[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
MODERNIZING APPRAISALS: A REGULATORY
REVIEW AND THE FUTURE OF THE INDUSTRY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
NOVEMBER 16, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-111
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Housing and Insurance
BLAINE LUETKEMEYER, Missouri, Chairman
LYNN A. WESTMORELAND, Georgia, Vice EMANUEL CLEAVER, Missouri, Ranking
Chairman Member
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico WM. LACY CLAY, Missouri
BILL POSEY, Florida AL GREEN, Texas
ROBERT HURT, Virginia GWEN MOORE, Wisconsin
STEVE STIVERS, Ohio KEITH ELLISON, Minnesota
DENNIS A. ROSS, Florida JOYCE BEATTY, Ohio
ANDY BARR, Kentucky DANIEL T. KILDEE, Michigan
KEITH J. ROTHFUS, Pennsylvania
ROGER WILLIAMS, Texas
C O N T E N T S
----------
Page
Hearing held on:
November 16, 2016............................................ 1
Appendix:
November 16, 2016............................................ 39
WITNESSES
Wednesday, November 16, 2016
Brady, Ed, Chairman of the Board, National Association of Home
Builders....................................................... 11
Bunton, David S., President, the Appraisal Foundation............ 6
Garber, Bill, Director of Government and External Relations,
Appraisal Institute............................................ 9
Park, James R., Executive Director, Appraisal Subcommittee....... 4
Trice, Joan N., Chief Executive Officer and Founder, Clearbox.... 8
Wagner, Jennifer S., Managing Attorney, Mountain State Justice,
Inc............................................................ 12
APPENDIX
Prepared statements:
Brady, Ed.................................................... 40
Bunton, David S.............................................. 51
Garber, Bill................................................. 76
Park, James R................................................ 96
Trice, Joan N................................................ 116
Wagner, Jennifer S........................................... 128
Additional Material Submitted for the Record
Luetkemeyer, Hon. Blaine:
``Regulatory Issues Facing the Real Estate Appraisal
Profession''............................................... 143
``A White Paper on the Federal Banking Agencies' Arbitrary
and Capricious Efforts to Exempt the Vast Majority of
Federal Real Estate Related Financial Transactions from
Title XI of FIRREA's Appraisal Reforms''................... 177
Written statement of the National Association of REALTORS... 192
Royce, Hon. Ed:
Written responses to questions for the record submitted to Ed
Brady...................................................... 202
Written responses to questions for the record submitted to
David S. Bunton............................................ 204
Waters, Hon. Maxine:
Written responses to questions for the record submitted to
Jennifer S. Wagner......................................... 212
MODERNIZING APPRAISALS: A REGULATORY
REVIEW AND THE FUTURE OF THE INDUSTRY
----------
Wednesday, November 16, 2016
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2128, Rayburn House Office Building, Hon. Blaine
Luetkemeyer [chairman of the subcommittee] presiding.
Members present: Representatives Luetkemeyer, Pearce,
Posey, Ross, Barr, Rothfus, Williams; Cleaver, Velazquez, Clay,
Green, and Beatty.
Ex officio present: Representative Waters.
Also present: Representative Sherman.
Chairman Luetkemeyer. The Subcommittee on Housing and
Insurance will come to order. Without objection, the Chair is
authorized to declare a recess of the subcommittee at any time.
Today's hearing is entitled, ``Modernizing Appraisals: A
Regulatory Review and the Future of the Industry.''
Before we begin, I would like to thank the witnesses for
appearing before the subcommittee today. We look forward to
your testimony. I now recognize myself for 5 minutes to give an
opening statement.
Many homeowners don't focus on appraisals until something
goes wrong, or until they can't get one. It is not an area in
which Congress spends much time debating or one that the media
covers intently, but appraisals are one of the cornerstones of
the home-buying process. Issues that impact appraisers also
impact nearly every American buying or selling a home in rural
and urban areas, in high- and low-income neighborhoods.
These issues affect lenders, home builders, real estate
professionals, and ultimately, the health of the American
economy, and the manner in which appraisals are regulated
merits the attention of this subcommittee. The appraisal
profession has changed dramatically since the last major
regulatory overhaul with passage of FIRREA in 1989. The finance
mortgage system has changed, and alternative valuation methods
are more advanced than ever. Yet when it comes to the
regulatory regimes surrounding appraisals, it seems we are
stuck in 1989. Let's do a quick overview of the system in place
today, as I understand it.
The Appraisal Subcommittee, a body comprised of seven
Federal regulators, regulates the standards and requirements of
each State appraisal board. The Appraisal Foundation, a
nongovernmental entity chartered by Congress, promulgates those
standards and requirements for the States, but lacks any
meaningful regulatory authority. That authority lies in the
States, which go through the actual process of credentialing
the appraisers based on the criteria set by the Foundation. We
have licensed appraisers, certified appraisers, and general--
certified general appraisers. We have appraisal management
companies that act as a third party in selecting appraisers.
This is not a simple regime, and it impacts homeowners.
Perhaps as a result of some of this regulatory bureaucracy,
the appraisal industry is experiencing a shortage that is
beginning to harm the housing market. We are seeing delayed
closings and increased consumer costs. This shortage is hitting
rural areas particularly hard, including rural Missouri, which
I am very familiar with.
Today's hearing will give us an opportunity to investigate
the past, present, and most importantly, the future of
appraisal regulation. I personally would like to see a more
State-centric model of regulation, one that cuts some of the
Federal bureaucracy hovering above appraisers today.
Beyond the regulation of appraisers, we should look at the
current regime--what the current regime requires of lenders,
builders, and home buyers. We need to examine alternative home
valuation methods that employ the most modern technologies and
foster greater consumer choice. We should look at the
individuals who should and should not be qualified to do an
appraisal and deploy resources accordingly.
In rural Missouri, for example, where today there may be
one appraiser for every two counties, there needs to be an
alternative. We need to address this in the changing
marketplace. Dodd-Frank attempted to address some of the
shortcomings seen in the appraisal market, but the law's impact
has not enhanced the system for appraisers, stakeholders, or
most importantly, consumers. Appraisal is important. They
instill confidence and guard against housing markets that could
otherwise become depressed.
We live in the 21st century, and the market deserves 21st-
century solutions. It is long past time to examine this model
regulation and find a better way. Again, I want to thank the
witnesses for appearing before the committee today. I look
forward to an open conversation.
And the Chair now recognizes the ranking member of the
subcommittee, the gentleman from Missouri, Mr. Cleaver, for 5
minutes for an opening statement.
Mr. Cleaver. Thank you, Mr. Chairman. We are holding this
hearing on the role of--that appraisals play in the housing
market, and this will give us the opportunity to discuss
changes that have been made to the appraisal system following
the Dodd-Frank Act that went into effect in 2010. As we all
know, the States are responsible for much of the regulations
for the appraisal process, including the certification and
licensing of appraisals, as well as the registration of
appraisal management companies.
The Federal Government also plays a role in a more general
oversight working to create more uniform standards, and the
Financial Institution Recovery Reform and Enforcement Act of
1989 originally sought to oversee appraisal standards, but many
of those provisions were updated with the passage of the Dodd-
Frank Act, including independent appraisal requirements and the
duty to report on appraisers who violate the law, and during
the housing crisis, they were many.
It has been a hard 6 years since the start of the housing
crisis, though this committee has spent a considerable length
of time working to staunch the bleeding, and many of the wounds
are still healing. The fraudulent inflation of home prices by
some dishonest appraisers did, in fact, play a significant role
in the housing crash, and it is imperative that we continue to
impose high standards to ensure the safety and soundness of the
housing market but also, to protect the honest, hardworking
appraisers.
During the debate over Dodd-Frank, I can remember those
seats being taken by individuals who gave us horror stories
about what appraisers--some appraisers were doing. But I do
think that--I mean, at least I try to be careful that we don't
somehow demean all appraisers. But I believe it is necessary to
uphold appraisal independence to ensure that lenders operate
independently from appraisers without unduly putting pressure
to overinflate prices.
I also have a number of questions regarding the alternative
valuation methods where computer systems are used to determine
the value of mortgages. While Dodd-Frank bears sole reliance on
these systems, I do, in fact, have concerns that a move toward
higher use of computerized modeling would be detrimental to the
housing market, so I appreciate you being here today, and I
look forward to becoming dialogical as the committee hearing
goes on. Thank you, Mr. Chairman.
Chairman Luetkemeyer. I thank the gentleman. I now
recognize the gentleman from Texas, Mr. Green for the balance
of the time.
Mr. Green. Thank you, Mr. Chairman, and I thank the ranking
member as well. I do believe that we have some room for
improvement in this area, and I think that some of the things
that I have heard from people who have had actual experiences
are--would merit some consideration. I talk to realtors, I talk
to the lenders, and I have talked to the people who actually do
some of this appraising, and there appears to be space for
improvement.
It seems that one of the overriding concerns is a lack of
an appeal process, a lack of a process that allows for a
dispute to be resolved when it comes to the value of property.
And another area of concern appears to be how long will an
appraisal stay with the property before you can have another
appraisal, assuming that you have applied for an FHA loan.
Conventional loans are a little bit different from the FHA
loans.
These FHA loans are desired for various and sundry reasons.
The hard stop on a FHA loan may not be the same as
conventional, so people want the better product. But in getting
the better product, they are having some concerns that I think
we should look at. But I also think that as we look at these
concerns, we should make sure that we don't just completely do
away with some things that have been that are beneficial. This
is the old baby-in-bathwater argument. I think that there are
some things that are beneficial that we have to maintain and
should maintain, but I do believe that in a major piece of
legislation, there are opportunities to make corrections that
are sometimes called "technical corrections," and I would
support what the ranking member has said in terms of our
desiring to be amenable to looking at some of these things, and
I yield back the balance of my time.
Chairman Luetkemeyer. The gentleman yields back. Today we
welcome the testimony of Mr. James Park, executive director of
the Appraisal Subcommittee; Mr. David Bunton, president of the
Appraisal Foundation; Ms. Joan Trice, chief executive officer
and founder of Clearbox; Mr. Bill Garber, director of
government and external relations from the Appraisal Institute;
Mr. Ed Brady, chairman of the board, National Association of
Home Builders; and Ms. Jennifer Wagner, managing attorney,
Mountain State Justice, Incorporated.
You will each be recognized for 5 minutes to give an oral
presentation of your testimony. And without objection, your
written statement will be made a part of the record. And just
to give you a little primer on the lights in front of you,
green means go, yellow means you have 1 minute to wrap up with
your testimony and all the questions that you see around us
when we ask you, and red means time to stop. I do have the last
say.
So with that, Mr. Park, you are recognized for 5 minutes.
Welcome.
STATEMENT OF JAMES R. PARK, EXECUTIVE DIRECTOR, APPRAISAL
SUBCOMMITTEE
Mr. Park. Good morning, Chairman Luetkemeyer, Ranking
Member Cleaver, and members of the subcommittee, thank you for
the opportunity to testify before you this morning. My written
testimony details the history of appraisal regulation, the
Appraisal Subcommittee, our current operations, and the added
responsibility and authority given to the ASC through the Dodd-
Frank Act.
Given my limited time before you this morning, I will focus
my comments on the discussion topics as requested by this
subcommittee.
First, regarding alternative valuation methods. This is
nothing new. The GSEs, lenders, and others have been using them
for many years. While technological and innovation is needed
and should be encouraged, care should be taken to develop
valuation techniques that do not rely solely on technology and
big data, but also rely on the professional expertise provided
by an appraiser.
