[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

APPRAISAL OVERSIGHT: THE REGULATORY
IMPACT ON CONSUMERS AND BUSINESSES

=======================================================================

HEARING

BEFORE THE

SUBCOMMITTEE ON
INSURANCE, HOUSING AND
COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

JUNE 28, 2012

__________

Printed for the use of the Committee on Financial Services

Serial No. 112-140

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76-111 WASHINGTON : 2012
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HOUSE COMMITTEE ON FINANCIAL SERVICES

SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

James H. Clinger, Staff Director and Chief Counsel
Subcommittee on Insurance, Housing and Community Opportunity

JUDY BIGGERT, Illinois, Chairman

ROBERT HURT, Virginia, Vice LUIS V. GUTIERREZ, Illinois,
Chairman Ranking Member
GARY G. MILLER, California MAXINE WATERS, California
SHELLEY MOORE CAPITO, West Virginia NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina WM. LACY CLAY, Missouri
LYNN A. WESTMORELAND, Georgia MELVIN L. WATT, North Carolina
SEAN P. DUFFY, Wisconsin BRAD SHERMAN, California
ROBERT J. DOLD, Illinois MICHAEL E. CAPUANO, Massachusetts
STEVE STIVERS, Ohio

C O N T E N T S

----------
Page
Hearing held on:
June 28, 2012................................................ 1
Appendix:
June 28, 2012................................................ 41

WITNESSES
Thursday, June 28, 2012

Berenbaum, David, Chief Program Officer, National Community
Reinvestment Coalition (NCRC).................................. 16
Bunton, David S., President, The Appraisal Foundation............ 18
Gregoire, Francois K., President, Gregoire & Gregoire, Inc., on
behalf of the National Association of REALTORS (NAR).......... 20
Kelly, Donald E., Executive Director, Real Estate Valuation
Advocacy Association (REVAA) on behalf of REVAA and the
Coalition to Facilitate Appraisal Integrity Reform (FAIR)...... 21
Mann, Karen, President, Mann & Associates, on behalf of the
American Society of Appraisers (ASA) and the National
Association of Independent Fee Appraisers (NAIFA).............. 23
Park, James R., Executive Director, Appraisal Subcommittee (ASC),
Federal Financial Institutions Examination Council (FFIEC)..... 8
Rodgers, Donald T., President, Association of Appraiser
Regulatory Officials (AARO).................................... 6
Shear, William B., Director, Financial Markets and Community
Investment, U.S. Government Accountability Office (GAO)........ 5
Stephens, Sara W., President, the Appraisal Institute............ 26

APPENDIX

Prepared statements:
Berenbaum, David............................................. 42
Bunton, David S.............................................. 71
Gregoire, Francois K......................................... 85
Kelly, Donald E.............................................. 103
Mann, Karen.................................................. 118
Park, James R................................................ 131
Rodgers, Donald T............................................ 149
Shear, William B............................................. 157
Stephens, Sara W............................................. 180

Additional Material Submitted for the Record

Biggert, Hon. Judy:
Written statement of Edward J. Pinto, Resident Fellow, the
American Enterprise Institute.............................. 199
Letter to Federal Reserve Chairman Ben Bernanke and Consumer
Financial Protection Bureau Director Richard Cordray from
the American Guild of Appraisers, dated February 21, 2012.. 248
Written statement of the Dallas/Ft. Worth Association of
Mortgage Brokers (DFWAMB).................................. 269
Biggert, Hon. Judy, and Miller, Hon. Gary:
Letter from Leading Builders of America, dated June 27, 2012. 270
Biggert, Hon. Judy:
Written statement of the Mortgage Bankers Association........ 274
Biggert, Hon. Judy, and Miller, Hon. Gary:
Written statement of the National Association of Home
Builders................................................... 279
Green, Hon. Al:
Letter from the Houston Association of REALTORS, dated June
28, 2012................................................... 284
Miller, Hon. Gary:
Written statement of the IMPACT Mortgage Management Advocacy
and Advisory Group (IMMAAG)................................ 285

APPRAISAL OVERSIGHT: THE REGULATORY
IMPACT ON CONSUMERS AND BUSINESSES

----------

Thursday, June 28, 2012

U.S. House of Representatives,
Subcommittee on Insurance, Housing
and Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Judy Biggert
[chairwoman of the subcommittee] presiding.
Members present: Representatives Biggert, Miller of
California, Capito; Gutierrez, and Sherman.
Chairwoman Biggert. This hearing of the Subcommittee on
Insurance, Housing and Community Opportunity will come to
order. Without objection, all Members' opening statements will
be made a part of the record. And I will yield myself as much
time as I may consume for an opening statement.
Good morning. I want to welcome our witnesses. Today's
hearing is entitled, ``Appraisal Oversight: The Regulatory
Impact on Consumers and Businesses.''
I would just say that timing is everything, and I think
that hopefully some of our Members will be here shortly after
they find out what is going on in other places.
We are examining how appraisal-related provisions in the
Dodd-Frank Act and other regulatory initiatives have affected
consumers and the real estate industry. This hearing is a
continuation of the subcommittee's oversight work related to
the mortgage origination process.
A key element of a vibrant and sound housing market is
effective appraisal regulation. Regulation should facilitate
robust competition among industry participants; it should
ensure transparency and integrity throughout the mortgage
origination process, while giving law enforcement officials the
necessary tools to weed out bad actors; it should avoid placing
unnecessary burdens on businesses; and most importantly, it
should benefit consumers.
During today's hearing, we will examine the Federal and
State roles in appraisal regulation. We will also explore
suggestions to improve the appraisal regulation structure and
regulations. For example, can we make more efficient,
consistent, and effective appraisal oversight by streamlining
regulations and redundant efforts to monitor the appraisal
industry?
Finally, some mortgage industry participants have raised
concerns about concentration in the appraisal industry as well
as the quality and accuracy of appraisals. How could
regulations enhance integrity among appraisers and ensure
accuracy in appraisal evaluations?
Given the broad interest in the issue of appraisal
regulations, I would like to hold at least a second hearing
during the 112th Congress on this subject to hear from other
stakeholders.
So with that, I look forward to hearing from today's
witnesses. I hope that today's hearing will provide members of
the subcommittee with a variety of ideas as to how appraisal
regulation can be improved for both consumers and businesses.
I would like to recognize our ranking member, the gentleman
from Illinois, Mr. Gutierrez, for his opening statement.
Mr. Gutierrez. Thank you very much for yielding, Madam
Chairwoman, and thank you for holding this hearing.
As we proceed with profound systemic and comprehensive
financial system and housing finance reform, it is becoming
increasingly clear that we will benefit greatly from a clearly
defined, fair, sound, and well-regulated system of property
appraisal. In other words, all of the industries involved in
the real estate market, from builders to consumers, will
benefit from a clear and level playing field in the appraisal
system.
I look forward to hearing about the GAO--what the GAO found
in its two studies on this issue, specifically the several
weaknesses that it identified that have limited the Appraisal
Subcommittee's effectiveness in discharging its duties,
specifically weak enforcement tools and reporting procedures,
and in addition, whether the ASC is fully addressing the
requirement to create and operate a national hotline to receive
complaints of noncompliance with appraisal independent
standards and uniform standards of professional appraisal
practices.
I look forward to learning more about the concerns of
appraisers and the representative organizations on the impact
appraisal management companies are having not only on the
ability of experienced appraisers to make a living but on the
quality of the appraisals as they impact the housing and
financial, specifically consumers.
Madam Chairwoman, it is important to understand the
concerns of other stakeholders, such as REALTORS and
mortgagers regarding this and other aspects of appraisal
issues. But most important to me and I think to many of our
colleagues on this side of the aisle, I want to learn how these
appraisal issues are affecting consumers, including whether or
not consumers are receiving their money's worth in terms of
quality of appraisal they pay for. Are they being fully
informed of what they are paying for and are they protected
from fraud, and do they have the proper means to address their
grievances?
I understand there is much to cover in this hearing and
this is only another step in the examination of this critical
issue. Therefore, I thank you, and I yield back the balance of
my time.
Chairwoman Biggert. Thank you, Mr. Gutierrez.
The gentlelady from West Virginia is recognized for 2
minutes.
Mrs. Capito. Thank you. Thank you, Madam Chairwoman, and
Ranking Member Gutierrez.
I thank everybody for being here today. There is just
nothing going on in Congress today, so I am glad we are here to
talk about appraisals.
I would like to thank the chairwoman for looking into this.
It is important.
And I am going to keep this brief. I wanted to take a few
moments to address an issue that I have heard many complaints
about in my State of West Virginia.
I believe that the appraisal process is absolutely
essential and so important to the mortgage process because, as
we know, a sound regulatory structure in which the industry can
operate and serve the consumer is of prime importance. I hope
to get a better clarification today as to whether the Appraisal
Subcommittee can handle this role or whether it would be better
left to the States to act as the primary regulator.
My main focus, though, has been to have a marketplace for
the consumer that the consumer can access. I represent a State
where home values are relatively low. We don't have a lot of
foreclosures; we didn't get out over our skis, like a lot of
other places.
And so, purchasing a home may appear to be very affordable.
It still strains a lot of the home budgets, and I am concerned
because I hear of folks who--of rising costs of appraisals and
that appraisers in some cases are unfamiliar with the area in
which they are making the appraisals--local markets. Even in a
small State like West Virginia, it might not sound like much,
but if you are coming from Elkins to appraise a home in
Charleston, it is a totally different market. It is also 130
miles away.
And so, if this is the case, I know that the AMCs have had
an increased market share since 2008 and I am curious to know
if this has contributed by putting another layer, a middle
layer or a more increased middle layer, has that increased the
cost of the appraisal to the consumer? I am really concerned
about the cost of the appraisal to the consumer and the
accuracy of the appraisal. It is essential.
And so, I am interested to know if Dodd-Frank provisions
have absolutely created a more consumer-friendly process or
not.
So I appreciate the chairwoman for holding this hearing,
and I welcome our panelists to the committee room. Thank you.
Chairwoman Biggert. The gentleman from California, Mr.
Miller, is recognized for 2 minutes for an opening statement.
Mr. Miller of California. Thank you, Chairwoman Biggert. I
want to thank you for having this hearing today. It is
extremely important.
The appraisal process was broken, and to some degree, it is
still broken. After HVCC passed the Dodd-Frank Act, I remember
arguing vehemently about the process and the direction that we
are heading, and it proved to be right; it was a disaster and
we repealed most of that.
But there is a lot lingering after that process that we are
still having to deal with. Out-of-area appraisals are a
significant problem we are dealing with. Using distress sales
as comparables--it oftentimes creates more problems than it
does benefit because an appraiser who is not a local appraiser
doesn't understand the difference between the distressed
property and the rehab that is necessary to take place to make
that a comparable property and a property that is not a rehab,
what they are dealing with in those areas.
So there is a lot of confusion and ambiguity and the
process, I think, has to be dealt with. New home construction
is another good example. You are trying to compare a new home
to a piece of property that sold for less than sticks and
bricks. They are not comparable; they don't meet the new
standards, new compliances required by local agencies and
States that pass these mandates on energy efficiency.
Green Home in California is another one that is having to
deal with it. Builders are putting costs into homes. Many areas
are mandated to do that and they can't even use the cost of
those improvements as part of the appraisal.
I would like to enter into the record a letter from the
National Association of Home Builders, and a second letter from
Leading Builders of America.
Chairwoman Biggert. Without objection, it is so ordered.
Mr. Miller of California. Thank you. But when you talk to
different groups and individuals, you don't hire an electrical
contractor to bid concrete work, and you don't hire an out-of-
town appraiser to do local appraisals. You are getting them in
areas sometimes where they don't have any expertise and you
can't just necessarily, not knowing an area, go to a computer
and pull up an equivalent square footage home and say, ``It
equates to what we are trying to sell here.'' It doesn't.
We found out the situation with HVCC when they first
passed, and Congressman Kanjorski proposed that, my argument
was that perhaps New York is the most problematic State in the
Nation, but 49 other States don't have those problems, and we
need to allow more local control. Being able to take an
appraisal and use it, again, is not available during the old
process we had where you required a lender to basically do the
appraisal. That appraisal could not be taken to another lender
to do the work.
So there are areas that we need to deal with that I don't
think we have. We are in a recovering market and we need to do
what we can to make sure that the market has an opportunity to
recover. And I think until we fix the appraisal process, that
is not going to happen. We are not doing a service to people
who sell their home nor are we doing a service to people who
buy the home, and we are doing a complete disservice to the
people who are trying to finance homes and sell homes.
So I thank you for your generous time, and I am looking
forward to the testimony.
Chairwoman Biggert. Thank you.
The gentleman from Texas, Mr. Green, is recognized for 1
minute.
Mr. Green. Thank you, Madam Chairwoman. And I sincerely
thank you, Madam Chairwoman, for hosting this hearing.
This is an important hearing and I would like to associate
myself, if I may say so, with Mr. Miller's comments. I did not
hear them in their entirety, so I won't associate myself with
all of them, but what I did hear, I associate myself with.
I would also like to enter into the record a letter from
the Houston Association of REALTORS. This letter is signed by
Mr. Shad Bogany, who is the Federal coordinator and also the
State chair-elect, as well as Mr. Wayne Stroman, who is the
chair of the board for 2012.
Chairwoman Biggert. Without objection, it is so ordered.
Mr. Green. Thank you.
Madam Chairwoman, I think that Mr. Miller has made some
salient points. We find ourselves with people making decisions
that are not entirely familiar with the empirical evidence. I
do believe that we have to revisit some of these issues so as
to tweak the system that we have in place.
My belief is that this is something that is salvageable,
and is something that is doable. I think that we just have to
find a way to work on this project and focus on the question
before us.
I have had an opportunity to talk to REALTORS so I have
some first-hand information about what is going on in my city--
first-hand information. I have talked to many REALTORS about
this concern. I have even gone so far as to talk to people who
do the actual appraisals, and they too have some concerns.
So I thank you for hosting this hearing. I am looking
forward to hearing much of the evidence--and I have to say much
of it because, as you know, there are many things happening
today, without getting into all of what is going on, and I am
being pulled in many different directions. But I have to be
here for this because of the importance associated with it.
Thank you again, and I yield back the balance of my 3
seconds.
Chairwoman Biggert. Thank you, Mr. Green.
We are delighted to have our panelists here today. We are
going to have two panels, and so we will start with panel
number one.
We have: Mr. William B. Shear, Director of Financial
Markets and Community Investment for the U.S. Government
Accountability Office; Mr. Don Rodgers, President, Association
of Appraiser Regulatory Officials; and Mr. James R. Park,
Executive Director, Appraisal Subcommittee, Federal Financial
Institution's Examination Council.
Thank you all so much for being here. And without
objection, your written statements will be made a part of the
record. You each will be recognized for a 5-minute summary of
your testimony.
We will begin with Mr. Shear.

