Bill Pastuszek, Shepherd AssociatesI recently spent some time with a roomful of residential appraisers. They advanced the usual lamentations of too many requirements, tight turnarounds, and fees that did not reflect the amount of work required to please their clients. Nothing much new, and they were no doubt probably right.
In looking at the Uniform Residential Appraisal Report (URAR) of today, I am struck by the dramatic differences between the current iteration and the appraisal report of 6 years ago. Today’s report contains so much more: URAR with UAD, the MC1004 market conditions addendum, addendum after addendum, Dodd Frank Independence statements, and other various loyalty oaths and certification leaving appraisers with boundless liability. It’s a better report, but at what cost?
The original single family form dates back to the midsts of the 1970s at the beginning of the reign of the secondary market shaping appraisal practice. While USPAP tells us that development and reporting are different activities, these forms have profoundly influenced residential appraising and given it tunnel vision/blinders, take your pick, that current reforms are trying so hard to reverse. The form, not the process, has to a large extent created many of the problems of contemporary residential appraisal.
During the housing downturn’s depths, the GSEs (Government Sponsored Enterprises) otherwise known as Fannie Mae & Co., were forced by legislative pressure to make drastic changes to their lending process. These included changes to appraisal reporting and appraisal forms.
The current form that is used for virtually all single family appraisal work is the URAR FNMA Form 1004 (or Freddie Mac Form 70). The current version of the form dates back to 2005, at the beginning of the downturn.
FNMA 1004 superseded the earlier form, called the “green hornet” by some. The old form contained slots for three sales comps, which in turn contained numerous checkboxes in the neighborhood and improvements sections allowing appraisers to select a ranking from poor to good. Most appraisers chose “average.” Surprised? Don’t be. It’s not just appraisers that like the middle of road. The tendency was to move to the middle and this had an effect on many appraisers’ ability to analyze objectively.
Over time, even with the advent of licensing, the rise of USPAP, and the supposed growing sophistication of the appraisal process, these forms have continued to keep appraisers narrowly focused on certain facts, opinions, and analyses (or lack thereof)–though no longer on typewriters or with floppies and pin-fed feeders. Even though appraisers were always free to expand beyond the restrictions of the form, most chose not to. Why? It was pretty easy not do so: find three comps, put them on the grid, make some pre-determined adjustments, mail the report off, and get a check in a few weeks.
The system worked, well, well enough. In the 1980’s and 1990’s of the S&L Crisis there was the sense that more information was needed. This perception then was applied more rigorously to commercial appraisal than to residential appraisal. With licensing’s advent in the mid 1990s, appraisers were held, at least ostensibly, to a higher standard. USPAP became important. At the time, FNMA requirements were largely interpreted by the underwriters and appraisers, often wrongly.
The Home Valuation Code of Conduct (HVCC) came into being during the depths of the crash. It was an overt attempt to reinforce the requirement that appraisers act independently, impartially, and objectively, as the system had completely broken down due to undue influence of almost everyone on the appraisal process. Weren’t appraisers still signing a certification about being “independent, impartial, and objective? What were they actually doing. The HVCC concepts were incorporated into the Dodd-Frank sections on appraiser independence.
During this dismal period, it became clear that the three comps model of the 2005 URAR was not sufficient to get appraisers and underwriters to understand the viciously declining markets of the late 2000’s. Spawned out of crisis conditions, and an unsatisfactory solution, the MC1004 was incorporated into the URAR. This market conditions addendum was created to force appraisers actually to do (and show) market trends in order to arrive at a value opinion. (Wasn’t that supposed to be happening all along?)
Many complaints later, the addendum remains unrevised. It’s still frustratingly part of residential appraisals. It was a necessary solution lacking elegance.
The Uniform Appraisal Dataset (c. 2011) was a further refinement by FNMA to standardize the appraisal process and make appraisers’ opinions and ratings more consistent from assignment to assignment. While an effort towards a solution, it has not created transparency and has made it almost necessary to read residential appraisal reports with a manual in hand.
FannieMae has continued to enhance the appraisal process by creating Collateral Underwriter (CU) which does by technology what reviewers and underwriters tried to do – strive for consistency of data and analysis from report to report. This system serves as a watchdog over the work of appraisers and cites appraisers for real (or apparent) violations of consistency and accuracy.
So appraisers continue to be driven by a system over which they have relatively little say. To a certain extent, appraisers have been the victims of their own lack of interest in the larger industry trends. Appraisers feel oppressed by appraisal rules that seem to have more to do with underwriting than valuation, by appraisal management companies that keep expanding the scope of assignments, and by clients that still would like to influence results but can’t do so directly anymore but nonetheless try.
Interestingly enough, some appraisers are figuring it out. Those appraisers are using common sense and accurate data to arrive at reasoned and supportable market analysis conclusions, despite the sometimes cumbersome restrictions and requirements placed on them. Those appraisers are finding commonsense and defensible solutions to support adjustments and select comparables, despite the often nonsensical requests of reviewers. And these appraisers are moving towards a higher level of sophistication in appraisal analysis in an environment where mitigating risk and making everything look good eclipses correct market conclusions.
Quantitative analysis techniques hold great progress as another tool for residential appraisers. But until data becomes more standardized and appraisers and underwriters become better educated, the comparables in the grid will continue to tell the story in the markets. Let’s hope that more appraisers gain the knowledge, experience, and competency to take residential appraising to the next level. Reports won’t get shorter but it is hoped that they will get better.
Bill Pastuszek, MAI, ASA, MRA, heads Shepherd Associates, Newton, Mass.