Eminent Domain Blog : Pennsylvania Eminent Domain Lawyer & Attorney : Fox Rothschild Law Firm : Condemnation, Real Estate Valuation : Philadelphia, Bucks County, Pennsylvania

The Georgia Real Estate Appraisers Board recently adopted its final regulations regarding standards for developing and reporting an “evaluation appraisal.” The regulations state that, where permitted by federal law and policies, a state-licensed or certified appraiser performing an evaluation appraisal need not comply with the Uniform Standards of Professional Appraisal Practice.

The new regulations state that a licensed or certified appraiser may offer “an appraisal which is limited in its scope and development” where an appraisal by a licensed or certified appraiser is not required by federal law. These situations include transactions with a value less than or equal to $250,000, transactions where there is no advancement of new money other than funds necessary to cover reasonable closing costs and transactions with business loans with a value equal to or less than $1 million in which rental income from the property is not the primary source of repayment.

The regulations contain a list of approximately 20 items that a certified appraiser must include in each evaluation appraisal.

Also significant: the regulations state that the evaluation must contain “an estimate of the property’s market value” and that “a valuation that does not provide a property’s market value or sufficient information and analysis to support the value conclusion is not acceptable as an evaluation appraisal. While a broker price opinion, a competitive market analysis, an automated valuation model and a tax assessment value may be useful in developing an evaluation appraisal, the information obtained from these methods of valuation is insufficient standing alone to meet all of the criteria necessary to be an evaluation appraisal.”
 

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Forty-two U.S. appraisal firms announced March 18 that they now are operating as Valbridge Property Advisors. The new firm is comprised of independent, local-market valuation firms with each office run by the local practice leader who must hold an MAI designation of the Appraisal Institute.

The new firm will specialize in office, industrial, retail, multifamily, hospitality, recreation and other special-purpose property types, and the MAI designation is held by appraisers who are experienced in the valuation and evaluation of these types of properties, as well as by those who advise clients on real estate investment decisions.

The firm is shareholder-owned with a board of directors and officers, including Richard L. Armalavage, MAI, serving as president and chief executive officer. It is headquartered in Naples, Fla. “Client demand for a strong independent national commercial property appraisal services platform has driven the formation of Valbridge,” Armalavage said in a news release. “Valbridge will be able to maximize opportunities for clients by elevating industry standards for accuracy, integrity, reporting and technology in service to current and future clients.”
 

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Legislation was introduced in the Pennsylvania General Assembly to expand the ability of real estate sales professionals to provide Broker Price Opinions and Comparative Market Analyses outside of the real estate brokerage context. This legislation would amend the Real Estate Licensing and Registration Act and the Real Estate Appraisers Certification Act.

A Comparative Market Analysis or Broker Price Opinion is developed by a licensed real estate broker, associate broker, or salesperson and provides an estimate of the probable selling price or leasing price of a particular parcel of property. Currently, a Pennsylvania licensed real estate broker or salesperson is permitted to perform a CMA in the real estate brokerage context for “the purpose of determining the asking/offering price for the property by a specific actual or potential consumer or for the purpose of securing a listing agreement with a seller.” Brokers and salespersons are currently prohibited from doing CMAs outside the brokerage context because a value or price opinion provided for a fee is defined in PA law as an “appraisal” and requires an appropriate appraisal license or certification to be held by the individual performing that work

The legislation – SB 869 – was introduced in the Pennsylvania Senate on April 18, 2013. It is sponsored by Sen. Robert M. Tomlinson and has 16 co-sponsors. Senator Tomlinson is the Chair of the Senate Consumer Protection and Professional Licensure Committee.
 

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The Bipartisan Policy Center issued a report proposing changes to current appraisal policy. Although it was primarily focused on reducing the government’s role in the nation’s housing finance system, it had appraisal related recommendations. For example, it recommended banning the use of distressed home sales as comparables which the BPC said was helping to decrease local home values and buyers’ ability to secure financing.

The BPC Housing Commission is led by former U.S. Sens. George Mitchell, Mel Martinez and Kit Bond and former U.S. Housing and Urban Development Secretary Henry Cisneros. The report titled “Housing America’s Future: New Directions for National Policy,” can be found bipartisanpolicy.org/sites/default/files/BPC_Housing%20Report_web.pdf
 

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The Appraiser Qualification Board issued the Second Exposure Draft of Proposed Interpretation and Revision to the Real Property Appraiser Qualification Criteria. The AQB is an independent board of The Appraisal Foundation and composed of at least five practicing appraisers who are appointed by the Foundation’s Board of Trustees for three-year terms. Under the provisions of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), the AQB establishes the minimum education, experience and examination requirements for real property appraisers to obtain a state certification. In addition, the AQB performs a number of ancillary duties related to real property and personal property appraiser qualifications.