Unlike appraisals, there are no generally accepted
standards for development or use of AVMs, or automated
valuation models, evaluations, or hybrids. Automated tools are
easily manipulated, and overreliance could lead to misleading
conclusions, fraud, and abuse. Automated tools also have
limited use in rural and urban areas where data is scarce or
unreliable.
Second, regarding the appraiser shortage. It appears that
economic conditions in certain parts of the country have
increased demand for appraisal services. What is not clear is
the cause of these localized supply-and-demand issues, and the
veracity of news reports on the topic is questionable. Part of
the problem may be that many appraisers refuse to accept
mortgage lending assignments due to low pay, confusing or
burdensome conditions, fear of blacklisting, and a perception
that lenders don't value their opinions.
However, I am concerned about the lack of new entrants into
the profession compared to the numbers of appraisers leaving.
This has been a trend for several years now and could lead to
problems in the future.
In 2008, Congress passed a Housing and Economic Recovery
Act, HERA, requiring FHA to only accept appraisals performed by
certified appraisers and barring the use of licensed
appraisers. Since HERA, many lenders have followed suit,
effectively removing otherwise qualified appraisers from
mortgage lending. This is a particular problem in rural
markets.
Third, regarding the de minimis value threshold. The
Federal financial institutions regulatory agencies set the de
minimis threshold with CFPB concurrence. Questions regarding
the threshold should be directed to those agencies.
Fourth, regarding the streamlined Federal regulatory
regime, the ASC recognizes the importance of a streamlined
regulatory system and has taken several steps to promote one.
Details are in our written testimony.
Related to other areas that could be streamlined or
improved, standardize the varying requirements placed on
appraisers by the GSEs, FHA, VA, Federal regulators, and
lenders. Today's current cornucopia of statutes, rules, and
guidelines, some of which continually change, are confusing and
burdensome to all.
Require the GSEs to share with appraisers data being
collected from appraisal reports through the GSE's collateral
portals. Modernized use of appraisals in mortgage lending allow
appraisers to provide a reasonable range of values. Low-risk
transactions are sometimes denied or canceled when the
appraised value is just slightly below the value needed to make
the deal work.
Lastly, regarding replacing the current system with a
State-based regulatory structure. Currently, we have an
effective system that draws on the strengths of the States,
private sector, and Federal Government. The system also largely
relies on appraisers to regulate other appraisers. Replacing
the Federal regulatory structure with a State-based regulatory
system would greatly complicate, not streamline, the system.
Cost to consumers and lenders would increase and unnecessarily
burden the mortgage finance system as States would almost
certainly implement varying laws and regulations. There are
already examples of this in the States.
In conclusion, throughout my career in the private sector
and now in the Federal Government, I have dealt with a
complicated array of Federal and State laws, regulations, and
guidelines, and I can assure you that the industry seeks more
standardization, not less. While the current system respects
and supports States' rights, I want to impress upon you the
importance of a national minimum baseline of enforceable
appraisal standards and appraiser qualifications to facilitate
Congress.
Turning appraisal regulation back to the States would
likely be counterproductive as it would increase regulatory
burden and cost and likely further restrict consumer access to
purchasing a home and credit, in general.
Thank you for the opportunity to appear before the
subcommittee, and I look forward to answering any questions.
[The prepared statement of Mr. Park can be found on page 96
of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Park.
Mr. Bunton, you are recognized for 5 minutes.
STATEMENT OF DAVID S. BUNTON, PRESIDENT, THE APPRAISAL
FOUNDATION
Mr. Bunton. Thank you, Mr. Chairman, Ranking Member
Cleaver, and members of the subcommittee. The Appraisal
Foundation greatly appreciates the opportunity to appear before
you today and to offer our perspective on the regulation of
real estate appraisers.
By way of background, I've served as a senior staff member
of the Foundation for the past 26 years and have the privilege
of serving on the Congressional staff for a dozen years prior
that.
Let me just begin with a few words about who we are and
what makes us different. One, we are a not-for-profit
organization that was founded before the enactment of FIRREA.
We are not an advocacy group or a trade association, but rather
an umbrella group that represents about 100 organizations, and
they range from the American Bankers Association to the
Department of Veterans Affairs, from the National Association
of Home Builders to the Department of Interior.
Essentially an appraiser regulatory system, we are the
private sector expertise. We do not have a--as the chairman
pointed out, we don't have any regulatory authority, but we
provide the tools to the regulatory community. For example, we
set the minimal qualifications that you need to get a State
credential education experience. We write the exam that is used
by all 50 States in five territories, and we also are the
authors of the generally recognized standards of conduct, the
Uniform Standards of Professional Appraisal Practice that all
State-licensed and certified appraisers must adhere to. We have
also been a resource to numerous Federal Government agencies,
and currently have cooperative agreements with the U.S.
Department of Energy and the Department of Justice.
To address the points that were referenced in your
invitation to testify, I would like to offer the following:
We do have a very unique Federal, State, and private sector
partnership that has grown and matured over the past quarter
century. It is effective and operates solely on user fees paid
by appraisers. There are no government-appropriated funds
involved in this, and we believe this could be a model for
other regulatory programs.
Regarding the effectiveness of the Appraisal Subcommittee,
the implementation of a rating system of the State appraiser
regulatory programs and the appointment of policy level
representatives to the subcommittee have been very positive
steps in recent years. However, we believe there are few
opportunities for improvement in its current structure.
Dodd-Frank and its impact on the current regulatory system,
stakeholders, and consumers. The focus on appraiser
independence, the regulation of appraisal management companies,
and the elimination of some predatory lending practices were
all positive outcomes. However, there have been several
unintended consequences of those decisions, which we look
forward to discussing with you today.
The de minimis threshold in Federally related transactions.
According to the National Association of Realtors, the average
sale price of an existing home is $230,200. The current level
of the de minimis is $250,000. You can make the argument it is
already too high, and we are certainly in opposition to any
increase to the $500,000 level.
We also believe that efforts should be made to restore the
definition of what constitutes a Federally related transaction,
back to what Congress originally intended when FIRREA was
enacted in 1989.
A shortage of appraisers. There is no question that there
is currently a shortage of appraisers in certain markets. It is
not a national shortage, but in certain markets, particularly
in rural areas and areas that have seen an uptick in mortgage
originations, there is a shortage. We have--there are several
reasons for this, no one reason, and I look forward to sharing
those reasons with you this morning.
Appraising in the 21st century. As long as we have a
collateral-based lending structure, there will always be a need
to determine the underlying value of the security for a loan.
While we may have entered the age of big data, the analysis of
that data by a trained valuation professional has never been
more important. An example for that would be what happened 9
days ago. The day before the election, we all were exposed to a
great deal of very precise data, and we all learned 24 hours
later, it was not accurate data. So that is an example of
where--you can trust the numbers but you need some human
intervention there.
In conclusion, today we may hear testimony that will
contain proposals that range from creation of a new large
Federal bureaucracy to one that all but eliminates Federal
oversight. The current Title XI real property appraiser
regulatory system, while unique and not without its flaws, it
has made a real positive difference over the past quarter
century. It promotes consistency among the States due to the
appropriate Federal oversight. It has instilled competency by
ensuring that we have meaningful standards and qualifications,
and a uniform national exam, none of which existed before the
enactment of FIRREA, and it operates at no cost to the
taxpayers, and there are no Federally appropriated funds.
Appraisers have historically made a significant
contribution to the safety and soundness of our financial
system, and their important role will continue in the future.
The catalyst for the creation of this current appraiser
regulatory system was to protect the integrity of the deposit
insurance fund, a need that is as strong today as it ever was.
The Foundation stands ready to assist with any effort to make
the current system more efficient.
Again, we appreciate the opportunity to share our
perspective with you, and we urge this subcommittee and all
Members of Congress to continue to use the Foundation as a
fair, impartial, and objective resource. Thank you very much.
[The prepared statement of Mr. Bunton can be found on page
51 of the appendix.]
Chairman Luetkemeyer. Mr. Bunton, you are very, very good.
That was exactly 5 minutes. That is amazing. Thank you very
much for your testimony.
Ms. Trice, you are recognized for 5 minutes.
STATEMENT OF JOAN N. TRICE, CHIEF EXECUTIVE OFFICER AND
FOUNDER, CLEARBOX
Ms. Trice. Chairman Luetkemeyer, Ranking Member Cleaver,
and members of the Subcommittee on Housing and Insurance, thank
you for the opportunity to share my thoughts regarding,
``Modernizing Appraisals: A Regulatory Review and the Future of
the Industry.''
My name is Joan Trice, and I am speaking on behalf of no
one in particular, but anyone who desires to uphold appraisal
independence. Today, all stakeholders suffer from appraisal
regulatory regime that is outmoded. The housing finance crisis
shed a bright light on the systemic failures of the appraisal
process.
The structural flaws of the regulatory schema reveal a
system whereby no one was held accountable. This illustration
of the current regulatory system says it all. It should be no
surprise that giventhe above diagram, that the appraisal
industry is being highly scrutinized. It is entirely
dysfunctional. It is time for big and bold, a plan to overhaul
the system.
The appraisal profession needs a single authority to take
ownership of the policy, process, practice, procedures, and the
people who are licensed. National licensing is needed with
oversight at the State level. States must adopt a standardized
process for investigation and adjudication of any disciplinary
actions. Peer review and rehabilitation of the appraiser should
occur at the State level.
This new entity should not carry forward any of the legacy
agencies that exist today. The times call for a fresh holistic
solution to replace the disjointed ineffective structure that
currently exists. Repeal FIRREA Title XI and replace it with
this new independent agency.
Independence is the cornerstone of the appraisal process.
The home valuation code of conduct, and subsequently the
appraisal independence requirement components of Dodd-Frank,
left an indelible mark on the appraisal profession. For the
last 9 years, practically every single stakeholder has done
their best to avoid compliance with the appraisal independence
requirements. Appraisal is truly the weak link, and our current
policies and systems continue to diminish the important role
that appraisers play in the housing finance ecosystem.
Discussions of shortages, poor quality, cost, delayed delivery
of appraisals, and the de minimis threshold are all code for
efforts to diminish the role of the appraisal process.
The events of the presidential election offer a cautionary
tale. Big data failed, models failed, bias and lack of
independence by the analysts failed. Fannie Mae and Freddie Mac
would have you believe that they hold all the marbles. Once
again, they are competing with each other by reducing appraisal
requirements. This is a race to the bottom, and we have seen
this movie before, and we know how it ends.
Do not think for a minute you can replace appraisers with
pushbutton technology. Appraising is part art and part science.
Create a system whereby well-trained ethical appraisers have
access to reliable data and afford them the independence to
play their important role.
In conclusion, if Congress is truly serious about the
safety and soundness of the housing finance system, then there
is only one clear path for the appraisal process to thrive.
Establish a single authority over real estate appraisal. The
white paper entitled, "Reengineering the Appraisal Process" I
provided explores in greater detail solutions to bolster the
appraisal profession.
Thank you for the opportunity to share my thoughts on this
important topic.
[The prepared statement of Ms. Trice can be found on page
116 of the appendix.]
Chairman Luetkemeyer. Thank you, Ms. Trice.
Mr. Garber, you are recognized for 5 minutes.
STATEMENT OF BILL GARBER, DIRECTOR OF GOVERNMENT AND EXTERNAL
RELATIONS, APPRAISAL INSTITUTE
Mr. Garber. Mr. Chairman and members of the subcommittee,
on behalf of the largest professional association of real
estate appraisers in the United States, thank you for holding
this hearing. Real estate appraisal plays a critical role in
the American economy by helping financial institutions conduct
risk management and make safe and sound loans.
