Monday, July 9, 2012
Edward V. Murphy
Specialist in Financial Economics
Real estate appraisers attempt to measure the value of a property that is being purchased or refinanced. In mortgage contracts, the property serves as collateral for the loan. Banks and their regulators may rely on the appraisal to reduce the potential losses if the borrower fails to repay the loan. Property purchasers may also rely on an appraisal if they wish to reassure themselves that the price they offered was reasonable given market conditions. This report discusses the regulation of appraisers and provides information on related statutes and rules.
The fallout from the housing bubble raised questions about the effectiveness of the regulation of residential real estate appraisers before and during the financial crisis. Real estate prices rose rapidly in some areas, then fell rapidly. When the real estate bubble burst, questions arose about the accuracy of the appraisals that supported the mortgage loans during the housing bubble.
Traditionally, regulation of real estate appraisers was handled at the state level, with a federal agency, the Appraisal Subcommittee (ASC), overseeing the state boards that licensed and certified appraisers. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank Act, P.L. 111-203) increased federal requirements for real estate appraisers and transferred some federal oversight powers from banking regulators to the new Consumer Financial Protection Bureau (CFPB).
The Appraisal Foundation, a professional organization, issues the specific standards for conducting appraisals. These standards form the Uniform Standards of Professional Appraisal Practice (USPAP), but are not federal law. The Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examinations Council (FFIEC) provides some of the funding for the Appraisal Foundation and oversees its activities.
Business practices of banks and securities firms that offer or purchase a large share of mortgages can influence appraisal standards. The rules that banking regulators and the Federal Housing Finance Agency (FHFA) set for these institutions can influence industry-wide standards, even when the rules do not technically apply to all firms. During the financial crisis, the Home Valuation Code of Conduct (HVCC) was an informal industry standard created as part of a settlement between the attorney general of New York and Fannie Mae and Freddie Mac, which are regulated by the FHFA. The Dodd-Frank Act included a sunset provision for the HVCC, and directed the banking regulators to propose interim regulations until the CFPB began operating.
Title XIV, subtitle F of the Dodd-Frank Act included other changes to the regulation of real estate appraisals. Major provisions of subtitle F include a requirement of a property visit for appraisals of a home financed by a high-risk mortgage; conditions for a second appraisal at no cost to the home purchaser; mandated independence for appraisers; portability of some residential property appraisals; rules for customary and reasonable fees; standards for appraiser education; and a mandatory annual report to Congress by the ASC on its activities.
The ASC, banking regulators, and the CFPB are proposing and implementing several new rules. For example, the agencies issued an interim final rule for reasonable and customary fees for appraisers, as required by Section 1472 of the Dodd-Frank Act.
Date of Report: June 26, 2012
Number of Pages: 12
Order Number: RS22953
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