It has been decades since I read the book, “The World According to Garp” but it still remains one of my all time favorite books. One of the messages in the book was “beware of the undertoad”. The “undertoad” was a child’s understanding of the unknown but dangerous forces that lie beneath the ocean waves. That is the cautionary tale as well for the appraisal profession. The undertow can be quite a powerful and invisible force that could quietly pull the profession into the void.
I’ve lived it, like most of you have. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 was a game changer. Among other things it established the mechanism for licensing of appraisers. We’ve all been witness to what has worked and what hasn’t. The events that led up to FIRREA pale in comparison to the recent financial crisis that inspired the Dodd Frank Act.
An analysis of the intent of these major legislative efforts was to provide proper oversight of the appraisal process including oversight of the participants – lenders, AMCs and appraisers. One of the most astounding gaps in the oversight of the appraisal process revolves around the definition of a “federally related transaction” or FRT.
I’ll bet the vast majority of appraisers believe that an appraisal is required for all transactions above the deminimus which is currently $250,000. Originally that floor was $100,000. Today, once again, the deminimus is being challenged and proposed to be raised to $500,000. Yes, you heard that right. In the wake of the largest financial crisis in history, efforts are underway to diminish the safeguards provided by an appraisal. But that is only half the story.
I do hope you are sitting down. Did you know that the interpretation of an FRT as outlined in the AMC Final Rules is that very few transactions actually are defined as a FRT. Fannie and Freddie transactions are exempt. Gulp.
Why is this important to appraisers? And to the general public at large? Rationally, one must presume that it was the intent of FIRREA to establish a law that provided appraisal oversight. It would not be logical to assume that the drafters of FIRREA intended to simultaneously exempt nearly every transaction. This little footnote in FIRREA could be the death knell of the profession.
Why is it suddenly so controversial? The AMC Final Rules allow for state appraisal agencies to “opt out” of establishing an AMC program inclusive of registration and oversight of AMC activities. Again, legislators must have considered that outsourcing of appraisal functions to a third party provided risk to the housing finance system and, hence it needed oversight. Buried, within the commentary of the AMC Rules, are comments by the FFIEC regulators that the decision for a state to “opt out” would have virtually no impact on AMC activity since most transactions are exempt and fall outside of the regulation.
The Association of Appraisal Regulatory Officials (AARO) issued a letter to the Appraisal Subcommittee in August of 2015. The ASC forwarded the letter asking for clarification to the FFIEC agencies. The Collateral Risk Network also wrote a letter to the FFIEC agencies in March of 2016 reiterating the need for clarification. Many of the states are on hold, not knowing how to proceed with rule making at the state level, until clarification is provided. It is indeed a gap so broad that it could undermine the entire profession. It has created the effect of having states questioning their entire appraisal licensing program. If most transactions are exempt, why continue the charade and expense of a licensing program?
Many lenders are pondering the “what if” scenarios. AMCs are befuddled not knowing if business in states that may “opt out” will completely dry up. Or, who is to stop them from doing business in the absence of a regulator? None of this uncertainty bodes well for the appraisal profession.
We need a clear message. We need rational oversight and enforcement. We have lots of rules, some clearer than others. This loophole clearly needs to be closed so we can return to the important business of ensuring that the appraisal profession is on the right path and continues to play an important role in the housing finance system.
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