Today, the number of appraisers in the United States is on
the decline, and banks and real estate professionals are
expressing concerns about a potential shortage of appraisers.
Appraisers routinely are being buried by rules and regulations
in nearly every facet of their business, from how an appraiser
reports an appraisal through supervising trainees, uneven
licensing requirements to licensing and registration fees
passed down by clients, to mandates from Federal agencies,
appraisers' professional lives have become overly complicated,
more expensive, and less productive due to a dated and archaic
regulatory structure that needs to be revised and updated to
the reflect today's market.
Real estate appraisers face a layering effect of rules and
regulations that create a disincentive for potential entry into
the profession, while also diminishing the profession's
profitability. This is counterproductive, given that rules and
regulations continue to grow in number every year. These
include background checks with no Federal mandate or efficient
processing system, unappealing supervisory appraiser and
trainee appraiser requirements, and constantly changing rules
and standards.
While we appreciate the role and function of the various
organizations and agencies that have been part of the appraisal
regulatory structure since its beginnings in 1989, the
appraiser regulatory structure today is overly complicated. The
primary functions of the Appraisal Subcommittee can and should
be performed more efficiently, and without perpetually taxing
appraiser practitioners and users of appraisal services.
And the Appraisal Foundation's role in setting standards
and qualifications, a role that is carried out reasonably well,
should be unimpeded by unrelated activities. In short, the
continuous state of change forced on the profession can be
simplified and made more accountable. As such, the Appraisal
Institute believes there is a better, less complicated approach
that would improve appraisal quality, reduce costs, and address
fundamental concerns that are driving away appraisers from the
profession.
We believe that our proposed model would benefit from the
combined experiences of other industries and precedents
established by Congress. Specifically, we suggest that Congress
modernize the appraisal regulatory structure and align it with
those in the real estate and mortgage industry using a model
like the Nationwide Mortgage Licensing System cooperative among
State agencies.
Authorizing the appraisal profession to utilize a system
like the NMLS for its certification and licensing system would
enable State appraiser regulatory agencies to benefit from
enhanced communication with other State agencies, including
those outside of appraisal such as State banking regulatory
agencies. Such a realignment would also provide a common system
for appraisers to submit applications for licensure in multiple
States.
Today, appraisers who wish to earn and carry licenses in
multiple states must separately apply in each State,
significantly adding to administrative requirements and
obligations. The most direct example of the benefits of such a
system involves background check requirements that currently
are being imposed on appraisers on a State-by-State basis.
Several years ago, the Appraisal Foundation established a
fingerprint-based background check requirement for States.
Today, 47 States now have in place a requirement for formal
background checks. Many States impose similar requirements on
existing credentialed holders in real estate appraisal, many of
whom have been practicing in good standing without any issues
for many years. A few States even went so far as to impose
these requirements on appraisers practicing in other States who
applied for a license via reciprocity or a temporary practice
permit.
Even though the Appraisal Foundation had the best
intentions, it eventually backed away from this requirement,
acknowledging that it had erred. Now it is unlikely that States
will repeal or change the existing requirements anytime soon.
Under an NMLS-like system, such background checks could be
performed and shared by all participating State agencies hoping
to significantly shave its burdensome administrative expense.
In conclusion, the Appraisal Institute is not suggesting
eliminating all Federal involvement in the appraisal regulatory
structure, but rather repositioning it to align with regulatory
systems of other related industries. Should States fail in
their responsibilities to manage appraisal oversight, a
specified Federal agency like the FDIC, or FHFA could be
authorized to set up a backstop system just as the statute
recognizing the NMLS does today. Such a system simply would
reposition the Federal role to one of a backstop authority of
one of last resort.
Presently, real estate appraisers pay for the operation and
maintenance of the regulatory structure through license renewal
fees, course requirements, and mandates to purchase the volume
of rules and regulations. After almost 27 years of FIRREA, it
is time to make the appraisal regulatory structure and process
more efficient and reposition--and responsive to the needs of
practitioners and consumers.
The Appraisal Institute applauds Congress' review of the
FIRREA statute with an eye towards modernizing the appraisal
regulatory structure, and we stand ready to assist you in any
way we can. Thank you for giving us the opportunity to testify
today, and I would be happy to answer any questions.
[The prepared statement of Mr. Garber can be found on page
76 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Garber.
Mr. Brady, you are recognized for 5 minutes.
STATEMENT OF ED BRADY, CHAIRMAN OF THE BOARD, NATIONAL
ASSOCIATION OF HOME BUILDERS
Mr. Brady. Chairman Luetkemeyer, Ranking Member Cleaver,
and members of the subcommittee, I am pleased to appear before
you today on behalf of the National Association of Home
Builders to share our views on the regulatory structure of the
appraisal industry and suggestions for ensuring efficient and
effective collateral valuation.
My name is Ed Brady, and I am a home builder and developer
in Bloomington, Illinois, and sitting here as NAHB's 2016
chairman of the board.
The housing recovery has been impeded by ongoing problems
in the U.S. residential appraisal system. While lenders,
Federal banking regulators, and Federally related housing
agencies implemented corrective measures in response to
valuation breakdowns in the wake of the Great Recession, And
Congress mandated additional measures in the Dodd-Frank Act,
these steps did not address fundamental flaws and shortcomings
of the residential appraisal framework.
Improper appraisal practices, a shortage of experienced
appraisers, and inadequate oversight of the appraisal system
continue to restrict the flow of mortgage credit and retard the
housing recovery. NAHB is not advocating that appraisals should
be higher than the market. Rather, our goal is to establish an
appraisal system that produces accurate values through all
phases of the housing cycle.
The focus of reforms, to date, have been on eliminating
undue influence on appraisers to produce inflated valuations.
However, when home prices began declining, improper appraisal
practices exasperated the sliding values. Some appraisers used
distress sales, many of which involve properties that were
neglected and in poor physical condition as comparables in
assessing the value of a brand new home, without accounting for
major differences in condition and quality. Without such
adjustments, the two housing types are just not compatible or
comparable.
As the housing market has improved, builders face new
appraisal challenges, specifically the lack of data on new
construction, a shortage of appraisers experienced in
appraising new construction, and no practical way to appeal a
faulty appraisal. Getting more new home transactions into
multiple listing services' databases would be a simple solution
for the lack of data. NAHB is presently engaged in that
discussion, and this, we hope, to result--have results soon.
Through dramatic increase in the use of appraisal
management companies, or AMCs, has led to more activity by
appraisers with less training and experience. This is
problematic for new home construction transactions, which by
their nature, are very complex.
Appraisers must be able to analyze detailed plans and
specifications, determine the value of options, including
state-of-the-art energy efficiencies, find appropriate
comparables, and factor in land values. One way to improve the
quality of new home valuations is to strengthen education,
training, and experience requirements for appraisers of new
home construction.
The biggest flaw in the current appraisal system is the
lack of workable appeals processes. Current valuation practices
do not provide a process for expedited appeals of inaccurate or
faulty appraisals. Buyers and sellers, builders and real estate
agents can be held hostage by the current inability to promptly
address legitimate questions on evaluation. NAHB recommends the
adoption of a standard appraisal appeal structure similar in
design to the one utilized by the VA.
Finally, the current residential appraisal system continues
to face many challenges due to inconsistent and conflicting
appraisal standards and guidance as well as the inadequate
Federal oversight. NAHB believes that fundamental appraisal
system reform must be a principal element of efforts to rebuild
the Nation's housing finance system.
Coordination and accountability currently are lacking, and
there are major gaps in the system. In closing, collateral
valuation is critical--is a critical component of the mortgage
decision. While there have been a number of positive changes to
the appraisal system since the financial crisis, there remain a
number of unresolved issues. NAHB stands ready to work with
this subcommittee, along with appraisal, housing, and financial
stakeholders to address the real challenges we face in
restoring the public trust and how we build, transfer, value,
and finance America's--American consumers' most valuable asset,
their home. Thank you, Mr. Chairman.
[The prepared statement of Mr. Brady can be found on page
40 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Brady.
Ms. Wagner, you are recognized for 5 minutes.
STATEMENT OF JENNIFER S. WAGNER, MANAGING ATTORNEY, MOUNTAIN
STATE JUSTICE, INC.
Ms. Wagner. Thank you, Mr. Chairman, Ranking Member
Cleaver, and members of the subcommittee. On behalf of Mountain
State Justice, the National Consumer Law Center, and the
National Association of Consumer Advocates, thank you for
inviting me to testify today.
I am the managing attorney of Mountain State Justice, a
nonprofit legal services providers in West Virginia. Since the
early 2000s, we have served thousands of the homeowners in
danger of losing their homes as a direct result of appraisal
fraud and other predatory lending practices. I am here today to
thank Congress for imposing stricter new standards for
appraisals under the Dodd-Frank Act.
These new standards have dramatically reduced appraisal
fraud. In turn, saving countless of homeowners from
foreclosure. It is common knowledge that lax regulation of the
mortgage and appraisal market led directly to the devastating
financial collapse of 2008. Before the collapse, profit-driven
brokers and lenders worked with appraisers to fraudulently
inflate home values. Lenders made more money from larger loans,
and they rewarded appraisers willing to hit target values with
repeat business, and sometimes even kickbacks.
Many of these loans contained features that would cause the
homeowners' payments to skyrocket after a short teaser period.
Even before the market collapsed, consumers and their advocates
began to see this house of cards topple as homeowners trapped
in these underwater loans were unable to refinance when their
payments spiked up. Thousands, and soon millions, of homeowners
faced foreclosure. Surely, we all remember this.
In my organization alone, for years, every single week, we
saw dozens of homeowners facing foreclosure because of
appraisal fraud. Appraisal fraud is why one of my clients, I
will call Ms. R, came into my office desperate to save her
home. Ms. R had tried to refinance for a lower fixed interest
rate after her payments skyrocketed. She was denied because her
loan was so underwater and now she faced foreclosure.
How did this happen? A broker appraiser team preyed on her,
repeatedly flipping her into loans of ever-increasing amounts.
Then a phone salesman for another lender called promising her
lower payments. This lender didn't bother with an appraisal.
Instead, it used an automated valuation model, which provided a
grossly inflated valuation based on flawed data. This
inaccurate computer model inflated the value of Ms. R's home by
nearly 300 percent. Ms. R was trapped.
The conduct that pushed her to the brink of homelessness
also led to the devastation of 2008 when millions of homeowners
lost their homes and banks failed across the country. The
regulations adopted by Congress in response were absolutely
necessary to prevent a repeat of the same devastating events.
The Dodd-Frank Act increased regulation of appraisals
building on the necessary safety and soundness requirements
passed after the savings and loan crisis. Dodd-Frank has ended
the practice of appraisal fraud, primarily by requiring
appraisals to be independent as well as accurate and conducted
in person by qualified appraisers.
These reforms help homeowners make--help keep homeowners
informed about the biggest financial decisions they will ever
make. They also protect lenders and investors and insurers by
ensuring that they have the collateral necessary to protect
their risk. There is no doubt that these reforms have been a
success. Weakening these standards, including allowing lenders
to rely on alternative valuation models, or eliminating
appraisal independence controls, will return us to the recent
era of unreliable reports that ultimately upended the market.
The existing baseline of Federal lending and appraisal
standards is necessary to ensure that consumers and the entire
financial market are uniformly protected from both fraud and
from unintentional error. The savings and loan crisis of the
1980s, and then the economic collapse of 2008, showed the
urgent need for these commonsense rules.
