Interagency Guidelines Web seminar, February 10, 2011 Questions from participants. The answers here are suggestive guidance only and should not be treated or considered legal or regulatory advice. You will want to refer questions to your own legal counsel or your own financial regulator for more definitive answers and for how they would interpret the same provisions. 1. Can a Lender remove an approved appraiser to "inactive" status simply because that individual appraiser is on an investor s "watch list"? This is a simpler question because you refer to a lender as opposed to an appraisal management company (AMC). If you had asked about an AMC, that would bring state AMC statutes into the mix, many of which regulate the process of removing appraisers from lists. As a general rule, the feeling is that you have control over the appraisers who are on your approved appraiser list or lists (you may have more than one list depending on whether you need to maintain different lists for different investors which is what it seems as if you are doing). The limitation has to do with appraisal independence. There are at least two limitations: In the Interagency Guidelines, there is a general requirement that the approved appraiser list be managed in a way that assures independence Further, there should be periodic internal review of the use of the approved appraiser list to confirm that appropriate procedures and controls exist to ensure independence in the development, administration, and maintenance of the list. There is no specific reference to an approved appraiser list in the Interim Final Regulations, but the underlying policy of the Interim Final Regulations has to do with: If you sell to Fannie Mae/Freddie Mac, you will be subject to the Appraisal Independence Requirements (the successor to the HVCC rules). (Note that these requirements often show up in some state legislation. I. Appraisal Independence Safeguards B. No employee, director, officer, or agent of the Seller, or any other third party acting as joint venture partner, independent contractor, appraisal company, appraisal management company, or partner on behalf of the Seller, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, inducement, intimidation, bribery, or in any other manner including but not limited to: (8) Removing an appraiser from a list of qualified appraisers, or adding an appraiser to an exclusionary list of disapproved appraisers, in connection with the influencing or attempting to influence an appraisal as described in Paragraph B
above (this prohibition does not preclude the management of appraiser lists for bona fide administrative or quality-control reasons based on written policy); and As a result, you need to satisfy yourself that removing an appraiser from the list is not for the purpose of influencing or attempting to influence an appraisal. The way you state your question, you have more or less indicated that that is not your intention, but a requirement of your investor. It would seem to me that even if your investor may hesitate to tell you specifically why they want you to remove someone from their list they should be prepared to indicate that while they may not be able to tell you specifically why they are removing the person from their list that it is not for a purpose that would violate the Appraisal Independence Requirements established by Fannie Mae and Freddie Mac. This would seem to help satisfy not just the Appraisal Independence Requirements but also the regulatory issues. (This is not a new question and your own financial regulator may have a more specific answer.) 2. Neil - will you be addressing the inclusion of an actual "value" estimate in an evaluation? You will want to refer to section XIII. Evaluation Content. One of the eight major bullet points is: Provide an estimate of the property s market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (that is, the date that the analysis was completed), with any limiting conditions. Any federally related transaction needs to be supported by a market value estimate. It is a requirement that an evaluation provide an estimate of the market value that differentiates an evaluation from other valuations such as BPOs, which do not estimate market value. 3. We have had discussions regarding the authority for a lender's staff appraiser(s) (who may not be licensed in the property's state) to assign value for lending purposes. When the lender does not agree with the appraiser's opinion of value, is it a violation to "assign" a value the lender is comfortable with from a lending perspective without obtaining a formal appraisal, such as a drive-by, field review, etc? If the person who assigns the value is a reviewer, this is really an issue of licensing. Many states take the position that anyone performing appraisal services with respect to properties in their jurisdiction must be appropriately licensed or certified. They especially identify review appraisers performing appraisal services who are not licensed or certified in their state when the property is located in their state. They consider this a violation of their state law (essentially unlicensed activity).
Alternatively, the lender can simply reduce the loan-to-value (that is, give less credit to the value that the appraiser is assigning) to have the same effect. The challenge with that is that the consumer will have a copy of the appraisal and wonder why they did not get the full LTV. The other challenge is that you may have a problem with having a credible compliant appraisal. 4. Do the guidelines differentiate between exterior and interior condition verification? In other words, is an exterior condition assessment satisfactory? The Interagency Guidelines do not appear to mandate any inspection. For example, under XII Evaluation Development, they say: An institution should consider performing an inspection to ascertain the actual physical condition of the property and market factors that affect its market value. When an inspection is not performed, an institution should be able to demonstrate how these property and market factors were determined. The challenge we have is that it is not clear right now what would be a different way to demonstrate physical condition. For example, what if we have a previous appraisal with an assessment of condition and photos? Would MLS photos or virtual tours be enough? What about satellite photos or Google Earth photos? It might be that we would have to tie those different approaches to past experience with the accuracy or reliability of using those approaches. 5. Does physical condition mean an assessment of the interior and exterior of a property? (see #4 above) 6. It seems like lenders will be allowed to avoid getting new appraisals if they can provide reasons why they don't need one. It seems to me this opens up many speculative reasonings. Can you give an example of reasoning that would qualify and reasoning that would be rejected? To a certain extent it may seem that way. I do think that the agencies do not want the institutions to spend money if they do not need to, but I think they also recognize the tendency to do the minimum. The Interagency Guidelines address this in detail under XVII. Program Compliance, (B) Portfolio Collateral Risk. The following language is indicative of what they are looking for, but you should note when you read the section that the agencies have provided several important elements or things to consider.
