A recent post from AppraisalPort© regarding legislative updates that may affect appraisers across the country and AI’s position.
Below is a brief synopsis of three bills that could potentially have both positive and negative ramifications for appraisers. The first one is HR 3461: The Financial Institutions Examination Fairness and Reform Act, which is sponsored by Rep. Shelley Capito (R-WV) and is designed to promote bank examination consistency, safety, and soundness. The AI supports measures to promote consistency, but believes amendments are necessary to this bill as introduced. The bill contains many provisions to strengthen the bank examination process, but the AI sees a problem in that it waives the right of bank examiners to order new appraisals due to safety and soundness issues. The AI believes examiners should not have their hands tied in these situations. The AI also believes appraisals should be allowed to be ordered whenever they are needed. Bank examiners currently oppose the bill, but it does have bipartisan support which could lead to passage, at least in the House.
The next bill with interest for appraisers is S 3047: Expanding Refinancing Act of 2012 sponsored by Diane Feinstein (D-CA). This bill amends the National Housing Act to authorize the Secretary of Housing and Urban Development (HUD) to insure or commit to insure any mortgage made to refinance an eligible mortgage. This would essentially expand the Fannie Mae and Freddie Mac refinance guidelines to include FHA loans. The idea is to help homeowners with upside-down mortgages refinance to a more favorable loan and avoid foreclosure.
The bill defines the requirements of an “eligible mortgage” as:
1) A loan not guaranteed by Fannie Mae and Freddie Mac.
2) A loan secured by an owner-occupied residence.
3) A loan where the principal obligation does not exceed 140% of the value of the property securing the mortgage or the HUD-insured loan limits in effect.
As introduced it appears to retain the FHA appraisal requirement. The AI supports this bill, but is seeking more clarification with respect to some of the fine points. Currently this bill would not find a lot of favor in the House and would have problems getting the needed votes to pass.
A third bill — S 3085: Responsible Homeowners Refinancing Act of 2012 sponsored by Robert Menendez (D-NJ) — is designed to make it easier for homeowners to refinance loans held by Fannie Mae and Freddie Mac. This bill would basically modify some of the guidelines of the Home Affordable Refinance Program (HARP) to:
1) Prohibit up-front fees.
2) Use alternative streamlined methods to appraise the value of a property.
3) Provide the ability to carry over mortgage insurance.
These modifications would seem to help borrowers, but the bill would basically waive the need for an appraisal on these loans and encourage the use of alternative valuation methods such as AVMs. Prohibiting any costs from being passed on to the borrower would also discourage lenders from ordering appraisals. Currently 20% of HARP refinances, utilizing the same lender, call for an appraisal, while an appraisal is ordered 80% of the time when a new lender is utilized for the HARP refinance. This bill could cut that rate substantially and the AI is opposed to this bill as introduced; it would, however, be acceptable to appraisers if some of the provisions were reconsidered.
The AI indicated that a vote on this bill will likely be forced before the November election. As with the above-mentioned bill, it will probably meet with resistance in the House as the voting tends to follow party lines. Some members of Congress believe HARP II is starting to work and no new legislation is needed. This will be one to watch over the next few months.
The latter part of the AI session in San Diego was devoted to covering issues on a state level. I can’t go into that level of detail here, but the major theme for states seems to be how to handle the regulation of Appraisal Management Companies (AMCs). Scott DiBiasio reported that to date 33 states have enacted laws to bring AMCs under the regulatory authority of the state appraisal boards. The latest five to accomplish this in 2012 are Colorado, Kansas, New Hampshire, Pennsylvania, and Virginia.
As many have suggested, the issues involved with regulating AMCs are becoming more complicated than those associated with appraiser licensing. States have to consider requiring surety bonds for appraiser non-payment, background checks, customary & reasonable fees, AMC application process & fees, and so on. The AI believes some states have developed very good guidelines while others have experienced challenges and may need major amendments. Arizona, Louisiana, Missouri, and Washington are among states working to perfect existing laws. Hopefully, the states still working on their legislation are following the example of those with the best programs. States scheduled to enact legislation in 2013 include Alaska, Idaho, Wisconsin, West Virginia, and Wyoming.
