Appraisal Regs in the Wake of the Crash

You know how Dodd-Frank changed real estate, but what about the valuation industry? Learn about common misconceptions regarding how appraisals have changed since the financial crisis.

December 18, 2015

It’s no secret that the financial collapse sent shock waves across the housing sector and ushered in a new wave of regulation. The real estate community is certainly no stranger to the various laws and policies enacted since 2008, including the widely cited Dodd-Frank Wall Street Reform and Consumer Protection Act. Yet brokers and agents may not be aware of how certain regulation has impacted appraisals and the larger lending process. At The Appraisal Foundation, we often encounter misunderstandings about regulation. Here we tackle some of the common myths about appraisal regulation.

The Prominence of AMCs

The most notable outcome for appraisers after Dodd-Frank took effect was the explosion of appraisal management companies, the third-party institutions that hire appraisers on behalf of lenders. After the housing bubble burst, lawmakers sought to preserve appraiser independence, and their solution was to reinforce the firewall between appraisers and lenders. AMCs have since proliferated as an efficient and low-cost way for banks to find appraisers; however, this has also resulted in some unintended consequences. Some criticize AMCs for offering low prices and requiring very quick turnaround times, raising concerns about the quality of appraisals. Another concern is that some AMCs contract with appraisers who live far away from the property they are evaluating and who may not have sufficient knowledge of the local market.

Many in the housing sector mistakenly believe that lenders are required to engage an appraiser through an AMC. The truth is that there is no legislation mandating the use of AMCs.

Data, Data, Data

Another notable trend is the prominence and reliance on “big data.” In particular, Fannie Mae and Freddie Mac are increasingly offering data analysis tools for lenders to assess the accuracy of appraisals. Regression analysis allows banks and Fannie and Freddie to assess the differences in values of similar property characteristics within different markets. Lenders can extract the data from an appraisal report into these models to evaluate the credibility of the appraisal.

Reactions to the use of data analysis by Fannie and Freddie are mixed. Some appraisers feel it’s an additional burden and an unnecessary review of their work, while others see it as a valuable tool to assess the credibility of appraisals.

Common Misunderstandings

In addition to misperceptions about AMCs, there are several common fallacies we hear about appraiser regulation. For instance, there is a misperception that The Appraisal Foundation’s Appraiser Qualifications Board prohibits licensed trainee appraisers from inspecting a property on their own or signing an appraisal report. In reality, the AQB does not prohibit a trainee from signing an appraisal report, nor does it mandate that a supervisor coinspect a property, though some mortgage lenders do demand those provisions. While the AQB hasn’t changed its requirements, financial institutions have become more wary of trainees signing appraisal reports since the financial collapse.

Another common misconception we hear from brokers and agents is that they are not allowed to communicate with appraisers. Any information that helps an appraiser do his or her job better is not only allowed but also strongly encouraged and welcomed. The only communication barred is that which is intended to unduly influence the outcome of the appraisal. Learn more about what you can and can’t say to an appraiser here.

Everyone knows that the fallout from the financial crisis and the resulting regulations changed the way the real estate industry works. But by understanding how the work of appraisers has shifted, you can be better prepared for a smooth valuation process.

President of The Appraisal Foundation

David S. Bunton is President and chief operating officer of The Appraisal Foundation since 1990.  He is a respected leader in the valuation world in the United States and abroad.  Prior to joining The Appraisal Foundation, David served as a staff member for twelve years in the U.S. House of Representatives and the United States Senate.