I was at an industry sponsored Holiday luncheon the other day. A member of our State Appraiser Coalition was giving us an update on the petition that was distributed and delivered to Fannie Mae regarding Collateral Underwriter. To paraphrase, our coalition member said: Fannie Mae called because the Illinois Appraisers are Rabble Rousing again.
The Uniform Standards of Professional Appraisal Practice Standards Rule 3-6 requires each appraisal to contain a signed certification. To summarize portions of that certification, it states:
- The reported analyses, opinion and conclusion are …. unbiased professional analyses, opinions and conclusions
- My engagement in this assignment was not contingent upon …. Reporting predetermined results.
- My compensation is not contingent on an action… from its use
- My compensation for completing the assignment is not contingent on development or reporting of predetermined assignment results that favors the cause of the client…
Many are going to disagree with the opinions of this paper, others are going to agree. The intent is to be able to see the forest through the trees without clear cutting the trees to see the forest.
- We all have violated the above at some point and time in our career and continue to do so.
- All of us have received the following request from our clients "We can't approve the loan unless you provide us with x, y and z from our supplementary guidelines that you agreed to comply with in the engagement letter you signed, for which you won't get paid for unless you comply"
- We can't pay you for that review unless you provide three additional comparable sales and reconcile into a new opinion of value, just use the extraordinary assumptions allowed in USPAP to make your compliance concern go away.
- Please provide comparable sales that have sale prices within 25% of the unadjusted comparable sale prices, really. Predetermine the value and then choose comps that fit.
The examples are endless, we all have them.
USPAP and State Licensing place the burden of compliance on the appraiser. There is no burden of compliance on the lender or the AMC. Many will point to Dodd-Frank and the Appraiser Independence Rule and disagree. Well, then why is it still an issue, because there is no penalty to a Lender or AMC. The penalty is applied to the appraiser. Do the GSEs have a DNR list for AMCs? Appraiser Independence "Does Not Exist" in the Residential Appraisal Mortgage Process.
Let's remove the cloak: The Residential Mortgage Process is designed to "Approve the Loan". A clear violation of the USPAP Certification.
Need more examples. Can someone show me in USPAP where it says the comparable sale has to be within 6 months of the effective date, within 1 mile of the subject and you can't make across the board adjustments for differences in physical characteristics? Underwriting Risk Guidelines are not the "Appraisal Process" and should not be the stick Teddy Roosevelt carried. Underwrite the risk don't manipulate the appraisal to mask the risk like how review appraisals were used in subprime lending contributing to the financial crisis.
The Engagement Letter says the appraisal must comply with USPAP but must also comply with the lenders additional supplementary standards. Those supplementary standards introduce bias into the comparable selection, they are also parameters that must be met in order for the loan to be made, the appraiser to get paid and therefore in essence the assignment was accepted on delivering a report that met pre-determined assigned results favoring the client.
I can hear the grumbles from the audience already. Clear cut those trees so you can see the forest, stop hiding behind the illusionary cloak of USPAP compliance.
It's easy to be an armchair quarterback and point out the flaws. It's very difficult to change how an entire industry does business.
United as an industry we can change it, fragmented we can't. Join your local State Appraiser Coalition. They have the ear of the ultimate decision makers at the State and Federal Levels. Lobby for stronger AMC regulation, at a minimum an AMC should be subject to the same risk as an appraiser and probably a higher standard since the lending industry has made them the gatekeeper. First loss position belongs to the AMC, it's their responsibility to tell their client what they are requesting is a violation of USPAP and Appraiser Independence.
Stop assuming that an Engagement Letter with terms compromising the requirements of USPAP is protection, because if you ever get in front of a Disciplinary Board or worse a Judge in a Civil Case with the FDIC as the plaintiff you may be in for a rude awakening.
Keith Wolf holds the SRA and AI-RRS designations awarded by Appraisal Institute, is a Certified Residential appraiser in IL, CVR Certified in Multiple Regression Modeling, and a Licensed Managing Real Estate Broker in 5 states. His 33 year financial services career spans regulatory compliance, underwriting, asset and valuation risk management for Household, Ocwen and Wingspan. He is currently a candidate for a Master Degree in Data Science with a Certificate in Applied Geospatial Science at Elmhurst College with a goal of developing a browser based platform that appraisers and lenders can use to manage valuation risk.
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