“In 2006, the AQB issued an Interpretation to the Criteria, addressing continuing education for appraisers returning from active military duty. Based on recent events such as Hurricane Sandy, the AQB has recognized that appraisers impacted by a state- or federally-declared disaster may be similarly situated,” the board wrote. “Therefore, the AQB is exposing a revision to the previously adopted Interpretation (that will apply to the current, or 2008 Criteria), as well as a revision to the already adopted Criteria (that becomes effective on Jan. 1, 2015).”

The changes can be found at The Appraisal Foundation’s website appraisalfoundation.sharefile.com/d/s5763fd573e94aafa.
 

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The Appraisal Foundation, a national non-profit organization dedicated to the advancement of professional valuation and protecting the public trust, has released two new pamphlets benefitting consumers and lenders. According to the Foundation, A Guide to Understanding a Residential Appraisal was developed specifically for consumers. This pamphlet is intended to provide consumers an overview of the residential appraisal and how it relates to the home buying process. Appraisers, Appraisals & You: A Lender’s Guide to USPAP was developed for lenders working in the loan underwriting process. This pamphlet is intended to provide insight to lenders in working with appraisers as well as an overview of the entire appraisal process.
Both pamphlets are available from the Foundation by a downloadable PDF on its website www.appraisalfoundation.org
 

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A new rule passed Jan. 15 gives mortgage lenders an additional year to institute appraisal standards for higher-risk loans. Six agencies were involved in approving the rule, including FDIC, the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Housing Finance Agency and the National Credit Union Administration. According to the Appraisal Institute, the rule takes effect Jan. 14, 2014, and will require lenders that issue loans that don’t meet the qualified mortgage standard to get written reports by certified appraisers who have conducted physical inspections of homes. In addition to the physical inspection, the rule will require a second appraisal in situations where a home is being flipped for a quick, higher resale. However, a second appraisal will not be required if the new sale price increased only slightly.

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One important issue for litigation experts to always consider is whether their draft reports can be obtained by another party via discovery. The rules vary by jurisdiction. Recently, the US Tax Court amended Rule 70 of its Rules of Practice & Procedure to exclude drafts of expert reports from discovery. This protection applies regardless of the form in which the draft is recorded.  This is similar to the Federal Rules of Civil Procedure. The new Tax Court regulation also protects the reports and opinions of any consulting (non-testifying) expert. 

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Loans involving properties in the path of Hurricane Sandy will certainly be delayed according to National Mortgage News. In addition to the obvious business interruption, many properties will need to be reappraised to determine if the Hurricane caused a decrease in property value. Given the volume of reappraisals, the loan process will be severely impacted. David Stevens, president of the Mortgage Bankers Association, told National Mortgage News that he expected mortgage profits and origination volumes to dip for a short period because of days lost to the storm.

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The New Jersey Department of Banking and Insurance performed 173 examinations of mortgage licensees in 2011. According to National Mortgage News, these examinations concluded that 90 percent of the mortgage firms had some type of violation. The examinations showed a total 4,347 violations, or 25 per examination. The most common violations were deficiencies in loan documentation (accounting for 55 percent of violations) while charging impermissible fees was the second most common violation (accounting for 11 percent of violations). Apparently, this pattern is not unique to NJ. For example, according to National Mortgage News, representatives of the Maryland Department of Labor, Licensing and Regulation and the Pennsylvania Department of Banking and Securities also have stated that there are substantial problems in their states.

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The New Jersey Department of Banking and Insurance performed 173 examinations of mortgage licensees in 2011. According to National Mortgage News, these examinations concluded that 90 percent of the mortgage firms had some type of violation. The examinations showed a total 4,347 violations, or 25 per examination. The most common violations were deficiencies in loan documentation (accounting for 55 percent of violations) while charging impermissible fees was the second most common violation (accounting for 11 percent of violations). Apparently, this pattern is not unique to NJ. For example, according to National Mortgage News, representatives of the Maryland Department of Labor, Licensing and Regulation and the Pennsylvania Department of Banking and Securities also have stated that there are substantial problems in their states.

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Appraisers have been the target of complaints since the fiscal crisis began in 2008. As a result, some lenders started requiring that appraisers provide as many as eight to 10 comparable transactions in their reports. Prior to the requirement, lenders generally required at least three comps on most residential appraisals. The National Association of Realtors called this new requirement “excessive” in an Oct. 11 news release. The NAR claims that the requirement was affecting home sales.
An NAR online survey showed that 11 percent of realtors indicated a contract was cancelled during the last three months due to an appraisal, and an additional 15 percent of surveyed realtors said a sale price was renegotiated to reflect a lower appraisal. However, 65 percent of realtors reported no contract issues connected to home appraisals.
The pendulum continues to move on the appraisal industry in the wake of the fiscal crisis.
 

