Joan Trice, Founder of the Collateral Risk Network, was a witness for a legislative hearing titled, “What’s Your Home Worth? A Review of the Appraisal Industry,” before the Subcommittee on Housing, Community Development and Insurance on June 20th, 2019. Alongside other members of the panel, this hearing discussed topics such as De Minimus Threshold for FRTs, appraiser independence, disparities in home values in minority communities, the role of technology in appraisals, and more. During this hearing, the testimony Joan had written (see below) became the guideline, not speech, for what she had to say. CLICK HERE to watch her 5-minute Congressional testimony.
Joan’s hope for this hearing was to express to Congress the dire need for reengineering the appraisal process which would benefit all of those who touch an appraisal over its lifetime, not just the lender at origination. Not a modernization plan built on faster and cheaper, but a plan that would emphasize quality and competency. Joan also made several comments during her follow up questioning against bifurcating the appraisal by way of introducing unlicensed, unvetted, and inexperienced inspectors into the process. CLICK HERE to watch those statements.
Written Testimony of Joan Trice
Before the Subcommittee on Housing, Community Development and Insurance
June 20, 2019
Chairwomen Waters, ranking member McHenry and members of the Subcommittee on Housing, Community Development and Insurance, thank you for the opportunity to share my thoughts regarding “What’s Your Home Worth, a Review of the Appraisal Industry”.
For most, buying a home is the largest investment they will ever make in their lifetime. There are many stakeholders who benefit from the consummation of a real estate transaction. The real estate appraiser is the only party to the transaction who is expressly unbiased and whose compensation is not contingent upon the deal.
An independent appraisal performed by a qualified licensed appraiser protects the lender from making risky loans and the homeowner from paying too much. The mortgage insurer relies upon credible appraisals to establish the LTV to calculate risk. Rating agencies need to accurately evaluate the underlying collateral values. Capital markets need transparency into the collateral valuation of each loan within the portfolio. All of these stakeholders rely upon a credible appraisal performed by a qualified licensed professional.
Most everyone here today likely read the book the Big Short or watched the movie, or both. I suggest you watch it one more time. Many of you likely assume we fixed all of those issues with Dodd Frank. I assure you, on the collateral side of the equation, we did not. In many ways it is in worse shape. Predatory appraisal practices are in full bloom. It feels very 2005ish to me.
The segment of the US population that suffers the most is the affordable housing sector when they pay too much for a home. To borrow a phrase from Josh Rosner, co-author of “Reckless Endangerment” a “home without equity is a rental with a mortgage”. Current policies allow appraised values to be “gamed”. Seller concessions promote the practice of contract sales prices to be inflated. This policy and the resulting compounding effect by its very nature makes affordable housing no longer affordable. Truth in valuation should be a right of every homeowner. Just remember one thing if nothing else that I state here today–“Value is not negotiable. Sales prices are.” Appraisers, by and large, are not appraising properties too low. Properties are selling for inflated prices. Please examine carefully these policies.
These inflated sales prices subsequently become comparable sales that appraisers use in their next appraisal. These transactions feed automated underwriting engines and automated valuation models (AVMs). We must examine appraisal policies and practices, legislation, and guidance that prey upon the least sophisticated first-time home buyer. A rollback of the FRT exemption and resetting the de minimus threshold to zero would return to the original intent of FIRREA. Every transaction should require an appraisal to be performed by a licensed or certified appraiser.
I mentioned all of the stakeholders that the appraiser serves directly or indirectly. But who stands behind the interests of the appraiser? I respectfully submit that no one is. There is less transparency today than pre-Mortgage Crisis. For example, there has not been a single enforcement action against a lender for appraisal independence violations. Within Credit Risk Transfers (CRTs) the property address is not available preventing any due diligence on collateral valuations. This opaqueness forecloses on the concept of rational due diligence by the investor, who then must be wholly reliant upon an implied government guarantee.
I testified on November 16, 2016 that discussions about appraiser shortages, slow turn times, raising the de minumus threshold, FRT exemptions were all a ploy to “let’s get rid of the appraiser”. The Collateral Risk Network implores you to return to a focus of safety and soundness. A healthy vibrant market, a rational regulatory schema, and protections of appraisal independence with vigorous enforcement, will help cure all that ails the appraisal profession.
We’ve seen the tragic ending when a regulator (The FAA) leaves the regulated (Boeing) to self-regulate and audit themselves. This was done all in the name of expediency and regulatory relief. Fannie Mae and Freddie Mac are focused on modernization efforts that are not modern at all. Faster and cheaper should not come at the cost of safety and soundness. While Artificial Intelligence, Machine Learning, Big Data, and Blockchain technologies are all very exciting and will someday show great promise in advancements to the mortgage transaction, please be aware that much of what you hear is hype. Just like driverless cars, it sounds exciting, but we are decades away. Technology can augment the process making humans able to apply judgment to a highly complex decision.
First, we must have structural reforms and a regulatory schema in place (see attached regulatory diagram). Data standards and privacy rules need to be established. Who owns the data? Should the codified definition of market value be revisited? Should a public utility be established to maintain appraisal data and transfer rights to all of the stakeholders noted above? Should this data be made available to participants in the Common Securities Platform?
These are all challenging questions that must be thoughtfully considered. The data must be democratized and become transparent in order to maintain a safe and sound housing finance ecosystem.
The Collateral Risk Network, a group of chief appraisers and risk managers representing a broad spectrum of stakeholders, urges Congress to consider establishing a single consolidated authority to oversee the modernization of the valuation process. Much like the SEC provides oversight to a large and dynamic market, we envision a similar agency to fill the role in the housing finance markets. US residential real estate is the largest asset class in the world. It’s imperative that we create a safe environment for all stakeholders.
Let us know what you thought of the Congressional hearing in the comments below. What other topics needed to be brought up by Congress? Send your ideas to firstname.lastname@example.org.