
Accountability Office (GAO) draft report entitled Real Estate
Appraisals: Opportunities to Enhance Oversight of an Evolving
Industry. The report provides an overview of the valuation methods,
including appraisals, used by lenders for first-lien residential
mortgage originations. In conducting the study, GAO recognized that
the recent mortgage crisis resulted in increased scrutiny of lenders'
appraisal practices and that recent policy changes have addressed many
of the concerns with these practices. The report contains one
recommendation to the Federal Reserve, the other federal banking
regulators, the Federal Housing Finance Agency (FHFA), and the Bureau
of Consumer Financial Protection (Bureau), concerning the
establishment of minimum standards for appraisal management companies
(AMCs).
As the draft report acknowledges, appraisals provide important
information on a property's market value that assists consumers in
making informed borrowing decisions. Further, the report recognizes
that independent and credible real estate valuations, including
appraisals, are critical to prudent residential mortgage lending.
Board regulations and supervisory guidance that address the
independence of appraisers in credit transactions involving federally-
regulated financial institutions have been in place since the 1990s.
To strengthen the appraisal process more broadly, in July 2008 the
Federal Reserve Board issued final rules that applied to all
creditors, mortgage brokers, and their affiliates. The Board's rules
expressly prohibited these parties from coercing, influencing, or
otherwise encouraging appraisers to misstate or misrepresent the value
of a consumer's principal dwelling. The July 2008 final rules also
prohibited a creditor from extending credit when the creditor has
reason to believe that the appraiser was encouraged to misstate or
misrepresent the value of the dwelling, unless the creditor determines
that the appraisal was accurate or bases its credit decision on a
separate appraisal that was not subject to the prohibited practices.
Subsequently, the Board issued interim final rules in October 2010 to
implement the appraisal independence provisions in section 1472 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act). The October 2010 interim final rules include several provisions
that protect the integrity of the appraisal process and seek to ensure
that real estate appraisers are free to use their independent
professional judgment in assigning home values without influence or
pressure from those with interests in the transactions. For example,
the interim rules prohibit a party from withholding or threatening to
withhold timely payment from the person preparing the valuation
because the person did not value the consumer's principal dwelling at
or above a certain amount.
The October 2010 rules also prohibit appraisers and appraisal
management companies from having a financial or other interest in the
credit transaction or property that is the subject of the appraisal.
To facilitate compliance, the interim final rules provide a "safe
harbor" for creditors that observe certain restrictions on the
selection, supervision and compensation of appraisers. Under the
rules, a creditor or settlement service provider that has information
about appraiser misconduct must file a report with the appropriate
state licensing authorities. To protect the quality of appraisals, the
rules also require that independent appraisers receive customary and
reasonable compensation for their services. Compliance with the
October 2010 interim rules became mandatory on April 1, 2011.
Going forward, the Board and the other federal banking agencies, the
FHFA and the Bureau will share responsibility for jointly issuing
permanent rules on appraisal independence. In developing permanent
rules, we will consider the public comments received on the Board's
October 2010 interim final rules, including the views and issues
discussed in the GAO's draft report. We will also consider the
experience gained through the examination process and the handling of
any complaints that the agencies have received since the interim rules
became effective.
The federal banking regulators have long stressed to federally
regulated financial institutions the importance of a quality and
independent appraisal process. The federal banking regulators adopted
appraisal regulations in 1990 and have reminded institutions of the
importance of the appraisal process over the years in several
supervisory guidance issuances, including the Interagency Appraisal
and Evaluation Guidelines (December 2010). These guidelines address
the federal banking regulators' expectations for a regulated
institution's appraisal process and reflect recent changes in lending
and appraisal practices, including the greater use of a third party
(such as an AMC) by institutions to perform their residential
appraisal management function. In the guidelines, the federal banking
regulators remind institutions that, even if a third party performs
all or a part of their appraisal function, institutions remain
responsible for ensuring that the third party complies with all
applicable laws and regulations.
