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Thriving in a Post-FIRREA World
by James Baumberger, MNAA
We real estate appraisers are remarkable professionals. The potent combination of our education, experience, integrity, market knowledge, and analytical judgment is unparalleled. Not to dampen the dreams of those who believe artificial intelligence (AI) and computational analytics will soon render appraisers obsolete and unnecessary, but I do not believe that movie is “coming to a theatre near you” anytime in the near future.
However, I do believe the tools of advanced technology will be found in the toolbox of appraisers who have adapted to thrive in a post-FIRREA world.
After achieving my first state appraiser license 30 years ago, I practiced most of my career in the world created by FIRREA, or Title XI, where my mortgage lending clients had a regulatory requirement to employ my services. Passage of the Financial Institutions Reform, Recovery, and Enforcement Act jokingly evoked the following from some colleagues: “Finally I’m a Rich Real Estate Appraiser.” As it turns out, the joke was on us, but the punchline would not be revealed for many years, as we will discuss later.
As you know, in 1989 FIRREA ushered in the Appraisal Subcommittee (ASC), the Appraisal Foundation (TAF), and the modern era of mandatory state licensing for real estate appraisers. FIRREA originally required that state-credentialed appraisers be required to perform appraisals for Federally Related Transactions (FRTs) with a transaction amount > $100,000—referred to as the residential De Minimus, or appraisal threshold. With apologies in advance to redheads, who are perfectly fine people, state-credentialed appraisers suddenly became the redheaded, freckled step-children of the mortgage lending industry. While some lenders grudgingly acknowledged we were part of the family, they did not necessarily want to sit next to us at the dinner table.
Still, many of us enjoyed thriving careers in those years believing that most of America’s residential mortgage transactions were FRTs. It was a little disconcerting in 1994 when the residential De Minimus, or appraisal threshold, was increased by federal banking regulators to > $250,000. Still, most of us did not notice a decrease in demand for our professional services. The commonly shared assumption was that FRTs were all of the loans sold on the secondary market, plus those loans either guaranteed or insured by the federal government, which represented the vast majority of residential mortgage lending transactions.
For the first few years after the credit-foreclosure crisis of 2008, a common question asked repeatedly of attorneys, compliance experts, and federal regulators at national appraisal conferences was, “What is the exact definition of an FRT?” The answers were always some variation of, “We are not sure, so we have asked the Agencies for a definition.” The Agencies, sometimes called the Interagency, refers to the Federal Financial Institutions Examination Council (FFIEC). The FFIEC is comprised of the CFPB, FDIC, FHFA, FRB, NCUA, and the OCC.
Eventually, guidance on what was an FRT, in terms of FIRREA’s appraisal requirements, began to be revealed by the FFIEC in exposure drafts and rule-making commentary. The FFIEC’s final conclusion was either brilliant or devious in the extreme, depending upon one’s perspective. Either way, the guidance was earth-shattering and stunning to all. The Agencies (FFIEC) decided that any residential mortgage transaction which is exempt from the appraisal requirements of FIRREA is not an FRT. Next, the FFIEC significantly narrowed the appraisal requirements for Federally Related Transactions by issuing four exceptions to FIRREA. The following four types of residential mortgage transactions are exempt from FIRREA’s appraisal requirements, and thus are not FRTs:
• Loans that are sold to the Government Sponsored Enterprises (GSEs)—Fannie Mae and Freddie Mac.
• Loans insured or guaranteed by a U.S. government agency—FHA, USDA, and VA.
• Loans with transaction amounts <$250,000—current De Minimus which is increasing to < $400,000 on 01/01/2020.
• Loans that were not originated by a regulated institution.
If this is news to you, I would recommend you sit down, pause momentarily, and take a deep breath before reading further. The FFIEC now estimates that 90-91 percent of residential mortgage lending transactions do not require an appraisal based upon regulations. Now you understand why I say the joke was on us, and why I say we are now practicing our profession in a post-FIRREA world.
Is this the end for residential real estate appraisers? Must we fade into the dust bin of history as blacksmiths and typesetters before us? Not at all, and our future can still be very successful, but the rules of engagement have definitely changed for us. In a post-FIRREA world, clients must want to employ appraisers.
Fortunately for us, the good news is that many borrowers, lenders, and real estate brokers recognize that appraisers add value to the transaction—pun intended. Not that kind of value, as in a higher value opinion, but in terms of invaluable consumer protection. Appraisers protect consumers by ensuring the estimated property value supports the loan amount. In the federal rulemaking comments for the increase in the residential appraisal De Minimus to < $400,000 on 01/01/2020, appraisers are officially recognized as helping to ensure “a safe and sound real estate lending process.”
Appraisers must provide positive customer experiences and achieve mastery of advanced valuation technology to remain relevant and thrive. The false stereotype, which sadly contains a kernel of truth, of a curmudgeonly appraiser who is unaware that they are in a customer service business must be debunked. While we cannot, should not, and will not ever commit to a target value, we must commit to providing active communications and credible results combined with professional courtesy and timely service. Clients with other options must choose to hire appraisers in a post-FIRREA world.