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The Government Accountability Office recently released a report examining real estate valuations in the wake of the recent mortgage crisis. The report, used data from Fannie Mae, Freddie Mac and five of the biggest mortgage lenders. It revealed that valuations received through broker price opinions and automated valuation models take less time and are less costly than traditional appraisal reports, but traditional appraisal reports are still mandated for almost all first-lien residential loan originations due to their greater reliability. The report noted that appraisal management companies are becoming more prominent because of regulations that prevent conflicts of interest in the appraiser selection process.

The Dodd-Frank Act requires state appraisal licensing boards to supervise AMCs. The law also mandates that federal banking regulators, the Federal Housing Finance Agency and the Consumer Financial Protection Bureau create minimum standards for states to apply in registering AMCs. However, the report states that federal regulators have not finished rulemaking to establish state standards. Dodd-Frank broadened the role of the Appraisal Subcommittee, which oversees state appraiser regulatory programs, monitors requirements relating to appraisal standards for federal financial institutions, maintains a National Registry of state-certified and licensed appraisers and monitors and reviews operations of the Appraisal Foundation. However, the ASC has been restricted in meeting its responsibilities under Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the report noted.

 

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Today at 10:00 am ET, representatives of the Appraisal Institute and the Appraisal Foundation will testify before the US House of Representatives, Committee on Financial Services, Subcommittee on Insurance, Housing and Community Opportunity. The topic of the hearing is “Appraisal Oversight: The Regulatory Impact on Consumers and Businesses.” The following link is to the hearing website which includes the written testimony of those witnesses as well as other participants. financialservices.house.gov/Calendar/EventSingle.aspx

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The Appraisal Institute urged the U.S. Sentencing Commission to require the use of real estate appraisals when calculating loss in mortgage fraud cases.  Section 1079A of the Dodd-Frank Act requires the U.S. Sentencing Commission to review and, if appropriate, to amend the federal sentencing guidelines applicable to mortgage fraud and financial institution fraud offenses and to consider whether the guidelines appropriately account for the potential and actual harm to the public and the financial markets from those offenses.

 

Appraisal Institute President Sara W. Stephens, MAI, testified at a recent hearing, “We believe the Commission should adopt a special rule for determining the fair market value of real property if the mortgaged property has not been disposed of by the time of the sentencing. However, this rule should require use of real estate appraisals prepared by qualified appraisers in accordance with the Uniform Standards of Professional Appraisal Practice, as opposed to tax assessments, to ensure fairness and consistency.”

The Appraisal Institute, the American Society of Farm Managers and Rural Appraisers oppose proposed amendments to the federal Mortgage Fraud Sentencing Guidelines which propose using tax assessments, and not real estate appraisals, to determine fair market value.  Stephens said that assessed value may not conform to market value. She also advocated that the Commission establish a special rule relating to the qualifications of real estate appraisers.

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New York's top court on Tuesday ruled that the state attorney general may pursue allegations that First American Corp. and its former subsidiary eAppraiseIT inflated property appraisals under pressure from client Washington Mutual. However, the court ruled only on the issue of jurisdiction and not the merits of the attorney general's claims. Then-Attorney General Andrew Cuomo brought the 2007 civil suit alleging the practice contributed to the national subprime mortgage crisis. The Court of Appeals concluded federal law and regulations do not pre-empt the state claims alleging fraud and violations of real estate appraisal rules. The 1989 Financial Institutions Reform, Recovery and Enforcement Act, which followed the federal savings and loan crisis, “sanctions the establishment and use of state agencies dedicated to certifying and licensing appraisers and delineates requirements for using these appraisers in federally related transactions,” Judge Carmen Beauchamp Ciparick wrote.

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The Appraisal Foundation announced Oct. 13 that it has released its 2012-13 edition of the Uniform Standards of Professional Appraisal Practice. “USPAP” includes a variety of standards of professional practice for all appraisal disciplines. The 2012-13 edition will become effective Jan. 1, 2012, and will be valid for two years. The new edition of USPAP includes the standards of professional practice, guidance from the Appraisal Standards Board and a host of changes and revisions. Copies of the 2012-13 edition are available for purchase at www.appraisalfoundation.org

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According to Lender Processing Services - a data and analytics firm that tracks monthly statistics in its loan-level database of nearly 40 million mortgages - mortgage delinquencies fell slightly to 8.09 percent in September from August. The mortgage delinquency rate fell 0.5 percent from the previous month and was 12.7 percent lower than at the same point last year. The foreclosure pre-sale inventory rate was 4.18 percent, up 1.7 percent from August and an increase of 8.9 percent from a year ago.

Data showed that 2.17 million homes were currently in pre-foreclosure and that more than 6.3 million properties nationwide were in foreclosure. Florida, Illinois, Mississippi, Nevada and New Jersey had the highest percentage of noncurrent loans. Alaska, Montana, North Dakota, South Dakota and Wyoming had the lowest percentage of noncurrent loans, which includes delinquencies and foreclosures as a percentage of active loans in each state.