Eliminating these minimum Federal protections, and instead
relying solely on the States would open the door to more
economic crises that devastate homeowners and financial
institutions alike. In sum, Congress wisely adopted the current
Federal appraisal protections to protect the American dream of
homeownership and financial stability.
Without these protections, we face the risk of a new
financial crisis, even while we barely recovered from the last
one. I urge you to keep these essential protections in place. I
am happy to answer any questions. Thank you.
[The prepared statement of Ms. Wagner can be found on page
128 of the appendix.]
Chairman Luetkemeyer. Thank you, Ms. Wagner.
With that, we will begin the questions, and I will
recognize myself for 5 minutes.
Mr. Garber, you made a couple of comments with regards to
some of the other--the Appraisal Subcommittee and the Appraisal
Foundation. I guess, so my question is, do you believe both
those entities are relevant?
Mr. Garber. Thank you for the question. These are two
different entities, so I think they should be treated
separately, separate discussions altogether. With regard to the
Appraisal Subcommittee, we do see that the role that is being
played by the subcommittee today has essentially been
accomplished as far as its mission and goals.
State appraisal boards have been licensing appraisers for
many years, and they are doing a very good job of processing
appraisal licenses and certifications, and they are doing a
base level of enforcement. This has been going on for some
time, and by the Appraisal Subcommittee's own records, they are
grading State appraisal regulatory agencies very well. There is
no State that is at risk of compliance burden.
The issue with the Appraisal Subcommittee is that it is set
up by FIRREA, which the way it is structured, it results in an
ever-increasing set of regulations on top of appraisers. It is
an oddity in the--
Chairman Luetkemeyer. That begs the questions then, do you
believe the regulatory system for appraisers needs a Federal
regulatory body?
Mr. Garber. We think that the Federal role should be
repositioned to that of a last resort. So right now, the
Appraisal Subcommittee is odd in that it actually audits
independent or sovereign State agencies. We find no comparable
for this in the marketplace today in any regulatory aspect
where the Federal Government is actually auditing State
agencies. So we are suggesting that that be aligned with those
that--recent precedents that have been enacted by Congress,
like the NMLS, which puts the burden on the States, the States
have to maintain that job, and as long as they are performing
at a high level, then they are allowed to do that, but there is
still a Federal role, but it is one of a last resort.
Chairman Luetkemeyer. Okay. Mr. Park, would you like to
respond to that?
Mr. Park. Sure. The regulatory system that we have in place
now recognizes States' rights, and what the Appraisal
Subcommittee does in terms of our compliance reviews of the
States is we review the States to make sure that they are in
compliance with Title XI, which includes the AQB minimum
criteria, that they have implemented USPAP, and that they are
in compliance with those minimum baselines.
Again, it is key to have that minimum baseline for the
States to adhere to in order to facilitate commerce. Otherwise,
without that minimum baseline, you are going to have the States
go in 55 different directions, and it is going to increase the
cost and burden on mortgage lending significantly.
Chairman Luetkemeyer. Okay. I had a very good friend of
mine, who is an appraiser, and I had a long conversation with
him just last week, and his comment to me was that he didn't
know how any person could ever get started in the appraisal
business today, because of the difficulty of getting licensed
and finding your own business.
The business model is not--and I come from rural Missouri.
I am about as rural as you get, a town of 300 people, but he
lives in a town of about 30,000. But the problem is, as a
number of you indicated here, that there is a shortage. There
is a shortage in my area. And while I recognize 2008 pointed
out some problems, has Dodd-Frank caused--the rules that came
out of Dodd-Frank, have they--has the pendulum swung so far
that now we are lining up with a shortage? That the
restrictions in Dodd-Frank are such that it is squeezing the
appraisal industry to the point where we don't have people
being able to get in it? And if so, that is a problem, and how
do we fix that? Excuse me. One of you want to tackle that? Mr.
Bunton?
Mr. Bunton. A couple of issues regarding the shortage. One,
Dodd-Frank and regarding the appraisal management companies, I
think a lot of lenders felt that they were compelled to
establish appraisal management companies. And what has happened
is because of their focus on--a lot of them. There are good
AMCs, but a lot of them are not maybe not as good. They focused
on the cost and the turnaround time. So there is a shortage of
appraisers who are willing to work for that fee. We still have
a lot of appraisers. We have more certified appraisers today
than we did 10 years ago, but they don't want to work for that
fee.
The other impact is, is that the licensed appraisers in the
United States, when FHA, through an act of Congress, said that
we can only use certified appraisers, that had a huge impact,
particularly in rural areas where you had licensed appraisers.
The number of licensed appraisers--excuse me, 10 years ago,
there were 29,000--just under 30,000. Today there are 7,900,
and so there has been a huge drop in the licensed category.
Lenders don't want to use licensed appraisers or trainees,
and that creates the problem that your friend talked about
entering the market. Banks used to be the training ground for
appraisers. Now they have outsourced it, and since banks don't
want to use trainees or licensed people, people don't want to
bring on trainees because they are not really good. Thank you.
Chairman Luetkemeyer. Very good. I appreciate your
comments. My time has expired. With that, we recognize the
gentlelady from California, Ms. Waters.
Ms. Waters. Thank you very much, Mr. Chairman. Today, we
are examining proposals to fix our current system of regulating
and overseeing appraisals, but is there really any reason to
believe that it is broken?
To the contrary, it seems that we have substantial evidence
to demonstrate that our current system, in particular, the
important reforms brought about under Dodd-Frank, has been
largely successful in streamlining standards across the country
and protecting us against the kind of harmful appraisal fraud
that we saw leading up to the housing crisis.
While there is always room for further improvement, I don't
see any reason for a complete overhaul of our current system as
some have suggested we need. So I would like to get some
comments of Ms. Wagner. Freddie Mac recently announced that it
plans to dispense with traditional appraisals for some
mortgages and replace them with automated valuation models,
AVMs. Further, Mr. Park's testimony supports the use of
different valuation products, according to the risk
characteristics of a loan.
Can you talk about some of the risk that AVMs can impose to
consumers and the financial system? Do you think that AVMs
could be appropriate for some lower risk loans, as Mr. Park has
suggested?
Ms. Wagner. Thank you for that question. First of all, I do
agree that, as they say, "if it is not broke, don't fix it,"
and I don't think that we are broken. In fact, I think that we
are engaged in fixing what happened before.
AVMs do give me significant concern, and they give the
appraisers that I have talked to, as well as my homeowner
clients, those same concerns. They just can't be fully
accurate. If you use a computer valuation model, you are not
getting the input of actually going out to the house and seeing
whether there has been any kind of damage to the interior of
the house, and you are also not getting the input of if someone
has made substantial improvements to the house.
There is no standardized method for AVMs, and a lot of the
data inputs are simply inaccurate coming from tax data that is
outdated, and from the use of comparables not based on actually
seeing whether those properties are comparable, but just sort
of inputting from the area. And a lot of places, there is
tremendous diversity in housing. It is not just subdivisions.
And one example is a client of mine, who lived on a road
right next to a subdivision, an appraiser in that case used
comparables from the subdivision that were much closer to her
house than houses that were actually much more like her house.
An AVM model would do that same exact thing without any kind of
oversight, so you can't see the property appeal, you can't see
the unusual characteristics of the property, you can't see any
kind of damage, infestation of rats, anything like that, and
you can't see any kind of improvements, so it does greatly
concern me.
Ms. Waters. Well, thank you very much, and I believe
exactly what you said. First of all, I like independent
appraisals. I like small businesses. I don't like the way the
system may be run now with the management, appraisal management
companies and taking a fee or cut, you know, from the
appraisers. But let me ask you, because I think there is room
for dealing with still some potential fraud.
If the lending institutions are owning still some of these
appraisal units in their business, I think that is a problem. I
would like to get rid of that. But let me just, you know, agree
with you in saying that the work that was done in Dodd-Frank
really did get rid of a lot of the problems, a lot of the
fraud. I see no reason at all to be talking about getting rid
of Dodd-Frank.
With all due respect to Mr. Luetkemeyer, you are absolutely
right. There is no way that these models, these AVMs can
determine what that house really is, what it really looks like,
where the damage is, et cetera, et cetera, and again, I think
as I was coming in, I heard some testimony from someone that
talked about the recent big data problem that we are seeing in
the election, and on and on and one. Get rid of that crap.
Leave the human element in appraisals.
And so with that, thank you for your testimony here today.
I agree with you 100 percent, and I yield back the balance of
my time.
Chairman Luetkemeyer. The gentlelady yields backs. With
that, we go to the gentleman from New Mexico, Mr. Pearce, for 5
minutes.
Mr. Pearce. Thank you, Mr. Chairman. Mr. Bunton, where does
the Appraisal Foundation get its funding?
Mr. Bunton. The majority of the funding is through
publication sales, the book of standards course work, material
like that. We receive a grant from the Appraisal Subcommittee
for $350,000, the current grant level, and our budget is about
$4.2 million.
Mr. Pearce. Okay. Mr. Park, you heard Ms. Wagner's
testimony and said that basically the bubble in the housing
prices were not created by spiking--just by a spike in consumer
demand, but as a result of intentional fraud and lack of
oversight. So that seems to be sort of directed at your
function to me.
I mean, I am--I have to confess, I am a little bit confused
by--I think as Ms. Trice's chart shows, so I am a little
confused about what is going on, but--so is her statement a
reflection of the oversight that you bring?
Mr. Park. Well, her statement reflects the States are the
one that regulate appraisers--
Mr. Pearce. Yes, but I know, but you--
Mr. Park. --directly
Mr. Pearce. --you oversee the States, and you are supposed
to--it says in your document that you can bring actions if a
State is in noncompliance. So surely, the Federal Government
doesn't say that it is okay to create fraud and the States
don't say it is okay to create fraud, so you would expect there
would be something that would show up if the amount of fraud is
there. So I am just asking, is that a fair assessment of your
oversight?
Mr. Park. The Appraisal Subcommittee's role is to oversee
the States in regard to--
Mr. Pearce. Okay.
Mr. Park. --requiring--
Mr. Pearce. Sir, with all respect--
Mr. Park. --to Title XI.
Mr. Pearce. You oversee the States, but you say on page 8
that you have the right to bring action in the case of
noncompliance or order of nonrecognition. Does that mean that
you don't have oversight of the States? You don't--
Mr. Park. We do have oversight of the States.
Mr. Pearce.And you can't do anything about it.
Mr. Park. We would take action if a State is in--is not
complying with Title XI.
Mr. Pearce. So you are saying the fraud that was--the fraud
that was suggested by Ms. Wagner was then approved under Title
XI. That is what I would have to draw the conclusion, if you
don't find any reason to bring an action. It says you have the
right to bring the action in your own document.
Mr. Park. Generally speaking, if there is a fraudulent
appraisal, there is going to be a violation of Uniform
Standards of Professional Appraisal Practice, USPAP, involved
in that fraudulent activity. The States are the ones that
handle complaints and adjudicate complaints in regard to fraud
in their State or violations of the uniform standards.
Mr. Pearce. So if there is fraud going on that was alleged
there, then you have no say-so.
Mr. Park. We have to work within the purview of the law.
Mr. Pearce. So what does--have you ever brought an action
against the State?
Mr. Park. We have never taken a nonrecognition action
against the State, which, prior to 2010, the Dodd-Frank Act was
the only action that the subcommittee could take against a
State, which would be a very dramatic and Draconian action. The
subcommittee has chosen, for the past 25 years, to work through
the partnership with the States and with the foundation to
correct--
Mr. Pearce. But you are never taken an action?
