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Appraisal Foundations: Tech, Standards, and FIRREA
Appraisal Foundations: Tech, Standards, and FIRREA
I. Technology in Modern Appraisal
A. FinTech and its Impact
FinTech, or Financial Technology, significantly impacts modern appraisal. Mobile technology advancements positively disrupt almost every phase of the appraisal process.
- Efficiency Gains
Mobile technology enhances appraisal speed, accuracy, and cost-effectiveness.
a. Speed Optimization:
Appraisals can commence remotely, with office staff pre-filling forms accessible to appraisers en route. Data synchronization ensures appraisers receive updated information quickly.
b. Accuracy Improvement:
Online forms reduce human error, automatically syncing data across all relevant documents. Sketching tools provide precise measurements, real-time comparable data access, and voice notes offer readily accessible verbal observations.
Experiment: Compare the time and error rates between traditional paper-based appraisals and those utilizing mobile technology.
c. Cost Reduction:
Streamlined processes reduce time spent on individual appraisals, increasing appraiser throughput and revenue potential.
d. Payment Facilitation:
Mobile payment apps enable immediate billing, eliminating delays associated with traditional invoicing methods.
- Mathematical Model for Efficiency
Let:
T_traditional = Time spent on a traditional appraisal (hours)
T_mobile = Time spent on a mobile-enhanced appraisal (hours)
N_traditional = Number of appraisals completed traditionally per week
N_mobile = Number of appraisals completed with mobile technology per week
R = Revenue per appraisalโโ
The efficiency gain (EG) from using mobile technology can be expressed as:
EG = (N_mobile - N_traditional) * R
Where:
N_traditional = Hours worked per week / T_traditional
N_mobile = Hours worked per week / T_mobile
If T_traditional = 8 hours, T_mobile = 6 hours, Hours worked per week = 40, and R = $500:
N_traditional = 40 / 8 = 5 appraisals per week
N_mobile = 40 / 6 โ 6.67 appraisals per week
EG = (6.67 - 5) * $500 = $835 per week
This calculation exemplifies the potential for increased revenue due to efficiency gains from mobile technology.
B. Mobile Devices as Essential Tools
Mobile devices have become indispensable tools for appraisers, replacing traditional clipboards and paper-based workflows.
II. FIRREA and Appraisal Regulation
A. Historical Context and Need for Regulation
Prior to the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), the appraisal industry lacked uniform standardsโ and qualifications, contributing to excesses in the lending industry.
B. FIRREAโs Provisions
FIRREA established essential guidelines for financial institution regulation, including:
1. State Licensing and Certification:
Mandated state licensing and certification for appraisers.
2. Nationwide Competency Standards:
Established nationwide competency standards, now requiring a four-year degree.
3. Uniform Standards of Professional Appraisal Practice (USPAP):
Required adherence to USPAP.
C. Limitations of FIRREA
FIRREA alone did not prevent unsafe lending practices, leading to the 2008 financial crisis and subsequent legislation, such as the SAFE Act, HVCC, Appraisal Management Companies, and the Financial Reform Act.
III. The Appraisal Foundation
A. Establishment and Purpose
The Appraisal Foundation was jointly founded by major appraisal organizations in response to FIRREA to set appraisal standards and appraiser qualification criteria for licensing and certification.
B. Oversight and Authority
1. State Authority:
Licensing and certification authority delegated to the states, overseen by the Appraisal Foundation under Title XI of FIRREA.
2. Monitoring:
The Appraisal Subcommittee monitors state regulatory agencies and the actions of the Appraisal Foundation and federal financial institution regulatory agencies.
C. Compliance with Standards
States must conform to appraisal standards set by the Appraiser Qualifications Board (AQB) of the Appraisal Foundation.
IV. Federally Related Transactions
A. Definition
Federally related transactions are those involving a federal or regulatory agency or an insured agency, including mortgage loans intended for the secondary market.
B. FIRREA Definition (Title XI, Section 1121):
โThe term โfederally related transactionโ means any real estate-related financial transaction which:
(A) A federal financial institutions regulatory agency or the Resolution Trust Corporation engages in, contracts for or regulates, and
(B) Requires the services of an appraiser.โ
C. Transaction Thresholds
Exempt from the requirements of a licensed or certified appraiser are residential transactions of $250,000 or less and nonresidential transactions of $1 million or less.
V. Standards of Appraisal
A. USPAP
The Appraisal Standards Board (ASB) of the Appraisal Foundation developed USPAP, which provides the standards for appraisal practice.
