Thursday , 3 December 2020

“Beware of the Undertoad”

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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About Joan Trice

Joan Trice
Joan N. Trice is the founder and CEO of Allterra Group, LLC, publisher of Appraisal Buzz, and host of the annual Valuation Expo, the largest conference for the valuation community. Joan also hosts the Collateral Risk Network, a members-only group of more than 500 dedicated chief appraisers, collateral risk managers, regulators, and valuation experts who are focused on resolving the many challenges facing our profession.

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    It’s Monday morning, Wake up America! FIRREA and the Dodd-Frank Act are charades enacted by Congress at the will and funding of the banking industry making the appraisal industry the fall guy for the housing market crashes of the base when in fact it was the lending institutions loose lending policies that lead to inflated values and loans in default. The appraisers get more regulated and the lenders get baled out with taxpayer dollars, little or no legislative consequences. and not the cycle repeats itself. I feel sorry for the appraisal profession I once loved and the state of affairs in government and politics in general. It seems to me that most everyone in the lending and legislative process are corrupt with the appraisal industry the least culpable yet suffer the harshest consequences along with the general public who end up paying the tab while Congressmen and bankers line their pockets.

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    Joan, are you really looking out for the industry in general, or just the AMC’s. What happens when states opt out, thus AMC’s can’t get a license to operate in that state? Will the world end? Will no one be able to buy or refinance a property? Or will the appraisal simply be assigned out by a non-commissioned staff member? Will the appraiser be paid the $600 being charged to the borrower instead of the $300 collected now? I would love to reduce my workload by half but yet double my pay.

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    Bill, the entire point of the article is that the logical assumed understanding of Dodd-Frank and related rules was that if a state opts out, then the AMC can’t operate in that state (logically, this is what the passage of the law was trying to enact). It was assumed, as you state, that if there are no state laws/rules, then the AMC can’t operate in that state. What is actually being suggested by regulators is that Dodd-Frank, AMC rules, etc. *don’t apply* to most transactions because they aren’t really “federally-related transactions”. This latter interpretation would mean that AMCs could operate in states WITHOUT LICENSING, since the licensing applies to FRTs only. In other words, if no (or extremely few) transactions are actually FRTs, then AMC rules are out the window. In essence, this loophole or interpretation neuters the entire purpose of this area of the law. Regardless of what you believe Joan Trice is looking out for, this is a HUGE issue that could have ENORMOUS consequences for appraisers, AMCs, lenders – and truly the public.

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      Well I am not worried about it. You all are wrong that most appraisals are not federally related transactions. If a loan is involved through a lending institution it is an FRT. Fannie and Freddie guidelines have to be followed when possible because they are the secondary market. Only when they sell them to the secondary market (Fannie Mae or Freddie Mac) do they become nonFRTs. The original loan is an FRT.

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    I’m a little surprised everyone is just now realizing how few loan transactions are FRTs. When FIRREA was enacted it exempt the GSEs and introduced the Evaluation concept exemption for everything under $250k for residential and $1 million commercial under the abundance of caution rule. Joan Trice is correct, there is an undertow movement and it is being led the Lenders. Executive Management/ Board of Directors. They want the residential appraisal process to go away. Why? because of all the costs they incur post closing and from defending repurchase claims that does nothing to improve loan quality or loan performance. Like an undertow you can’t swim into the current it’s too powerful, you need to swim across the current. We need a Comprehensive Appraisal Reform Management Act (CARMA) that is developed by a grass roots effort from within. That means we need to consolidate and stop throwing each other under the BUS, because if don’t the undertow will suck us all down into the abyss including the AMC business model, TAF and the ASC.

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    Well I am not worried about this. You all are wrong that most appraisals are not federally related transactions. If a loan is involved from a lending institution, then it is an FRT. Fannie Mae and Freddie Mac are the secondary market. Yes, you have to try and follow their guidelines when possible, only because the lending institution may sell it to them. The original loan is an FRT.

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