 

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The United States Tax Court recently issued an opinion that contains valuable lessons for any forum. Real estate valuation litigation regularly occurs in the Tax Court.

In Boltar LLC v. Commissioner, the Tax Court granted the government’s motion to strike the taxpayer’s appraisal because it was “unrealiable and irrelevant.” In that case, the IRS and the taxpayer disagreed as to the value of a donated conservation easement on real property located in Indiana. The Court ruled that the taxpayer’s appraiser used the wrong facts and standard in appraising the property and, therefore, struck the appraisal. The government’s notice of deficiency was upheld for the amount stated - only $42,400 out of a total $3,245,000 claimed as a charitable deduction on the partnership return.

Of particular interest was the Court’s harsh criticism of experts acting as advocates for their clients. It stated:

In most cases, as in this one, there is no dispute about the qualifications of the appraisers. The problem is created by their willingness to use their resumes and their skills to advocate the position of the party who employs them without regard to objective and relevant facts, contrary to their professional obligations

In addition, the cottage industry of experts who function primarily in the market for tax benefits should be discouraged. Each case, of course, will involve exercise of the discretion of the trial judge to admit or exclude evidence. In this case, in the view of the trial Judge, the expert report is so far beyond the realm of usefulness that admission is inappropriate and exclusion serves salutary purposes.

The importance of the credibility of experts – and attorneys – cannot be overstated. It is critical to resist the temptation to push experts to unsupportable positions. This is an important lesson for attorneys, experts and clients.
 

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According to the quarterly Mortgage Fraud Risk Report from Interthinx, there was a 22 percent decline in property valuation fraud risk over the previous year. Occupancy fraud risk increased 25 percent.
Valuation fraud can occur at origination with inflated appraisals or on short-sale transactions with artificially low estimates, according to a June 2 MortgageDaily.com article. The Las Vegas metropolitan market had the worst index, according to the report, but its 524 index value is still down 20 percent from the previous quarter. Overall, the risk of appraisal fraud was down 12 percent over the last quarter of 2010.
Occupancy fraud occurs when investors attempt to secure more favorable owner-occupied loan terms even though they don't intend to live in the property. The report showed a 25 percent increase in occupancy fraud risk in the first quarter of 2011. Overall the mortgage fraud risk index fell 5 percent over the last year, according to MortgageDaily.com.
 

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The Appraisal Institute is encouraging its members to write to Pennsylvania legislators to support a bill regulating “appraisal management companies.” Appraisal management companies are defined by the Bill as anyone “that provides appraisal management services and acts as a third-party intermediary between a person seeking a valuation of real estate and an appraiser or firm of appraisers.” The bill – known as the Appraisal Management Company Registration Act – was passed by the PA House and is currently pending in the Senate Consumer Protection and Professional Licensure Committee.
AMCs operating in Pennsylvania are not currently required to register with any government agency. The bill requires, among other things, that AMCs operating in Pennsylvania that order appraisals to register with the State Board of Certified Real Estate Appraisers and prohibits AMCs from being owned and/or managed by individuals who have had an appraiser license or certification denied, refused, cancelled or revoked. It also requires AMCs to have systems in place to verify that they only utilize licensed or certified appraisers and ensure that all appraisals are in compliance with the Uniform Standards of Professional Appraisal Practice.
 

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The Dept. of Labor has issued a proposed rule to revise the definition of “fiduciary” in the Employee Retirement Income Security Act (commonly known as “ERISA”) and the Internal Revenue Service regulations. The proposal will affect whether appraisers who work with pension and 401(k) plans and IRAs will be deemed to be fiduciary investment advisors. Appraiser organizations, including the Appraisal Institute, have sent letters in opposition to the proposal. They argue real estate appraisers do not provide “investment advice.”

For the department’s proposal, visit: webapps.dol.gov/FederalRegister/HtmlDisplay.aspx For the AI’s full letter, visit appraisalinstitute.org/newsadvocacy/letrs_tstimny.aspx#Comments
 

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The Treasury Department’s Financial Crimes Enforcement Network issued its Mortgage Loan Fraud update reports for the first 2 quarters of 2010. Those reports included statistics relating to “suspicious activities” regarding appraisal activities. It found that between 5 and 6 percent of the overall reports of suspected mortgage fraud in the first half of 2010 had some connection to appraisal activities. There were 1,577 appraisal related filings in the second quarter of 2010 and appraisal-related suspicious activity was reported in 1,484 filings in the first quarter.