Mr. Park. --a problem within--we have not taken--
Mr. Pearce. You have not taken an action, and yet,
according to Ms. Wagner, fraud was the reason for the bubble
in--
Mr. Park. And the Dodd-Frank Act gave the subcommittee
additional regulatory authority to take actions in lieu of, or
short of a nonrecognition--
Mr. Pearce. You have gotten that--
Mr. Park. --process.
Mr. Pearce. You have gotten that additional permission, and
have you done anything under that?
Mr. Park. We have not found--
Mr. Pearce. Okay. That's all I need to know.
Mr. Park. --the need to take any further action.
Mr. Pearce. Ms. Trice, would you like to address this,
because this seems like no one is in charge of anything, that
we are going to oversee but we are really not going to take any
actions. Would you like to make an address on this?
Ms. Trice. Yes, please. I think the consumer is the one who
is the one who gets punished the most by this regulatory
structure that I have diagramed here. So if a consumer has a
problem with the appraisal, and the NAHB pointed this out as
well, if someone needs to make an appeal, there is not an
efficient, effective process. So if it is immediate, let's just
say there is an appraised value falls short of the contract
price, the consumer can only make an appeal to the lender. If
they make an appeal to the State--
Mr. Pearce. Let me ask one more question, if I can.
Mr. Garber, in your opinion, what would happen if AFC
didn't exist at all?
Mr. Garber. Well, if States would continue to do licensing
and enforcement--but we are not suggesting that that go away.
Mr. Pearce. I didn't ask. I am asking for my perspective,
and my time is about shot.
Mr. Garber. Yes. From right now, the appraisal community
would have a less burdensome regulatory environment. In fact,
it would be a more attractive proposition to enter the
profession because we would have fewer rules and volume of
layering effect that is currently occurring under the current
regime.
Mr. Pearce. Okay. Thank you.
Mr. Garber. That is important to the rural markets.
Mr. Pearce. All right. Thank you. Thank you, Mr. Chairman,
for your indulgence.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentlelady from New York, Ms.
Velazquez.
Mr. Velazquez. Thank you, Mr. Chairman.
Chairman Luetkemeyer. You are recognized for 5 minutes.
Ms. Velazquez. Thank you. I would like to address my first
question to each member of the panel.
Given that automated valuation models are playing an
increasing role in residential valuation and the number of
appraisers is dwindling, the appraisal landscape is changing
quickly, regardless of regulation. What do you see as the role
of appraisers 10 years from now? Mr. Park?
Mr. Park. The appraiser profession is still and will
continue to be a very important cog to the financial system in
the United States. Automated valuations, automated tools can
only go so far. You don't realize how big this country is and
how diverse the housing is in this country until you start
trying to place appraisal orders all over, all over the Nation.
Ms. Velazquez. Uh-huh.
Mr. Park. There are certain areas where you have homogenous
property types where automated tools are useful, but I would
submit that those tools should not be left alone so that a
computer is generating the valuation without--without an
appraiser's expertise being involved.
So the future is, appraisers will have to adapt to uses of
technology, lenders will have to adapt, and so will regulators.
Ms. Velazquez. Thank you. Mr. Bunton.
Mr. Bunton. Automated valuation models are a tool that
appraisers use. That is all they are. And there may be an
application for them, as Mr. Park points out, with homogenous
housing stock, with a very low loan-to-value, those types of
things, but as far as 10 years from now, you are still going to
need a valuation professional to sift through all the data.
They will probably perform more appraisals in a day than
they do today because they will have access to a great deal of
information just sitting at their desk, but you are going to
need that human interface of a trained valuation professional
to make determinations, particularly in areas where you don't
have a homogenous housing stock.
Ms. Velazquez. Thank you.
Ms. Trice. There is two basic components to an AVM. One is
the data, the second one is the algorithm. So today, we have a
very poor database, frankly. We have no inventory of every
piece of property in the United States, so we have MLS data,
which is essentially sales data, which is, how do I say,
flowery sometimes. It is not necessarily factual. Then we have
public record data, which varies from State to State and county
to county, so in essence, we don't have very good data.
In theory, AVMs in the future could become more reliable,
but today's market, they are not. And just a reminder, human
beings write the algorithms, so it is nothing more than an
opinion cloaked in a mathematical formula.
Ms. Velazquez. Thank you.
Mr. Garber. Thank you for the question. Big data, in
general, has the potential to enhance the valuation process if
it is looked at closely, and there is a trained professional
evaluation of the methods that are used.
Right now, there are appraisers that are integrating big
data into their own appraisal reports, and I think you would
find, may be surprised that a lot of appraisers are actually
very technologically savvy today.
I think our biggest concern is we don't see that our
regulatory structure is really positioned to allow and enable
appraisal professionals to provide the full range of services
that the user community and consumers really are looking for.
There is a full range of demand for valuation services. Loan
purchases is a big one, but it is not the only one. You have
refis, you have workouts, you have the ability or the need to
do monitoring of entire portfolios.
Right now our estimates indicate that there are four
evaluations performed for every single appraisal in the market
today. Right now appraisers are not involved in the majority of
the valuation services that are being engaged by financial
institutions.
We want to position our regulatory structure so that it is
more responsive to those needs.
Ms. Velazquez. Thank you.
Mr. Brady.
Mr. Brady. Just very quickly. Data is important, especially
in our segment of the industry in new construction. It changes
every day. It relies on code changes, it relies on energy and
efficiency. So the human touch is always going to be an
element.
I think the AVM is a resource. But we should not rely,
especially in our segment of the market, on AVMs.
Ms. Velazquez. Thank you.
Ms. Wagner.
Ms. Wagner. Very briefly, I do think I addressed this
question a little bit. But I think looking ahead into the
future, it just highlights the need for careful regulation in a
Federal structure in order to ensure that there is some
consistency and safety in the marketplace. So if we do end up
using these models slightly more, it should be balanced with
actual appraisals, and we do need some oversight to make sure
it is done fairly and safely for everyone.
Ms. Velazquez. Thank you.
Thank you, Mr. Chairman.
Chairman Luetkemeyer. The gentlelady's time has expired.
We have a great discussion going here today. I thank all of
the panel for their concise answers.
With that, we go to Mr. Rothfus from Pennsylvania, for 5
minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
Mr. Garber, while I understand that a national appraiser
shortage may not yet be here, though industry trends suggest
that one may be coming soon, we all seem to agree that
localized shortages are a problem, especially in rural
communities. My district includes a number of rural communities
and I was hoping to get a better understanding of how this
dynamic may impact my constituents. Can you describe how
localized appraiser shortages may impact communities such as
those in rural Pennsylvania?
Mr. Garber. Yes, thank you for the question. Appraisers, as
I was saying, are facing a layering effect of rules and
regulations right now, and it is never ending at this point,
where there are no bounds around the current regulatory
structure.
So as an example, we have seen proposals and actually in
effect now programs to codify appraisal methodology, where
appraisers not just have to follow a certain standard, but are
being obligated to follow methods and techniques, such as the
cost approach or the sales comparison approach or the income
approach in the appraisal process, and follow it along a strict
guideline.
Mr. Rothfus. Where would that be coming from?
Mr. Garber. Well, it came from a proposal originally
directed by the Appraisal Subcommittee for The Appraisal
Foundation to undertake, and that has resulted in the creation
of a third board under The Appraisal Foundation called the
Appraisal Practices Board.
That board has a very unclear role in today's marketplace,
but I will give you an example of how it is being used. State
regulators have already identified this as a document or a set
of materials that they are using in enforcement cases. So
appraisers have to keep that in mind as they are developing
their appraisals.
And just last week I was talking with an official at
Freddie Mac. Freddie Mac issued a bulletin last week on green
and energy-efficient appraisal issues. Within that bulletin,
those documents are actually referenced.
In talking with the Freddie Mac official they indicate that
those bulletins are actually part of the contracts that they
have with loan sellers to Freddie Mac. Those are now
effectively part of the contract when a lender sells a loan to
Freddie Mac. They don't realize it, but that is an unauthorized
board of The Appraisal Foundation today, but their lenders are
going to be obligated to follow all of that information to a
tee.
And in your rural market, every market is different, so the
rules or the guidelines that work in Washington, D.C., may not
work in rural Pennsylvania, because every market is going to be
different. That is why we need to have more flexibility to the
methodology.
Mr. Rothfus. Would you think that if you are seeing some
shortages appearing in some areas, rural areas, could those
trends eventually get to other areas.
Mr. Garber. So absolutely. I provide some information on
the projections ahead. We do see the potential for a 20 to 25
percent continued reduction or a further reduction over the
next 5 to 10 years.
What is troubling to us is that there are fewer appraisers
that are interested in entering the profession. They are facing
all of these rules, regulations, fees. Right now, the Appraisal
Subcommittee is about ready to finalize a rule to implement an
appraisal management company registry fee. The process that was
used to undertake that rulemaking failed to consider the
impacts on small businesses.
The reality is that rule is going to impose significant
fees on small business appraisal service providers, because
they are going to be passed through from the appraisal
management company directly onto the heads of practitioners.
If you are an appraiser, you are looking at this system,
you are stepping back and you are reconsidering the proposition
today. And that is what troubles us as a leader within the
appraisal profession. We need to reposition this to make it a
more attractive endeavor.
Mr. Rothfus. Thank you. Move over to Mr. Park.
Alternative valuation models or methods have been used by
the appraisals industry for many years. In your testimony you
seem to support the use of new methods and new technologies
based on improved data, yet you caution against moving
completely away from an appraiser-based process. Could you
describe for which types of transactions alternative valuation
methods, such as automated models, might be most appropriate?
Mr. Park. Yes, thank you for the question.
As I stated earlier, in areas of the country where you have
a more homogenous housing stock, where you have good quality
data, coupled with a low risk transaction--when I say a low
risk transaction, an example would be a rate and term refinance
where a borrower is simply lowering their rate from 5 percent
to 4 percent, something like that. They are not taking cash
out. There is no additional risk in the transaction. The
borrower has a good credit score and so forth. They pose a good
credit risk with little likelihood of default. Those are
transactions where an AVM could be useful again with human
intervention in terms of making sure that the results of that
AVM make sense.
Mr. Rothfus. I yield back. Thank you, Mr. Chairman.
Chairman Luetkemeyer. The gentleman yields back.
With that, we go to the ranking member of the committee,
Mr. Cleaver from Missouri.
Mr. Cleaver. Thank you, Mr. Chairman.
Ms. Trice, do you like hamburgers.
Ms. Trice. Excuse me?
Mr. Cleaver. Do you like hamburgers?
Ms. Trice. Hamburgers? I love hamburgers.
Mr. Cleaver. Do you prefer mustard or mayonnaise?
Ms. Trice. Neither.
Mr. Cleaver. Neither. What do you prefer?
Ms. Trice. I like ketchup.
Mr. Cleaver. Ketchup. I don't. But I delivered a speech in
actually the boot heel of Missouri, Cape Girardeau, which you
may or may not have heard of. So I go to Chili's and I sit at
the table with a staffer and there is no waitress, there is no
wait staff at all. They have a contraption on the table. It
says, place your order. And it came with mustard, and I like
mayonnaise. I think that is one of the great tragedies of this
moment.
And so I think that there is some general consensus that
the AVMs or the new technological way in which some of these
appraisals are done, particularly, I guess, with home equity
loans, primarily with home equity loans, but I think you can
also sense that there is some concern here about that.
And so I am wondering, you know, I don't want to be a
troglodyte and I am afraid of technology, you know, but what
happened in the financial crisis is that the appraisals ended
up being far too generous. And so I think in some instances
people thought, well, you know, if we can put the AVM it will
stop that process. But it also removes the humanity from it. It
also creates some other issues.
