for assessing the completeness, adequacy, and appropriateness of  these institutions’ appraisal and evaluation policies and procedures. Appraisal Subcommittee. Among other things, ASC is responsible for (1)  monitoring and reviewing the practices, procedures, activities, and  organizational structure of the Appraisal Foundation—including  making grants to the Foundation in amounts that it deems appropriate  to help defray costs associated with its Title XI activities; (2)  monitoring the requirements that states and their appraiser regulatory  agencies establish for the certification and licensing of appraisers; (3)  monitoring the requirements established by the federal banking  regulators regarding appraisal standards for federally related  transactions and determinations of which federally related  transactions will require the services of state-licensed or -certified  appraisers; and (4) maintaining a national registry of state-licensed  and -certified appraisers who can perform appraisals for federally  related transactions. The Widespread Use of Appraisals for Mortgage Originations Reflects Their Advantages Relative to Other Valuation Methods

Available data and interviews with lenders and other mortgage industry  participants indicate that appraisals are the most frequently used  valuation method for home purchase and refinance mortgage  originations. Appraisals provide an opinion of market value at a point in  time and reflect prevailing economic and housing market conditions. Some mortgage industry stakeholders have  argued that wider use of the cost approach in particular could help  mitigate what they viewed as a limitation of the sales comparison  approach. The data we obtained did not  allow us to analyze the differences between the values appraisers  generated using the different approaches. Conflict-of-Interest Policies Have Changed Appraiser Selection Processes, with Implications for Appraisal Oversight

Recently issued policies reinforce long-standing requirements and  guidance designed to address conflicts of interest that may arise when  direct or indirect personal interests bias appraisers from exercising their  independent professional judgment. AMCs are third parties that, among other things, select appraisers for  appraisal assignments on behalf of lenders. Greater use of AMCs has raised questions about oversight of these firms  and their impact on appraisal quality. AMC officials we spoke with said that they had processes  that addressed these areas of concern—for example, using an automated  system that identified the most qualified appraiser based on the  requirements for the assignment, proximity to the subject property, and  performance metrics such as timeliness and appraisal quality. While the impact of the increased use of AMCs on appraisal quality is  unclear, Congress recognized the importance of additional AMC oversight  in enacting the Dodd-Frank Act by requiring state appraiser regulatory  boards to supervise AMCs. The Dodd-Frank Act requires the federal  banking regulators, CFPB, and FHFA to establish minimum standards for  states to apply in registering AMCs, including requirements that  appraisals coordinated by an AMC comply with USPAP and be conducted  independently and free from inappropriate influence and coercion. Such reinforcement could help to provide greater  assurance to lenders, the enterprises, and federal agencies of the quality  of the appraisals provided by AMCs. To help ensure more consistent and effective oversight of the appraisal  industry, we recommended in our July 2011 report that the heads of the  federal banking regulators, CFPB, and FHFA—as part of their joint  rulemaking required under the Dodd-Frank Act—consider including  criteria for the selection of appraisers for appraisal orders, review of  completed appraisals, and qualifications for appraisal reviewers when  developing minimum standards for state registration of AMCs. federal banking regulators and FHFA agreed with or indicated that they  would consider our recommendation but as of June 2012 had not issued  a rule setting minimum standards for state registration of AMCs. Several Weaknesses Have Potentially Limited ASC’s Effectiveness in Performing Its Title XI Functions

ASC has been performing its monitoring role under Title XI, but several  weaknesses have potentially limited its effectiveness. In addition, ASC faces potential  challenges in implementing some Dodd-Frank Act provisions. Monitoring States’ Compliance with Title XI

GAO-11-653. In addition to this procedural weakness, ASC has functioned without  regulations and enforcement tools that could be useful in promoting state  compliance with Title XI. Monitoring the Appraisal Requirements of the Federal Banking Regulators

