The Collateral Risk Network (CRN) was founded in late 2003 and is comprised of over 500 members of valuation experts who are focused on resolving the many challenges facing the valuation profession. In 2014 the CRN Council was established to leverage the considerable brain trust of the CRN. These valuation industry leaders have organized efforts to identify issues and develop viable solutions that improve the climate for the appraisal profession and the housing finance system.
Recently the council members came together and drafted comments on the Economic Growth and Regulator Paperwork Reduction Act of 1996 (EGRPRA). Every ten years a review is required to identify outdated or unnecessary regulations. Below is the letter that was submitted to the OCC, the Board of Governors of the Federal Reserve System, and the FDIC.
Dear Sir or Madam:
The Collateral Risk Network (CRN) is comprised of over 500 members of dedicated chief appraisers, collateral risk managers, and valuation experts who are focused on resolving the many challenges facing our profession. The CRN represents every stakeholder in the valuation arena therefore CRN comment letters are not intended to speak for all members as with each issue, stakeholders often have diverse opinions. The CRN position is to highlight the various viewpoints and work towards holistic solutions that are best for the entire profession.
Deficiencies in lending and valuation standards within the mortgage industry in the 1980s resulted in the passage of the Financial Institutions Reform, Recovery, Enforcement Act of 1989 (FIRREA) with the intent to establish federal oversight safeguards to protect consumers and prevent another financial crisis experienced by the savings and loans failures.
In spite of the well-intended consumer benefits in the 1989 FIRREA regulations, the continual relaxing of lending standards through the 1990s and early 2000s resulted in the most devastating financial crisis in the history of this country via the financial collapse of 2007 in the MBS markets. The repercussions of the economic impact included many lenders and banks going out of business, unemployment skyrocketing, issuers of MBA and MBS incurring substantial losses from investments as well as the subsequent legal proceedings, millions of Americans lost their homes, neighborhoods incurred large decreases in value due to increased foreclosures and over-valued markets. Additionally, numerous investors suffered substantial losses in the MBA and MBS markets including many public union investment and retirement funds.
Although blame can be shared in many directions, this comment letter focuses on appraisal regulations within the FFIEC guidelines that are being considered within the EGRPRA.
Although Congress passed the Dodd-Frank Act in 2010 with the intent of creating protections for consumers, those protections are limited in scope. These protections have been narrowly defined as a consumer’s primary residence and second appraisal flips involving Higher Priced Mortgages.
The provisions of the 2010 Dodd-Frank Act do not protect consumers from the very relaxed lending standards that enabled millions of American consumers to purchase homes they could not afford and resulted in the largest foreclosure losses in the history of this country.
Evaluations vs. Appraisals
Although the Interagency Appraisal and Evaluation Guidelines published in 2010 emphasized that a valuation method, such as a Broker Price Opinion or Automated Valuation Model that does not provide a property’s market value or sufficient information and analysis to support the value conclusion is not acceptable as an evaluation, numerous instances have been cited where institutions did in fact rely upon documentation that did not meet the evaluation content requirements and made less-than-sound collateral decisions to engage in the transaction.
An example of those instances include a speech given by Darrin Benhart, OCC Deputy Comptroller for Credit and Market Risk before the Mortgage Banker’s Association’s Risk Management and Quality
Assurance Forum where he cited “shortcomings in the development, reporting, and review of evaluations. “ He also mentioned deficiencies due to “prepackaged products, some of which claimed to be [Guidelines-compliant] but lacked even the basics – no opinion of [market value], unsigned and undated reports.
There are significantly more guidelines relating to the compliant development of a credible appraisal than exist for evaluations. There are also numerous comprehensive quality control systems in place to monitor the quality and accuracy of appraisal reports being delivered to lenders through the electronic data portals. As a result, financial institutions’ regulatory burden and risk are reduced when relying upon appraisals. By contrast, because of the limited regulation of Evaluations, and absence of standardized QC processes, the risk actually increases through the use of Evaluations, thus increasing the regulatory burden of the institution to ensure compliance with the Interagency Appraisal and Evaluation Guidelines.
Eliminate The De Minimus
Should the De Minimus be raised from $250,000 to $500,000, as is currently being considered, it would expose an even broader consumer population to diminished regulatory oversight and significant risk.
The least sophisticated borrower is exposed to greater risk if the De Minimus is raised.
Connected with that is an additional concern we wish to convey relating to the current nature of the real estate markets in this country, which have been experiencing several years of price increases and in many cases, overheated HPI trends in many of the MSAs throughout the country. The Evaluation Content criteria, currently existing in the Interagency Appraisal and Evaluation Guidelines, do not address the market analysis requirements that are contained within USPAP that provide users of appraisal services with critical data relating to market trends, especially as more and more real estate markets become over-priced, over-supplied creating a security risk and potential for another market down-cycle that could severely impact the MBS and MBA markets. Our concerns relate to the failure of evaluations to provide the necessary market information to enable the investors to be making informed decisions. Information that is required within appraisal reports and receiving more and more emphasis.
Raising the De Minimus to $500,000 would increase the potential exposure of the transactions in those over-heated markets when more lenders could opt for an evaluation in lieu of an appraisal.
Consistent with that concern is the fact that although Fannie Mae and Freddie Mac, as well as the Federal Housing Administration (FHA) and the Department of Veteran Affairs (VA) currently require appraisals, there currently are no statutory prohibitions from those enterprises accepting alternative valuations such as Evaluations. As noted above, the impact to risk would be substantial at the current $250,000 De Minimus level. Raising the minimum to $500,000 would increase risk expose to an even greater percentage of enterprises, institutions and consumers.
Considering the millions of borrowers currently at risk with the $250,000 De Minimus Threshold, the Collateral Risk Network believes FFEIC should give serious consideration to the elimination of the De Minimus Threshold.
The CRN appreciates the opportunity to comment and looks forward to your reply. Please let me know if I can provide any additional information. I can be reached at firstname.lastname@example.org.
Stephen T. Linville
Allterra Group, LLC
Have any comments or would you like to submit content of your own? Email email@example.com