Thursday , 24 October 2019

A Truth About Bifurcation

There are numerous articles, discussions, and opinions regarding the third-party inspection process appraisal (step one) and subsequent appraisal and report (step two). While the nomenclature for this process is ever evolving, for the sake of this article, it will simply be addressed as the bifurcated appraisal process.

The third-party inspection piece is the part of the bifurcation appraisal process which has garnered the most discussion. Don’t get me wrong, the discussion regarding who should be completing the inspection is understandable and justifiable. Should it be done by an appraiser or appraiser trainee? A home inspector or insurance inspector? Some random third-party? Unfortunately, as with many things today, we must be able to sort out the truths from the half-truths, and pure nonsense. There needs to be clarity on this issue prior to any type of bifurcated appraisal process becoming mainstream.

However, I believe there needs to be some focus given to the second step of the process. I have been hearing, anecdotally, of appraisers who have been completing bifurcated appraisals without ever having appraised in the specific market/geographical area where the subject is located. Therefore, a discussion regarding competency requirements might be useful.

Competency – specifically, the geographic competency of the appraiser who is completing the appraisal. Competency can have an enormous impact on the creditability of an appraisal. For example, would it be reasonable to assume an appraisal completed by a California licensed appraiser of a property in San Diego, when the appraiser has only ever completed appraisals in San Francisco, to be credible? Just because you have a license in the state in which the property is located, does that mean you have knowledge and experience in all markets within a state? Probably not, at least not in my example. Maybe in states like Rhode Island or Delaware, it could be possible due to their size, but for the most part – probably not. The same questions of credibility would also apply to having a California license while located in a different state, but still never had appraised in the specific market/geographic area.

What does USPAP have to say about this issue? The Competency Rule, in my opinion, is pretty clear. The first Comment section under “Being Competent” in part states the following:

“Comment: Competency applies to factors such as, but not limited to, an appraiser’s familiarity with a specific type of property or asset, a market, a geographic area, an intended use, specific laws and regulations, or an analytical method. If such a factor is necessary for an appraiser to develop credible assignment results, the appraiser is responsible for having the competency to address that factor or for following the steps outlined above to satisfy this COMPETENCY RULE.”

Not only does it mention a market and a geographic area, it also applies to specific property type. Remember that “Comments” are an integral part of USPAP and have the same weight as the component they address. It also says, “if such a factor is necessary for an appraiser to develop credible assignment results.” I believe most of us would agree that market/geographic competency, acquired through the knowledge and experience, from appraising in that specific area, is a necessary factor.

However, it’s important to point out that USPAP through the Competency Rule offers some flexibility and provides specific steps on how to gain that knowledge and experience.

That could be good news for those of you who are currently completing or even pondering whether to complete these types of assignments.

One of the reasons there has been all this discussion about the bifurcated appraisal process is a result of public knowledge regarding Fannie Mae’s pilot program and their proprietary Form 1004P. The 1004P is the form being used to complete bifurcated appraisals, as part of their pilot program.

If you are currently using the Form 1004P, or are contemplating it, you need to be aware of Fannie Mae’s view on geographic competency. First and foremost, Fannie Mae does not allow the flexibilities available in USPAP to gain knowledge and experience. As reflected in their Selling Guide, Fannie Mae requires the lender (including their authorized agents) to use appraisers who already have “the knowledge required to perform a professional quality appraisal for the specific geographic location and particular property type.”

Additionally, you always need to be aware of the scope of work, limiting conditions, and certifications you are signing off on – a number of the certifications for the Form 1004P start out with “I.” Also be very aware of Certification #10:

10. “I have knowledge and experience in appraising this type of property in the subject’s market.”

I believe we would all agree that’s straight forward.

I think clarity will come with respect to the inspection issue once the Federal Housing Finance Authority (FHFA), the GSE’s regulator, weighs in on the issue. At this point, FHFA would have to afford some form of approval for such a product to go mainstream. There may be several acceptable methods/alternatives for the inspection process. However, I believe it will be most beneficial for the long-term future of the appraisal industry that appropriate focus is given to the appraiser trainee for such assignments.

Should that come to fruition, I believe it will then be imperative for the Appraiser Qualifications Board (AQB) to consider adding an educational requirement on how to inspect a property. Current requirements lack any similar educational consideration. For instance, being able to identify building components and finish materials are key factors in determining condition and quality.

With respect to Competency, remember that just because an appraiser is licensed in the state where the subject property is located, doesn’t mean they are necessarily competent to complete an appraisal assignment in that specific market/geographic location. That holds true to any appraisal assignment. If you are completing bifurcated appraisals on the Form 1004P as part of the Fannie Mae pilot, or if you are using one of the numerous other lender proprietary forms that exist, think twice about the applicable competency requirement.

Lastly, I’ll leave you with an interesting question a colleague proposed about technology and its influence on market and geographic competency: Could it ever be possible to gain competency (knowledge and experience) without ever setting foot in the specific market?

Have any comments or would you like to submit an article of your own? Email comments@appraisalbuzz.com for more information!
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About Robert Murphy

Robert Murphy
Mr. Murphy has an extensive background in the real estate appraisal field that began in 1978. With 40 plus years of experience in the field he developed a comprehensive knowledge and understanding of valuation related issues including but not limited to valuation techniques, risk management, credit policy and compliance, data integrity, and technology issues. During this time Bob held executive level positions in a financial institution, an appraisal management company, an independent appraisal company, as a sole proprietor, a government sponsored enterprise, and as a consultant. Bob’s appraisal experience specialized in high-end complex property appraisals, corporate relocation, litigation and traditional mortgage lending. In 2016 Bob started his own company Collateral Advisors LLC which provides consulting services on a wide range of collateral valuation issues. Immediately prior to that Bob was Director, Property Valuation and Eligibility at Fannie Mae. He joined Fannie Mae in 2000 where his role as a subject matter expert aided in the development of collateral valuation policies which included automated valuation policies, appraisal report forms, while also being responsible for the implementation of special projects such as the Home Valuation Code of Conduct and its successor, Appraiser Independence Requirements. As Director, Bob was responsible for Fannie Mae’s collateral valuation and property eligibility policies which are communicated through the Selling Guide, Announcements and Lender Letters. Additional responsibilities included policies relating to the development, implementation, and training regarding the Uniform Appraisal Dataset, Uniform Collateral Data Portal, and Collateral Underwriter as well as other projects that involved collateral issues from both a practical and credit policy perspective, such as Appraiser Quality Monitoring. He also presented Fannie Mae’s collateral policies and positions to numerous industry participants and government agencies as well as congressional staff. Bob is a former SRA and Appraisal Institute USPAP and residential appraisal course instructor.

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