The reports can be found at www.fincen.gov/news_room/rp/files/MLF_Update_1st_Qtly_10_FINAL.pdf and www.fincen.gov/news_room/rp/files/MLF_Update_2nd_Qtly_10_FINAL.pdf

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The Appraisal Standards Board of The Appraisal Foundation released its fourth exposure draft of proposed changes to the upcoming 2012-13 edition of the Uniform Standards of Professional Appraisal Practice. USPAP governs most appraisals in the United States. The Appraisal Foundation is a not-for-profit organization that publishes USPAP. Its Appraisal Standards Board is composed of six appraisers who are appointed for three year terms by the Board of Trustees of The Appraisal Foundation.

This exposure draft emphasizes revising USPAP’s reporting requirements and options. “The goal of (USPAP) is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers,” ASB Chair Sandra Guilfoil wrote in a letter accompanying the recent draft. “This fourth exposure draft continues its refinement of additional changes to USPAP that are intended to improve its clarity, relevance and enforceability.”

The draft is open for public comment through Jan. 14. It can be found at https://appraisalfoundation.sharefile.com/d/se001d41a1384c57b .
 

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Reuters has reported that fair value accounting rules that would require real estate companies to report land and buildings held for investment may become the new standard.

According to Reuters, the Financial Accounting Standards Board has tentatively decided to require fair value accounting for investment property. Fair value accounting practices measure assets by their market worth rather than historical cost. This could impact companies such as real estate investment trusts if they value their holdings based on historic costs, which typically had been counted upon to appreciate each year. However, FASB is examining whether current accounting practices create an unrealistic view of present real estate values given the current state of the economy.
 

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The Government Accountability Office provided an update of its study of real estate appraisal issues as mandated by the Dodd-Frank financial regulatory reform bill. The GAO is conducting a year-long study of appraiser independence. As required by the Dodd-Frank legislation, the GAO must study the effectiveness and impact of options for selecting appraisers, different valuation methods and the effectiveness of the Home Valuation Code of Conduct.

 

The GAO’s study will focus on appraisals of one- to four-unit residential properties to answer four broad questions:

 

How often are different options for selecting appraisers and valuation methods used?

 

What are the potential advantages and disadvantages of these options and methods, and how do policies, including HVCC, affect their use?

 

To what extent do valuation costs and disclosures to consumers vary by appraiser selection option and valuation method, and how has HVCC affected these costs and disclosures?

 

How do federal and lender policies, including HVCC, address conflicts of interest in the valuation process, and how have these policies affected industry stakeholders?

 

At this point, the GAO study is still in its preliminary stages. For example, it is in the process of “evaluating potential data sources, analyzing federal policies and academic and industry research, and interviewing federal agency officials and appraisal industry stakeholders.” Stay tuned.

 

The update can be found at www.gao.gov/products/GAO-11-158R

 

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In a move that sent tremors throughout the appraisal community, the Appraisal Institute withdrew its sponsorship of The Appraisal Foundation on September 7. (See my September 16, 2010 entry).

The Appraisal Foundation has now posted a “Q&A” on its website regarding this important issue. That post can be found at: www.graphicmail.com/new/viewnewsletter2.aspx

According to the Appraisal Foundation,

“the Appraisal Institute once again failed to communicate with the Foundation regarding a matter directly related to our organization. In this case, without the Foundation’s knowledge or approval, the Appraisal Institute approached three other organizations with the following proposed revision to the federal law (FIRREA) which grants authority to The Appraisal Foundation:

“to maintain the independence of the Appraisal Standards and Appraiser Qualifications Boards and to avoid potential conflicts of interest, The Appraisal Foundation shall not directly or indirectly offer or sponsor any qualifying or continuing education courses for certified or licensed real estate appraisers beyond the National Uniform Standards of Professional Appraisal Practice course specifically required for licensure and certification.”

According, to the Appraisal Foundation, this was not the first time the Appraisal Institute allegedly violated similar Foundation rules.

The Foundation also stated that “under the right circumstances, there will always be a door open for the Appraisal Institute to return to The Appraisal Foundation.” However, the Foundation expressly stated, “we are always willing to talk with their representatives. We hope and believe the opportunities associated with a change in their leadership in a few months may be constructive.”

Once again, I truly hope these important organizations resolve their differences.
 

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In a move that sent tremors throughout the appraisal community, the Appraisal Institute withdrew its sponsorship of The Appraisal Foundation on September 7.

The Appraisal Institute is the most prestigious real estate organization and has more than 25,000 members and 91 chapters throughout the world. I am an affiliate member of AI (the designation for non-appraiser real estate professionals). The Appraisal Foundation was founded in 1987 by eight major appraisal organizations to help regulate the appraisal profession within the US. It is perhaps best known for its promulgation of the Uniform Standards of Professional Appraisal Practice (“USPAP”) which contains the generally accepted standards for professional appraisal practice in North America.