The Dodd-Frank Act recognizes the increasing role of AMCs in
residential mortgage lending. The Act mandates that the federal
banking regulators, the FHFA, and the Bureau issue rules establishing
minimum requirements for states to apply in the registration of AMCs.
We expect the agencies to start work on these rules once the Bureau is
fully operational. The GAO recommends that these rules address
requirements for the selection of appraisers, review of appraisals,
and qualifications of appraisal reviewers. In developing rules to
establish minimum standards for AMCs, we will consider the GAO's
recommendation.
Thank you for the opportunity to review the draft report.
Sincerely,
Signed by:
Patrick M. Parkinson:
Director, Division of Banking Supervision and Regulation:
Signed by:
Sandra F. Braunstein:
Director, Division of Consumer and Community Affairs:
[End of section]
Appendix III: Comments from the Federal Deposit Insurance Corporation:
FDIC:
Federal Deposit Insurance Corporation:
Division of Risk Management Supervision:
550 17th Street NW:
Washington, D.C. 20429-9490:
July 6, 2011:
William B. Shear:
Director, Financial Markets & Community Investment:
United States Government Accountability Office:
Washington, D.C. 20548:
Dear Mr. Shear:
The Federal Deposit Insurance Corporation (FDIC) reviewed the GAO
report Real Estate Appraisals: Opportunities To Enhance Oversight Of
An Evolving Industry (Report) (GAO-11-653).
The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated
a GAO study on the effectiveness and impact of various real estate
valuation methods, the options available for selecting appraisers and
the impact of the Home Valuation Code of Conduct which established
certain appraiser independence requirements for loans sold to Fannie
Mae and Freddie Mac. The study focused on valuations of single-family
residential properties for first lien purchase and refinance
mortgages. To conduct the study the GAO (a) examined the most common
valuation methods; (b) reviewed the factors affecting consumer costs
and disclosure requirements; and (c) evaluated conflict-of-interest
and appraisal selection policies and their impact.
A copy of the GAO draft report was provided to the Federal banking
regulators for comment prior to the report being issued in final form.
FDIC staff discussed the draft report findings and recommendations
with GAO representatives. Several areas were identified where
clarification or additional supporting facts would augment report
findings or expand on one or more important points.
The report recommends that the Federal banking regulators consider
developing minimum standards for registering appraisal management
companies (AMCs) that include criteria for: selecting appraisers,
reviewing completed appraisals, and qualifications for appraisal
reviewers. The FDIC along with other Federal banking agencies and the
Bureau of Consumer Financial Protection will meet in September 2011 to
begin developing standards for registering AMCs.
We appreciated the opportunity to review and comment on the draft
audit report and we hope these efforts will further improve the
appraisal process.
Sincerely,
Signed by:
Sandra L. Thompson:
Director:
[End of section]
Appendix IV: Comments from the Office of the Comptroller of the
Currency:
Comptroller of the Currency:
Administrator of National Banks:
Washington, DC 20219:
July 6, 2011:
Mr. William B. Shear:
Director, Financial Markets and Community Investment:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Shear:
We have received and reviewed your draft report titled "Real Estate
Appraisals: Opportunities to Enhance Oversight of an Evolving
Industry." Your report responds to a mandate in the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Act) for a study of the
effectiveness and impact of various valuation methods and the options
available for selecting appraisers, as well as the impact of the Home
Valuation Code of Conduct.
You found that: (1) the widespread use of appraisals and the sales
comparison approach reflect their relative advantages for valuations
in mortgage originations; (2) recent policy changes may affect
consumer costs for appraisals, while other policy changes have
enhanced disclosures to consumers; and (3) conflict-of-interest
policies have changed appraiser selection processes, with implications
for appraisal oversight. You note that lenders have increasingly
relied upon appraisal management companies (AMC) to perform certain
functions and that direct federal oversight of AMCs is limited.