Prudent portfolio monitoring practices include criteria for determining when to obtain a new appraisal or evaluation. Among other considerations, the criteria should address deterioration in the credit since origination or changes in market conditions. 7. What is an example of an evaluation? Unfortunately there is no industry standard (or industry form) for an evaluation, although we have seen AVMs combined with additional elements or desktop valuations used in this circumstance. In general, any credible estimate of market value which includes all of the eight elements that the agencies identify in Section XIII Evaluation Contents (performed by an appropriate person) would more or less comply. 8. Does FNC's GAAR Appraisal Score tool comply with review guidelines, assuming the institution applies a risk-based tier? I would refer you to Section XV. Reviewing Appraisals and Evaluations, B. Depth of Review. This talks about matching the level of review to the level of risk. In appropriate cases, the FNC GAAR Appraisal Score might easily be the appropriate level of review (remember you still need to get the consent of your primary Federal regulator). It allows you to make the preliminary assessment, but then refer out those appraisals where it appears that more review is appropriate. 1-to-4 Family Residential Real Estate. The reviews for residential real estate transactions should reflect a risk-focused approach that is commensurate with the size, type, and complexity of the underlying credit transaction, as well as loan and portfolio risk characteristics. These risk factors could include debt-to-income ratios, loan-to-value ratios, level of documentation, transaction dollar amount, or other relevant factors. With prior approval from its primary Federal regulator, an institution may employ various techniques, such as automated tools or sampling methods, for performing pre-funding reviews of appraisals or evaluations supporting lower risk residential mortgages. When using such techniques, an institution should maintain sufficient data and employ appropriate screening parameters to provide adequate quality assurance and should ensure that the work of all appraisers and persons performing evaluations is periodically reviewed. In addition, an institution should establish criteria for when to expand the depth of the review. 9. Would a licensed or certified out-of-state review appraiser be qualified to opine on market value and qualify as a second opinion of value on which to base the loan, assuming the review is USPAP compliant? If the person who assigns the value is a reviewer, this is really an issue of licensing. Many states take the position that anyone performing appraisal services with respect to properties in their jurisdiction must be appropriately licensed or certified. They especially identify review appraisers performing appraisal services who are not licensed or certified in
their state when the property is located in their state. They consider this a violation of their state law (essentially unlicensed activity). 10. Do you see a problem with internally developing a summary update form for appraisers to use to update commercial/land appraisals that resemble the 1004D form where results are reported around a benchmark? (Has the value in the original report declined?) I will leave it to you to sort out any USPAP issues, but what you describe sounds like it fits very well into what the agencies are saying in XVII. Program Compliance. I would take it that if your use of the update form found a material decline in value, that you would then use that to decide whether to obtain a new appraisal or evaluation. B. Portfolio Collateral Risk Prudent portfolio monitoring practices include criteria for determining when to obtain a new appraisal or evaluation. Among other considerations, the criteria should address deterioration in the credit since origination or changes in market conditions. Changes in market conditions could include material changes in current and projected vacancy, absorption rates, lease terms, rental rates, and sale prices, including concessions and overruns and delays in construction costs. Fluctuations in discount or direct capitalization rates also are indicators of changing market conditions. 11. I'm still not clear on the statement "A valuation method should address the property s actual physical condition and characteristics as well as the economic and market conditions that affect the estimate of the collateral s market value. and its relation to slide 33 statement of $250k threshold? The statement you quoted is advising institutions that whatever valuation method they use (or which applies), that it needs to address the property s actual physical condition and characteristics as well as the economic and market conditions. The $250,000 threshold would simply allow an institution to use an evaluation instead of appraisal but the issue of physical condition and characteristics and the economic and market conditions would still need to be addressed (see XIII. Evaluation Content). 12. Does the restriction/limitation of using a borrower-provided appraisal apply to consumer loans/1-4 family residential loans? Does FNMA or Freddie Mac have separate guidelines that address this issue?
The restriction on borrower-provided appraisals applies to all federally related transactions, including consumer loans and one-to-four family residential (as well as commercial-industrial, multifamily and so on). The Fannie Mae/Freddie Mac Appraisal Independence Requirements do not specifically mention borrowers, but they do say that the Seller or third party specifically authorized by the Seller must select and retain the appraiser. No other third party (which would include borrowers) is acceptable. The Seller or any third party specifically authorized by the Seller (including, but not limited to, appraisal companies, appraisal management companies, and Correspondent lenders) shall be responsible for selecting, retaining, and providing for payment of all compensation to the appraiser. The Seller will not accept any appraisal report completed by an appraiser selected, retained, or compensated in any manner by any other third party (including Mortgage Brokers and real estate agents). The Fannie Mae Seller Guide does provide: Lenders may not use appraisals ordered or received by borrowers or other parties with an interest in the transaction, such as the property seller or real estate broker. 13. Does the use of home price indices qualify as a portfolio value monitoring tool? XVII. Program Compliance B. Portfolio Collateral Risk does point to the use of various approaches to monitoring collateral valuation trends. Home price indices certainly would fit into those approaches. However, many home price indices are limited in several ways. For example, they may be limited to certain markets, certain loan types and so on. In addition, some home price indices tend to track trends at a fairly broad market level (such as MSA, when you may wish to know price trends at a zip code level). As a result, you may need to supplement the home price index you select with other information at a more granular level, or in other ways. You may note that you can take advantage of current appraisals you are receiving in the various market areas as one way to supplement a home price index. Consistent with sound collateral valuation monitoring practices, an institution can use a variety of techniques for monitoring the effect of collateral valuation trends on portfolio risk. Sources of relevant information may include external market data, internal data, or reviews of recently obtained appraisals and evaluations. An institution should be able to demonstrate that it has sufficient, reliable, and timely information on market trends to understand the risk associated with its lending activity.