AI and the Appraisal Foundation have been fighting throughout this year regarding AI actions relating to proposed legislation. The Appraisal Foundation claimed that AI improperly sought to influence other Appraisal Foundation members to support legislation that may have been contrary to the Foundation’s interests. The Foundation ultimately sanctioned AI for its alleged actions.

The AI Board of Directors’ letter to the Foundation stated: “The Appraisal Institute must be able to discuss freely issues of concern to, and advance the interests of, its members, the profession and the public, which The Appraisal Foundation has made clear, is inconsistent with Foundation sponsorship. Moreover, the Foundation has decided to punish the Appraisal Institute for actions that it did not commit. That decision is grossly unfair, unacceptable, and attacks the very integrity of the Appraisal Institute.”

AI’s statement regarding its withdrawal can be found at appraisalinstitute.org/newsadvocacy/news/2010/090710_AI_WithdrawalFromTAF.aspx

It is truly sad that these two important organizations cannot work together. Hopefully, cooler heads will prevail and will close this rift.
 

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U.S. and international accounting proposals are being circulated which could impact the way private equity, venture capital and other alternative private investment funds explain how they appraised an asset including real estate. According to a recent story in Pensions & Investments, managers of these funds could face much tougher rules on explaining how they arrived at an asset's value and the methods used to appraise such assets.

The proposed changes are part of an ongoing effort to standardize the way fair-value reporting is handled at the international level. In conjunction with a recent G-20 meeting, both the Financial Accounting Standards Board and the International Accounting Standards Board released exposure drafts of revised fair-value standards. The IASB’s draft focuses on increased transparency about fair-value measurements, including valuation techniques and assumptions made to measure fair value, according to Pensions & Investments. The FASB’s draft would essentially require managers to clearly state how they arrived at fair-value valuations and would more plainly bring U.S. standards in line with international accounting standards, Pensions & Investment reported.
 

The story can be found:  www.pionline.com/apps/pbcs.dll/article

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President Obama signed the financial regulatory reform bill into law on July 21.  The Bill included appraisal provisions including provisions to sunset the controversial Home Valuation Code of Conduct by directing for the establishment of a federal appraisal independence standard, enhancing appraiser competency provisions - including clarification regarding consideration of professional appraisal designations – and providing for financial resources for oversight and enforcement of appraisal rules.

The Appraisal Institute “applauded the legislation’s inclusion of the first modernization of real estate appraisal regulations in more than 20 years.” “This bill will mean good news for consumers because they should see more reliable home appraisals,” said Appraisal Institute President Leslie Sellers, MAI, SRA. “It will encourage the use of highly trained and competent real estate appraisers and will provide much-needed resources for oversight and enforcement.”

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According to a study by the LexisNexis® Mortgage Asset Research Institute, reported mortgage fraud and misrepresentation increased 7 percent from 2008 to 2009. 

The study states that the reasons for the increase include “new opportunities to take advantage of consumers, maintenance of lifestyles obtained during the boom period, consumers who are desperate for the American dream of home ownership, and the need for new, creative methods of moving illicit funds.”  It also states that the fraud is being facilitated by technology which provides “fraudsters with the ability to access information, conduct criminal activities and remain anonymous via the internet, and manipulate processes that rely on the need for expediency.”

 

The report also included information regarding the role of appraisers in fraud and misrepresentation.  It concludes that “[t]he most prevalent types of appraisal fraud and misrepresentation for loans originated in 2009 involve incorrect comparables, omitted information, and value inflation. Thirty-six percent of loans with reported appraisal fraud and/or misrepresentation have misused comparables. Thirty-three percent involve a material omission of relevant information that would have affected the value. Value inflation . . . is also a large portion of reported appraisal fraud and misrepresentation.”

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The nation’s leading organizations of appraisers recently told all 50 state appraiser boards that real estate agents and brokers allegedly are providing broker opinions of value of commercial real estate without appropriate appraiser credentials. The Appraisal Institute, the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, and the National Association of Independent Fee Appraisers joined in this effort.

The organizations stated that the performance of “BOVs” by agents and brokers “blatantly disregards numerous state statutes that require appraiser credentialing for opinions of value of real estate” and urged the boards to “take aggressive enforcement action against any provider of a BOV who does not hold an appropriate appraiser credential.”

This has been a contentious issue for some time. There are circumstances where real estate experts who are not appraisers can provide a valuation opinion. For example, Pennsylvania Courts have expressly ruled that real estate brokers can serve as valuation experts in eminent domain cases even if they do not have a real estate appraiser license.

Of course, any professional should consider the relevant law – statutory or case law – before he or she provides a valuation opinion.
 

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The US Department of Housing and Urban Development (HUD) last week served subpoenas on 15 mortgage companies nationwide seeking information on failed FHA loans. The subpoenas part of a program reviewing FHA approved mortgage lenders with “significant” foreclosure rates.