So, you know, any time we have come up with a new
technology, a great technology, I think, and I am looking for
this, too, that there has to be some kind of counterbalance to
maintain the humanity. And so I am wondering if most of us
agree that the system is somewhat flawed right now. What can we
do as a counterbalance?
Ms. Trice. One of the problem with AVMs is that they can be
manipulated and we saw that in the mortgage crisis. So what
happens is they built what they called cascades so that they
would bundle 10 different AVMs into one ordering platform.
Well, what would happen is a lender would continue it order an
AVM until, bingo, he got the number that he needed.
So one of my dear friends was an AVM developer, and he had
sold his company, and the entity that bought his company said,
hey, we need to juice the algorithm, because in Florida we are
not getting enough hits, so we need you to dial in a 20 percent
appreciation rate in Florida. Because they are only get paid if
they get a hit on that AVM. So don't for a minute think that
AVMs can't be manipulated and subject to fraud.
Mr. Cleaver. Oh, yes.
Ms. Trice. They just can do it on a wholesale basis rather
than one at a time.
Mr. Cleaver. Mr. Brady.
Mr. Brady. I think it is an overall--I mean, reform is
needed. The Appraisal Subcommittee as example probably doesn't
have enough teeth. They talked about it earlier, there is no
enforcement. I mean, you can note a problem in a State, but
they need a little bit more authority to take action.
From State to State is different. Some have boards, some
have funding, some don't. Some sweep the funding on appraisal
fees into the general fund and don't fund it appropriately. So
there needs to be a better standard.
The appeals process, we need a good appeals process,
because I had an example just 3 weeks ago where I had a plan,
new construction. I gave them a cost analysis, $249,000, it
came in at $234,000. The reason it came in at $234,000 is the
oversight of not finishing the basement and 9-foot ceilings.
Very simple, yet I wasn't able to convince that appraiser to
make that change.
So we need a very quick and adequate appeal process to at
least not inflate the cost, but justify the cost.
Mr. Cleaver. Is that something we should be doing?
Mr. Brady. There should be a standard within the industry,
like the VA, like the Tidewater potential, the Tidewater
Initiative, that allows an appraiser to call if it is
undervalued compared to what the contract might be, to call and
ask questions. And we have gone so far away from that because
of political correctness and worries that we are inflating the
price of a product valuation that we have gone, as the chairman
suggested, the pendulum has swung almost too far to really
punish the supply or the provider.
Mr. Cleaver. Thank you.
Chairman Luetkemeyer. The gentlemen's time has expired.
With that, we will go to the gentleman from Kentucky. Mr.
Barr is recognized for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman.
Thanks to our witnesses for your testimony.
I was particularly interested in Ms. Trice's appraisal
oversight schematic or graph that shows the complexity of the
oversight system that we have in place now and interested in
your suggestion of a big and bold plan to overhaul the system.
I do think that that you are right, that sometimes less can
be more in terms of actually providing for an accountable
system, because when you do have this dizzying maze of agencies
and responsibilities you are dividing lines of accountability
and the responsibilities of the participants are not clearly
set forward.
So can you just summarize your testimony a little more and
amplify it to say what would be that big and bold plan that
would streamline the system? And do we still need the ASC, the
subcommittee, or does it need to completely replaced with a new
structure that you are proposing?
Ms. Trice. Well, I do call for a new structure, but that
doesn't mean that you wouldn't take the components that do work
from the current system and put it in this new entity. I mean,
we do need licensing of individuals.
Lending however is national, it is no longer local. And so
if we set up a 50-State system, you essentially are--I will
borrow from this President-elect Trump--we are building a wall
between each border of each State.
So we have to have a system that is portable across all
States and it is uniform in its standards, so if I get a
mortgage in Maryland and I want to move to Delaware I know
exactly what to expect and the process is uniform.
I do subscribe to the theory that people are honest and
want to do the right thing, but under the current regulatory
scheme, they don't even know what the right thing is to do. So,
you know, it certainly is difficult to follow the rules when
you don't understand the rules and whose rules they are.
Mr. Barr. Has the Dodd-Frank law helped proliferate the
complexity of the regulatory structure or are there some
positive changes there? What is the impact of Dodd-Frank in
exacerbating the complexity?
Ms. Trice. Dodd-Frank has many positive components. Number
one, the appraisal independence requirements are really
critical to the appraisal process. The problem has actually
been the enforcement of it.
So we keep adding new regulations, but we didn't enforce
any of them. So the result of that is we punish good people and
the cost of compliance has just gone off the charts. But bad
actors continue to behave badly.
Mr. Barr. One thing I keep hearing from constituents,
banks, actors in the real estate market, is that there are
excessive appraisal requirements that add unnecessary costs to
transactions, and I would like for any of you all to comment on
that.
In other words, the complaint that I am hearing
specifically is that there are new requirements, I don't know
if they are Dodd-Frank requirements or other regulatory
retirements, that require appraisals every time there is a
refinancing or every time there is a transaction, even when
there is not a material change in the valuation of the
property.
Can anybody speak to that of what is the cause of that? And
do we need as many appraisals as we have?
Mr. Garber. Well, we just got through a bank crisis, so
that is partly what is going on there, is that we have a lot of
failed banks or banks that have been coming up for air. And so
the bank examiners have been monitoring, they have been
examining those cases, looking at those portfolios, and they
have seen a need to kind of get an understanding of the risks
that are involved there.
So having an appraisal to update those files, to understand
your risks from a taxpayer standpoint is an important thing,
and I think that is a good goal from a safety and soundness
standpoint. But from the appraiser's standpoint, there are
clearly new rules that are hitting appraisers on the head. We
see fees that are being passed through to appraisers to be paid
for in order to be accepted on an approved list.
I mentioned the registry fees that are coming from the
Appraisal Subcommittee. That is going to hit appraisers
squarely in the face and be a huge disincentive from practicing
in those areas.
And financial institutions themselves, too. People don't
realize there are a lot of appraisers that work at banks. Bank
appraisers have to deal with this complicated regulatory
structure, too, and they have to obtain those licenses just as
the practitioners do. So an efficient system would be helpful
there.
Mr. Barr. Thank you.
Chairman Luetkemeyer. The gentleman's time has expired.
I now recognize the gentleman from Texas, Mr. Green, for 5
minutes.
Mr. Green. Thank you, Mr. Chairman.
I thank the witnesses for appearing as well.
Mr. Brady, I was especially interested in your comments. If
you might recall, when I gave my opening statement, I dealt
with this area of appraisals and appeals, and you have followed
up on this.
Let's just talk about a possible example to make this
clear, or clearer, if we can. Let's assume that you have an FHA
loan and the seller believes that there is a problem with the
appraisal. I won't use terms like fraud, but there is a
problem. And let's assume that the buyer thinks there is a
problem as well. What is the process at that point to allow
them to have an opportunity to impact that appraisal?
Mr. Brady. Well, it varies, and a banker that gets an
appraisal that doesn't meet a contract price can ask the
appraiser to talk to the seller and try and justify it. Many
times that doesn't occur and that is where the problem exists.
But also, in a transaction where you get an appraisal a
week before, let's be generous and say a week before closing,
and the appraisal's not justifies the purchase price, that
process takes much longer, the deal either blows up, doesn't
close, both buyers or sellers are unhappy.
In a new construction situation, many times sellers,
meaning us, will eat the difference, not justifiably, but in
order to close a house because the appeal process or that
process is too lengthy to get it done in a matter of time. So
where it would take place better is in the Tidewater Initiative
where an appraiser would conduct the seller prior to issuing an
appraisal, so that they can either justify or not, not inflate
the price, the purchase price, so that it doesn't happen at the
last minute.
Mr. Green. I understand. But is that required, is it
required of the appraiser to have that conversation?
Mr. Brady. No.
Mr. Green. And in a good many cases that does not happen is
what you are saying?
Mr. Brady. That is correct.
Mr. Green. Now you indicated that you sell properties,
obviously you do, you are a builder. But let's just take the
homeowner who just has a home, a typical person in the United
States America. If this person finds problems with the
difference, that person may not be able to eat, that was a term
you used--
Mr. Brady. That is correct.
Mr. Green. --to eat that loss. That person my find it
unacceptable. At this point can that person go out and say,
"Well, let me just get another appraisal"?
Mr. Brady. No. I don't believe they can go out and get
another appraiser appraisal.
Mr. Green. Believe you are right.
Mr. Brady. But time is of the essence and they don't have
time to justify the actual cost.
Mr. Green. Well, it is not just the time. There are other
factors involved, too.
Ms. Wagner, your hand has been up. I would like for you to
respond quickly, if you can, please.
Ms. Wagner. Yes, thank you.
One concern that we do have with the appeal process is
that, while there might be some legitimate cases where we have
seen that type of process manipulated in the past that has led
to overvaluations, we have seen lenders contacting appraisers
and pressuring them to increase values or telling appraisers
that the values have come in too low, and then there has been
some manipulation within the system to then come back with a
higher value.
Mr. Green. Let me intercede for just a second. So we are
concluding that we need a balance.
Ms. Wagner. Right.
Mr. Green. And there seems to be a pervasive belief that
that balance has not achieved, and that is what I want to work
on, to try to achieve that balance. I would like to work with
you, Ms. Wagner--I also want to work with you, Mr. Brady--to
see if we can achieve that balance, because that is what is
critical.
And the realtors are telling me that balance has not been
achieved. I have talked to homeowners who believe that it
hasn't been achieved, because once they get the first
appraisal, getting another one is not an easy thing to
accomplish. I think there is a waiting period before you can
get another appraisal. Is that right, Ms. Wagner?
Ms. Wagner. That is true for FHA loans.
Mr. Green. FHA, yes. Is that waiting period about 6 months?
Ms. Wagner. Yes, sir.
Mr. Green. Okay. So you are stuck with a 6-month appraisal.
You are a homeowner, you are not a builder, you don't eat
losses. You are trying to move up in the world. So I want to
correct this.
But let me quickly say this, I want to move to another
area. None of you are here today to say that we should get rid
of Dodd-Frank because of your concerns and the consternation
that you have with one area of it. Is that a fair statement?
Are you here to say you want to eliminate Dodd-Frank? Anyone?
If so, kindly raise your hand. All right.
Now, I want to go to one specific area of Dodd-Frank. We
have a Defense Department in this country. We have a Securities
and Exchange Commission to protect investors. The Defense
Department defends the country. Why wouldn't we have a Consumer
Financial Protection Bureau to protect consumers? Anybody here
want to get rid of the CFPB today? If so, raise your hand. Do
you think that it is just a horrible institution and we ought
to just do away with it?
Thank you, Mr. Chairman. I yield back the balance of my
time. No hands raised, for the record, on either question.
Thank you. I yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
We welcome Mr. Sherman to the committee today for some
questioning. I see he is here and wants to participate. So we
welcome him. The gentleman from California is recognized for 5
minutes.
Mr. Sherman. I thank the Chair for letting me participate,
although I am not a member of the subcommittee.
I would like to ask The Appraisal Foundation how close you
are to releasing new rules for entering appraisers.
Mr. Bunton. We are currently in the--we call it the
exposure draft process. Much like regulators, we issue drafts.
We want to make sure we get it right. That board that does it
actually has a meeting this Thursday and Friday in St. Louis.
My guess, it would probably be spring before it occurs.
Mr. Sherman. I will ask this of whatever witnesses would
choose to respond. What are one or two facets of the current
appraisal system and system of appraisal regulation that you
think we ought to preserve that are essential regardless of
what other changes might be made?
