Ken:
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This is going to be a loooong post, even by my typically long-winded standards, so a fresh cup of coffee might be in order at the start, for those who intend to slog on through to the end.
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I have reviewed the Independent Valuation Protection Institute (IVPI) proposal, Q & A, and IVPI endorsement, but find too many flaws in the proposal to offer my endorsement of the IVPI proposal as it stands.
The IVPI proposal does a good job of summarizing the symptoms of the basic flaws in the current system, but does not boil it down to the core cause of those symptoms and then over-reaches in recommending the creation of a national syndicate, for lack of a better term, through which all appraisals for conforming loans must flow.
The core cause of virtually all appraisal-related problems in the current scenario is that too many folks with “skin” in the deal have input into the selection of appraisers. Even where organizations have erected meaningful firewalls between the commission-incentivized lending function and the selection of a specific appraiser for a specific assignment, they typically allow those same players to participate, if not directly control, the roster of possible appraisers eligible for each assignment. When lending personnel have any input at all into the roster of eligible Appraisers, they will always lean in favor of those Appraisers who always give them the most-optimistic possible value. While the IVPI proposal, in the extremely unlikely event that it were enacted as-proposed, would cure that core problem, it would do so at a huge cost to both lenders and consumers, and there are many more-efficient cures for that particular problem.
Establishment of a centralized “protected” repository for all appraisal reports is another notion which almost begs for abuse. To fulfill their mission, the IVPI would not need complete copies of every report; they need only some data elements from each report to allow ample verification of a given appraisal report’s authenticity. For instance, upon completion of a report, several data elements which are unique to that report (e.g., Address, Parcel ID #, Client, effective date, signature date, number of pages, opinion of value, the first 3 digits of each comparable sale’s address, etc, etc.) could be automatically sent to the central register. The system could then cross-reference each appraisal report, review, complaint, and note using the same identifying information. Under that simpler and far lower-cost system, lenders and investors could easily verify the authenticity of a given report using unique logon / password information included within that report. The software vendors could easily hammer out the details to make such reporting of limited data using the XML or AI Ready standards a highly automated and efficient process. To fulfill any audit function of the IVPI, they can request full copies from the lender, Appraiser, or both whenever they deem it necessary, but maintaining a gigantic repository of a complete copy of every appraisal report is not necessary, efficient, or prudent.
The proposed Centralized Ordering System is also a non-starter, for me. Although it would certainly relieve the various pressures of competition, competition is almost never a negative factor in any market. In fact, over the past 15 years, those pressures have resulted in huge improvements in Appraiser efficiency AND reliability. In such a system, who decides what fee is appropriate for each order? If Appraisers are to set their own fees – in an environment with non-competitive pricing - I think most Appraisers would immediately and substantially increase their fees, and you can count me in on that trend. At the same time, the competitive pressures that foster efficiency and prompt communications with clients would be drastically reduced, inevitably resulting in increased incentives to use alternative valuation products. Even if the IVPI sets the fees for each region, the resulting lack of competitive pressures would inevitably lead to a decline in the incentives for any Appraiser to adopt new technologies or develop skills that set them apart from their competition, because there will not be any competition.
Training of future generations of Appraisers will be even-less economically feasible under the proposed rotational system, which allows registration of only certified / licensed Appraisers. Even though a directly-supervised trainee SHOULD increase an appraisal company’s capacity – roughly equal to ½ an experienced Appraiser by the end of the 1st year – the trainee will not be represented on the rotational roster and the Supervisor will be eligible only for the same number of assignments as any other individual Appraiser, despite having the additional capacity of the Trainee. So, in the proposed model, we have active disincentives to take on the task of training future Appraisers. How exactly does that help the profession?
Another major problem with the proposal of a centralized repository for all orders and reports is that the existing AMCs will use their deep pockets to prevent any such mandate. Count on it. There are no deep pockets on the IVPI (as proposed) side of the battle, so that die is fairly well set from the start. Also, since several of the proposed IVPI functions step squarely on the toes & arches of several entrenched government bureaucracies and quasi-governmental agencies, the AMCs will have ample help in their fight.
While proposing such comprehensive systematic changes, I was surprised that the IVPI proposal did not recommend that Appraisers not only be relieved of the responsibility of reviewing any contract of sale, but specifically prohibit any party in the transaction from providing any such information to the Appraiser. We do not need the contract to do our job, consideration of the contract cannot possibly result in a higher level of objectivity on the part of the Appraiser, and such consideration can tend to skew the results – even if only by small amounts. Since enhancing Appraiser objectivity is the goal once all is said and done, I am surprised that the IVPI proposal did not take that rational step of addition by subtraction.
The significant additional costs which would be added to the system by the IVPI proposal would further incentivize lenders to rely more-heavily on alternative valuation products, which are not nearly as reliable as a truly independent appraisal, but have the current benefits of being mostly immune to pressure and extremely low-cost. From an Appraiser’s perspective, any proposal which increases the incentives for lenders to use AVMs, BPOs, and other alternatives is not in my best interest. Looking at the broader perspective, it also seems that enactment of the IVPI proposal would result in a net zero improvement in overall quality of valuations, since any improvement in appraisal quality due to the reduction of pressure on Appraisers would be offset by the inevitable increase in use of less-reliable valuation methods – methods which are used by the lenders only when that method spits out the “right” number, resulting in a great deal of systematic bias. (BTW, everyone in the media is talking about losses due to high appraisals, but I haven’t seen the results of any studies regarding the loss-rate on AVM valuations in comparison to Appraiser valuations over otherwise similar loan pools. Is anyone familiar with such a study & willing to share?)
Establishment of Review Appraiser qualifications and certifications is a fine idea, but can more-easily be accomplished within the existing framework without the additional layer of regulation and inevitable bureaucracy proposed by the IVPI. The loss-mitigation sections of the existing GSEs already know which Appraisers are the most-reliable Reviewers. They can easily offer a course or courses for certification and already maintain their own internal audit process for their Reviewers. Duplication of that existing function does not seem to be necessary.
The proposal to suspend any Appraiser who has a complaint forwarded to the Appraisal Boards of the various states puts the cart squarely before the horse or, literally, the sentence before the verdict. In essence, the Appraiser is told to find some other way to earn a living until such time as the State Board sees fit to convict them of something. The hallowed presumption of innocence, in typical bureaucratic fashion, is tossed out the window for the sake of procedural expedience. Since I have never been in favor of empowerment of any bureaucracy, I will never support that notion.
In the end, almost all of the problems evolving from the systematic pressure for Appraisers to “hit the number” can be cured by thorough implementation and continuous compliance monitoring of section 4 of the Home Valuation Code of Conduct (HVCC). The IVPI proposal over-reached far beyond the framework of the HVCC and would establish a de facto National Board. Although an independent National Board might not be a horrible idea, adding that Board as another layer of bureaucracy on top of the existing framework is a horrible idea.
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Fred W Holtsberry
Mid-Ohio Appraisal Services