The companies are:

•First Tennessee Bank, Memphis, TN
•Alethes, Lakeway, TX
•Security Atlantic Mortgage Co., Edison, NJ
•Pine State Mortgage Corporation, Atlanta, GA
•Birmingham Bancorp Mortgage Corporation, West Bloomfield, MI
•Alacrity Financial Services, Southlake, TX
•Assurity Financial Services, Englewood, CO
•D and R Mortgage Corporation, Farmington, MI
•Webster Bank, Cheshire, CT
•Mac-Clair Mortgage Corporation, Flint, MI
•Americare Investment Group, Inc., Arlington, TX
•1st Advantage Mortgage, Lombard, IL
•American Sterling Bank, Independence, MO
•Sterling National Mortgage Company, Great Neck, NY
•Dell Franklin Financial, Columbia, MD
 

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The National Association of Independent Fee Appraisers (NAIFA) has issued a response to the Home Valuation Code of Conduct (HVCC). The HVCC became effective for single-family mortgage loans (except government-insured loans) originated on or after May 1, 2009, and delivered to Fannie Mae and has been a source of controversy for appraisers and lending institutions.

In its response, the NAIFA acknowledges a lot of the concerns about the HVCC that have been expressed by various segments of the mortgage industry. However, the NAIFA puts the responsibility on the lender. The response states:

The fact is that all of the concerns mentioned above are all the responsibility of the lending institution. They are responsible for making sure that the competency of the appraiser and the quality of the appraisal meets the standards required to execute a sound mortgage decision.

The NAIFA will be issuing a “Consumer Guide for Quality Appraisals” which will be available soon at www.NAIFA.com. The NAIFA response can be found at www.naifa.com/about/NAIFA_Responds
_to_HVCC_Issue8_28_09.pdf.

 

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The Federal Housing Finance Agency issued a notice seeking to address "misinformation" regarding the Home Valuation Code of Conduct. The notice, titled "Strengthening Appraiser Independence and Improving the Valuation Process," was issued July 22, 2009. According to the Notice, the Code, adopted in December 2008, "expanded on existing [Fannie Mae and Freddie Mac] appraisal standards, seeking to redress problems that contributed to the current mortgage crisis and to improve the quality of the mortgage loans they purchase. . . . The HVCC is designed to promote professional appraisals free from inappropriate pressure from lenders, borrowers or brokers."

To address the "misinformation", the Notice provides, among other things,:

"Contrary to some suggestions, the Code provides for communications with appraisers about errors, additional needed information and unprofessional conduct. . . . The real bar is on communications that seek to influence the appraiser to adopt a set valuation, which is prohibited."

"Contrary to some suggestions, the Code does not lead to lower appraisals for property. The Code insulates appraisers from pressures that led to higher or lower appraisals and should now lead to more accurate valuations."

"Contrary to some suggestion, the Code does not favor the use of [Appraisal Management Companies] over independent or in-house appraisers.

"The use of unqualified in-state or out-of-state appraisers, unfamiliar with local conditions, should be reported to state appraiser licensing agencies."

"Contrary to some suggestions, appraisals are transferable between lenders under the Code."
 

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The Appraisal Foundation – a nonprofit organization that establishes standards for appraisers – has announced that it is establishing a “Consistent Enforcement Task Force.” The Foundation stated, that “[w]ith 55 different state real property appraiser regulatory bodies enforcing USPAP, there is a wide range of disciplinary actions taking place. While uniformity may be an unrealistic goal, there is a need for greater consistency in enforcement. One objective is the development of recommended disciplinary guidelines.”

The Task Force will provide a set of recommended disciplinary guidelines. The Task Force is composed of Trustees, current and former state appraiser regulators and an Appraisal
Subcommittee representative.
 

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Senate Banking Committee Chairman Chris Dodd and House Financial Services Chairman Barney Frank sent a letter to the heads of the bank regulatory agencies asking them to address whether banks are inflating the value of 2nd mortgages on their balance sheets. They stated in the letter that these inflated values discouraged proactive efforts to modify and restructure mortgage loans and “crippled” programs designed to prevent foreclosures. The letter further states, “Across the country housing prices have dropped and many Americans owe far more on their mortgages than their homes are worth.” The Appraisal Institute commented on the letter by stating, “The letter was generated in an effort to make available refinancing opportunities for struggling homeowners who are currently not eligible for mortgage modifications because their loans do not reflect current market values.”

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The U.S. House of Representatives passed the Mortgage Reform and Anti-Predatory Lending Act of 2009. The bill, H.R. 1728, passed by a vote of 300 to 114 on May 7, 2009. The bill includes provisions that will impact appraisers including:

• Requirements for complete interior inspection appraisals for all subprime loans;
• Establishment of a federal appraisal independence standard with significant monetary penalties for violations;
• Modernizing provisions of Title XI of FIRREA to provide additional resources for state enforcement and greater accountability of federal and state appraisal regulators;
• Required separation and clear disclosure of fees paid to appraisers and fees paid for appraisal administration (i.e., fees paid to appraisal management companies);
• Limitations on the use of broker price opinions in loan origination; and
• Registration requirements, and a regulatory framework, for Appraisal Management Companies, with mechanisms to prohibit infiltration by appraisers sanctioned by state regulatory agencies.