STATEMENT OF WILLIAM B. SHEAR, DIRECTOR, FINANCIAL MARKETS AND
COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
(GAO)

Mr. Shear. Thank you.
Chairwoman Biggert, Ranking Member Gutierrez, and members
of the subcommittee, I am pleased to be here today to discuss
our work on real estate appraisal issues. My statement today is
based on information from two reports we issued in response to
mandates in the Dodd-Frank Act.
The first, which we issued in July 2011, included an
examination of real estate valuation methods, including
appraisals, as well as conflict of interest in appraiser
selection policies. The second, which we issued in January
2012, included an assessment of the Appraisal Subcommittee's
monitoring functions and certain challenges faced by ASC.
In summary, we found that, first, appraisals, which provide
an estimate of market value at a point in time, are the most
commonly used valuation method for first-lien residential
mortgage originations. While data on different approaches for
conducting appraisals are limited, we found that the sales
comparison approach is required by Fannie Mae, Freddie Mac, and
FHA, and is reportedly used in nearly all appraisals. We also
found that the cost approach, in which an estimate of value
uses data on land value and what it would cost to replace or
reproduce a residence, is often used in conjunction with a
sales comparison approach.
Second, conflict of interest policies have changed
appraisal selection processes and the appraisal industry more
broadly. Specifically, the policies have led to increased use
of appraisal management companies.
In our July 2011 report, we concluded that setting minimum
standards that address key functions AMCs perform on behalf of
lenders would enhance oversight of appraisal services and
provide greater assurance of the credibility and quality of the
appraisals provided by the AMCs. Therefore, we recommended that
these regulators consider addressing several key areas,
including criteria for selecting appraisers, as part of their
joint rulemaking under the Dodd-Frank Act to set minimum
standards for States to apply in registering AMCs.
Now, I will briefly discuss our evaluation of the Appraisal
Subcommittee. It has been performing its monitoring role under
Title XI authority, FIRREA. We found that several weaknesses,
which are generally associated with the lack of established
policies and procedures and clear definitions, have potentially
limited ASC's effectiveness.
We recommended that ASC clarify the criteria it uses to
assess States' compliance with Title XI and develop specific
policies and procedures for monitoring the Federal banking
regulators and the Appraisal Foundation. ASC is taking steps to
implement these recommendations.
Chairwoman Biggert and Ranking Member Gutierrez, this
concludes my prepared statement. I would be happy to answer any
questions.
[The prepared statement of Mr. Shear can be found on page
157 of the appendix.]
Chairwoman Biggert. Thank you so much.
Mr. Rodgers, you are recognized for 5 minutes.

STATEMENT OF DONALD T. RODGERS, PRESIDENT, ASSOCIATION OF
APPRAISER REGULATORY OFFICIALS (AARO)

Mr. Rodgers. Chairwoman Biggert, Ranking Member Gutierrez,
and members of the subcommittee, thank you for the opportunity
to testify today. I am the executive director of the North
Carolina Appraisal Board and I am currently the president of
the Association of Appraiser Regulatory Officials, which is
comprised of the real estate appraiser licensing agencies.
My testimony today will focus on issues that are
particularly relevant to State regulators.
First, lack of resources: State appraiser licensing
programs were established as a result of FIRREA to issue
appraiser credentials and oversee compliance by appraisers with
standards and State laws. Some programs are part of an umbrella
agency that handles all occupational licensing of the State.
They often use a pool of investigators and assign legal counsel
on a per-case basis.
Others are stand-alone agencies that handle appraising and/
or real estate. They may have contract or staff investigators
and full-or part-time legal assistants.
Finally, there are States such as North Carolina that have
an autonomous board set up by State statute. These boards do
not receive State funding and typically hire their own staff.
Programs that share staff may lack sufficient resources and
may not be able to comply with Federal requirements. State
officials do not understand why this program must be given
priority when the backlog for other agencies is just as great.
Second, appraisal fraud: An appraisal is an opinion of
value, which makes it difficult to show that the appraiser
intended to deceive someone. For this reason, law enforcement
officials often shy away from bringing fraud charges against
appraisers. Although State and Federal law enforcement have
joined task forces with State regulators, they are often not
able to share information due to concerns that their
investigations could be compromised.
Appraisers are not usually the originator of fraud schemes
but are brought into it with the promise of future assignments
instead of large payments, which would provide the smoking gun
tying them to the fraud.
Third, appraisal management companies: AMCs have existed
for many years. As a result of the Home Valuation Code of
Conduct many more AMCs were established. There were, however,
no regulations in place defining AMCs or controlling who could
own or operate an AMC.
Often appraisers are prohibited from speaking with brokers,
builders, or borrowers. This creates consumer frustration
directed toward appraisers as consumers are not aware of the
role of the AMC in the appraisal process.
Appraisers have their own issues with AMCs, including
numerous assignment conditions, requests to go outside of their
market, and delays in receiving payment. A frequent problem for
regulators is that they must license two entities whose
interests are often at odds.
Each group may attempt to change laws and rules that impact
the other's ability to function. As complaints increase against
AMCs, States may lack the resources to investigate out-of-State
companies who have substantial legal resources.
Fourth, alternate valuation services: Broker price opinions
and other evaluation products are generally not regulated by
appraiser licensing boards. Consumers do not realize the
difference and may think they are receiving an appraisal when
an appraiser was not involved in the process. There is limited
authority to discipline brokers for errors in the development
of these valuations and they are not sufficiently regulated.
Fifth, evaluation of the appraisal regulatory system: Some
of the cooperative efforts between State boards, the ASC, and
the Appraisal Foundation are an investigator training program
provided at no cost to the States' task forces on trainee
supervision and consistent enforcement. The Foundation issues
exposure drafts and requests comments when there are proposed
changes to USPAP or the appraisal qualification criteria and
schedules meetings to coincide with AARO conferences. The ASC
staff attends AARO and Foundation meetings and assists the
States in drafting rules and legislation.
There continue, however, to be areas that show the need for
improvement. State regulators should be represented on the
Appraisal Subcommittee as well as on the Foundation's boards.
There should be a national repository for appraiser and AMC
records, either through expansion of the national registry or a
system similar to the National Mortgage Licensing System.
Current ASC meeting procedures discourage the public from
attending. Universal application and complaint forms have been
discussed but are difficult to achieve absent a Federal
requirement.
The ASC has been in the process of changing its policy
statements for several months, but States have not had the
opportunity to see a draft or to comment.
The lack of enforcement sanctions was a serious omission
from FIRREA and created a situation where derecognition was the
only penalty available to the ASC for violations. The Dodd-
Frank Act has given the ASC broader enforcement options, the
ability to make grants to the States, and oversight of the AMC
registration process. It remains to be seen what effects these
new tools will have on the oversight of the State appraiser
programs.
Thank you for the opportunity to testify before you today.
I will be glad to answer any questions.
[The prepared statement of Mr. Rodgers can be found on page
149 of the appendix.]
Chairwoman Biggert. Thank you.
Mr. Park, you are recognized for 5 minutes.

STATEMENT OF JAMES R. PARK, EXECUTIVE DIRECTOR, APPRAISAL
SUBCOMMITTEE (ASC), FEDERAL FINANCIAL INSTITUTIONS EXAMINATION
COUNCIL (FFIEC)