To help ensure more consistent and effective oversight of the
appraisal industry, you recommend that we, along with the Federal
Deposit Insurance Corporation, Federal Reserve, Federal Housing
Finance Agency, National Credit Union Administration, and the Consumer
Financial Protection Bureau, as part of the joint rulemaking required
under the Act, consider including the following areas when developing
minimum standards for state registration of AMCs: criteria for
selecting appraisers for appraisal orders, review of completed
appraisals, and qualifications for appraisal reviewers.
We agree with your recommendation. The OCC's and the other federal
banking agencies' appraisal regulations and related supervisory
guidance contain longstanding standards that include: (1) criteria for
selecting appraisers for appraisal orders; (2) minimum standards for
pre-and post-funding real estate appraisal and evaluation reviews; and
(3) qualifications for review appraisers. In short, your
recommendation for addressing future standards for state regulation of
AMCs is consistent with the agencies' current standards for the
performance of real estate appraisals in connection with federally
related transactions.
It is important to note, however, that improved oversight by the
states does not diminish the federally regulated institutions'
responsibility to ensure that any services performed on their behalf
by an AMC or other third party comply with applicable laws,
regulations, and supervisory guidance.
We appreciate the opportunity to comment on the draft report.
Sincerely,
Signed by:
John Walsh:
Acting Comptroller of the Currency:
[End of section]
Appendix V: Comments from the National Credit Union Administration:
National Credit Union Administration:
1775 Duke Street:
Alexandria, VA 22314-3428:
703-518-6300:
Via E-Mail:
June 23, 2011:
Mr. William B. Shear:
Director:
Financial Markets and Community Investment:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
shearw@gao.gov:
Dear Mr. Shear:
We have received and reviewed your draft report "Real Estate
Appraisals Opportunities to Enhance Oversight of an Evolving
Industry". The Dodd-Frank Wall Street Reform and Consumer Protection
Act (the Act) mandated that GAO study the various valuation methods
and the options available for selecting appraisers, as well as the home
Valuation Code of Conduct (HVCC) which established appraiser
independence requirements for mortgages sold to Fannie Mae and Freddie
Mac.
GAO recommends in the draft report: "To help ensure more consistent
and effective oversight of the appraisal industry, we recommend that
the heads of FDIC, Federal Reserve, FHFA, OCC, NCUA, and the Bureau of
Consumer Financial Protection”as part of their joint rulemaking
required under the Act”consider including the following areas when
developing minimum standards for state registration of Appraisal
Management Companies (AMCs): criteria for selecting appraisers for
appraisal order, review of completed appraisals, and qualification for
appraisal reviewers."
NCUA agrees with GAO's recommendation in the draft report. We will
work with the agencies identified above to address GAO's
recommendation in the joint rulemaking process required under the Act.
Sincerely,
Signed by:
David Marquis:
Executive Director:
[End of section]
Appendix VI: Comments from the Federal Housing Finance Agency:
Federal Housing Finance Agency:
Office of the Director:
1700 G Street, N.W.
Washington, D.C. 20552-0003:
202-414-3800:
202-414-3823 (fax):
June 30, 2011:
Mr. William B. Shear:
Director:
Financial Markets and Community Investment:
Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Shear:
Thank you for the opportunity to review and comment on the Government
Accountability Office (GAO) Report, Real Estate Appraisals:
Opportunities to Enhance Oversight of an Evolving Industry. We
appreciate the careful review of valuation practices and requirements
over the last two decades and agree with the conclusions and
recommendations.
The Report highlights the importance of unbiased appraisal valuations
free from undue influence or pressure from parties to the mortgage or
real estate transaction. The Report notes that appraisal independence
requirements--separation of appraisal and loan production functions -
have been included in the banking agency appraisal regulations since
1990. It cites the problem of inflated appraisals caused by undue
pressure and conflicts of interest, which led to the adoption of the
Home Valuation Code of Conduct (HVCC) by Fannie Mae and Freddie Mac
(Enterprises). The Report reviews the Dodd-Frank Act requirement that
the Federal Reserve Board publish appraisal independence rules to
safeguard against coercion and conflicts of interest in the appraisal
valuation process for mortgages.
