CRN comments on policies, practices and processes related to the evaluation of the FHFA

Presented at the FHFA Appraisal Related Policies, Practices, and Processes on February 11, 2021.

Many thanks to FHFA for providing this platform today.

FIRREA was promulgated to ensure that a professionally trained and licensed real estate appraiser, with no compensation tied to the outcome of the transaction, acts independently to protect the public and serves to maintain the safety and soundness of housing finance.

Do we have this today? No, I don’t think so. We have almost all the players trying to reduce the role of the evaluator. During the last crisis, the credit side of the equation was solemnly dismissed with reported income, not doc loans. For this next crisis, it would seem that the weakest link is the evaluation process. Now we have “no doc” reviews or waivers. We continue to increase the de minimis. We have perverted FIRREA’s intention with appraisal exemptions for the vast majority of loans. In short, FIRREA has been gutted, as have the independent appraisal mandates in Dodd Frank.

The most significant change for the evaluation profession would be to create a framework to enable and assist evaluators to report the truth.

The independence of evaluation is the most important principle of the evaluation process. Without it, you have nothing. All innovation in the world will not solve structural problems.

We have policies, practices and procedures in place that encourage reviewers to evade the truth and to deceive. Here are some examples:

  • Vendor concession policies encourage reviewers to mislead. While vendor concessions are well intentioned, in practice they do not harm the affordable housing sector.
  • We provide 30-year loans on properties that may be underwater in 10 years or that are no longer structurally sound. When was the last time you saw an appraiser report an economic life of less than 30 years?
  • We have lenders and AMCs creating blacklists of evaluators who kill deals.
  • Automated warranty systems have created an avalanche of valuable revisions and reconsiderations whereby appraisers must respond to machine-selected compositions. Lenders who have compared GSE systems claim that 60% of the time the scores are diametrically opposed. It tells me that one is good and the other is not, or that they are both terribly wrong. The lenders inform me that the scores seem somewhat random.
  • The valuation process has evolved into a unique approach to value. We are in a foamy market today and we have removed two legs from the stool that could help identify speculative aspects of house prices. Each approach acts as a mathematical proof of the other.
  • Some recent policy changes are causing reviewers to approach HBU incorrectly. This puts reviewers at risk of choosing between violating Fannie’s policy or the USPAP.

The GSEs are de facto the bearer of standards in the mortgage appraisal process. This is a structural problem that must be corrected in order to achieve evaluation independence. You actually have the fox guarding the henhouse. An independent entity must be created.

The evaluation data must be democratized within this entity. All stakeholders should have access – assessors, lenders, regulators, rating agencies, investors and PMI companies.

This entity must develop new reporting formats. It starts with a top-down approach and the whole process needs to be rethought through the lens of collateral risk.

We need to stop blaming reviewers for failures of a system they didn’t create. We’re sending signals to the reviewer community that they’re incompetent, slow, useless. They are woefully underpaid, but we don’t understand why we can’t attract new entrants? We have set ridiculous barriers to entry for the privilege of being abused by the very stakeholders they serve. That too must change.

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