Although Title XI charges ASC with monitoring the appraisal requirements  of the federal banking regulators, ASC has not developed policies and  procedures for carrying out this responsibility. The absence of policies and procedures specifying monitoring tasks and  responsibilities limits accountability for this function and is inconsistent  with federal internal control standards designed to help ensure  effectiveness and efficiency in agency operations. Further, one ASC board member told us that ASC’s  monitoring of the federal financial regulators was more limited than its  monitoring of states because (1) board members from the federal  financial regulatory agencies are knowledgeable of the appraisal  requirements of their agencies, (2) the federal regulators’ interagency  process for developing appraisal guidelines (in place since 1994) has  reduced the need for monitoring the consistency of guidelines across  agencies, and (3) monitoring the states’ appraiser requirements requires  in-depth review of state processes for licensing, certification, and  enforcement. However, determinations about what activities are Title  XI-related are not always clear-cut. To address this limitation, we  recommended that ASC develop specific criteria for assessing whether  the grant activities of the Appraisal Foundation were related to Title XI   In  and include these criteria in ASC’s policy and procedures manual.June 2012, ASC officials told us that they had been developing these  criteria and planned to finalize them by August 2012.
Why GAO Did This Study

Real estate valuations, which encompass appraisals and other estimation methods, have come under increased scrutiny in the wake of the recent mortgage crisis. The Dodd-Frank Act codified several independence requirements for appraisers and requires federal regulators to set standards for registering AMCs. Additionally, the act expanded the role of ASC, which oversees the appraisal regulatory structure established by Title XI of FIRREA. The act also directed GAO to conduct two studies on real estate appraisals. This testimony discusses information from those studies, including (1) the use of different real estate valuation methods, (2) policies on appraiser conflict-of-interest and selection and views on their impact, and (3) ASCs performance of its Title XI functions. To address these objectives, GAO analyzed government and industry data; reviewed academic and industry literature; examined policies, regulations, and professional standards; and interviewed industry participants and stakeholders.

What GAO Found

Data GAO obtained from Fannie Mae and Freddie Mac (the enterprises) and five of the largest mortgage lenders indicate that appraisalswhich provide an estimate of market value at a point in timeare the most commonly used valuation method for first-lien residential mortgage originations. Other methods, such as broker price opinions and automated valuation models, are quicker and less costly but are viewed as less reliable. As a result, they generally are not used for most purchase and refinance mortgage originations. Although the enterprises and lenders GAO spoke with did not capture data on the prevalence of approaches used to perform appraisals, the sales comparison approachin which the value is based on recent sales of similar propertiesis required by the enterprises and the Federal Housing Administration. This approach is reportedly used in nearly all appraisals.
Conflict-of-interest policies have changed appraiser selection processes and the appraisal industry more broadly, raising concerns about the oversight of appraisal management companies (AMC), which often manage appraisals for lenders. Recent policies, including provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), reinforce prior requirements and guidance that restrict who can select appraisers and prohibit coercion. In response to market changes and these requirements, some lenders have turned to AMCs. Greater use of AMCs has raised questions about oversight of these firms and their impact on appraisal quality. Federal regulators and the enterprises said they hold lenders responsible for ensuring that AMCs policies and practices meet their requirements but that they generally do not directly examine AMCs operations. Some industry participants voiced concerns that some AMCs may prioritize low costs and speed over quality and competence. The Dodd-Frank Act requires state appraiser licensing boards to supervise AMCs and requires the federal banking regulators, the Federal Housing Finance Agency, and the Bureau of Consumer Financial Protection to establish minimum standards for states to apply in registering them. Setting minimum standards that address key functions AMCs perform on behalf of lenders could provide greater assurance of the quality of the appraisals that AMCs provide. As of June 2012, federal regulators had not completed rulemaking to set state standards.
The Appraisal Subcommittee (ASC) has been performing its monitoring role under Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), but several weaknesses have potentially limited its effectiveness. For example, ASC has not clearly defined the criteria it uses to assess states overall compliance with Title XI. In addition, Title XI charges ASC with monitoring the appraisal requirements of the federal banking regulators, but ASC has not defined the scope of this functionfor example, by developing policies and proceduresand its monitoring activities have been limited. ASC also lacks specific policies for determining whether activities of the Appraisal Foundation (a private nonprofit organization that sets criteria for appraisals and appraisers) that are funded by ASC grants are Title XI-related. Not having appropriate policies and procedures is inconsistent with federal internal control standards that are designed to promote the effectiveness and efficiency of federal activities.

What GAO Recommends

GAO previously recommended that federal regulators consider key AMC functions in rulemaking to set minimum standards for registering these firms. The regulators agreed with or said they would consider this recommendation. GAO also 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. See G AO-11-653 and GAO-12-147 .