While the Report confirms that appraisals are the most commonly used
valuation method for first lien residential mortgage originations, the
combined data for the Enterprise (page 12) does not reflect
differences between the organizations. However, as noted in the
Report, lenders may and do require appraisals for their loans beyond
the Enterprise automated underwriting system recommendations. Lenders
frequently choose to require appraisals to maximize the secondary
market choices for their loans.
The Report suggests that use of appraisal management companies (AMCs)
by lenders increased in response to higher loan volumes during the mid-
2000s, lender expansion into new geographic areas, and appraisal
independence requirements. We appreciate that the Report alludes to
the fact that neither the HVCC nor the Enterprises' current Appraisal
Independence Requirements mandates use of AMCs or any particular means
of meeting the independence requirements.
Given increased use of AMCs by lenders and concerns expressed by
appraisal industry participants regarding the quality of appraisals
produced by AMCs, FHFA understands GAO's recommendation for the
agencies identified under the Dodd-Frank Act to consider including
certain criteria when developing minimum standards for state
registration of AMCs as part of their joint rulemaking. These criteria
would include standards for selecting appraisers for appraisal orders,
review of completed appraisals and qualifications for appraisal
reviewers. FHFA agrees with the GAO's recommendation that the joint
rulemaking process with the banking agencies should consider the areas
cited by the GAO.
Thank you again for the opportunity to comment on this study. If you
have any additional questions, please contact me or Alfred Pollard at
(202) 414-3788.
Sincerely,
Signed by:
Edward J. DeMarco:
Acting Director:
[End of section]
Appendix VII: GAO Contact and Staff Acknowledgments:
GAO Contact:
William B. Shear, (202) 512-8678 or shearw@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Steve Westley (Assistant
Director), Don Brown, Marquita Campbell, Anar Ladhani, John McGrail,
Marc Molino, Erika Navarro, Jennifer Schwartz, and Andrew Stavisky
made key contributions to this report.
[End of section]
Footnotes:
[1] An AMC is defined by the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Pub. L. No. 111-203) as a third party that
oversees a network or panel of more than 15 appraisers within a state
or 25 or more appraisers nationally in a given year and has been
authorized by lenders to recruit, select, and retain appraisers;
contract with appraisers to perform appraisal assignments; manage the
process of having an appraisal performed; or review and verify the
work of appraisers. Dodd-Frank Act § 1473(f)(4) (codified at 12 U.S.C.
§ 3550(11)).
[2] The enterprises purchase mortgages that meet specified
underwriting criteria from approved lenders. Most of the mortgages are
made to prime borrowers with strong credit histories. The enterprises
bundle most of the mortgages they purchase into securities and
guarantee the timely payment of principal and interest to investors in
the securities. On September 6, 2008, the enterprises were placed
under federal conservatorship out of concern that their deteriorating
financial condition and potential default on $5.4 trillion in
outstanding financial obligations threatened the stability of
financial markets.
[3] The Act stated that HVCC ceased to be effective as of the date the
Board of Governors of the Federal Reserve System (Federal Reserve)
issued interim final rules covering appraiser independence. Dodd-Frank
Act § 1472(a) (codified at 15 U.S.C. § 1639e(j)). The Federal Reserve
issued that rule on October 28, 2010. 75 Fed. Reg. 66554.
[4] Dodd-Frank Act § 1476.
[5] GAO, Status of Study Concerning Appraisal Methods and the Home
Valuation Code of Conduct, [hyperlink,
http://www.gao.gov/products/GAO-11-158R] (Washington, D.C.: Oct. 19,
2010).
[6] Because our interviews with individual lenders and AMCs focused on
larger companies, the views they expressed may not be representative
of these industries as a whole.
[7] The market share figures in this paragraph are in terms of dollar
volume and do not include home equity loans.