FNC Study Shows Appraiser Due Diligence in The Process of Developing A Market Value Opinion
Below is the summary of a study conducted by Yanling Mayer, a senior research economist at FNC. The study compared appraisal valuation relative to the contract sale price. You may find the results interesting.
Last month, the Appraisal Institute released “Guide Note 12: Analyzing Market Trends,” a resource designed to give AI members an analytical framework for studying market trends while developing a market value opinion on a property. The Guide Note is particularly concerned with challenges faced by appraisers when market conditions are rapidly changing, as demonstrated by recent boom and bust cycles of the U.S. housing market. In slower markets like today’s, the Guide Note recognizes that a lack of market data is often challenging to appraisers attempting to make market value adjustments.
Based on the latest information contained in a large sample of purchase-mortgage appraisals completed in June, FNC conducted an analysis to examine how appraisal valuations respond to local market conditions — particularly when conditions are prone to produce less efficient transaction prices. It is well known that buyer-seller-negotiated prices can deviate from a property’s underlying value due to various inefficiencies that exist in real estate transactions. In today’s market environment, the problem is likely compounded by distressed conditions that characterize many housing markets across the country. Unlike in a typical arms-length transaction involving two households-homeowners and homebuyers, the parties to distressed properties are typically unique and the properties are often sold at a significant price discount which may or may not represent underlying market trends. Likewise, fewer home sales make it more difficult to observe relevant price information and market trends and thus more likely to produce inefficient prices.
The analysis shows that appraised value can differ quite significantly from contract price despite the fact that nearly one in three pre-closing sales transactions are appraised at exactly the contract price. Of a sample of purchase-mortgage appraisals on single-family homes and condos completed between January and June 2012, nearly 25% are appraised above contract by 3.0% or more. Combined with another 8-9% appraised at below contract by 3% or more, a third of the purchase-loan appraisals contain a market value opinion differing at least 3% in value from the contracts.
More importantly, the analysis shows that appraisal valuation appears to be performing the important risk management function it is designated to do for lenders’ mortgage transactions: helping to ascertain the market value of the underlying collateral. The analysis finds a strong positive correlation between indications of market inefficiency and appraised value’s tendency to move away from a contract price. In other words, there is a greater chance that appraised value will be different from the contract price when underlying market conditions are more inclined to produce less efficient transaction prices. Overall, the evidence suggests appraiser due diligence in the process of developing a market value opinion on the underlying collateral.
• More active markets – defined in the analysis as having at least 10 non-distressed sales in a prior month – are associated with lower probability of observing significantly different appraisal valuation. A more active market makes gleaning information more efficient. A significantly different appraisal valuation is defined as one in which appraised value falls below or above contract by at least 3% of contract price.
• Greater market distress — measured by the proportion of distressed properties in total homes sales in the prior three months — is associated with a higher probability that a significantly different appraised value will be observed. More specifically, market distress increases the probability of appraised value falling significantly below the contract price.
• REO or short sale properties are more likely to be appraised at higher value than the contract price. Sellers of such properties are driven to make a quick sale and are typically willing to ask a price significantly below the property’s market value in exchange for liquidity.
• Low-tier properties – contract price below $250,000 – are more likely appraised above the contract price. In contrast, high-tier properties (those with a contract price at $1 million or more) are less likely to receive a higher valuation. Since the subprime mortgage crisis is concentrated among low-tier properties, distressed sales are more likely to occur among these properties as their owners fall into financial distress. Since the appraisal data often have missing information regarding a property’s distressed sale status (short sale, REO, or other forms of distress), it is suspected that the low-tier property indicator picks up such impact on appraisal valuation.
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