Mr. Garber. I would be happy to take that, Congressman. The
Dodd-Frank Act anti-coercion provisions and the appraisal
independence provisions of Dodd-Frank are extremely important.
I remember living the era of the housing boom, and I think we
were on record to Congress with a letter of caution, a pending
house of cards, as early as 2002. So those protections are
important.
I would point out that those are part of the Truth in
Lending Act. They are not part of FIRREA. So when we are
talking about making changes to our regulatory structure, we
are really referring to the FIRREA, the original FIRREA
statute, and less so relative to Dodd-Frank, particularly those
anti-coercion provisions.
Mr. Sherman. Mr. Brady.
Mr. Brady. I would just follow up.
The independence is a good thing, being able to have
independence from appraisers. But the problem is you put all
your eggs in that one basket, on the independence on the AMCs,
as some of the panel suggested, we are getting less qualified,
less educated, less trained appraisers sometimes in those AMCs.
That creates a problem that we have to resolve at least by an
appeal process, in a very thorough and expeditious appeal
process.
Ms. Trice. I reiterate appraisal independence is the most
important component of Dodd-Frank.
Mr. Sherman. Mr. Bunton.
Mr. Bunton. If I could just speak to that.
Appraisal independence is a great thing. Unfortunately, it
also has caused sometimes appraisers to be viewed as
radioactive, where real estate agents don't want to talk to
them because they are afraid they are going to get in trouble,
lenders doesn't want to talk to them.
As the gentleman was talking about earlier, you need that
communication between the appraiser, and whether it is the
lender or the real estate agent or the homeowner, so that he
has as much information. Talking to an appraiser is not
coercion. It is communicating. It is giving information.
Mr. Sherman. Thank you.
What can be done to encourage appraisers to work in rural
areas to address supply issues?
Mr. Garber.
Mr. Garber. Well, make it make their lives easier for one.
More productive and profitable would be helpful. Stop imposing
new rules and mandates on how they do their job relative to the
methodologies in particular, because those rural areas are very
complex. An appraisal in Washington has vast amounts of data,
you have a lot of conforming markets. Whereas in a rural area,
you might have data access problems and there might be
limitations with the data.
But the notion of trying to codify the appraisal process,
including the methods that they are using, how to use the sales
comparison approach, as an example, in those markets, that is a
disincentive to entering the profession. That is why appraisers
enter the appraisal profession, is because they are paid to
provide their professional expertise. They are trained, they
know appraisal and valuation, and they should be allowed to do
their jobs and use their professional judgment, not follow a
set of rules like a cookbook.
Mr. Sherman. I understand.
Let's hear from Ms. Wagner.
Ms. Wagner. I think that these overarching standards are
actually really necessary for appraisers. And I have worked
with many appraisers in my largely extremely rural State of
West Virginia, and the regulations have never been and the
USPAP standards have never been addressed to mean, by honest,
hardworking appraisers, they have never said that there is a
problem with the USPAP standards.
There is room within those standards for rural communities,
for areas like this, and there is a real need to have that
guidance. And so, that is something that I have heard from
appraisers who want to do the right thing, and any kind of
flexibility with that would be used by the dishonest folks who
want to get away with something, is my understanding from that
market.
Mr. Sherman. I want to sneak in one other concept. Should
we change the rules to allow interstate work more easily?
Yes, Ms. Trice or Mr. Park.
Ms. Trice. In specific to commercial work, definitely. If I
am an expert in appraising a golf course, for example, and I am
on the East Coast, and I get called--there aren't that many
golf courses in the United States--I have to apply for a
license.
Mr. Sherman. I hear the administration is going to see to
more. But go on.
Mr. Park. There are already rules in place for appraisers
to be able to apply for reciprocity between States. And that
process has become much smoother and much better over the last
several--
Mr. Sherman. I believe my time has expired. I thank the
chair.
Chairman Luetkemeyer. I thank the gentleman.
We have a second round planned here. The gentleman from New
Mexico has some very salient points he would like to make. He
is recognized for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
Ms. Trice, I don't mean to be picking on you, but you seem
to be kind of a straight shooter. So from this side of the
aisle, from this side of the table, when I read the statement
by Ms. Wagner, and I am kind of wanting you to help me evaluate
that. It says, "It is common knowledge," page 2 of the
testimony says, "It is common knowledge that lax regulation of
the mortgage and appraisal market led directly to the financial
collapse of 2008. Prior to the collapse, unscrupulous mortgage
brokers and lenders joined forces with a handful of appraisers
to fraudulently inflate home values."
So from my perspective looking at a thing that runs into
the hundreds of billions of dollars and maybe nibbles into the
trillion-dollar range when you look at home values, is it
possible for a handful of appraisers to have done that?
Ms. Trice. No, not all by themselves.
Mr. Pearce. Okay.
Ms. Wagner. If I may actually respond to that. I mean,
since you are using my language.
Mr. Pearce. Well, I appreciate it. I am just reading your
statement.
Ms. Wagner. I know, and I would be like to be able to
clarify.
Mr. Pearce. Mr. Park, actually I really want to direct
myself now to the time element that Mr. Green got into. So when
you all are checking the States out, do you measure the time
from the initiation? Do you get sort of a trend across the
Nation that this State takes 1 day, this State takes 6 months,
or whatever? Do you do that kind of analysis?
Mr. Park. In terms of handling complaints?
Mr. Pearce. No, no, no. The terms of the appraisal process,
how long it takes.
Mr. Park. No, that is not something that the subcommittee
has the authority to delve into in terms of the States.
Mr. Pearce. Okay. But you do keep a registry of people, of
appraisers.
Mr. Park. We maintain a national registry of appraisers who
are eligible to perform appraisals for Federally related
transactions.
Mr. Pearce. Okay. And so Ms. Trice made a comment that bad
actors continue to act badly. Do you ever take people off of
that registry? And what is the process by which you take them
off?
Mr. Park. We do. In cases where appraisers are found to be
not compliant with the requirements we will remove those. In
limited cases those appraisers can be removed from the
registry.
Mr. Pearce. And you take the States' information for who is
compliant and who is not or you track your own compliance and
noncompliance?
Mr. Park. We take the information from the States. The
Dodd-Frank Act also gave the subcommittee additional authority
to remove appraisers and AMCs from the national registry on an
interim basis in lieu of States failing to act.
Mr. Pearce. So again, going back then to the assertion that
the appraisers were a key piece of the collapse of 2008, how
many appraisers did you pull out of your registry for bad
acting?
Mr. Park. Again, we haven't pulled off any appraisers on a
permanent basis for bad acting, as you put it. Regulation of
appraisers resides within the States.
Ms. Pearce. I understand, but you are the one that keeps
the registry. That is what your paper says. And you said you
had taken people off the registry. So my question is, how many
have you taken off the registry?
Mr. Park. The registry is populated by the States. The
Appraisal Subcommittee does not enter the data into the
registry.
Mr. Pearce. It says the ASC is required to maintain the
registry?
Mr. Park. We maintain the database and the States populate
it.
Mr. Pearce. All right.
So one of the things in your testimony that you do say is
that you are in the process--or one of the things that is
greatly needed is to streamline processes, streamline and
stabilize the appraisal standards. Now, is that something you
all have attacked or is this something you just identified that
needs to be attacked?
Mr. Park. It is something that we have identified as an
issue along with all of the other requirements that are placed
upon appraisers. If we could get to a point at some time in the
future, a point of stasis where there aren't as many changes
going on, it would make it--
Mr. Pearce. All right. I get it. I get the point. I am
running out of time.
So, Mr. Garber, Mr. Park said that 25 years is not hardly,
just barely a glimmer in a matter of a bureaucracy. I am kind
of paraphrasing it. When I look at Uber, it didn't exist 5
years ago, and now it is worth about $67 billion. So markets
are really generating fast. This idea that we can't get a
coherent way of regulating in 25 years, is that something you
agree with or disagree with?
Mr. Garber. I think there is clearly a better model that
Congress has recognized recently, and that is the nationwide
mortgage licensing system to the States.
Mr. Pearce. All right. Thanks. I appreciate it.
I yield back, Mr. Chairman.
Chairman Luetkemeyer. The gentleman yields back.
With that, we have the gentleman from Texas who has a
second question. He is recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
Ms. Wagner, you had something that you were trying to
complete. Would you want to do so now?
Ms. Wagner. Thank you, sir.
I just wanted to point out that I think that there are some
really important market forces at work, and maybe when I said a
handful of appraisers I was discussing in West Virginia there
are some identifiable bad actors. But I think that the market
forces at work really created a situation where the lending
industry was able to put substantial pressure on appraisers
that compromise their independence and compromise their ability
to provide adequate values.
And so, with the requirement of appraisal independence in
Dodd-Frank, I think that that really helps to ensure that there
is some independence there and that those market forces don't
interact in order to put pressure on people to increase values
or change values.
And in addition, I think that the uniform standards of
professional appraisal practice help create standards that
appraisers can be reviewed according to and can ensure that
there are adequate protections in place for both consumers and
homeowners and the economy as a whole. So I think that both of
those systems are very essential.
Mr. Green. Thank you. I do agree with what you have said. I
would add this. We do agree, I believe, that from time to time
even the best of us can make mistakes. And much of what we do
is based upon not only some standard, but also some evaluation
that is subjective. And when those mistakes are made, we would
want to have a process by which they can be corrected.
I was a judge for 26 years. I thank God that there was an
appeals process. Over the 26 years I was not perfect. I was
better than everybody else however.
So the point is that we do need to have a methodology by
which we can achieve the balance, and that is what I would like
to work with you on.
Ms. Wagner, I really like your input, and I like yours,
too, Mr. Brady, because I think between the two of you we can
strike that balance.
Now, let me go over to Mr. Park.
Mr. Park, just to get some understanding, first let me
start with this basic premise. Do you agree that most people
who commit fraudulent acts that they don't expose themselves,
that they pretty much decide that this is something they will
keep to themselves or they will keep it within a certain circle
of people?
And I mention this because there seems to be the belief
that you have the responsibility of eliminating fraud and that
you are some sort of cop on the beat. I don't think that is
your function. Am I correct?
Mr. Park. No. I think that the Appraisal Subcommittee
should have a role in preventing fraud whenever it can and has
the authority to do so. But that authority largely resides
within the States in terms of dealing with the individual
transactions where fraud might occur.
Mr. Green. And my point is, however, that if it comes to
your attention, if you have the opportunity, you would act. Is
that a fair statement?
Mr. Park. We would act within the confines of the law,
absolutely. And we have tracked fraudulent--reports of
appraisal fraud in the States so that we can work with the
States when that becomes a real problem, again, through a
partnership, not from the perspective of the Federal Government
telling the States how they should handle their problems with
fraud.
Mr. Green. So you are not the supervisor, you work with,
you don't dictate to.
Mr. Park. It depends on the issue. But when we do have the
authority--
Mr. Green. Well, let's just talk about generally speaking.
Mr. Park. --we do act in a supervisory role.
Mr. Green. Mr. Park, excuse me. Let's talk generally
speaking, if we may. Generally speaking, do you supervise the
activities of the States?
Mr. Park. Yes.
Mr. Green. And when you supervise the activities of the
States are you responsible for ascertaining whether or not
fraud exists?
Mr. Park. We are not directly responsible for that, no,
sir.
Mr. Green. Okay. That is the point that I have been trying
to help you make, Mr. Park. You are not the guy who acquires
the empirical evidence to move forward. Is that a fair
statement?
Mr. Park. That is correct.
Mr. Green. That is the point, Mr. Park. There are people
who seem to be attributing this to you.
