Unintended consequences of regulations for appraisals - by Maria Hopkins

If there’s one thing I’ve learned after 32 years as an appraiser is that every time regulations are put in place for a valid reason, there is almost always a negative unintended consequence. With regard to appraisals, the government put licensing in place many years ago trying to make sure appraisers had a minimum amount of knowledge and experience. The unintended consequence was that lenders thought as long as an appraiser had a license, they were all equally qualified and competent, when in fact those appraisers who had earned designations with an appraisal organization such as the Appraisal Institute or the Massachusetts Board of Real Estate Appraisers had far exceeded those minimal licensing requirements. It is a constant education process to convey to clients what the benefits are to hiring a designated appraiser or at least one who is affiliated with an appraisal organization and not just which ever appraiser can do the cheapest, fastest appraisal. 

Fannie Mae had guidelines for adjustments where if the percentage adjustments were exceeded, there was a requirement to just explain why it was necessary to exceed them. Underwriters started pressuring appraisers not to exceed them and even mistakenly thought it was a requirement not to exceed them. They began to see an appraisal with few adjustments as being a good appraisal and one with many adjustments as being a bad appraisal. So the unintended consequence of Fannie’s guidelines was that appraisers started writing misleading (not truthful) reports reacting to the pressure from good intentioned but misguided underwriters. I used to explain to people, why would an appraiser go to the trouble of making adjustments which required extra explanations if they weren’t  just trying to do a correct job? How can four houses (subject + 3 comparable sales) all be so similar in New England? It was more common that there are differences that need to be adjusted. When the market crashed last time, extensive forensic reviews were needed on the appraisals that were the basis of loans. We found that quite often the appraisals with little adjustments that appeared good on the surface were misleading with a lot of missing necessary adjustments. After a nationwide survey, Fannie eliminated the adjustment guidelines when it became obvious what the unintended consequences were.

 A few years ago the format for an appraisal was completely standardized with specific formatted cells otherwise known as UAD appraisal format. They then had a scoring system for each appraisal of 1-5 with 5 being inferior, flagging certain items that they wanted underwriters to pay special attention to and perhaps ask for more explanation from the appraiser to make sure the property was not overvalued. They were careful to specifically say that a score of 4 or 5 did not necessarily mean it was a bad appraisal and a low score did not mean it was a good appraisal. The system was only to guide underwriters to focus on certain things and make sure the appraisal documented certain issues more. So now the unintended consequence is that regardless of what the score was supposed to mean, lenders are often denying loans based on the score and there is pressure on the appraiser to change something or do something that may be completely untrue in order to get the score down, again leading to misuse of the system and the creation of misleading reports. 

Sometimes automation can be a great thing with value added benefits. Other times it just creates a whole set of new problems with unintended consequences. There are layers upon layers of minutia and detail to learn correctly and sometimes I just long for the good old days where there seemed to be more common sense.

Maria Hopkins, SRA, RA, is president of Maria Hopkins Associates, Spencer, Mass.