Mr. Park. Good morning, Chairwoman Biggert, Ranking Member
Gutierrez, and members of the subcommittee. Thank you for the
opportunity to update you on the work of the Appraisal
Subcommittee, also known as the ASC.
Title XI of FIRREA created the ASC as an independent agency
within the Federal Financial Institution's Examination Council
(FFIEC). Title XI was passed following the savings and loan
crisis of the 1980s to address weaknesses regarding real
property appraisals used in connection with federally-related
transactions.
Title XI called for the establishment of State programs to
credential and supervise appraisers and created a unique
regulatory framework that involves Federal, State, and private
entities. At the Federal level, we have the ASC; at the State
level, the State appraiser regulatory agencies; and on the
private side, the Appraisal Foundation.
The ASC is made up of seven members designated by the heads
of the Federal Financial Institution's regulatory agencies as
well as HUD, FHFA, and the CFPB. This past January, the CFPB
appointed its first representative to the ASC. Effective April
1st, the FFIEC appointed the HUD representative as the new
chairman, who is also a certified appraiser and the first
appraiser to chair the ASC.
The member agencies remain committed to fulfilling the
ASC's statutory responsibilities. As part of its core
responsibilities, the ASC monitors the State appraiser
regulatory programs for compliance with Title XI. The ASC
completed 27 reviews in 2011 and 31 are planned for 2012.
The ASC also maintains the National Registry, comprised of
appraisers eligible to perform appraisals for federally-related
transactions. The registry contains just fewer than 105,000
credentials, down almost 14 percent from its peak in 2007. With
the registry fee being the ASC's sole source of revenue, the
reduction in the number of credentials comes at a particularly
challenging time as the scope of responsibility is increasing
due to the Dodd-Frank Act.
In monitoring the Foundation, ASC staff attends all public
and private meetings of the Foundation boards. For Fiscal Year
2012, the ASC approved a grant of approximately $900,000 to the
Foundation. The grant includes funds for the State investigator
training program, which has been beneficial to the States.
Through our monitoring, the ASC is aware that the
Foundation is currently working on a new strategic plan. The
ASC played no role in the development of the strategic plan.
However, when made public, the ASC will review and possibly
comment on matters related to ASC responsibilities.
The ASC continues to make progress in addressing the Dodd-
Frank Act requirements. Last fall, the ASC approved a plan to
establish the Appraisal Complaint National Hotline and a great
deal of work has been completed towards its implementation.
ASC member agencies are currently working to finalize the
details for internal complaint intake and disposition. Launch
of the hotline is anticipated before the end of 2012.
The Dodd-Frank Act also required the GAO to conduct a study
of the ASC. In its report issued last January, the GAO made
three recommendations.
First, GAO recommended that the ASC clarify definitions
used to categorize States' compliance with Title XI. In
response, the ASC has clarified the definitions, which are now
incorporated into all appropriate documents.
The ASC also drafted revised policy statements that have
been approved for publication in the Federal Register to
solicit public comment. The revisions included new findings and
definitions to further address this GAO recommendation.
Second, GAO recommended that the ASC develop specific
policies for monitoring appraisal requirements developed by the
Federal Financial Institution's regulators. Finally, GAO
recommended that the ASC develop specific policies for
determining whether the Foundation's grant activities are
related to Title XI. Staff is drafting policies for ASC
approval to address these last two recommendations.
Other ASC priorities include fulfilling the authority and
responsibilities conferred by the Dodd-Frank Act in such areas
as State grants and rulemaking. Regarding State grants, many
State appraisal programs do not control their funds. Therefore,
the ASC will focus on ensuring grant funds are used to support
the program.
While the ASC has not yet formally addressed rulemaking,
the proposed policy statements would implement the interim
sanctioning authority given to the ASC by the Dodd-Frank Act to
remove appraisers from the National Registry for up to 90 days.
Use of any additional interim sanctioning authority would
require rulemaking.
In conclusion, I again appreciate the opportunity to appear
before the subcommittee, and I look forward to addressing your
questions. Thank you.
[The prepared statement of Mr. Park can be found on page
131 of the appendix.]
Chairwoman Biggert. Thank you, Mr. Park.
This is a time when the members of the committee will ask
questions. I will start, and yield myself 5 minutes.
Mr. Shear, do you think that the ASC has made efforts to
reform its policies and procedures for determining whether the
activities of the Appraisal Foundation are Title XI-related?
Mr. Shear. As Mr. Park said, we followed up and we are--we
know that they have made progress in this area as far as coming
up with a definition--that would be, how do you define Title XI
activities? So we know they are making progress in this area.
Chairwoman Biggert. So you think that they are moving ahead
enough for--
Mr. Shear. Yes. We are very glad that they agreed with our
recommendation and that they are putting things down in a
formal way to address these issues.
Chairwoman Biggert. Okay. According to your testimony, and
based on your July 2012 report, the Appraisal Subcommittee has
not clearly defined the criteria it uses to assess a State's
overall compliance with Title XI. Could you expand on this
assertion?
Mr. Shear. I would be glad to. One thing that we have
observed over the years is that the oversight of State
compliance with requirements has been enhanced over the years,
so we see that and we see the establishment of many policies
and procedures that are clearly stated.
But from an internal controls standpoint, we just dealt
with a--three different categories that it would bring great
clarity and it would provide for more kind of robust oversight
if these three categories--or whatever categories they had--
were more clearly stated and defined, and we understand that
they are making progress in this area.
Chairwoman Biggert. Okay. Thank you.
And, Mr. Rodgers, you provide some suggestions on how the
appraisal regulatory structure can be improved at the State and
national level. Can you describe and explain some of those
suggestions for this committee in a little more depth?
Mr. Rodgers. Yes, ma'am. I would be glad to.
In looking at the areas of improvement, as Mr. Park said in
his testimony, the policy statements--which are given to the
States to follow to show compliance with Title XI--are in the
process of being revised. We have not at this point--understand
that process has been going on for several months--had any
exposure to the States nor do we have the States' comments.
When the Appraisal Foundation makes changes to their--the
standards or either the criteria there is a very robust
exposure and vetting process and it allows a lot of unintended
consequences to get out there. So I would encourage the
subcommittee to get those to the States for comment as soon as
possible.
Also, we believe that the States should have representation
both on the subcommittee as either a member or through some
sort of liaison, and they also should have the same
representation on the standards and qualifications boards.
These boards directly affect policies, rules for each of the
States, and for them to understand what impact or what
unintended consequences might come by the result of changes to
rules or regulations is essential, so we think that is a very
essential point.
With regards to the public meetings of the Appraisal
Subcommittee, the process is very rigorous to try to attend.
You have to register in advance, and have a photo ID. You go
through a security process that is more extensive than getting
in this building, and you have to be escorted to and from the
meeting site.
This is largely because they are held in the offices of the
Federal financial institutions, so it is understandable the
level of security needed in those buildings. We would suggest
that they should be held somewhere the public could come
without preregistration or identification. In our State, you
come to a public meeting and you can walk right in. And so, we
would suggest that, as well. Those are just some of my
suggestions.
Chairwoman Biggert. Thank you.
I yield myself such time as I may consume for additional
questions.
Mr. Rodgers, there seem to be a great number of the
appraisal industry participants who claim that real estate
appraisal fraud is significantly increasing. As a State
regulator, does your appraisal fraud data reflect or dispute
this claim?
Mr. Rodgers. Just speaking for my individual State, we have
not seen a large increase in appraisal fraud. I think a lot of
the flipping schemes that were taking place in the early part
of this last decade--they are just difficult to perpetrate
given the financial climate we are in now. The rapidly inflated
markets made it easier to perpetrate, where now that certainly
doesn't take place.
We have heard of issues of what is now called flopping
schemes, where it is misrepresented to the lending institution
what the property is worth. They short-sell for a low amount
and then some of the real estate professionals, in turn, sell
the property at a large profit, so kind of a reverse of the
flipping scheme.
We have seen some cases in our State which were right in
the middle of the transition to the economy falling where there
were subdivisions where a lot of promises were made, no money
down type investments. A lot of people bought lots for
investment type properties and then the market crashed in the
middle of it. So some of these were fraud in the fact that they
were trying to entice people into making poor investment
choices, but the actual market fell out from under them, which
was not part of a fraud scheme.
Chairwoman Biggert. Thank you.
Then, Mr. Park, it is my understanding that the Appraisal
Subcommittee was created in response to the savings and loan
crisis in the late 1980s and early 1990s. In light of
significant changes over the past 20 years, what is the
relevance of the ASC in today's market?
Mr. Park. The relevance of the ASC is the Federal oversight
that we provide for the States as well as the monitoring of the
Appraisal Foundation and the grants that are provided to the
Appraisal Foundation for the work of the Appraisal Standards
Board and the Appraiser Qualifications Board. The original--
Chairwoman Biggert. The question is, is the model outdated
or do you think you are in the 21st Century, as far as the
Federal oversight?
Mr. Park. Title XI, as originally enacted, had some flaws
in it. The Dodd-Frank Act attempted to correct some of those
flaws, providing more authority and responsibility to the
Appraisal Subcommittee, and while many of those provisions of
the Dodd-Frank Act are still being put into place, they should
assist the subcommittee in providing greater regulatory
oversight for the appraisal regulatory system.
Chairwoman Biggert. Mr. Shear, do you think that there
should be a complete overhaul of that to make sure that it is
in the 21st Century?
Mr. Shear. We didn't look at various options for
restructuring, so I can't answer your question directly, but we
did look at how Dodd-Frank changes the role of the Appraisal
Subcommittee and the new authorities and responsibilities, and
we think the Appraisal Subcommittee has some huge challenges
ahead. As they move forward in implementing our recommendations
and taking other actions, I would expect that this committee
and others will be taking a very close look to see whether the
Appraisal Subcommittee has the resources and the right type of
structure to carry out these additional responsibilities,
especially pertaining to monitoring the Federal financial
regulators.
Chairwoman Biggert. Okay.
Mr. Park, obviously the ASC failed to detect a significant
amount of appraisal fraud during the financial crisis. A lot of
other people made a lot of mistakes too, but do you think
because of that, the States could assume some of the role of
the ASC?
Mr. Park. The role of the ASC is not to detect appraisal
fraud; that is really the realm of the States. They are the
enforcement mechanism of the system.
The ASC's role is to create an environment where fraud can
be easily detected and then the States have the ability to
enforce disciplinary actions for fraud or lesser offenses--
misleading appraisals, incompetent appraisals, and so forth.
Chairwoman Biggert. Was there a problem with the
environment then, that the ASC created at the time of the
financial crisis?
Mr. Park. The ASC has to work within the confines of Title
XI, within the authority that is given. One of the inherent
problems with Title XI that Dodd-Frank tried to correct is the
fact that the only disciplinary authority that the Appraisal
Subcommittee had to use against States that were out of
compliance was non-recognition of the State program. Non-
recognition of the State appraisal program would, in effect,
shut down mortgage lending in the State.
So while it has been addressed with several States, and
States know that is a potential outcome of compliance reviews,
they also know that it is a very draconian measure.
Chairwoman Biggert. The ASC oversees the States, and you
said that you don't detect the fraud, but has the ASC put out
any information about fraud trends and worked with the States
to better address fraud?
Mr. Park. During the compliance review process, our policy
managers who actually conduct the compliance review talk to the
States, gather information about what they are doing related to
fraud. More and more States, we have found, are getting
involved in various mortgage fraud committees and working with
the FBI, and Federal and State Government officials to address
the problem of mortgage fraud and appraisal fraud.
Chairwoman Biggert. Okay.
Mr. Rodgers, do you think that this is--has this happened
in your State? Has this been a help?
Mr. Rodgers. I do agree that there have been efforts both
on the level of AARO and with the subcommittee reviews that
issues that occur in other States are certainly made available
and aware of other States. Again, the joint investigator
training that has been alluded to allowed three regulators from
each State to attend at no cost and to focus on some of these
issues that you may see.
As I pointed out in my testimony, in dealing with law
enforcement officials, one thing is they have to have a fairly
substantial threshold of financial harm before they can become
interested in a fraud perpetration, and when they have
participated in a task force, which I think has been useful in
helping identify players in some of these mortgage frauds, it
is sometimes difficult for the information to be shared both
ways because they are in a criminal investigation and sometimes
they fear that the advancement of a licensing investigation may
compromise their criminal investigation.
Chairwoman Biggert. Thank you.
I have exceeded my time, and so there will be some leeway
for Mr. Gutierrez. Mr. Gutierrez?
Mr. Gutierrez. Thank you so much. You are so kind.
I am in a very generous mood. My prescriptions are ready at
the drugstore.
I want to let the panelists know that if you have an
appointment, you can keep it. Preexisting conditions will not
be counted against you. If you have your kids on health care,
it is okay. I guess it is the law of the land now, so I feel
pretty good about that. Sorry for that little aside, but I
thought you might want to know what the Supreme Court has
decided, especially since you were all--I know not on your--
[laughter]
Note, I am not talking to the rest of you, who I know are
very well-informed of what happened, but not our three very
distinguished and welcomed witnesses here this morning.
So, Mr. Shear, as we continue to look at comprehensive
housing finance reform, a key element missing from the debate
is comprehensive appraisal reform. I think our goal should be
to establish an appraisal system that produces accurate values
through all phases of the housing cycle. And the agency
guidelines that became effective in December 2010 were a vast
improvement over 2004 guidance but the scope was limited.
As we confront the major systemic hurdles to appraisal
reform, specifically the fragmented and what some of us
consider dysfunctional nature of the appraisal system and
regulatory oversight the question is, who has the authority
and, more importantly, the ability to coordinate and implement
the changes we need to accomplish?
Mr. Shear. You raise really good questions and our work can
address some of those questions. There is room for improvement
with the Appraisal Subcommittee, and in particular, the new
authorities and responsibilities provided by Dodd-Frank allow
the Appraisal Subcommittee to do a better job of trying to
oversee the State regulators.
We also think it is very important and also a huge
challenge for the Appraisal Subcommittee to try to come up with
a way of monitoring the Federal financial regulators, given
their structure and their small size. So there is an awful lot
that seems to be riding on what the Appraisal Subcommittee is
capable of doing.
But I think the types of questions you ask are very good
questions because even if the Appraisal Subcommittee does
successfully implement new procedures, implements new
authorities, and takes on new responsibilities, there still is
the question as far as how comprehensive a system we have. And
based on our work, I can say those are very good questions that
become very much a part of the whole fabric of mortgage reform
under Dodd-Frank.
Mr. Gutierrez. Mr. Rodgers, could you help us a little more
than--
Mr. Rodgers. Yes--
Mr. Gutierrez. --across the country.
Mr. Rodgers. I think there are two questions with regards
to what happens on the State level. The question has been
raised about dealing with appraisal fraud and joint work with
law enforcement. Largely, the complaints and the comments I
have heard from the Members here today have more to do with the
accuracy of valuation, helping to recover from the housing
crisis, and situations like that.
Unfortunately, on the State level you are dealing with a
complaint system where the board receives a complaint, then it
falls under a due process system. For example, in our State,
immediately the respondent has 30 days to respond to the
complaint before we even initiate the investigation.
What you are hearing a lot from participants in the
marketplace is they need somebody that once an appraisal does
not meet their needs they need some sort of ability to appeal
or to get it revisited or reviewed. I think that will have to
be handled largely in the lending community.
Mr. Gutierrez. Mr. Park?
Mr. Park. Could I ask you to restate your question?
Mr. Gutierrez. The effectiveness of the system, and to
change and to improve, and to have new effective standards
across the country--we have changed them. How do you see those
standards changing? Are they changing quickly enough? Are they
being adopted quickly enough?
Mr. Park. The changes to the appraisal regulatory system
have occurred very slowly. The Dodd-Frank Act contained the
first significant changes since it was enacted back in 1989. So
there has been--but the Dodd-Frank Act did install quite a few
significant changes that we talked about earlier in terms of
the subcommittee's authority--
Mr. Gutierrez. But you think they are actually being
carried out effectively?
Mr. Park. Yes. We are in the process of enacting the
different provisions that the changes--the amendments to Title
XI that were part of the Dodd-Frank Act, and we have already
made changes in terms of--for example, the subcommittee did not
have the authority other than to comment on but we had no
authority during the compliance review process to look at the
funding and staffing of a State program. Dodd-Frank gave the
subcommittee the authority to do that as part of our compliance
review process.
Mr. Gutierrez. My time has expired. Thank you so much. We
will have more questions for you, and I thank you for the
testimony today because maybe it is just my imagination but I
have only met two appraisers--I have had appraisers--more than
two homes appraised.
But I remember meeting one about 25 years ago, and it is
like if your car--you tell the mechanic what you think might be
wrong with it, right? Contractor comes over to fix something
you might tell him where you--and it was like the last time I
had the appraiser come over, I almost felt like I was doing
some criminal act by telling her about the beautiful tile, how
expensive it was before I installed it and trying to tell her
what it was about my home that made my home unique so that she
could do a better appraisal, I thought.
When I talk to the mechanic, he kind of listens to me and
then does whatever he has to do to fix my car, but he doesn't
treat me like a criminal in trying to tell him what I think is
wrong or good or bad about my car, and I hope we don't get to
the point where you get into an adversarial relationship
between homeowners and their most prized possession, right, and
what it is we think it is worth. In the end, they are going to
make an objective determination but you can still get good
information, I think, from the American public as you make a
decision about what something is worth.
I thank all of you, and I look forward to the next panel.
Chairwoman Biggert. Thank you, Mr. Gutierrez.
And I would like to thank the panel for their expert
testimony and for being here. It has been very helpful to us.
With that, we will excuse the panel, but first of all, let
me just say that the Chair notes that some Members may have
additional questions for this panel, which they may wish to
submit in writing. Without objection, the hearing record will
remain open for 30 days for Members to submit written questions
to these witnesses and to place their response in the record.
Thank you very much.
And with that, we will have the second panel come forward.
I would like to recognize the second panel, and thank you
all for being here. And let me just go through the list.
We have: Mr. David Berenbaum, chief program officer,
National Community Reinvestment Coalition; Mr. David Bunton,
president, Appraisal Foundation; Mr. Francois Gregoire, the
2011 chair, National Association of REALTORS Appraisal
Committee; Mr. Don Kelly, executive director, Real Estate
Valuation Advocacy Association, REVAA, on behalf of REVAA and
the Coalition to Facilitate Appraisal Integrity Reform; Ms.
Karen J. Mann, president, Mann and Associates Appraisers, on
behalf of the American Society of Appraisers; and Ms. Sara
Stephens, president, Appraisal Institute.
Thank you all for being here.
We will now begin with the testimony. Without objection,
your written statements will be made a part of the record. You
will each be recognized for a 5-minute summary of your
testimony, and with that, we will start with Mr. Berenbaum.
You are recognized for 5 minutes.