Mr. Park. Point well made.
Mr. Green. Thank you, Mr. Park.
I am going to yield back, Mr. Chairman.
Chairman Luetkemeyer. The gentleman yields back.
With that, we will go to another gentleman from Missouri.
You guys are being inundated with us today. Mr. Clay is
recognized for 5 minutes.
Mr. Clay. Thank you, Mr. Chairman.
And I wanted to ask the panel, according to an educator at
the Appraiser Institute, the average age of an appraiser is 55
years of age and the main barrier for entry into the profession
is the requirement of employment. The employment requirement is
an appraiser trainee has to work under a certified appraiser
for 2,500 hours and a minimum of 2 years. So even if a person
completes the educational process successfully, they still face
a barrier of finding employment to complete the on-the-job
training requirement.
My question to the panel is, how can we create an
environment to help appraiser trainees to complete the
employment requirements to become a certified appraiser? And I
guess I will just start with Mr. Park and go down the line.
Mr. Park. It is important that the appraisal regulatory
system continues to look at new ways to bring people into the
profession. There has been a lot of progress made in terms of
the requirements for appraisers to enter the profession in
terms of increasing those requirements.
. Mr. Bunton can speak to this also since it is the
Appraiser Qualifications Board that is setting these
requirements. But they have established a national uniform
licensing exam, they have increased education requirements. And
now they are looking at reducing the experience requirements,
which historically have been a significant barrier to entry,
because it is difficult to find a supervisor to train you as a
trainee to get the necessary hours for your credential.
Mr. Clay. Thank you.
Mr. Bunton.
Mr. Bunton. Yes. The problem we have generally is also
users of appraisal services do not want to engage trainees. So
if I own an appraisal firm, I don't want to have trainees
because they are really not much value to me.
As far as the experience requirement, 2,000 hours you
mentioned, that is sort of a last vestige from an
apprenticeship-type operation. We are moving to a profession.
And our board is looking at case study courses and also an exam
where you could test out essentially of a lot of that time and
you become more valuable to an appraiser as a trainee much
quicker than the 2,000 hours over 12 months.
Mr. Clay. And, Mr. Bunton, I guess one of my concerns is
that it brings, it adds an extra burden when you try to strive
for diversity in this profession. Being a former realtor, we
rely on appraisers quite a bit. So I was wondering, has that
issue arisen in your industry and has anyone tried to address
it?
Mr. Bunton. We have. On several occasions we actually
solicit. We have four boards that we have to populate every
year, and we solicit it. We solicit minority groups, we solicit
all types of people to get as many qualified applicants as we
can get in there.
Mr. Clay. Thank you.
Ms. Trice, anything to add?
Ms. Trice. The only thing to add, I think it is a couple of
problems. We have set the bar too high. The number of hours
required to work with a mentor, you can actually become an
airline pilot and have less experience, but you are responsible
for several hundred souls, and nobody has ever died in the
appraisal process to the best of my knowledge.
But the other problem is really an economic one, and we
have had a compression of fees. And it is a very complicated
topic, but we have a component of Dodd-Frank on customary and
reasonable fees that has never been enforced. And so we have
increased the requirements for appraisals, but they make about
half of what they used to make. So nobody is going to want to
enter the profession with that kind of economic environment.
Mr. Clay. I see.
Mr. Garber has the institute done anything to try to make
the workforce--
Mr. Garber. Yes, absolutely we have. It is punitive right
now to take on a trainee, very difficult process. We have a lot
of--there are rules, regulations have been built up around that
process. We do need simplification of that. Those could be
modified significantly.
We have offered, and we don't agree with The Appraisal
Foundation on everything obviously, but an area that we have
been talking with them very closely is on the development of an
experience alternative or to earn experience in a classroom
situation in a tested environment. So to actually enable, where
you can't find a mentor-mentee relationship, to actually earn
that experience in a classroom under a tested situation.
Mr. Clay. Can they complete?
Chairman Luetkemeyer. Yes.
Mr. Brady. I would just add, training is important. I don't
know the number of hours and I am not in the professional
business of appraisals, but where you go to the AMCs and you
have a pool of appraisers, it doesn't mean that their expertise
is new construction or existing. And so we have to maybe look
at that more in detail as to if I have a new construction
product I get in the pool, they have never done a new
construction. So training and continuing education on this
process is very important.
Mr. Clay. Thank you.
Ms. Wagner, anything to add?
Ms. Wagner. Just briefly. I think from talking to
appraisers in my State, I think that having some compensation
for supervisors would be helpful because I think it is very
costly for people to bring on new trainees and that they are
not getting adequately compensated for that.
Mr. Clay. I see.
Thank you all very much for your responses.
Mr. Chairman, my time it is up.
Mr. Park. Could I make one comment to that?
Chairman Luetkemeyer. Sure. Go ahead, briefly.
Mr. Park. One of the issues that we are grappling with
right now is trying to educate lenders on the ability for
lenders to use trainees in their transactions.
Historically, trainees have served as that force multiplier
for appraisers. Once you get a trainee trained to a certain
level where they can do the inspections and they can do some of
the analysis and data gathering without that supervisor being
involved every step of the way, it makes it much more
economically viable to bring on trainees. Right now there are
requirements that are outside of the Federal Government that
limit the ability of trainees to be able to participate.
Mr. Clay. Thank you.
Chairman Luetkemeyer. Thank you.
With that, I have a couple of follow-ups, and then we will
wrap up here.
Mr. Garber, in your testimony you argue in favor of
limiting the activities of The Appraisal Foundation to prevent
potential conflicts of interest. Can you explain what those
conflicts of interest are?
Mr. Garber. Sure. Thanks for the question.
Whenever you have a statute that recognizes an entity,
obviously, there is great responsibility that is given to that
organization, but then there is also a great privilege that
comes with it. So if you get special standing and recognition,
they are given recognition and powers, the public looks at them
in a certain respect as an authority in certain areas. And it
is very common to address that for Congress to set forth
limitations in particular areas. The limitations are important
because it helps level the playing field. It doesn't give one
organization an advantage over another.
That is where we have been expressing concern relative to
the move to create a third board under The Appraisal
Foundation, the Appraisal Practices Board. That is a board that
was directed by the Appraisal Subcommittee for the foundation
to undertake to develop rules around methodologies. At the same
time, the foundation was setting up an education arm to offer
education around those entities or those valuation advisories.
We were concerned that that was essentially setting up a
situation where there is too much centralized authority. If you
have centralized authority in the area, the full range of
valuation, including standards, qualifications and the
methodologies, there is just a very strong potential for
conflicts of interest to exist on education and on
credentialing.
And Congress has recognized that, as I said. In the SAFE
Act, under the Nationwide Mortgage Licensing System, there is a
very strict prohibition for the Conference of State Bank
Supervisors to not get involved in education activities. The
same thing under the National Association of Registered Agents
and Brokers. NARAB has a very similar provision. Because,
again, it is a nonprofit organization, it is supposed to be a
neutral, it is given special standing in the industry to be a
neutral body within that universe. But it comes with
responsibilities and privileges, and we ought not set up a
situation where we are tilting the scales and giving an
advantage to one group or to the other.
Chairman Luetkemeyer. Mr. Park, do you want to?
Mr. Park. If I may correct the record. That is the second
time Mr. Garber indicated that the subcommittee directed The
Appraisal Foundation to establish the Appraisal Practices
Board. That is not the case.
There was a meeting, this predated my time at the
subcommittee, but there was a meeting of the subcommittee where
there was a discussion regarding the need for appraisers to
have additional education regarding--at that time the hot
button was declining markets and the Federal regulatory
agencies were seeing problems with appraisers' ability to
handle appraisals in declining markets.
The subcommittee never in any way directed The Appraisal
Foundation to establish the Appraisal Practices Board.
Chairman Luetkemeyer. Mr. Bunton, I am sure you have a
comment.
Mr. Bunton. Thank you. I would just like to address the
conflict of interest issue. I think their testimony references
a course approval program which we put in place primarily at
their behest. They also mentioned we shouldn't be in education.
They developed courses for us and donated them to us.
And as far as the Appraisal Practices Board, most
appraisers do not belong to a professional society, and that
board issues voluntary guidance, free of charge, no Federal
funds. The story behind the story here is that in 2010 they
were faced with suspension from the foundation for conduct.
They resigned rather than face suspension. So now, while they
were once an advocate, they have become an adversary, unlike
the other 95 organizations affiliated with us.
Mr. Garber. If I could?
Chairman Luetkemeyer. Okay. No, we are going to move on.
Mr. Park, we want to clarify what you have been saying with
regards to the registry. Apparently one of your statements said
that you had the ability to take people off, and now you are
saying the States are the one that really put people on or off.
What is your final statement here?
Mr. Park. Under certain conditions the Appraisal
Subcommittee does have the ability to remove an appraiser from
the national registry.
Chairman Luetkemeyer. Okay, what you are saying is under
Dodd-Frank you do have the authority to take them off?
Mr. Park. Dodd-Frank gave us additional authority to remove
appraisers and appraisal management companies from the national
registry for up to 90 days in lieu of State action.
Chairman Luetkemeyer. Okay.
Mr. Park. So if a State was simply refusing to take action
against an AMC or an appraiser who had demonstrable issues,
then the subcommittee could take such an action.
Chairman Luetkemeyer. Okay. So what you are saying is
normally the State takes care of all this, but you are the
remover of last resort, so to speak?
Mr. Park. That is correct.
Chairman Luetkemeyer. All right. Very good. Thank you.
That ends my questions. I do have some comments here.
I appreciate everybody's time today. You guys have been
great. It has been a very spirited discussion. And I think it
shows that we certainly have some issues here.
You know, 2008 showed that there were some problems in the
appraisal industry. Dodd-Frank was an attempt to fix it. Like
any bill, it is well intentioned. I am sure there are some
tweaks that need to be done. Some good things that came out of
it and probably not some good things. And so we want to work
with you to find solutions to those things that don't work, to
make sure that we fix them. We have had everything from blow
the system up to just tweak it a little bit. So it has made for
an interesting discussion today.
At the end of the day, the appraisers need to maintain
their independence, but they need some flexibility. Ms. Wagner
made a comment a while ago that flexibility is bad and it leads
to fraud, which impugned the integrity of every appraiser out
there, which I thought was remarkable. It was breathtaking,
actually.
But I think that generally the appraisers are caught in a
bind from the standpoint that what you do is give a snapshot in
time of what the value of that property is today. Tomorrow that
property will have a different value, it could go up, it could
go down.
I have a daughter who lives in Denver, Colorado. All of you
know Denver is a market where the real estate just keeps going
up and up and up. She built a new house 3 years ago and can
probably have close to 40 percent, if not 50 percent increase
in value in that amount of time. Now, its value, the price of
construction hasn't gone up, but the value of the home has gone
up.
I live in rural Missouri. I can tell you, we have a real
problem with appraisers. We have no appraisers in my county,
period. We have a county of 25,000 to 30,000 people and no
appraisers, zero, in my county. They are gone.
I said a while ago I have a friend who is in the business
and it is very difficult, as you have talked about, to get past
the certification problem.
So it tells me we have some difficulties and that the
bottom line is we have to have appraisers to make sure that
there is a trust in the value of the property and the people
who buy it and finance it can believe in the value of that
property for that day.
And so we want to work with you and we want to continue to
have this discussion, and we certainly appreciate all of you
being here today and having this, I think, very spirited and
very informational discussion. Thank you.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And with that, this hearing is adjourned.
[Whereupon, at 11:55 a.m., the hearing was adjourned.]
A P P E N D I X
November 16, 2016
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