[8] For additional information about the characteristics and
performance of nonprime mortgages, see GAO, Nonprime Mortgages:
Analysis of Loan Performance, Factors Associated with Defaults, and
Data Sources, [hyperlink, http://www.gao.gov/products/GAO-10-805]
(Washington, D.C.: Aug. 24, 2010).
[9] FHA insures lenders against losses from borrower defaults on
mortgages that meet FHA criteria. FHA historically has served
borrowers who would have difficulty obtaining prime mortgages but, in
recent years, has increasingly served borrowers with stronger credit
histories.
[10] The enterprises and federal banking regulators define market
value as the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently and knowledgeably,
and assuming the price is not affected by undue stimulus. Market value
is distinct from other types of value, such as liquidation value or
investment value. Liquidation value refers to the probable price a
property will bring in a limited market where the seller is under
extreme compulsion to sell. Investment value refers to the price a
particular investor would pay for a property in light of the
property's perceived value to satisfy his or her investment goals.
[11] While other valuation methods exist, such as tax assessment
valuations, we focus on appraisals, BPOs, and AVMs because they are
specifically mentioned in the statutory language mandating this study.
[12] The Appraisal Standards Board of the Appraisal Foundation
develops, interprets, and amends USPAP. The Appraisal Foundation is a
not-for-profit organization established by the appraisal profession in
1987. In addition to the Appraisal Standards Board, the Appraisal
Foundation sponsors the Appraisal Qualifications Board, which sets
minimum education and experience requirements for states' appraiser
licensing and certification programs, and the Appraisal Practices
Board, which identifies and issues opinions on recognized valuation
methods and techniques.
[13] A multiple listing service is a database set up by a group of
real estate brokers to provide information about properties for sale.
[14] Physical depreciation is a loss in value caused by deterioration
in the physical condition of the improvements. Functional
depreciation, also known as functional obsolescence, is a loss in
value caused by defects in the design of the structure (such as
inadequacies in sizes and types of rooms) or changes in market
preferences that result in some aspect of the improvements being
considered obsolete by current standards (for example, the location of
a bedroom on a level with no bathroom). External depreciation, also
referred to as economic obsolescence, is a loss in value caused by
negative influences that are outside of the site, such as economic
factors or environmental changes (for example, expressways or
factories that are adjacent to the subject property).
[15] Appraisers perform limited physical inspections of the property
on behalf of lenders to assess the property's condition as it relates
to value. The inspection performed by an appraiser is not equivalent
to a home inspection performed by a qualified home inspector. Home
inspections are performed on behalf of borrowers and provide
information on the condition of the physical structure (e.g., roof,
foundation) and systems (e.g., electrical, plumbing, heating and
cooling) of the house.
[16] Pub. L. No. 101-73, 103 Stat. 183 (1989).
[17] 12 U.S.C. §§ 3331, 3339-3345.
[18] Currently the Appraisal Subcommittee board includes officials
from the Federal Reserve, FDIC, OCC, OTS, NCUA, HUD, and FHFA. Later
in 2011, OTS (which the Act abolishes) will drop off the board, and
the Bureau of Consumer Financial Protection created by the Act will be
added.
[19] OCC: 12 C.F.R. Part 34, subpart C; Federal Reserve: 12 C.F.R.
Part 208, subpart E and 12 C.F.R. Part 225, subpart G; FDIC: 12 C.F.R.
Part 323; OTS: 12 C.F.R. Part 564; NCUA: 12 C.F.R Part 722.
[20] VA originations represented about 5 percent of the first-lien
residential mortgage market in 2010, while USDA originations comprised
about 1 percent of the market.
[21] An evaluation provides an estimate of the property's market value
but does not have to be performed by a state-licensed or -certified
appraiser. The federal banking regulators permit evaluations to be
performed in certain circumstances, such as mortgage transactions
below $250,000 that are conducted by regulated institutions. According
to the federal banking regulators' guidance, an evaluation should
identify the location of the property and provide a description of it
and its current and projected use; describe the methods used to
confirm its physical condition and the extent to which an inspection
was performed; indicate all sources of information used in the
analysis; and include information on the preparer of the evaluation.