STATEMENT OF DAVID BERENBAUM, CHIEF PROGRAM OFFICER, NATIONAL
COMMUNITY REINVESTMENT COALITION (NCRC)

Mr. Berenbaum. Thank you.
Good morning, Chairwoman Biggert, Ranking Member Gutierrez,
and other distinguished members of the subcommittee. My name is
David Berenbaum, and I am the chief program officer for the
National Community Reinvestment Coalition.
On behalf of our Coalition, I am honored to testify before
you today from both the consumer protection and the safety and
soundness perspective in order to discuss options for improving
the regulatory oversight of stakeholders in the home valuation
and housing finance industry. NCRC is an association of more
than 600 community-based organizations that promote access to
basic banking services, including credit and savings, to create
and sustain affordable housing, job development, and vibrant
communities for America's working families.
Today, the U.S. economy is mired in the worst economic
crisis in more than half a century and valuation issues remain
front and center in the financial reform debate. Our current
economy has clearly earned its moniker of a ``Great Recession''
and this is not an equal opportunity recession.
NCRC calls upon policymakers, the Appraisal Subcommittee,
and regulators to act swiftly to enforce Title XI of FIRREA,
embrace the reforms included in the Dodd-Frank Act, and
implement the following 10 recommendations that will help all
Americans, but particularly assist low- to moderate-income
communities, communities of color, and communities impacted by
the foreclosure crisis who are working to realize or sustain
the American dream of homeownership.
To accomplish this end, we propose the following: first, to
develop a more modern appraisal reporting process and utilize
more robust and uniform reporting that can be tailored to
today's needs. The recent changes by the FHFA regarding the
uniform appraisal data set have only added further confusion to
the already inadequate mandated four.
Second, require full appraisals by licensed appraisal
professionals for all residential mortgages above $50,000,
regardless of if they are originated or ensured by the private
sector or Fannie Mae, Freddie Mac, or the FHA. The current
limitations associated with the so-called de minimis value of a
quarter of a million dollars are out of touch with today's
realities.
Third, the role and impact of appraisal management
companies must be critically reviewed by the ASC to ensure that
they are not negatively affecting appraisal quality. Congress
should immediately investigate the emerging practice of
mortgage originators assigning or requiring that AMCs or
appraisal professionals they engage with for business assume
the buy-back risk from the secondary market or insurer claims
related to loan origination.
Fourth, appraisal professionals enhance safety and
soundness and protect the interests of all parties to a
mortgage transaction, including and especially consumers, and
they must be appropriately compensated under any usual and
customary fee standard that is developed.
Fifth, the banking regulators--Fannie Mae, Freddie Mac, and
FHA--should not escape Appraisal Subcommittee evaluation,
safety and soundness review, and enforcement.
Sixth, while automated valuation models serve as a useful
and cost-competitive compliance tool and an effective check
against fraud, they should never replace the use of appraisal
by a licensed appraiser for all mortgages that exceed $50,000.
Seventh, there is a need for more effective consumer
protection, transparency, and education, including a dedicated
consumer complaint hotline managed by the CFPB in collaboration
with not-for-profit organizations.
Eighth, responsible appraisal practices ensure and expand
housing opportunities in open society. It is unfortunate today
that we still see issues of the age of housing, predominant
value, and use of comparables, coupled with subjective remarks
with regard to the quality of housing in America's low-income
or minority communities.
Ninth, inappropriate appraisal undervaluation is equally
damaging to homeowners, communities, the taxpayers, investors,
and insurers. We are seeing widespread undervaluation through
the use of broker price opinions, and the short-sale process,
or general reluctance to recognize that in some communities,
the market is beginning to return.
And tenth, States must suspend the inappropriate action of
redirecting funds intended for appraisal compliance,
professional development, licensing, and oversight to their
general funds.
In conclusion, it is imperative for Members of Congress,
the CFPB, the prudential regulators, and the Appraisal
Subcommittee to work in conjunction with one another to ensure
that consumers and industry stakeholders benefit from a system
of regulation that helps ensure the independence and integrity
of the appraisal process. To accomplish this end, we urge you
to consider the recommendations that we have made today.
Thank you.
[The prepared statement of Mr. Berenbaum can be found on
page 42 of the appendix.]
Chairwoman Biggert. Thank you so much.
Mr. Bunton, you are recognized for 5 minutes.

STATEMENT OF DAVID S. BUNTON, PRESIDENT, THE APPRAISAL
FOUNDATION

Mr. Bunton. Thank you very much, Madam Chairwoman. The
Appraisal Foundation greatly appreciates the opportunity to
appear before you today to offer our perspective on the
regulation of real estate appraisers.
By way of background, I have served as a senior staff
member of the Appraisal Foundation for the past 22 years, and
prior to that I had the privilege of serving as the chief of
staff of one of your former colleagues. I should point out that
I am not an appraiser.
There are many misperceptions about the Appraisal
Foundation, and let me start off by saying what the Appraisal
Foundation is not. It is not a government agency, it is not a
regulatory body, it wasn't created by Congress, it is not an
appraisal trade association, and we have no individual members.
What are we? We are a 501(c)(3) not-for-profit education
organization.
We were founded by eight national appraisal organizations,
25 years ago, before the enactment of FIRREA. We are an
umbrella organization composed of over 100 organizations and
government agencies with an interest in valuation. We have
attached a list of those organizations to our testimony. And we
were created primarily to foster professionalism in appraising.
What the Appraisal Foundation is, is the private sector
expertise in the real property appraiser regulatory system
under Title XI of FIRREA. The Foundation does not have any
regulatory authority, but we provide the tools to the
regulatory community.
Specifically, we set the minimum education and experience
requirements for someone to become a State-certified or State-
licensed real estate appraiser. We are the authors of the
National Uniform Exam that all 55 States and territories use.
And we are the authors of the generally recognized standards of
professional conduct known as the Uniform Standards of
Professional Appraisal Practice (USPAP), that all State-
licensed and certified real estate appraisers must adhere to.
With the work of our boards, we understand the very
importance of public trust. In fact, the words ``public trust''
appear in our mission statement. And we have learned over the
years that one way to build and maintain public trust is to
promote transparency wherever and whenever possible.
All of our boards conduct public meetings. They adopt their
work product in open sessions. They issue exposure drafts,
often numerous times. And all comment letters we receive are
posted on our Web site. In fact, the people who serve on our
boards--we interview them in a public setting.
In addition, as part of our commitment to promoting the
public trust, we have worked with several U.S. Government
agencies at their request on developing specific
recommendations to improve their internal appraisal operations,
to assist them in their investigative work regarding valuation,
and to assist them in developing new policies and procedures.
As Mr. Rodgers pointed out in the previous panel, the
Appraisal Subcommittee, AARO, and the Foundation have had a
very close relationship over the past few years. State
investigator training, with over 300 State investigators now
having been trained. We are producing several training videos.
At a time of tight State budgets, State regulators can receive
training at their desk without having to fly anywhere.
And then, because all 55 States and territories are using
the same document for enforcement, USPAP, we have created
something called a voluntary disciplinary action matrix, and
what that is, it lists specific violations of USPAP and then
recommended disciplinary action. It also lists aggravating and
mitigating circumstances. It is completely voluntary; it is
simply a tool for States to use.
I have been asked to touch on two internal Foundation
issues. One of them is the Foundation's strategic plan. It is
premature to get into the details of the plan because it will
not be presented to our board of trustees until next month.
Assuming it is accepted by our board, the Foundation will
publicly expose the draft plan, as it did with its current
plan, to all stakeholders for 90 days. This November, the board
of trustees will take into account public comments received and
make a final determination on approving the strategic plan.
I was also asked to comment on the Appraisal Practices
Board. There is a lot of misinformation about this newest board
that was constituted in July 2010. This essentially is the how-
to board, if you will. How do I appraise it with foreclosed
properties, and short sales, and things like that?
There are four things I want to mention about the APB.
First, the Appraisal Practices Board does not have any
congressional authority. Adherence to the guidance is strictly
voluntary.
Second, the APB does not operate with any public funds or
any grant money.
Third, the APB valuation advisories do not establish new
valuation methods or techniques. They rather are a compilation
of existing ones into one place.
And fourth, the APB valuation advisories are available to
anyone at no cost.
Earlier, we heard from the Government Accountability
Office, and over the past decade, there have been 16,000
disciplinary actions, 2,300 revocations, and 1,800 suspensions.
The States have been very active.
Title XI, while certainly unique without its flaws, is the
glue that holds these 55 jurisdictions together and, it is
important to remember, without the use of any appropriated
funds.
Madam Chairwoman, the Appraisal Foundation stands ready to
assist in any way you believe the subcommittee can help this
effort. Thank you.
[The prepared statement of Mr. Bunton can be found on page
71 of the appendix.]
Chairwoman Biggert. Thank you so much.
Mr. Gregoire, you are recognized for 5 minutes.