The bill now will be considered by the SenateSenate Banking Committee. There is no timetable yet for its consideration.

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The United States Tax Court recently found that an appraisal does not necessarily need to comply with the Uniform Standards of Professional Appraisal Practice – commonly known as USPAP – to be admissible or reliable. In Whitehouse Hotel Limited Partnership v. Commissioner of Internal Revenue – filed October 30, 2008 – the IRS’ appraiser submitted an appraisal that did not fully comply with USPAP. The taxpayer argued that the appraiser’s report was per se unreliable since it is not in conformance with USPAP. It further argued that it should not be received into evidence.

The Tax Court rejected that argument and admitted the appraisal into evidence. It offered the following explanation for its holding:

“USPAP is widely-recognized and accepted as containing standards applicable to the appraisal profession. Adherence to those standards is evidence that the appraiser is applying methods that are generally accepted within the appraisal profession. Therefore, at a minimum, compliance with USPAP is an indication that the appraiser's valuation report is reliable. However, a noncompliant valuation report is not per se unreliable. Full compliance with professional standards is not the sole measure of an expert's reliability. Petitioner essentially asks the Court to supplant its responsibility to assess an expert’s reliability with a rigid standard of reliability. Sole reliance on USPAP is a far more inflexible definition of reliability than the definition (depending on "reliable principles and methods") incorporated into Rule 702 of the Federal Rules of Evidence. Therefore, we decline to adopt USPAP as the sole standard for reliability of an expert appraiser.”

 

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A class action lawsuit was filed against Countrywide by a group of Idaho appraisers. The appraisers claim that Countrywide used strong arm tactics to pressure appraisers to provide false appraisals. The lawsuit further claims that Countrywide punished those appraisers who would not participated by blacklisting them and denying them work.

The class action complaint was filed in the United States District Court in Seattle. The plaintiffs seek to certify a class of all appraisers nationwide who have been blackballed by Countrywide.

Pressure from lenders has been an ongoing problem for appraisers for many years. Given the economic climate, it appears likely that similar cases will be filed.

 

 

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The Department of Housing and Urban Development has established a program to provide grants to state and local governments to purchase abandoned and foreclosed properties. According to HUD, the $3.92 billion Neighborhood Stabilization Program will provide emergency assistance to state and local governments to acquire and redevelop foreclosed properties that might otherwise become sources of abandonment and blight within their communities. The Neighborhood Stabilization Program (NSP) provides grants to every state and certain local communities to purchase foreclosed or abandoned homes and to rehabilitate, resell, or redevelop these homes. The purpose it to “stabilize neighborhoods and stem the decline of house values of neighboring homes.” Although the wording is unclear, it appears that these funds may be used to acquire property through eminent domain.
 

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The Federal Reserve recently adopted provisions prohibiting mortgage brokers from coercing, influencing, or otherwise encouraging an appraiser to provide a misstated appraisal in connection with a mortgage loan. The provision, which comes in the form of a “Final Rule,” was supported by the Appraisal Institute, American Society of Appraisers, American Society of Farm Managers and Rural Appraisers and the National Association of Independent Fee Appraisers.

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One concern I hear consistently expressed by appraisers is that there are times when they are pressured to reach a certain number when appraising properties.  Congress is considering legislation that prohibits all parties involved in a real estate transaction from improperly influencing an appraiser.  The legislation is part of an amendment to pending foreclosure prevention legislation known as the Federal Housing Administration Housing Stabilization and Homeowner Retention Act (H.R. 5830).  On April 24, the U.S. House Financial Services Committee agreed by voice vote to add the amendment to H.R. 5830.

The goal of the amendment is to ensure an independent and competently performed appraisal process.  It has been backed by the Appraisal Institute and has bipartisan support in Congress. However, the future of H.R. 5830 is uncertain.  It authorizes the FHA to guarantee billions of dollars worth of refinanced loans if lenders reduce loan amounts to reflect reduced home values.  The measure would require banks to make less money on the loans but it would also reduce their credit exposure, while helping families stay in their homes.  According to the Appraisal Institute, discussions are underway in the Senate on companion legislation to H.R. 5830, where several other questions will likely be addressed at the committee level, including what property standards (FHA or conventional) will be applied to the appraisals and who will actually order the appraisal.

It would be naive to think that this legislation would eliminate all improper behavior.  However, it is a step in the right direction even if it serves to draw attention to this serious problem.

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