US-less PAP?

A recent article in the Cincinnati Enquirer, Sheriff's appraisers cash in, serves generally to irritate, and is illustrative of a problem that exists in the appraisal world. That problem is the total misunderstanding of the appraisal profession by the legal profession and the public at-large. It is partly a result of the "double-dipping" that attorneys are allowed; when an appraisal is needed for a legal reason, the attorney handling the case is legally permitted to do the valuation himself. He can then pocket the fee for both the appraisal and the legal work.

Further, the courts are able to alter the rules under which appraisals are performed; the Jurisdictional Exception Rule of the USPAP was specifically designed to step around any possible conflict between legal and appraisal ethics. (Normally, what is not ethical for an appraiser -- charging for an appraisal based on the amount of value opined -- is completely ethical for the legal profession, and those "ethics" are extended by court rules even to licensed and certified appraisers working for the courts.)

The passage of SB 185 by the Ohio Legislature in 2006 was supposed to tighten up protections for consumers and reduce the pressure by lenders on appraisers to perform unethically. It is simply too bad that the rules are still as full of holes as a block of Swiss cheese. The holes begin at the Federal level and worm their way down to the local courts.

Prior to the passage of FIRREA there was no requirement for appraisers to be licensed or regulated to do business with regard to Federally Related Transactions (FRTs). Those transactions are defined in the Code of Federal Regulations (CFR) as:

12 CFR § 34.42 (OCC), § 225.62 (Federal Reserve), § 323.2 (FDIC), and § 564.2 (OTS),

(f) Federally related transaction means any real estate-related financial transaction entered into on or after August 9, 1990, that:

(1) The Board or any regulated institution engages in or contracts for; and
(2) Requires the services of an appraiser.

(Also for NCUA, CFR § 722.2 (e))

FIRREA required that appraisers for FRTs be licensed. The licensing requirements were to be drawn up by the states, but had to meet the minimum requirements set by the Appraiser Qualifications Board of the Appraisal Foundation, which was under the oversight of the Appraisal Subcommittee.

Title XI of FIRREA (1989) - aka the Savings and Loan Bailout -- in Section 1113 (1) stated, "a State certified appraiser shall be required for all federally related transactions having a value of $100,000 or more ..." It was quickly realized by the banking industry that certified appraisers were in short supply and not only were appraisals somewhat costly, but that when done correctly, created a time lag in the closing process. In 1994, the regulations were modified to require appraisals only for FRTs that exceeded the de minimus amount of $250,000.

Thus, a Federally Related Transaction does not necessarily require an appraisal. (It has always been good business practice when lending money, however, to have some idea what sort of collateral might be backing the loan, and provides a type of legal defense for the bank -- blame it on the appraiser! -- if the loan goes bad.)

But then we come to the "holes in the cheese". First, of course, at the Federal level, is the de minimus. The vast majority of mortgage loans are under $250,000. That meant that the vast majority of appraisals for those loans could be done by unlicensed -- potentially incompetent -- individuals. This is not to imply that all unlicensed appraisers are incompetent. Nor does it establish that all licensed and certified appraisers exercise competence as defined by the USPAP. It simply points out that any valuation for a FRT under the de minimus amount does not necessarily have to be done under the USPAP. It can be an estimate based on an AVM, it can be performed by a real estate agent doing a simple CMA, or it can be a PFA number supplied by anybody. FIRREA leaves up to the states, individually, to determine who can do business as an appraiser.

Ohio is not a mandatory licensure state. That means that if someone decides one day to be an appraiser, he is one. It is that easy. I am not an advocate for mandatory licensure. That is how I got my start; I simply started doing appraisal work as a real estate agent. That does not mean that prior to obtaining my certification, I did not try to comply with the USPAP. I did try. I even performed appraisals for FRTs, and conscientiously attempted to provide credible value opinions for my clients. Fortunately, I was not faced with any complex appraisal problems during that time.

Under SB 185, the Ohio Revised Code was changed to read,

"Sec. 4763.13. (F) Except as otherwise provided in section 4763.19 of the Revised Code, nothing in this chapter shall preclude a person who is not licensed or certified under this chapter from appraising real estate for compensation.

Sec. 4763.19. (A) Subject to division (B) of this section, no person shall perform a real estate appraisal for a mortgage loan if the person is not licensed or certified under this chapter to do the appraisal. [my bolds]

(B) Division (A) of this section does not apply to a lender using a market analysis or price opinion, an internal valuation analysis, or an automated valuation model or report based on an automated valuation model, and any person providing that report to the lender, in performing a valuation for purposes of a loan application, as long as the lender does both of the following:

(1) Gives the consumer loan applicant a copy of any written market analysis or price opinion or valuation report based on an automated valuation model;

(2) Includes a disclaimer on the consumer's copy specifying that the valuation used for purposes of the application was obtained from a market analysis or price opinion or automated valuation model report and not from a person licensed or certified under this chapter."

Despite all the hullabaloo about consumer protection in SB 185, it simply gave the Attorney General a tool with which to beat on licensed and certified appraisers, and loan officers who were stupid enough to use such people, if they stepped out of line.

This brings us to the problem illustrated by the Cinci Enquirer article. There is no state requirement anywhere that appraisals done for foreclosure sales be done by competent people. The statute simply says that the appraisers must be "freeholders" and residents of the county. (At least the Federal District Court has required that the appraisers for its foreclosure suits be state certified appraisers and residents of that county.)

The article does state, however, that three of the six appraisers are licensed. Those three, under the USPAP, are not permitted to waive the requirements under Standards 1 and 2, since the Hamilton County Court of Common Pleas does not appear to have made any rulings that permit them to do so! At the very least, the certifications required by Standard 2 must be attached to their appraisal reports, and must be submitted even if the reports themselves are not in writing!

Some questions :

(1) Why have none of the licensed or certified appraisers in Hamilton County filed any complaints with the Division of Real Estate against the sheriff's licensed appraisers regarding violations of the USPAP? The appraisals are public records and part of the court documents (at least they are here in Summit County).

(2) Why have no attorneys for the people being foreclosed on grasped the opportunity to take any action?

My curiosity is piqued. I am going to do some research into some of the Summit County foreclosure sales, the appraisals done prior to foreclosure, and the actual prices obtained for the properties on the REO market. I have a hypothesis : there is a correlation between either the Auditor's appraised value (which is not market value) and the foreclosure appraisal value (which is supposed to be at market value), or between the outstanding loan balance and the foreclosure appraisal value. This may take some time, but stay tuned!!