STATEMENT OF FRANCOIS K. GREGOIRE, PRESIDENT, GREGOIRE &
GREGOIRE, INC., ON BEHALF OF THE NATIONAL ASSOCIATION OF
REALTORS (NAR)

Mr. Gregoire. Good morning. Thank you, Chairwoman Biggert,
Ranking Member Gutierrez, and members of the subcommittee for
the opportunity to testify on behalf of the National
Association of REALTORS about appraisal and the regulatory
impact on consumers and businesses. NAR represents more than 1
million real estate professionals, including approximately
30,000 licensed and certified appraisers.
My name is Francois K. Gregoire. I go by Frank. I do not
speak French.
I am a REALTOR but I earn my living as a real estate
appraiser. My qualifications are fully detailed in my written
testimony.
NAR believes a strong and independent appraisal profession
is important to consumers and the real estate industry and
vital to restoring faith in the mortgage origination process.
Appraisals are one of the most critical components necessary
for the housing market recovery.
There is no question about the importance of appraisals in
real estate and mortgage transactions. A credible valuation by
a competent, licensed or certified professional provides
benefits to the lender, borrower, and secondary markets. Public
trust in the real estate profession is enhanced.
There are obstacles to preventing the realization of these
benefits. Among the obstacles is weakened appraiser competency.
Despite good intentions, litigation, legislation, and
regulation has diminished the importance of appraiser
competency as criteria for appraiser selection and retention.
The insertion of appraisal management companies between loan
originators and appraisers results in a focus on fee and
turnaround time rather than appraiser competency and
experience.
The most common concern expressed by our members, whether a
broker or an appraiser, is knowledge of the local market or
geographic competency. The Uniform Standards of Professional
Appraisal Practice requires appraisers to have competency or to
acquire competency to understand the nuances of a particular
market.
The current AMC model tends to disregard this necessary
focus on competency. Appraiser competency may be enhanced with
education and communication.
Communication between appraisers and real estate agents and
their clients is not prohibited and should, in fact, be
encouraged. Of course, efforts to intimidate, bribe, or coerce
an appraiser are and should continue to be prohibited.
Some AMCs provide legitimate services for reasonable fees
but many contribute to problems in the appraisal business and
the overall housing market. Contrary to their claims, there is
evidence that appraiser independence is often compromised by
the AMC.
Assignment conditions, such as unreasonable turnaround
times and unrealistic scope of work for reduced fees,
interferes with the decision-making process necessary for a
credible appraisal. Experienced appraisers refuse these
assignments. Instead of selecting the best appraiser for the
job, the assignment is often awarded to the appraiser who
responds first to a mass e-mail--not the best selection method.
The independent judgment of appraisers is compromised when
AMC reviewers unreasonably question comparable sales selection.
Non-appraiser AMC staff with only a cursory knowledge of
valuation interfere by insisting that specific information be
included or excluded from appraisal reports.
The altered business relationships between appraisers and
their clients, unreasonable completion time requirements,
diminished fees, and interference in the appraisers'
independence all contribute to the failure to recognize
positive movement in prices and values in many market areas.
NAR did not support the Dodd-Frank language that regulates
AMCs on two different tracks. We believe exempting some AMCs
from State registration has aggravated the problems. NAR
believes that all AMCs should be registered with State
regulatory agencies.
Additional appraisal challenges include limitations of the
current standard forms, the reporting format, lagging market
information, discrepancies in market definitions, privacy
concerns, the funding structure of appraisal programs, and the
declining number of appraisers. NAR is the only real estate
trade association able to speak with authority on appraisals
and alternative valuation products. We have long been proactive
in ensuring credible valuation of real property for our
industry and embrace an all-encompassing approach.
Appraisals are certainly the gold standard for mortgage
origination but there is a role for broker price opinions,
comparative market analyses, and automated valuation models.
Through our subsidiary, REALTORS Property Resource, and our
valuation committee, NAR is able to provide comprehensive data
sets and tools to assist in determining credible home values.
Thank you for holding this hearing to examine an issue
which is paramount to restoring confidence in the U.S. housing
market. NAR is dedicated to the idea that homeownership
matters. It contributes to our Nation, benefitting individuals,
families, and communities. Our efforts are directed at ensuring
that the dream of homeownership is available to the next
generation.
We look forward to working with the committee on this
issue, and I am anxious to answer your questions.
[The prepared statement of Mr. Gregoire can be found on
page 85 of the appendix.]
Chairwoman Biggert. Thank you, Mr. Gregoire.
Mr. Kelly, you are recognized for 5 minutes.

STATEMENT OF DONALD E. KELLY, EXECUTIVE DIRECTOR, REAL ESTATE
VALUATION ADVOCACY ASSOCIATION (REVAA) ON BEHALF OF REVAA AND
THE COALITION TO FACILITATE APPRAISAL INTEGRITY REFORM (FAIR)

Mr. Kelly. Thank you, Madam Chairwoman. I am delighted to
be here again. It is good to see you. I believe that you and
your staff have hit a homerun here. If you look at the panels
that have been put together here, a tremendous amount of
experience, so many of us have known each other in this
business for so long--and I won't say how long, just to protect
the innocent here. And despite some of our disagreements, I
must say that on behalf of REVAA and the FAIR Coalition, I will
say that personally, I love appraisers. I have been working
with appraisers for 30 years and they have tremendous
professionalism and it has been a delight to work with them.
My members love appraisers as well because without good
appraisers, there would be no appraisal management companies.
Allow me to summarize my testimony. First, regarding
appraisal management company operations, REVAA and FAIR members
provide necessary services to financial institutions as well as
benefits to appraisers and consumers in the course of a
mortgage transaction.
Second, in regard to regulation, we are working proactively
with the Federal Government and the States to implement the
regulatory requirements of the Dodd-Frank Act and State
legislation. Third, we encourage the Consumer Financial
Protection Bureau to continue to rely on the reasoning utilized
by the Federal Reserve Board for payment of customary and
reasonable fees.
To my first point, our members manage the production and
the delivery of real estate valuation products. They have been
responsible for advancements in technologies that benefit
mortgage investors, servicers, originators, appraisers, and
ultimately consumers.
AMCs typically operate national networks of employee-based
and independent contractors for the completion of appraisal
reports. Because mortgage lending is a national undertaking,
AMCs act as a centralized resource for mortgage lenders and
servicers that operate nationwide.
There are approximately 315 AMCs in operation today, owing
to the diversity of the lending industry and the competitive
marketplace. AMC has worked to match assignments with qualified
local appraisers. The average appraiser utilized by an AMC has
15 years of experience and typically travels less than 13 miles
on any given assignment.
AMCs perform extensive administrative and quality control
functions on behalf of both the appraiser and the lender to
ensure delivery of high-quality reports. Member companies rely
on competent and qualified appraisers and work diligently to
ensure quality.
As part of the selection criteria, our members typically
confirm the physical location of the appraiser's office. That
location is what they call ``geo-coded'' and used to calculate
the distance to subject properties and other metrics. In
addition, objective metrics are applied to an appraiser's
performance and appraisals are reviewed by quality assurance
teams who specialize in product development and review.
Contrary to what some have suggested, appraisers directly
benefit by working with an AMC by having an advocate to ensure
appraisal independence, to make sure that no attempt is made to
improperly influence the appraisal process. In addition, AMCs
provide significant value-added services to appraisers, such as
quality control, review, marketing, insurance, technical
support, and billing processes.
With loan rate lock-ins and time-sensitive negotiations,
AMCs help consumers by reducing the time required for appraisal
delivery.
To my second point regarding regulation, AMCs are subject
to new regulatory requirements under Dodd-Frank, and prior to
passage of the Act, several States had begun the process of
enacting laws to require registration of AMCs. We have been
actively involved with the States from the inception of these
registration laws and have long supported transparency and
independence in the appraisal process.
We believe it is important to work towards consistency and
uniformity in State laws and regulations to ensure that AMCs
can effectively operate on a national basis. We believe the
Appraisal Subcommittee and the relevant banking agencies can
and should contribute to ensuring a consistent set of national
requirements in this regard.
Finally, Dodd-Frank requires that lenders and their agents,
AMCs, compensate appraisers at a customary and reasonable rate
for appraisal services. We believe the Federal Reserve Board
acted appropriately and logically to implement the
congressional intent in this provision.
The board has recognized that appraisal services are not
one-size-fits-all and has created a compliance structure for
fees that reflects market realities and ensures that the
appraisal cost borne by consumers will remain competitive and
fair. While the board's interim final rule remains effective
without further finalization, we believe the CFPB should
maintain the criteria articulated by the Federal Reserve Board.
To reconsider the issue could result in additional confusion
and even lead to setting a fixed fee which may not reflect
local market and industry conditions.
Since we last met, States have been active in establishing
registration programs for AMCs. By and large, States have been
diligent with consistently required registration for a set fee,
background checks for AMCs and employees, surety bonds, minimum
education requirements, and built-in protections for appraisers
engaged by AMCs.
However, because mortgage lending is national in scope, we
believe it is important to work towards greater consistency and
uniformity in State AMC laws and regulations. We support
reasonable and appropriate laws and standards to improve the
appraisal industry as a whole, but we also believe the Federal
banking agencies should provide clarification and guidance for
the industry.
Thank you for the opportunity to testify. I look forward to
your questions.
[The prepared statement of Mr. Kelly can be found on page
103 of the appendix.]
Chairwoman Biggert. Thank you, Mr. Kelly.
Ms. Mann, you are recognized for 5 minutes.