B. FIRREA Requirements (Title XI, Section 1110):
Each federal financial institution regulatory agency and the Resolution Trust Corporation shall prescribe appropriate standards for the performance of real estate appraisals in connection with federally related transactions. These rules must require:
1. Appraisals performed in accordance with generally accepted standards as evidenced by the appraisal standards promulgated by the Appraisal Standards Board of the Appraisal Foundation.
2. Written appraisals.
Agencies may require compliance with additional standards as necessary.
VI. Statements and Advisory Opinions
A. Statements
The Appraisal Foundation adopts Statements that are integral to USPAP, illustrating how to apply the standards in various situations.
B. Advisory Opinions
advisory opinions provide guidanceโโ from the Appraisal Standards Board but do not establish new standards or interpret existing ones. They illustrate the applicability of standards to specific situations.
VII. Intended Use, Intended Users, and Standard of Value
A. Standard of Value (Purpose)
Refers to the type of value information the client seeks (e.g., market value, insurance value, tax value, value in use, investment value).
B. Intended Use
Refers to the clientโs planned application of the appraisal (e.g., loan provision, condemnation valuation, estate settlement).
C. Intended Users
Refers to the client(s) who will rely on the appraisal report.
D. Scope of Work
The level of research, development, and report complexity depends on the intended use and intended users.
E. Examples of Intended Uses and Users
1. Sellers: Setting asking prices and evaluating offers.
2. Buyers: Determining offering prices.
3. Lenders: Evaluating loan security.
4. Insurance Companies: Determining insurance coverage amounts.
5. Government Agencies: Setting compensation for property condemnations.
6. Parties in Legal Proceedings: Providing evidence for claims (e.g., marriage dissolution).
7. Listing Agents: Proposing realistic listing prices.
8. Owners: Estate planning.
Experiment: Conduct a survey of appraisers to determine the most common intended uses and users of appraisals in their practice areas.
VIII. Career Opportunities
Appraisers find employment in various sectors, including residential and commercial appraisal, real estate consulting, and government agencies.
Chapter Summary
appraisalโ Foundations: Tech, Standards, and FIRREA
This chapter provides a foundational overview of the appraisal profession, focusing on the influence of technology, the establishment of standardized practices, and the regulatory impact of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). The integration of financial technology (“FinTech”), particularly mobile technology, has demonstrably enhanced the appraisal process by increasing speed, improving accuracy through synced data and advanced sketching tools, reducing costs due to efficient time management, and facilitating seamless payments. This technological evolution has effectively transformed traditional appraisal methods.
Prior to FIRREA, the appraisal industry lacked uniform standards and consistent regulation, creating potential for inconsistencies and vulnerabilities. FIRREA addressed this deficiency by mandating stateโ licensing and certification for appraisers and establishing nationwide competency standards, including a four-year degree requirement. It also established the requirement for the use of Uniform Standards of Professional Appraisal Practice (USPAP).
In response to FIRREA, the Appraisal Foundation was created to define appraisal standards and appraiser qualifications. The Appraisal Subcommittee monitors state regulatory agencies as well as the actions of the Appraisal Foundation and Federal financial institutions regulatory agencies, ensuring adherence to these standards. States retain the authority to establish their own licensing and certification criteria but must align with the standards set by the Appraiser Qualifications Board of the Appraisal Foundation. The standards of the Appraisal Foundation apply to โfederally related transactions,โ defined as those involving a federal or regulatory agency or an insured agency, including mortgage loans intended for the secondary market. Exemptions exist for residential transactions of $250,000 or less and nonresidential transactions of $1 million or less.
The Appraisal Standards Board of the Appraisal Foundation developed USPAP, which dictates accepted appraisal practices. Integral to these standards are Statements, which illustrate applicationโ in various scenarios, and Advisory Opinions, offering guidance without creating or interpreting standards.
The chapter emphasizes the importance of defining the intended use, intended users, and standard of value (formerly “purpose”) of an appraisal. Standard of value clarifies the type of value information sought, while intended use describes how the client intends to utilize the appraisal. Intended users identifies all parties who will rely on the appraisal report. These factors collectively determine the scope of work required for the appraisal. The chapter also highlights the diverse range of potential applications for appraisals, emphasizing that an appraisal tailored for one intended user and use may not be suitable for others. Appraisals are used by sellers, buyers, lenders, insurance companies, government agencies, taxing authorities, businesses, and parties involved in legal proceedings, among others.