The primary driver of these regulatory changes, to provide clients with flexibility and options in terms of the valuation services they choose to employ, is the rush of mortgage lenders to gain a competitive advantage through innovation—by delivering a digital mortgage experience. Consumers are already demanding this functionality in today’s Amazon world based on ease, simplicity, and speed. Advanced software, big data, and computer analytics have combined to make the digital mortgage experience achievable for the first time in history.
The July 2018 Executive Order 13772, titled Nonbank Financials, Fintech, and Innovation, in the lending and servicing section (pages 83–143), discusses appraisals on page 103: “In recent years, lenders and homebuyers have pointed to the appraisal … as a frequent source of delays and a driver of extended closing timelines.” Fintech refers to the integration of technology into financial services companies in order to improve their use and delivery to consumers. The Executive Order continues that Fintech has “begun to disintermediate the traditional appraisal process… this technology has been adopted by both GSEs.” Advances in Fintech—especially AVMs—“have pushed appraisals in a new and innovative direction.” The Executive Order discusses desktop appraisals and hybrid, or bifurcated, appraisals as an intermediate type of appraisal combining aspects of the traditional appraisal process with automation and the database capabilities of AVMs.
Think what you will of these changes, there is no putting the technology genie back into the bottle. Change is the only constant. Whether we residential appraisers like or dislike the introduction of bifurcated desktop valuations, based on third-party property data collections, we cannot stop, nor ignore, this significant change in our industry. Honestly, my feelings about these changes are bittersweet depending upon the implementation of effective safeguards.
Apparently, the Federal Housing Finance Agency (FHFA)—federal over-seer of Fannie Mae and Freddie Mac—shares the feelings of many appraisers that these changes are folly unless there are thoughtful safeguards and well-defined limits to protect the public trust. As reported in this issue of Working RE magazine, the FHFA has placed a hold on one aspect of Fannie Mae’s Value Verify™ program known as Data and Done (See pg. 6 for more). This hold on issuing appraisal waivers based on Property Data Collection results does not prohibit Fannie Mae from continuing to pilot test its bifurcated desktop appraisal option (Visit WorkingRE.com; search “Bifurcated Appraisals” for more).
Advanced technology, big data, computer analytics, and the GSE’s data-mining of millions of appraisals have combined to change appraisers’ traditional scope of work and the appraisal work-flow process itself. In addition, the market demands a wider suite of valuation services than many of us are currently comfortable providing. For example, the demand for evaluations is reported to be approximately three–four times higher than for appraisals. If appraisal annually represents a $2.7–$2.8 billion-dollar industry, many experts report that evaluations are an $8 billion-dollar industry. Most evaluations in America are not completed by appraisers today, but they should be tomorrow. I believe professional appraisers are uniquely prepared to become the most trusted solution providers for all valuation services involving real estate.
A wise appraiser told me recently that, “It is time for appraisers to become comfortable with being uncomfortable.” Rather than being insensitive, or flippant, he was cognizant that we are called in this moment to be flexible and adaptive during a transitional period of major industry change. Naturally, change provokes some discomfort in us. As you may be, I am discomforted by the enormous changes in federal regulations over the last few years that now exempt 90-91 percent of all residential mortgages in America from the appraisal requirements of FIRREA. We no longer live and work in an America where residential lending clients must employ professional real estate appraisers.
In the post-FIRREA world where clients must want to hire appraisers, fortunately for us, many lenders, regulators and the GSEs continue to publicly recognize the value that credible appraisals and independent appraisers add to inform the decision-making process for real estate financing transactions. No other group of professionals is as prepared—by education, experience and ethical standards of practice—to protect the public trust, serve the credit-financial system of America and safeguard the real estate wealth of Americans, as are today’s highly competent professional real estate appraisers.
If appraisers evolve into providers of valuation services, master advanced technology and improve our customer service skills, appraisers will remain the preferred solution providers for all institutions that use valuation services. Tomorrow’s valuation services provider will perform a wide array of professional services ranging from inspections and property data collections to evaluations, bifurcated desktops and traditional appraisals, using technological tools we can barely imagine today.
We appraisers are extraordinary. The judgment and integrity that we contribute cannot be replaced by computers. As long as we apply both of these qualities effectively, and realize we are in a customer service business, the future for appraisers will be gratifying and rewarding. Residential appraisers can adapt and evolve into the valuation services providers of tomorrow. The best real estate valuation solutions, in my opinion, will come from the potent combination of advanced technology, big data and computer analytics driven by professional appraisers with the knowledge, expertise and objectivity to reliably reconcile the final results. I believe the future can be as bright for appraisers as we have the will to create for ourselves!
About the Author: James Baumberger is the managing partner at First Choice Appraisal Management, operating an ethical cost-plus business model in the Western United States. He is also President of the Coalition of Oregon Real Estate Appraisers (COREA), serves on the Board of Governors of the NAA, and is a second-generation appraiser, who is a course author and instructor for the Columbia Institute, Appraiser eLearning, and FCAM U.
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