Appraisal: Technology, Standards, and FIRREA's Impact

Chapter Title: Appraisal: Technology, Standards, and FIRREA’s Impact

Introduction

The appraisal industry, traditionally rooted in manual processes and subjective judgment, has undergone a significant transformation driven by technological advancements, evolving standards, and regulatory oversight, particularly following the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). This chapter delves into these intertwined aspects, exploring how technology reshapes appraisal practices, how standards ensure consistency and reliability, and how FIRREA established a regulatory framework to safeguard the integrity of the appraisal process.

I. Technology’s Evolution in Appraisal: “FinTech” Disruption

A. The Rise of “FinTech”
1. Definition: “FinTech,” short for Financial Technology, refers to the integration of technology into financial services. It extends beyond traditional financial institutions to encompass appraisal processes, impacting virtually every stage.
2. Mobile Technology’s Role: Mobile devices and applications have become indispensable tools for appraisers, replacing traditional methods and enhancing efficiency.

B. Benefits of Mobile Technology in Appraisal
1. Speed: Data input and preliminary analysis can commence remotely, accelerating the appraisal timeline.

  *   Example: An office assistant inputs property details into a mobile app while the appraiser travels to the site. The appraiser receives the synced data upon arrival, saving time on initial data collection.

2. Accuracy: Digital forms, automated data transfer, and advanced sketching tools minimize human error and enhance data consistency.

   • Data Synchronization: Information entered in one form automatically populates related fields, reducing transcription errors.

     • For example, if the property address is entered on a main form, it automatically transfers to all other relevant forms such as the sales comparison approach form and the cost approach form.

   • Sketching Software: Digital sketching tools improve the precision of property diagrams compared to manual drawings.

     • The Pythagorean Theorem can be incorporated to ensure square footage calculations are accurate, where a and b are the lengths of the sides of a right triangle and c is the length of the hypotenuse, and a² + b² = c².

   • Real-time Comparables: Access to up-to-the-minute comparable sales data improves market analysis.

   • Voice Notes: Speech-to-text functionality enables appraisers to record and transcribe observations instantly, ensuring comprehensive documentation.
     3. Cost Reduction: Increased efficiency translates to reduced appraisal costs due to less time spent on each assignment.

   • Time-Value of Money: The concept of the time-value of money applies here; the quicker an appraiser can complete an appraisal, the more opportunities they have to generate revenue.

     • PV = FV / (1 + r)^n , where PV is the Present Value, FV is the Future Value, r is the interest rate, and n is the number of periods.
       4. Streamlined Payments: Mobile payment solutions enable appraisers to collect fees on-site, reducing billing delays.

C. Practical Applications of “FinTech” in Appraisal
1. Automated Valuation Models (AVMs): Statistical models using algorithms to estimate property values based on historical data and market trends.

  *   Regression Analysis: AVMs often employ multiple regression analysis to identify relationships between property characteristics and sales prices.

      *   *Y* = *β*₀ + *β*₁ *X*₁ + *β*₂ *X*₂ + ... + *ε*, where *Y* is the estimated property value, *X* represents property characteristics, *β* represents regression coefficients, and *ε* is the error term.

2. Geographic Information Systems (GIS): Software for capturing, analyzing, and presenting geographic data, enabling appraisers to visualize property locations and neighborhood characteristics.
3. Data Analytics Platforms: Tools for analyzing large datasets to identify market trends, property characteristics, and potential risks.

II. Uniform Standards of Professional Appraisal Practice (USPAP)

A. Role of the Appraisal Foundation
1. Establishment: In response to FIRREA, major appraisal organizations formed the Appraisal Foundation to establish uniform standards for appraisal practice and appraiser qualification.
2. Structure: The Appraisal Foundation comprises the Appraisal Standards Board (ASB) and the Appraiser Qualifications Board (AQB).

B. Appraisal Standards Board (ASB)
1. USPAP Development: The ASB develops, interprets, and revises USPAP, the recognized ethical and performance standards for appraisers.
2. Components of USPAP: USPAP includes Standards, Statements, Advisory Opinions, and Rules.
a. Standards: Provide mandatory requirements for appraisal development and reporting.
b. Statements: Clarify and illustrate the application of specific USPAP standards.
c. Advisory Opinions: Offer guidance on complex appraisal issues but do not establish new standards.
3. Key USPAP Concepts
a. Intended Use: The client’s purpose for the appraisal.
b. Intended User: The parties who will rely on the appraisal report.
c. Scope of Work: The extent of research and analysis required based on the intended use and intended user.

C. Appraiser Qualifications Board (AQB)
1. Appraiser Qualification Criteria: Establishes minimum education, experience, and examination requirements for appraiser licensing and certification.
2. National Uniformity: AQB strives for national uniformity in appraiser qualifications to ensure competency across states.
3. Current Requirements: Current requirements include a bachelor’s degree to obtain an appraisal license.