STATEMENT OF KAREN MANN, PRESIDENT, MANN & ASSOCIATES, ON
BEHALF OF THE AMERICAN SOCIETY OF APPRAISERS (ASA) AND THE
NATIONAL ASSOCIATION OF INDEPENDENT FEE APPRAISERS (NAIFA)

Ms. Mann. Thank you very much.
Good morning, Chairwoman Biggert, Ranking Member Gutierrez,
and members of the subcommittee. My name is Karen Mann, and I
am an appraiser. I have been an appraiser for 32 years and I am
currently the president of my firm, Mann and Associates, in
Northern California.
Today, I am here to testify on behalf of the American
Society of Appraisers, ASA, and the National Association of
Independent Fee Appraisers, NAIFA. I am speaking on their
behalf today.
The current appraisal regulatory structure is a dramatic
improvement over what was in place prior to the savings and
loan debacle. Prior to that, you could own a clipboard, you get
a business card, get a tape measure, and you go out and call
yourself an appraiser. The problem is it became like the Wild
West where people thought that they could be an appraiser at
any time.
Thanks to the implementation of Title XI, we found that
there were rules and regulations that appraisers had to follow,
and it was good. That doesn't mean we always wanted to follow
the rules, but we had to, and that makes a more organized
society. It is very important.
The role of the appraiser had to recognize that the
appraisal industry had changed over the years. As a result of
that, we needed something that was a foundation for us, a
basis.
So now we have a standard of accountability, and this
standard of accountability was--the basis was Title XI, and now
with augmentation of the Dodd-Frank Act, we will have a fine-
tuning of that original standard format.
We also believe that the Appraisal Foundation has been and
continues to be an indispensible and positive factor in the
growth of the appraisal profession. Currently, some 65 percent
of practicing appraisers are not a part of a professional
appraisal organization for guidance. The Appraisal Foundation
has been an important element for these appraisers.
Professional appraisal organizations have been around since
the 1930s. However, the presence of approximately 65,000
licensed and certified appraisers relying on some source of a
foundation requires the use and the implementation of the
Appraisal Foundation guidance.
It is important to note that the Foundation decisions
involving standards, best practices, and qualifications are
made in a transparent manner and are open for comment, review,
and recommendation by appraisers and stakeholders.
Improving the current system is currently in process with
the proposed implementation of the appraisal portion of the
Dodd-Frank Act. The current regulatory system is adequate,
however, we recognize, like anything that is being developed,
one must tweak it, one must go in and improve it.
So we agree with the 2012 GAO report regarding the need for
greater effectiveness at the Appraisal Subcommittee. However,
we also believe the Appraisal Subcommittee is showing
improvement. They are trying to increase their skill sets and
to be more effective and more efficient.
We have several issues facing appraisers in today's
environment: first and foremost, as an appraiser, customary and
reasonable fees. With the implementation of the AMCs--we don't
disagree that having an AMC is appropriate or could be
appropriate, but the problem is that the experienced appraisers
don't want to work for the AMCs because the fees are so low.
The AMCs typically will charge--and it is customary for the
V.A. to publish that fees for appraisers are approximately
$450. The AMCs keep between 30 and 40 percent, which means that
the remainder goes to the appraiser. The appraiser then has a
lower fee. In today's business practice, having a lower fee
when your expenses are the same or increasing, makes it very
difficult to stay in business.
A lot of the newer and less experienced appraisers are
choosing to work for the AMCs, which is not a good thing for
consumers because the consumers may not be getting necessarily
the most qualified appraiser. I hear this every day from
homeowners who contact me and say, ``This person came from
Fresno and they are appraising a property in San Francisco.''
That is 400 miles and that is a long distance. Completely
different markets.
The next item we have to recognize is that the Dodd-Frank
reform has not yet fully been implemented. So the fact that it
hasn't been fully implemented--we are working on the
presumption that it is going to happen, but once it is
implemented we anticipate that the improvement to the entire
process will be accelerated immensely.
The good faith estimate and settlement form mortgage
disclosures do not disclose that the appraisal fee paid by the
consumer is actually two pieces. One piece is what goes to the
AMC and the remainder goes to the appraiser.
The homeowner--the property owner--should really know which
part goes to which because they think that--when we go out
there they say, ``We paid you $500 for this appraisal,'' and
when they find out that the appraiser is only getting $300 of
it, the homeowner feels deceived and they wonder what is going
on with the process.
One other factor that has been a bone of contention for
appraisers for years is eliminated the--and reducing the de
minimis. Currently, the de minimis means that properties with a
price--a value less than $250,000 for residential properties
and a million dollars for commercial properties do not
necessarily need a--the typical appraisal and other types of
valuation products may be used. We firmly believe that that
compromises the system and it compromises the homeowner--the
consumer--of properties worth less than $250,000, which is a
considerable amount when you consider the average price of the
home in the United States.
Finally, we have other issues with day-to-day operations,
but we don't think that your subcommittee should worry about
our minor little issues. We will try to endeavor to participate
and encourage and to try to develop processes that work and
help the committee and each other improve our system so that we
have a professional appraisal group of professional appraisers
for every single consumer.
Thank you for allowing me to represent my organizations.
[The prepared statement of Ms. Mann can be found on page
118 of the appendix.]
Chairwoman Biggert. Thank you, Ms. Mann.
Ms. Stephens, you are recognized for 5 minutes.

