A “dysfunctional” appraisal system can be fixed only if its regulatory framework is streamlined, its credentialing standards are made uniform, and the criteria used to ascertain real estate valuations are based on a combination of cost, income, and sales comparisons.
Such are the findings of a white paper released by NAHB on January 24, which spells out the association's “blueprint” for appraisal reform including a host of recommendations formulated last year by a working group comprised of builders and officials from the financial and appraisal sectors.
The goal of reform, NAHB states, is to “rebuild the nation’s housing finance system …, restore confidence in the real estate market, and establish a foundation for sustainable growth in the U.S. economy.”
The working group broke down its recommendations into four areas:
•Regulatory framework and oversight. The appraisal industry is regulated by several federal and state agencies that oversee standards and their enforcement, as well as education and examination requirements for an appraiser to obtain certification. This “jumble of existing entities,” according to NAHB, is “inefficient,” and lacks coordination and accountability. NAHB also points to a January 2012 report by the U.S. Government Accountability Office that identified the agencies’ weak enforcement tools and inconsistent statutory requirements.
NAHB’s solution is to integrate and streamline these regulatory entities, develop more transparent appraisal reports, and improve the effectiveness of state oversight in certifying and monitoring appraisers. That last reform would include prohibiting states from commingling appraisal license fees with general funds.
•Data and technology. “It is astounding that so little is known” about U.S. real estate, asserts the NAHB, which recommends creating a registry of all real property with a unique identifier. That registry—which NAHB dubs Terra.gov—would be accessible online to all stakeholders. NAHB also recommends the creation of a valuation repository, a public/private exchange for real estate transactions, and a standards body for setting guidance for data and technology.
•Professional standards. Right now, the Uniform Standards of Professional Appraisal Practice, or USPAP, is what appraisers must comply with in all federally related transactions. USPAP is what trade associations, and state certification and licensing boards use, too, as a compliance guide.
The problem, says NAHB, is that USPAP changes every two years, and isn’t fully understood by most appraisers. So the builder group wants USPAP’s key principles reaffirmed but streamlined and made clearer.
NAHB would like to see more colleges and universities offer programs that would satisfy appraiser certification. It would also like to see the creation of certification programs for each area of an appraiser’s practice—such as new construction—each with its own education and exams; and a “clear path” to obtaining a license with mandatory re-certification every five years, “which would address the complaint that the current stock of appraisers is not well trained or well educated.”
•Practices, processes and procedures. Most residential appraisers use form reports developed by Fannie Mae and Freddie Mac. “These forms have transformed appraisers into form fillers,” states NAHB, and the forms' requirements “tend to short-circuit the flexible application of USPAP standards.”
NAHB’s gripe here is that appraisers’ approach to appraise real estate value relies too frequently, and often solely, on sales comparisons, whereas NAHB wants appraisers to also use cost and income approaches. It also believes that asking appraisers to produce a single point of value, rather than a range, “is fundamentally flawed.”
Reform here would include establishing a single set of rules, using all three valuation approaches, that produce a range of value, which would be supported by statistical analyses of large data sets; and setting standards that best match the appraiser to the assignment.
Richard L. Borges II, president of the Chicago-based Appraisal Institute, whose membership includes nearly 23,000 valuation professionals in 60 countries, was part of the NAHB Appraisal Working Group. While he doesn’t concur with all of the report’s findings, Borges nevertheless says the white paper can only elevate the conversation about how the practice of appraising real estate might be improved.
He points out that the number of appraisers has shrunk by more than 15%, to about 83,400, since its peak in 2007; based on current trends, the number could fall by another 25% to 35% over the next five to 10 years, so efforts that help to rebuild that workforce, through education and training, are welcomed.
Borges observes that many of the reforms NAHB has put forth already exist, but their enforcement slipped through the cracks during the recent housing boom and bust periods. “What we need is respect for the requirements that are out there.” And nowhere in the white paper is there any discussion about how the reforms that NAHB proffers would be paid for.
More to the point, Borges takes issue with NAHB’s focus on broadly reforming the appraisal system when, in his opinion, what specifically needs reform is the residential mortgage finance appraisal system.
Borges also believes the quality of appraisals would benefit greatly if the system were less driven by parties that have financial stakes in an appraisal’s outcome. “What’s important is for appraisers to be free to follow our best practices,” says Borges. “We still think there’s an important role to be played by getting an independent opinion about a house’s value from a trained professional.”
John Caulfield is senior editor for Builder magazine.