D. Federally Related Transactions
1. Definition: Transactions involving a federal financial institution regulatory agency or an insured agency. This definition is outlined in FIRREA, Title XI, section 1121.
2. Appraisal Requirements: FIRREA mandates that federally related transactions require appraisals performed by state-licensed or certified appraisers adhering to USPAP.
3. Exemption Thresholds: Residential transactions of $250,000 or less and nonresidential transactions of $1 million or less are exempt from the requirement of a licensed or certified appraiser.

III. FIRREA’s Impact on the Appraisal Industry

A. Legislative Context
1. Financial Crisis of the 1980s: FIRREA was enacted in 1989 in response to the Savings and Loan crisis and widespread real estate fraud.
2. Regulatory Gaps: Prior to FIRREA, the appraisal industry lacked uniform standards and regulatory oversight, contributing to inflated property values and unsound lending practices.

B. Key Provisions of FIRREA
1. Title XI: Establishes a framework for state appraiser licensing and certification, overseen by the Appraisal Subcommittee (ASC).
2. Appraisal Subcommittee (ASC): Monitors state appraisal regulatory agencies and the activities of the Appraisal Foundation and federal financial institution regulatory agencies.
3. Establishment of the Appraisal Foundation: As previously mentioned, formed in response to FIRREA.

C. Objectives of FIRREA
1. Enhanced Appraiser Competency: Raise the bar for appraiser qualifications through education, experience, and examination requirements.
2. Uniform Appraisal Standards: Promote consistency and reliability in appraisal practice through USPAP adherence.
3. Regulatory Oversight: Provide federal oversight of state appraiser regulatory agencies to ensure effective enforcement of appraisal standards.

D. Unintended Consequences and Subsequent Legislation
1. Financial Crisis of 2008: Despite FIRREA, unsafe lending practices persisted, leading to the 2008 financial crisis.
2. The SAFE Act: The Secure and Fair Enforcement for Mortgage Licensing Act of 2008, aims to enhance consumer protection and reduce fraud by requiring states to license and register mortgage loan originators.
3. Home Valuation Code of Conduct (HVCC): An agreement, now defunct, intended to ensure appraiser independence by preventing lenders from directly selecting appraisers.
4. Appraisal Management Companies (AMCs): Third-party companies that act as intermediaries between lenders and appraisers. Increased significantly post-HVCC.
5. Dodd-Frank Wall Street Reform and Consumer Protection Act: Enacted in 2010, further addressed financial system risks and consumer protection, including provisions related to appraisal independence and quality.

IV. Appraisal Independence and Ethical Considerations

A. Threats to Appraisal Independence
1. Lender Influence: Pressure from lenders to inflate property values to facilitate loan approvals.
2. Conflicts of Interest: Situations where appraisers have a financial or personal interest in the outcome of an appraisal.
3. Valuation Bias: Conscious or unconscious bias that skews appraisal results.

B. Safeguarding Appraisal Independence
1. FIRREA and Dodd-Frank: Emphasize the importance of appraiser independence and prohibit undue influence.
2. USPAP Ethics Rule: Requires appraisers to act with impartiality, objectivity, and independence, and to avoid conflicts of interest.
3. AMC Oversight: AMCs play a role in ensuring appraiser independence by acting as a buffer between lenders and appraisers, but they also require careful regulation to prevent their own undue influence.

C. Ethical Dilemmas in Appraisal Practice
1. Pressure to “Hit the Number”: When lenders or clients pressure appraisers to reach a predetermined value.
2. Selection Bias: Intentionally selecting comparable sales that support a desired value.
3. Disclosure of Conflicts of Interest: Failing to disclose any financial or personal interests that could compromise objectivity.

V. Conclusion

The appraisal industry has undergone a profound transformation, driven by technology, standards, and regulatory oversight. “FinTech” innovations have enhanced efficiency and accuracy, while USPAP provides a framework for ethical and competent appraisal practice. FIRREA established a critical foundation for appraiser regulation and oversight, aimed at safeguarding the integrity of the appraisal process. However, ongoing vigilance and adaptation are necessary to address emerging challenges, such as maintaining appraiser independence and mitigating valuation bias, to ensure the appraisal industry continues to serve its essential role in the financial system.

VI. Review Questions

1. Explain how mobile technology has impacted the speed and accuracy of the appraisal process. Provide specific examples.
2. What is the role of the Appraisal Foundation, and how does it contribute to the standardization of appraisal practice?
3. Describe the key provisions of FIRREA and its impact on the appraisal industry.
4. What are some of the ethical challenges faced by appraisers, and how can these challenges be addressed?
5. How do intended use, intended user, and scope of work affect the development and reporting of an appraisal? Give examples.