STATEMENT OF SARA W. STEPHENS, PRESIDENT, THE APPRAISAL
INSTITUTE

Ms. Stephens. Thank you.
Chairwoman Biggert, Ranking Member Gutierrez, my name is
Sara W. Stephens and I am president of the Appraisal Institute,
the largest association of real estate appraisers in the United
States, representing 23,000 professionals and more than half of
all professionally designated appraisers in the United States.
In 2007 Chief Justice Roberts, writing for a unanimous U.S.
Supreme Court stated, ``Valuation is not a matter of
mathematics. Rather, the calculation of true market value is an
applied science, even a craft. Most appraisers estimate market
value by employing not one methodology but a combination. These
various methods generate a range of possible market values,
which the appraiser uses to derive what he considers to be an
accurate estimate of market value based on careful scrutiny of
all data available.''
These words are so true. Appraisal methods and techniques
require judgment by the appraiser. The choice of methods and
techniques are the responsibility of the appraiser.
For instance, in valuing a parcel of residential and
commercial real estate, appraisers are trained to decide
whether or not to use replacement cost and when and how to
adjust for seller sales concessions. These decisions by the
appraiser are dependent on the actions of the marketplace and
should not be mandated. Sadly, this tenet is at risk.
Established under a false premise that timely guidance on
appraisal methods and techniques does not exist, the Appraisal
Practices Board of the Appraisal Foundation is attempting to
assert itself as the authority over appraisal methodology, a
move that flies in the face of the decision of the Supreme
Court case that I just quoted. Despite having no authorization
from Congress in this area, proponents of the Appraisal
Practices Board are attempting to dictate appraisal
methodology.
In fact, even though the Appraisal Foundation maintains
that the guidance documents are voluntary, the Appraisal
Foundation is now encouraging States to adopt them as
compulsory. Furthermore, the Appraisal Foundation has professed
to reference them in the latest document edition of the Uniform
Standards of Professional Appraisal Practice, essentially
codifying them into State law.
We believe that Congress should exercise oversight over
this insidious attempt to confuse the public by subtly abusing
existing congressional authority. The appraisal process is not
aided by more rules. Instead, the appraisal profession is at
risk of having innovation curtailed.
Furthermore, the Appraisal Institute supports realigning
the appraisal regulatory structure with those of other
industries in the real estate and mortgage sectors. As a model,
we believe Congress could turn to the national mortgage
licensing system for mortgage loan originators, which is
mandated by the SAFE Act and is overseen by the Consumer
Financial Protection Bureau.
This is not a self-regulatory organization but one that is
owned and operated by the State bank regulators. We see several
benefits to a realignment of the appraiser and certification
system, including enhanced communication among regulators and
reduced red tape for appraisers.
Congress saw reason to authorize this body to assist others
within the real estate sector. So, too, can it be for
appraisers and appraisal regulators.
Congress also should remain engaged on the issues involving
appraisal procurement and appraisal management companies,
including the payment of customary and reasonable fees and
consumer disclosure of fees paid to appraisal management
companies. We often hear from real estate agents, homebuilders,
and others that poorly performed appraisals are killing deals
and/or holding back economic recovery. These accusations are
unfounded and misguided, as appraisers do not make the market;
they report the market.
The purpose of an appraisal is not to support a contract
sales price but instead is an integral part of lender risk
management. Any crisis of confidence regarding appraisals is a
direct result of the way in which lenders under the oversight
of bank regulatory agencies procure appraisals today.
Here, the predominant factors in the appraisal hiring
decision are often price and turnaround time of the appraisal,
not quality of service or geographic or market competency of
the appraiser. The dumbing down of appraisals cannot continue
and we ask Congress for its continued oversight.
Lastly, we know nothing is perfect. The regulatory system
that appraisers operate with today is 20 years old and we
believe it is time for a fresh look.
Appraisers do not need a set of arbitrary rules. As the
Supreme Court has stated, ``The careful scrutiny of data should
be at the forefront of the appraisal process and is essential
to maintaining its integrity.'' We ask for your oversight of
these matters. I thank you very much for the opportunity to be
here and I would be glad to answer your questions.
[The prepared statement of Ms. Stephens can be found on
page 180 of the appendix.]
Chairwoman Biggert. Thank you, Ms. Stephens.
We will now proceed to questions, and I will yield myself 5
minutes.
The Appraisal Subcommittee is in the process of developing
the new standards or rules as required by the Dodd-Frank Act,
and Dodd-Frank was enacted in 2010, almost 2 years ago. This
question is for all of you: Do you believe that the Appraisal
Subcommittee has been effective by taking more than 2 years,
and counting, to comply with the Dodd-Frank Act?
Let's start with you, Mr. Berenbaum, and just go down the
line.
Mr. Berenbaum. Thank you. I think that is a very important
question. We are anxious for the Appraisal Subcommittee to move
ahead very quickly in this phase, particularly with regard to
monitoring the activities of the other prudential regulators.
We have raised issues such as flopping, such as the quality of
appraisal compensation, such as issues with regard to expanded
use of automated valuation models to, in fact, the prudential
regulators.
And despite the lessons that should have been learned in
this financial crises, it appears to us, working with consumers
across the country, that the prudential regulators are not
acting quickly enough. And so, the ASC will and should be
playing a critical role in that space as well as, frankly,
working with the FHA, as well.
Chairwoman Biggert. Thank you.
Mr. Bunton?
And please be brief, because I have some other questions,
too.
Mr. Bunton. I think they are doing much better. The
Appraisal Subcommittee today is a far different organization
than it was just 7 months ago. I believe 4 of the 7 members
were not serving 7 months ago. They are new; they are higher
level policy people. For the first time, you have a Chair who
is an appraiser.
I attend every one of their public meetings and the
difference between it then and now is night and day.
Chairwoman Biggert. Thank you.
Mr. Gregoire?
Mr. Gregoire. The National Association of REALTORS does
not have a specific policy related to your question. However, I
can tell you that unlike a lot of other Federal agencies, the
ASC operates without an appropriation; they operate on an
appraiser tax. So they don't have the flexibility or the funds
to move in the same way that a lot of Federal agencies do.
And I believe that has to be taken into account. The folks
who are funding the operation of the Appraisal Subcommittee are
actual licensed and certified appraisers, and as Mr. Park
testified, that number of folks is diminishing.
Chairwoman Biggert. Thank you.
Mr. Kelly?
Mr. Kelly. Thank you. We would like to see the ASC move a
little quicker. As I testified, States are already proceeding
with registration and other standard development, and so I
believe that the ASC could be helpful with moving along with
their agenda.
Chairwoman Biggert. Ms. Mann?
Ms. Mann. Thank you. There is a pressing need for speedy
implementation by rulemaking of many of the Dodd-Frank
appraisal provisions, which have yet to be addressed.
These provisions involve enormously important issues,
including supervision, registration of AMCs, development of
quality control standards for AVM, that is automated valuation
models, establishment of an appraisal complaint hotline, and
the CFPB's consideration of whether the banking agencies'
existing dollar threshold, or the de minimis, is adequate. So
we look forward to this.
Chairwoman Biggert. Okay. Thank you.
Ms. Stephens?
Ms. Stephens. Yes, I think that one of the biggest problems
we see is that the current structure really assumes that the
States are not capable of administering this entire process of
certification and entire process of overview. We would like to
see that changed. And that is one of the reasons we make the
suggestion that a good look be taken at the way that our whole
entire system is set up.
Chairwoman Biggert. Thank you.
Now, I have two questions that are just a yes-or-no answer,
so the first one is--and we will start with you, Ms. Stephens,
and go the other way. Is the Appraisal Subcommittee effective?
Ms. Stephens. In my opinion, no.
Chairwoman Biggert. Ms. Mann?
Ms. Mann. I believe it is, and it is going to get better.
Chairwoman Biggert. Mr. Kelly?
Mr. Kelly. Yes.
Chairwoman Biggert. Mr. Gregoire?
Mr. Gregoire. Somewhat.
Chairwoman Biggert. Mr. Bunton?
Mr. Bunton. It needs improvement.
Chairwoman Biggert. Mr. Berenbaum?
Mr. Berenbaum. [Off mike.]
Chairwoman Biggert. Okay.
Now, another question, yes or no: Should Congress consider
a complete overhaul of appraisal regulations and improve it for
consumers and businesses alike?
Mr. Berenbaum?
Mr. Berenbaum. I think there is a serious need to look at
how--
Chairwoman Biggert. Yes or no?
Mr. Berenbaum. Yes or no? There is a need to look at it.
Chairwoman Biggert. Mr. Bunton?
Mr. Bunton. [Off mike.]
Chairwoman Biggert. Mr. Gregoire?
Mr. Gregoire. [Off mike.]
Chairwoman Biggert. Okay.
Mr. Kelly?
Mr. Kelly. We should continue to look at it, yes.
Chairwoman Biggert. Okay.
Ms. Mann?
Ms. Mann. Improve the existing system.
Chairwoman Biggert. Okay.
Ms. Stephens?
Ms. Stephens. Yes.
Chairwoman Biggert. Okay, thank you.
All right. My time has expired.
Mr. Sherman, from California, is recognized for 5 minutes.
Mr. Sherman. Thank you, Madam Chairwoman.
Mr. Gregoire, the GSEs have created this new uniform
appraisal database, the UAD, which is used on all GSE
appraisals, also for the FHA. How is it all working out?
Mr. Gregoire. Fortunately, because of the work that I do, I
have not had to complete one of those reports. However, I have
heard from dozens if not hundreds of appraisers about their
experience, and also from consumers. The UAD method of
reporting was not implemented to enhance the quality or the
credibility of an appraisal report. What it does enhance is
data-gathering.
It does not improve an appraiser's performance or ability
to accurately or credibly estimate an opinion of value. And in
fact, I believe that it makes the appraisal report more
confusing and less useful to the consumer.
Granted, the consumer is not an intended user of an
appraisal that is completed for mortgage finance transaction.
However, the wording in the form clearly anticipates that the
borrower will be placing some credence in that, and the report,
according to Federal law, is required to be provided to the
borrower prior to the closing of the transaction.
That UAD does not improve the usefulness of that report to
the consumer.
Mr. Sherman. So at a very minimum, we need to change how it
is presented so that the consumer can understand it?
Mr. Gregoire. I believe that the reporting format that is
instituted by the GSEs is not designed to result in a more
accurate estimate of value; it is designed for the convenience
of the GSEs. And things that make things more useful to
consumers are very often excluded from the report due to the
manner in which the report is delivered to the GSEs.
And there are also privacy concerns. The GSEs are now
insisting on a whole slew of interior photographs and the
borrower and the seller and the lender don't control the
distribution of that appraisal report, and a lot of our members
are very concerned about privacy.
Mr. Sherman. The only thing I have been told about real
estate is that it has something to do with location, and
location, and location. What can we do to make sure that the
appraisers actually understand the neighborhoods that they are
appraising, Mr. Gregoire?
Mr. Gregoire. Thank you, again. Unlike some of the
discussion here concerning geographic competency, I don't
believe that geographic competency is determined solely by the
appraiser's proximity to the property that is being appraised.
Geographic competency is determined by the appraiser's
knowledge of a particular market or knowledge of a particular
neighborhood or of a particular location. It is also determined
by the appraiser's knowledge of a particular property type.
And competency can be--it is not absolutely, positively
necessary at the time the appraiser accepts the assignment as
long as the appraiser takes the steps necessary to acquire the
competency. But you don't acquire competency in a manner of
minutes or hours, and I believe that appraisers are fully
capable of gaining the necessary competence if they are given
the appropriate and the necessary time to spend in a market,
interview the folks necessary to gather market information, and
given the time necessary to appropriately complete the
appraisal report.
Mr. Sherman. But even a very competent appraiser who is
given just one job in some community he doesn't know, he is
only paid a few hundred dollars so he can't spend hours and
hours studying everything. That competent appraiser, if he is
only going to do one appraisal in that neighborhood is probably
going to miss some things.
Mr. Gregoire. I agree, and I think that the Uniform
Standards for Professional Appraisal Practice provides the
appraiser guidance as what to do in such a circumstance, and
that is to decline the assignment. And I believe that we have
to hold appraisers to that standard. They have to know when it
is appropriate for them to accept an assignment and when it is
appropriate for them to decline the assignment.
Mr. Sherman. If I can squeeze in one more question, how are
appraisals and valuations affecting the housing recovery, or
what we hope to be a housing recovery?
Mr. Gregoire. That is a pretty broad question, but I
believe the concern of the National Association of REALTORS is
that there is interference in an appraiser's independence to
call things the way they see it. I have plenty of anecdotal
evidence of appraisers--and I work and appraise in Pinellas
County, Florida. It is a county which is not monolithic. There
are areas that are improving--some dramatically, some not so
much--and areas that are stable. There are appraisers who have
identified improving areas, and as a result of their data and
analysis in reaching an opinion that an area is improving have
reported that to their clients, and they have made the
appropriate positive adjustments to comparable sales to make
sure that those comparable sales are adjusted to reflect what
they would have sold for on the effective date of the
appraisal. The result that has been reported is that you better
rethink those date-of-sale time adjustments. That is
interference with an appraiser's independence and it results in
a misleading appraisal report and an appraisal report that does
not reflect a current and an improving market in a specific
area.
Chairwoman Biggert. The gentleman yields back.
The gentleman from California, Mr. Miller, is recognized
for 5 minutes.
Mr. Miller of California. Thank you, Madam Chairwoman.
So the problem I have, and I guess this panel really
doesn't--we really don't have a mortgage broker on here; we
don't have--these problems, but the data I have seen, 80
percent of all the appraisals being done are refinances, so
let's put those in one category. That is just somebody
refinancing their home, whatever.
HVCC was so efficient at changing the landscape that even
though Congress came back and said, ``No, we don't like that,''
FHFA and FHA never listened. They are still implementing the
concept of HVCC, which was a disaster. There was a time, like
ordering an appraisal when a mortgage broker, now called an
originator, could do something.
But they are excluded from participating in the appraisal
process as they were in the past, and many times trying to
represent a client--a REALTOR comes in with a client, mortgage
broker, they try to figure out what the house is going to sell
for, how the buyer is going it buy it, and they could do an
appraisal and they could go out and go to a lender, if the
lender's appraisal didn't come in the same line they could say,
why are there differences in the appraisals? Is there an error
in the appraisal? Are there different issues we need to
consider here?
Those are off the table, and in Dodd-Frank I made sure the
language included in there that said appraisal would be
portable, but they are not. They are just not being done. You
go to one lender and they do an in-house appraisal, and they
are not giving their appraisal to the other lender. So now
somebody has to go back and pay for two appraisals or three
appraisals when it could have been done the first time by
understanding what the house is really worth based on
somebody's understanding of what an appraisal should be and who
should do an appraisal.
And, geography, should that matter? I think it does if an--
and I think appraisals are wonderful. I have no problem with
that. But if he is 2 hours away, and he has one appraisal in a
neighborhood, that makes it really tough. And when you are
dealing with a marketplace that is tough, is an appraiser
likely to say, ``I think I should forego taking this job when I
can go on a computer and come up with something and present an
appraisal?''
So I think there is an inherent conflict in the industry
when you put that onus on the individual to say, ``No, I am
going to turn the work down.'' It has been a bad market. It has
been tough. People are trying to grow their businesses back.
But portability is huge, and it is not taking place. And a
problem I have is, especially in the industry today you are
appraising many distressed homes at a value and unless the
appraiser is out there on site looking and making sure he knows
it is distressed versus when it is not distressed they really
don't know. So you have to actually drive up to the door and
actually look and understand what you are dealing with.
And especially when it applies to new marketplace today,
when--I don't believe this country's economy is going to come
back until the housing industry comes back. I just don't
believe it. There is nothing showing me that it is going to
happen until the industry comes back full swing and this
economy turns around.
So you have builders in communities that are buying lots
basically through this down marketplace in the recent years for
less than it costs to do the improvements. So you have an
appraiser who is going out there appraising it on values less
than it would cost to do the improvements today and buy land
today. Land is supposed to be free but it is not, and even all
the new requirements placed on them aren't being considered in
appraisal value.
And I am not impugning appraisers. I don't mean that at
all. It is just very tough and you have to have somebody local
who understands it, understands the issue, understands the
market and can come up with a realistic value of that home
based on current market conditions.
And if that doesn't happen, you are going to continue to
distress the marketplace. New product can't be built today
unless you are using realistic values of what fair market value
is for that home in today's market.
But when you have a buyer willing to buy and a seller
