Appraisal Accuracy is Everyone’s Job Part II: Accuracy is Everyone’s Job, BUT Only the Appraiser is Qualified to Determine Value.

We recently wrote a piece suggesting that consumers be engaged in (or at least, informed about and aware of) the appraisal and valuation process.  You can see that posting here.

Of course, it’s always a good thing for the consumer to understand what he or she is getting himself/herself into.  But there’s also an opposite extreme here: the consumer (or Realtor…or loan officer…) who gets too involved in the appraisal process.  As in, attempts to influence the appraiser to inflate a value he rightfully and ethically assigns to the property.  This, on the other hand, is a big no-no…and a hot button issue today.

It’s no secret that the parties to a transaction will want the best value possible.  That’s why we have independent, professional, third-party appraisers in the first place.  Unfortunately, some of the laws and regulations assigned after the subprime crash in the mid-2000s were allowed to “sunset” after the passage of the Dodd-Frank Act.  Accordingly, there is now less in the way of the aggressive loan officer, Realtor or consumer who disagrees with an appraiser’s professional evaluation when it comes short of what the former had hoped for.

Appraisal independence is again a major issue in our industry (even though it has always been critical).  Here at Service 1st are well-aware of entities that actively attempt to influence appraisal values.  We’ve also been approached by those who do follow the rules to their own detriment, asking how they can ward off unfair, unethical or even illegal pressure to inflate home values.  We know of appraisers and appraisal management businesses that have lost the business or referral of lenders or Realtors upset at a refusal to alter a professional evaluation.

We applaud the advancement of the Inter-Agency Guidelines to better protect appraiser independence. The IAG is comprised of a group of regulators from The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA)].  They have, in essence, taken up the cause of protecting the integrity of the third-party appraiser.  To see the full rationale, have a look at the following from IAG:

Independence of the Appraisal and Evaluation Program

For both appraisal and evaluation functions, an institution should maintain standards of independence as part of an effective collateral valuation program for all of its real estate lending activity. The collateral valuation program is an integral component of the credit underwriting process and, therefore, should be isolated from influence by the institution’s loan production staff. An institution should establish reporting lines independent of loan production for staff who administer the institution’s collateral valuation program, including the ordering, reviewing, and acceptance of appraisals and evaluations. Appraisers must be independent of the loan production and collection processes and have no direct, indirect or prospective interest, financial or otherwise, in the property or transaction. These standards of independence also should apply to persons who perform evaluations.

Communication between the institution’s collateral valuation staff and an appraiser or person performing an evaluation is essential for the exchange of appropriate information relative to the valuation assignment. An institution’s policies and procedures should specify methods for communication that ensure independence in the collateral valuation function. These policies and procedures should foster timely and appropriate communications regarding the assignment and establish a process for responding to questions from the appraiser or person performing an evaluation.

An institution may exchange information with appraisers and persons who perform evaluations, which may include providing a copy of the sales contract for a purchase transaction. However, an institution should not directly or indirectly coerce, influence, or otherwise encourage an appraiser or a person who performs an evaluation to misstate or misrepresent the value of the property. Consistent with its policies and procedures, an institution also may request the appraiser or person who performs an evaluation to:

  • Consider additional information about the subject property or about comparable properties.
  • Provide additional supporting information about the basis for a valuation.
  • Correct factual errors in an appraisal.

An institution’s policies and procedures should ensure that it avoids inappropriate actions that would compromise the independence of the collateral valuation function, including:

  • Communicating a predetermined, expected, or qualifying estimate of value, or a loan amount or target loan-to-value ratio to an appraiser or person performing an evaluation.
  • Specifying a minimum value requirement for the property that is needed to approve the loan or as a condition of ordering the valuation.
  • Conditioning a person’s compensation on loan consummation.
  • Failing to compensate a person because a property is not valued at a certain amount.

This provision does not preclude an institution from withholding compensation from an appraiser or person who provided an evaluation based on a breach of contract or substandard performance of services under a contractual provision.

  • Specifying a minimum value requirement for the property that is needed to approve the loan or as a condition of ordering the valuation.
  • Conditioning a person’s compensation on loan consummation. 
  • Failing to compensate a person because a property is not valued at a certain amount.
  • Implying that current or future retention of a person’s services depends on the amount at which the appraiser or person performing an evaluation values a property.
  • Excluding a person from consideration for future engagement because a property’s reported market value does not meet a specified threshold.

Here’s the bottom line. There’s a balance to almost everything in the mortgage industry, and such balance is necessary when it comes to independent appraisals and consumer involvement. Yes, the consumer (and Realtor, and L.O.) should be kept aware of status, process and the like.  Yes, they should have some recourse (such as requesting a second appraisal) if they genuinely believe a first appraisal is flawed (it happens).  But when we allow stakeholders to actively pressure independent appraisers, we end up with inflated home values; bubbles and, eventually and in the extreme, some of the effects we saw after the subprime house of cards collapsed in and around 2008.  So, while appraisal accuracy is—TO SOME DEGREE—everyone’s job; it’s also everyone’s job to ensure the process proceeds with integrity.  Appraisal independence is an important check upon the natural inclination of stakeholders to seek the best value, period.  It’s also a critical reality check that protects the market itself, as well as homeowners (bubble bursts do terrible things to homeowners with proper ties with artificial values).