[22] 12 U.S.C. § 1813(q). In July 2011, OCC will assume oversight
responsibility of federal savings associations from OTS, while FDIC
will assume OTS' oversight responsibility for state savings
associations.
[23] Truth in Lending Act, 15 U.S.C. §§ 1601-1667f; Equal Credit
Opportunity Act, 15 U.S.C. §§ 1691-1691f; Real Estate Settlement
Procedures Act of 1974, 12 U.S.C. §§ 2601-2617.
[24] Dodd-Frank Act §§ 1011(a), 1021, 1061(b), and 1062. The Secretary
of the Treasury has designated July 21, 2011, as the transfer date. 75
Fed. Reg. 57252 (Sept. 20, 2010).
[25] These five lenders accounted for about 64 percent of first-lien
mortgage originations in 2009 and 66 percent in 2010, according to
industry data.
[26] The mortgages included in these data represent from 24 percent to
59 percent of the loans the enterprises purchased each year from 2006
through 2010. We focus on valuation requirements for mortgages
processed through the enterprises' automated underwriting systems
because this was the segment of their business for which comparable
data were readily available for both enterprises. The enterprises also
purchase mortgages from lenders that were not underwritten using their
automated underwriting systems. Some lenders have their own automated
underwriting systems that they can use instead of the enterprises'
systems. The enterprises also purchase mortgages that have been
manually underwritten, and they purchase mortgages in bulk through an
investor channel.
[27] See appendix I for additional information on the completeness of
these data. In 2009 and 2010, the enterprises and several lenders we
contacted participated in the Home Affordable Refinance Program
(HARP), which was part of the Making Home Affordable program started
in 2009 to stabilize the housing market. The purpose of HARP was to
provide a refinancing vehicle for homeowners that had (1) mortgages
held or guaranteed by Fannie Mae or Freddie Mac, (2) interest rates
above the prevailing market rates, and (3) LTV ratios between 80 and
125. HARP transactions are excluded from the data discussed here.
[28] When the enterprises waive the appraisal, they may also waive the
inspection, or they may require an exterior-only inspection completed
by a state-licensed or -certified appraiser.
[29] Private securitizations are securities issued by investment banks
or other private entities rather than the enterprises.
[30] In addition to the enterprises, FHA plans to adopt the
standardized appraisal data fields of UMDP for two appraisal forms
(the Uniform Residential Appraisal Report and the Individual
Condominium Unit Appraisal Report), but an FHA official told us that
they will not have access to the Web-based portal and therefore will
not be able to collect and analyze appraisal data on FHA-insured
mortgages using this system.
[31] GAO, Regulatory Programs: Opportunities to Enhance Oversight of
Real Estate Appraisal Industry, [hyperlink,
http://www.gao.gov/products/GAO-03-404] (Washington, D.C.: May 14,
2003).
[32] Some mortgage industry participants raised concerns about
conflicts of interest that can arise when brokers prepare BPOs for
properties they hope to be able to list for sale. In those situations,
brokers may have an incentive to recommend an artificially low listing
price--below what the market value of the property would be--in order
to sell the property and earn the sales commission as quickly as
possible. Alternatively, if they believe the market will bear a higher
price, they may have an incentive to recommend a very high listing
price in order to maximize their sales commission.
[33] Information at the county level is not available for properties
that are located in "nondisclosure states"--states in which the price
and terms of real estate transactions, such as the amount paid for the
property, are not subject to public disclosure.
[34] Similarly, VA requires the sales comparison approach for all
appraisals, except in unusual circumstances involving inadequate or
nonexistent comparable sales or an extremely unique property. Other
approaches that are applicable may be used in combination with the
sales comparison approach. USDA regulations for guaranteed loan
programs require all residential appraisals to be completed using the
sales comparison approach. The cost approach must also be used when
appraising properties that are less than 1 year old (7 C.F.R. §
1980.334(b)).
[35] FHA and the enterprises require the income approach for two-to
four-unit properties.