willing to sell and the appraiser comes down here everybody is
looking at each other scratching their heads saying, ``What do
we do?'' And that is where the problem is today.
You need to be able to say, ``I think you made some
mistakes in your appraisal here,'' but you are excluded from
that now. You can't do that. It is a conflict of interest
almost, the way they are looking at it.
You have to get back to some realistic approach to the
concept of value at market rate and putting a lender together
with that buyer and seller to be able to move forward in the
marketplace. And I think we are hurting ourselves and hurting
this economy by not realistically looking at that.
I guess when you look at the State appraiser expected to be
selected from individuals assigned based on completely the
performance of an appraisal, knowledge of an areas, and type of
a product, Ms. Stephens, is that happening? If not, what steps
are being taken to make sure that appraiser understands what
they are looking at?
And I am not impugning appraisers. I am just saying that we
restricted it through HVCC and that we have not come full
circle in correcting it.
Ms. Stephens. We are hearing from many of our appraisers
and many of their clients that this is not happening, that we
are not sending people into an area who are familiar. And one
of the big problems is, again, that most of the function of
today's residential lending market is vested in hiring people
based on fee and turnaround time.
We are not saying that all of the AMCs that are working out
there are not doing a good job, but we are saying that there
are instances where people are traveling great distances to
work on a residential assignment when there are qualified
people--professional people--in the area who would do that job
if the fee were commensurate with their--
Mr. Miller of California. And the problem with traveling
that great distance is it is a cost factor for the appraiser.
They are traveling; they are not doing something else. It is
time lost in the car when they could do two appraisals
somewhere else.
And I think the inherent conflict being placed on the
industry today is that nobody wants to turn a job down, and I
don't blame them. But there is not adequate compensation based
on the impact associated with what they have to do to get the
appraisal done to expect a reasonable approach to the appraisal
process.
And I know you have been generous, Madam Chairwoman, and my
time is way up. I had eight more questions, but I yield back.
Thank you very much.
I ask unanimous insert to insert into the record a written
statement by William Kidwell, president of Impact Mortgage
Management Advocacy and Advisor Group, IMMAAG.
Chairwoman Biggert. Without objection, it is so ordered.
Mr. Miller of California. Thank you, Madam Chairwoman.
Chairwoman Biggert. Mr. Miller, I am going to ask a few
more questions, so if you would like to--
Mr. Miller of California. I can finish. Yes I would love--
Chairwoman Biggert. All right.
Mr. Miller of California. Mr. Gregoire, an out-of-area
appraiser is one of the most common complaints. I know I just
said that. But what can be done, in your opinion, to fix that
problem?
The chairwoman gave me the time. Go for it.
Mr. Gregoire. I just had an e-mail forwarded to me from a
Tallahassee appraiser. This appraiser is in Tallahassee and he
wanted to let me know about an assignment that he was given
yesterday. They are a nationwide appraisal management company,
has a conventional 1004 MC appraisal for a purchase located on
a property in Karo, Georgia. I don't know where Karo, Georgia
is, but it is in Georgia, not in Florida.
``If you are interested in working with us on this and
future appraisals please reply to this e-mail with your
estimated turnaround time and fee.''
This appraiser is licensed--actually, is certified in
Florida, not in Georgia. That is an example. And I don't know
how many other appraisers in Florida received the same e-mail.
That is a primary driver of a lot of AMCs' determination as
to who gets the assignment--the turnaround time and the fee. No
question here whether or not he even is certified in Georgia or
what his qualifications are, whether or not he is a designated
appraiser. The--
Mr. Miller of California. And the problem with that--and I
do like appraisers. I am not impugning anybody. Please don't
anybody mischaracterize. What I am saying is everybody shopping
for business today, and when a lender receives an estimate from
this appraiser that says, ``We will do your appraisals for this
amount of money,'' and the lender says, ``That is a good
deal,'' it doesn't matter if they are 800 miles away.
Mr. Gregoire. Thank you.
Now, as to how it can be corrected, first off, I believe
that consumers should be entitled to an appraisal report that
is commensurate with the fee that the consumer pays for the
appraisal report. They are not getting that now.
They are getting only a fraction of what they are paying
for because the bulk of the fee is going to a party other than
the person who is completing the assignment. The bulk of the
fee is going to an organization, a company, that adds no value
to the transaction.
They are strictly a broker, strictly a middleman, and
despite all the claim of the quality control and the adherence
to the appraiser's qualifications, in most cases it is not. It
is simply a means of siphoning off money. Very often, the
appraisal management company is associated with or affiliated
with the lender, and it is a means for the lender to increase
his bottom line.
Mr. Miller of California. Done on a contract basis?
Mr. Gregoire. Yes.
Mr. Miller of California. Yes.
Mr. Gregoire. So we have to think that the consumer needs
to get what they are paying for, and if the lender wants to use
the services of an appraisal management company to broker these
valuation services--the AMCs claim that they are operating as
an agent for the lender. Well, by golly, let the lender pay for
that service, don't make the appraiser pay for it or don't make
the consumer pay for it. The lender is the one that is getting
the benefit; make the lender pay for that benefit.
Mr. Miller of California. I agree.
I guess I am admitting I am getting old, but I have been in
the real estate and building industry for over 40 years and I
really have tremendous respect for appraisers, especially when
I used to make application to a bank to build a subdivision and
they relied on their usually in-house appraiser to go out and
give a fair market appraisal because they were taking a risk
lending me the money, so--and the individual actually went out
and did what I considered a fair market appraisal. They did a
good job.
And when we would buy or sell the house they would take and
go and appraise the individual house and they based it on--they
appraised the house the block away and they appraised the house
a mile down the road, and they really understood the area. And
what we did with HVCC was overturn the apple cart to such a
degree that nobody has figured out, even though we have
directed them, how to put it back the way it was.
Government doesn't change rapidly. For some reason, they
did with HVCC, but coming back the other way, it has not done a
good job.
I think it has done a disservice to the appraisers in this
country who do excellent work. It has hurt them. It has created
a situation where the lenders are no longer having appraisals
to compare with theirs and they can't deal with the issues of
errors like we could in the past, having multiple appraisals,
and the appraisal can't be used somewhere else because one
person has already paid for it and it is proprietary.
And we have created a situation where they are putting out
and they are bidding these things on a bulk basis and whoever
gives them the best price is going to get all of them,
irrespective of the letter you read to me about geography.
I took notes on what you said earlier, and you talked about
geography, you talked about fully capable, and you talked about
guidance. Every one of them was followed with an if, and
proximity doesn't matter if, fully capable if, provide guidance
if. The problem is defining if. I had--Bill Clinton of what the
definition of is is, but ``if'' opens up a huge problem that we
started and we have to correct.
Now, the REALTORS are out trying to provide a service to a
buyer and seller. The mortgage brokers are trying to provide a
service to the buyer, seller, REALTOR. And the appraisers are
trying to provide service to everybody. And we have put them in
such a difficult situation that it is just not working, and we
have put them in a situation where it is, I believe, in some
fashion stifling the ability of the economy to recover because
we have decimated value in homes out there with this downturn
in the economy that we are not doing what is necessary that we
have hit a bottom to start building it back up or letting it
come back on a natural basis.
We are stepping it steps and we are stopping it right there
because we have mandated things that don't work. And now I hope
somebody is starting to listen that, ``Hey, we are not happy
with what we did; we messed up. But we are also not happy with
you not listening to us wanting you to correct what we did
wrong,'' and that is a problem today.
We have to fix it. It has to be done, and somebody needs to
listen.
And, Madam Chairwoman, you have been more than generous. I
would yield back my time twice. Thank you.
Chairwoman Biggert. Thank goodness.
Mr. Kelly. Madam Chairwoman?
Chairwoman Biggert. Mr. Kelly?
Mr. Kelly. Might I just respond quickly to Congressman
Miller's--I appreciate your summary and the description of the
plight and I agree with much of what you said. However, I don't
believe that you should consider legislating on the basis of
anomalies or hearsay.
I have heard the stories, too, about--
Mr. Miller of California. And I didn't mean to do that--
Mr. Kelly. I know you wouldn't, and I appreciate that. But
AMCs--there are 350 of them in the country. Are they all the
best and good? No. Are there good and great ones? Yes, there
are, and I think they are associated with my association. But
they do, indeed, provide real value to the process, and the
reputable AMCs indeed do help protect the appraiser but they
also allow for the types of transactions that you are talking
about to be facilitated.
We mentioned in our testimony earlier that BPOs, ABMs, and
other methodologies can be utilized to either check appraisals
or to give a sense of what the trends are in any given
neighborhood or any given property, and those sorts of tools
are very much available and in use in today's world.
I was delighted to see my friend Karen Mann using an iPad
to give her testimony today. And as you know from your real
estate experience, the big technology of the day back in our
day was the memory card in a Selectric typewriter.
So things have changed. Things are, indeed, available--
Mr. Miller of California. Sure.
Mr. Kelly. --today that can help, I think, go to the issues
that--
Mr. Miller of California. Ms. Stephens, what is your
opinion on what he just said?
Ms. Stephens. I think that there are a couple of things
that are incumbent on all of us and that we need to make sure
change, and one of those is that lenders are held accountable
for these appraisals and for the opinions and for their
actions. But we also need to make sure that people who are
regulating this industry, who are the regulators who are coming
in, are well-versed and that we have a sufficient staff to take
care of the problems that are coming and to make sure that what
is happening in the appraisal business is well-maintained and
understood as they try to do their job.
Mr. Miller of California. Madam Chairwoman, if you give me
1 second--Mr. Kelly, I agree with--I am not disagreeing with
what you said. What I was saying is we all make mistakes. We
did. Congress did. And we came back and tried to correct that.
But what we did was exclude everybody from being able to be
involved and participating in this appraisal process--use
matching appraisals dealing with areas we think that were done
wrong, errors that might have been made. And they happen in
appraisals. They just do. Happens in every business.
But we have taken and excluded that ability to be
competitive, comparative, and being to deal with mistakes that
just occur. And that is what I am saying is where we have
messed up. It is not impugning any appraiser anywhere. It is
saying, let's get back to a system of accountability and
portability and reliability.
And that was all I was saying, so if anybody in any way
took any statement impugning anybody it was never intended to
be that way. I am saying we goofed up. And other people make
mistakes, too. Let's get back to a system where we can correct
those mistakes and come up with something that is really good
for everybody.
And thank you, Madam Chairwoman.
Chairwoman Biggert. Thank you.
I will recognize myself for 5 minutes.
In that line of thinking, Ms. Stephens, you have offered an
alternative regulatory structure for real estate appraisers.
How would this structure differ from the one we have today?
Ms. Stephens. Let me start by emphasizing that what the
Appraisal Institute is speaking about and what we are proposing
is not a self-regulatory organization, like some have
mentioned. Self-regulatory organizations involve industry,
whereas the national mortgage licensing system is owned and
operated by bank regulators, in this case State bank
supervisors.
Those are the fundamentals of the State appraiser
certification and licensure and adherence to enforceable
Uniform Standards of Professional Appraisal Practice would
remain unchanged. At a high level, as I alluded to before, the
current regulatory structure assumes that States are not
capable of administering a system of certification, creating a
specific agency to intervene with the process. The mortgage
licensing system assumes that a State can assume the
responsibility and administer State certification, maintaining
a Federal presence out of a last resort.
For many years, Congress and others have sought a way to
advance regulator communication, and this mortgage licensing
system has developed a solution. We understand that they are
offering the system to State regulators outside the mortgage
loan origination business, and as there are common problems
that all State regulators face. So it would not be elite
appraiser regulators to participate in this system.
Thank you.
Chairwoman Biggert. Thank you.
And then, just one last question. Ms. Mann, on page 2 of
your testimony, you call a Federal Reserve rule on customary
and reasonable fees as required by Dodd-Frank, ``stunning and
completely inappropriate,'' and you also mention that this rule
creates a loophole. Could you expound on these points?
Ms. Mann. Let me catch up with you here.
Chairwoman Biggert. Okay. Page 2.
Ms. Mann. It creates a loophole whereas the AMCs were
allowed to go out and check customary fees, but within the
scope of their investigation they used AMC fees as part of the
equation, as part of the array. We feel that customary fees
should be outside of the AMC realm and it should be from the
general marketplace.
For instance, V.A., FHA, appraisals done for other
purposes, whether it be for dissolution or for estate work,
just to get an ideas as to what the customary fee is for an
independent appraiser in the field trying to make a living in
their small business.
Chairwoman Biggert. Okay.
Mr. Kelly, do you have a response to that?
Mr. Kelly. Yes, I do. We believe that appraisers should be
paid appropriately. Fees for appraisers--compensation for
appraisers--has always been set by the market. It is a supply
and demand equation, quite frankly. Appraisers indeed deserve a
reasonable, customary fee to be paid for the services that they
provide.
The notion that AMCs are somehow driving down fees for
appraisers I think is really mistaken. We don't set fees for
appraisers; we work for lenders. We are the agents of the
lender. We are doing the risk assessment pieces of what the
lenders have traditionally done. We provide, as I indicated in
our testimony, services for lenders and for appraisers.
One of the things that I have been told in all the years
that I was with the Appraisal Institute is that one of the
largest costs for appraisers was marketing. That in addition to
the risk--no insurance and warranties and those types of things
are real costs for appraisers, say, doing retail assignments.
Much if not all of that has been offloaded to the AMCs, and
so there is a sharing of that compensation. That risk and those
duties are no longer done by the traditional appraiser and the
consequent fee that they get is one that they agree to and have
been negotiated with to say, ``Will you go do this assignment
on 123 Maple? It is a 1004, etc., etc. What is your fee?'' They
say it is $300 or whatever it might be, and you strike an
agreement.
So there may be anomalies on that, just like we have talked
about anomalies on traveling, but those are truly anomalies, as
far as I can tell. I haven't seen any evidence of that--
Chairwoman Biggert. Thank you.
Would anyone else like to comment on that?
Mr. Berenbaum?
Mr. Berenbaum. Thank you very much.
I think it is very important to distinguish the importance
of what has happened over the past 8 years. At the height of
the market, 60 percent of mortgages were originated by mortgage
brokers, the majority of whom were professional lenders.
However, we all know that we saw many problematic
nontraditional, subprime loans. We also saw issues where
appraisers were working exclusively with companies such as
Ameriquest or brokers and they were overvaluing properties.
The intent of the Home Valuation Code of Conduct was to
ensure that arm's length transaction, which was part of USPAP.
We agree it should be changed.
The reality today, jumping forward to today, is some of the
unintended consequences of efforts to improve performance in
the marketplace. Appraisers tell us, when we ask them about
valuations given to consumers, with regard to accuracy issues,
in the past they would have a day or more to produce an
appraisal for a lender. Today, AMCs expect them to do two to
three appraisals in the same time period.
The fact of the matter is, appraisers are leaving the
practice, the profession, in droves because they can't make
ends meet. That is not a product of quality. These appraisers
are committed to providing quality products.
But it is a product, unfortunately, of a changing
marketplace, and what we are not seeing, and I hope we do see,
back to the purpose of this hearing, is that we do see, in
fact, the subcommittee working with the CFPB, working with the
prudential regulators, to ensure safety and soundness and the
return of robust lending.
Thank you.
Chairwoman Biggert. Thank you.
I ask unanimous consent to insert the following material
into the record: a June 28, 2012, statement from the National
Association of Home Builders; a June 28, 2012, statement from
the American Enterprise Institute; a June 28, 2012, statement
from the American Guild of Appraisers; a June 28, 2012,
statement from the Mortgage Bankers Association; a June 28,
2012, statement from the Dallas-Fort Worth Association of
Mortgage Brokers; and a June 28, 2012, statement from the
Leading Builders of America.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for Members to submit written questions to these
witnesses and to place their responses in the record.
With that, I would really like to thank you for your
expertise that you have brought to this panel, and for helping
us as we move forward. And so, I thank you all for being here.
And with that, this hearing is adjourned.
[Whereupon, at 12:06 p.m., the hearing was adjourned.]

A P P E N D I X

June 28, 2012

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