[36] These data reflect how frequently the appraiser entered an
estimate of value for each of the approaches on the appraisal report
form. They do not include information about how the appraiser
reconciled the estimated values from the different approaches.
[37] These data may not be representative of the mortgage market as a
whole. See appendix I for additional information about these data.
[38] Conventional mortgages are loans that are not insured or
guaranteed by federal agencies, such as FHA, VA, or USDA.
[39] Mercury Network, Appraisal Fee Reference: Median Observed
Appraisal Fees by County, State, and Region, February 2010.
[40] FHA uses the appraisal to determine the property's eligibility
for mortgage insurance based in part on the property's condition. The
appraiser inspects the property to be able to report on whether the
property meets FHA's minimum requirements and, if not, the repairs
required to correct any deficiencies.
[41] Some mortgage industry participants we spoke with said that, like
AMCs, appraisal firms that employ appraisers also keep a portion of
the total appraisal fee--estimates ranged from 30 percent to 50
percent--to cover expenses. Unlike AMCs, these firms would typically
provide health insurance and other benefits to the appraisers they
employ, according to those we spoke with. A number of appraisal
industry participants also said that some AMCs include appraisers
employed by appraisal firms on their appraiser panels, which may
result in even lower fees paid to those appraisers because both the
AMC and the appraisal firm are keeping a portion of the total
appraisal fee.
[42] Dodd-Frank Act § 1472(a) (codified at 15 U.S.C. § 1639e(i)).
[43] 75 Fed. Reg. 66554 (Oct. 28, 2010). If lenders and AMCs do not
rely on information that meets the conditions outlined in the rules,
their compliance is determined based on all of the facts and
circumstances without a presumption of either compliance or violation.
[44] Under the first presumption of compliance, lenders and AMCs are
also prohibited from engaging in anticompetitive acts that would
affect appraisers' compensation, such as price-fixing or restricting
others from entering the market.
[45] Dodd-Frank Act § 1472(a) (codified at 15 U.S.C. § 1639e(i)(1)).
[46] The rules also require lenders and AMCs to demonstrate that these
rates consider factors such as the type of property and scope of work.
[47] Several appraisal industry groups told us that higher fees for
appraisers would improve appraisal quality by retaining and attracting
better qualified appraisers to the profession.
[48] 12 U.S.C. § 2604(c), 24 C.F.R. § 3500.7.
[49] The HUD-1 settlement form is a standard form that itemizes the
charges imposed upon both the consumer (borrower) and the seller by
the lender in relation to the settlement, as required by 24 C.F.R. §
3500.8 and Appendix A to 24 C.F.R. Part 3500.
[50] Dodd-Frank Act § 1475 (codified at 12 U.S.C. § 2603).
[51] 12 C.F.R. § 202.14.
[52] Dodd-Frank Act § 1474 (codified at 15 U.S.C. § 1691(e)).
[53] The policies provide guidance for small institutions with limited
staff about how to comply. In such cases where absolute lines of
independence in the reporting structure cannot be achieved, lenders
are to take steps to help ensure that officials involved in selecting
an appraiser for a particular loan are not involved in approving the
loan. New consumer regulations implementing the Act's prohibition on
conflicts of interest in the valuation process include similar
provisions.
[54] Appraisal industry participants we spoke with provided varying
estimates of AMC use prior to HVCC, ranging from 15 percent to 50
percent of mortgage originations.
[55] Some appraisal reviews are administrative in nature--for example,
focusing on whether all fields in the appraisal report were filled in--
and can be performed by a variety of individuals. Other appraisal
reviews examine the technical aspects of the appraisal report--for
example, the reasonableness of the properties selected as comparable
sales and the adjustments made to them--and require a certain level of
knowledge and expertise in appraising.
[56] Dodd-Frank Act § 1473(f)(2) (codified at 12 U.S.C. § 3353(a)).
[57] Officials from the federal banking regulators said they expect
this process to begin in August or September 2011.
[End of section]
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