Real estate can be valued using a number of methods, including  appraisals, broker price opinions (BPO), and automated valuation models  (AVM). The Widespread Use of Appraisals and the Sales Comparison Approach Reflect Their Relative Advantages for Valuations in Mortgage Originations

		Available Data Indicate That Appraisals Are the Most Commonly Used Valuation Method for Mortgage Originations

Available data, lenders, and mortgage industry participants we spoke with  indicate that appraisals are the most frequently used valuation method for  home purchase and refinance mortgages. The enterprises and FHA require that appraisals  provide an estimate of market value at a point in time and reflect  prevailing economic and housing market conditions. Recent Policy Changes May Affect Consumer Costs for Appraisals, while Other Policy Changes Have Enhanced Disclosures to Consumers

		Consumer Costs for Appraisals Vary by Geographic Location, Appraisal Type, and Property Complexity

Lenders generally require consumers to pay for costs associated with  obtaining appraisals, which can include fees paid to appraisers and  appraisal firms for providing the appraisal and fees charged by AMCs that  lenders often use to administer the appraisal process. How the New Requirement That Appraisers Be Paid Customary and Reasonable Fees Will Affect Consumer Costs Is Unknown

A provision in the Act that requires lenders to pay appraisers a  “customary and reasonable fee” may affect consumer costs for  appraisals, depending on interpretation and implementation of federal  rules. If actual costs are higher than this  threshold, the lender is responsible for making up the difference,  providing lenders with a greater incentive to estimate costs accurately. Conflict-of-Interest Policies Have Changed Appraiser Selection Processes, with Implications for Appraisal Oversight

		Recent Policies Address Conflicts of Interest by Enhancing Appraiser Independence Requirements

Recently issued policies reinforce long-standing requirements and  guidance addressing conflicts of interest that may arise when parties  have an incentive to unduly influence or pressure appraisers to provide  biased values. Greater Use of Appraisal Management Companies Highlights Potential Shortcomings in Existing Oversight and Has Raised Questions about Appraisal Quality

Although reliance on AMCs has increased, direct federal oversight of  AMCs is limited. Similarly, the enterprises review  lenders’ policies and controls but not those of AMCs because lenders are  responsible for ensuring that AMCs meet the enterprises’ requirements. Officials from the enterprises said they do not review AMCs directly  because they do not have business relationships with AMCs. While views on the impact of AMCs on appraisal quality differ, Congress  recognized the importance of additional AMC oversight in enacting the  Act by requiring each state to register and regulate AMCs and placing the  supervision of AMCs with state appraiser regulatory boards. In addition,  the Act requires the federal banking regulators, along with FHFA and the  Bureau of Consumer Financial Protection, to establish minimum  standards for states to apply when registering AMCs, including  requirements that appraisals coordinated by an AMC comply with USPAP  and be conducted independently and free from inappropriate influence  and coercion. The Act  requires the federal banking regulators and other federal agencies to set  minimum state standards for registering AMCs, which provides an  opportunity for the regulators to address these areas of concern and  promote more consistent oversight of these functions, whether performed  by lenders or AMCs. Doing so could help to provide greater assurance to  lenders, the enterprises, and federal agencies of the quality of the  appraisals provided by AMCs. Recommendation for Executive Action

To help ensure more consistent and effective oversight of the appraisal  industry, we recommend that the heads of FDIC, the Federal Reserve,  FHFA, NCUA, OCC, and the Bureau of Consumer Financial Protection— as part of their joint rulemaking required under the Act—consider  including the following areas when developing minimum standards for  state registration of AMCs: criteria for selecting appraisers for appraisal  orders, review of completed appraisals, and qualifications for appraisal  reviewers. We examine (1) the use of  different valuation methods and their advantages and disadvantages; (2)  factors that affect consumer costs and requirements for disclosing  appraisal costs and valuation reports to consumers; and (3) conflict-of- interest and appraiser selection policies, and views on the impact of these  policies on industry stakeholders and appraisal quality. We also consider  the impact of the Home Valuation Code of Conduct (HVCC) throughout  the report. We requested aggregated data on valuations  for mortgages originated in these years from Fannie Mae and Freddie  Mac (the enterprises), the five largest lenders (as determined by the  dollar volume of total mortgage originations in 2010), six of the largest  appraisal management companies (AMC) (as identified by industry trade  associations), and three private vendors of mortgage and valuation  technology. We interviewed federal banking regulators, lenders, appraisers, AMCs,  state regulatory officials, and other mortgage industry participants to  discuss changes in policies and their impact on the appraisal process,  industry participants, and appraisal quality.
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 Wall Street Reform and Consumer Protection Act (the Act) mandated that GAO study the various valuation methods and the options available for selecting appraisers, as well as the Home Valuation Code of Conduct (HVCC), which established appraiser independence requirements for mortgages sold to Fannie Mae and Freddie Mac (the enterprises). GAO examined (1) the use of different valuation methods, (2) factors affecting consumer costs for appraisals and appraisal disclosure requirements, and (3) conflict-of-interest and appraiser selection policies and views on their impact. To address these objectives, GAO analyzed government and industry data; reviewed academic and industry literature; examined federal policies and regulations, professional standards, and internal policies and procedures of lenders and appraisal management companies (AMC); and interviewed a broad range of industry participants and observers..

What GAO Found

Data GAO obtained from the enterprises and five of the largest mortgage lenders indicate that 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, reflecting their perceived advantages relative to other methods. Other methods, such as broker price opinions and automated valuation models, are quicker and less costly but are viewed as less reliable and therefore generally are not used for most purchase and refinance mortgage originations. Although the enterprises and lenders GAO spoke with do not capture data on the prevalence of approaches used to perform appraisals, the sales comparison approach--in which the value is based on recent sales of similar properties--is required by the enterprises and the Federal Housing Administration and is reportedly used in nearly all appraisals. Recent policy changes may affect consumer costs for appraisals, while other policy changes have enhanced disclosures to consumers. Consumer costs for appraisals vary by geographic location, appraisal type, and complexity. However, the impact of recent policy changes on these costs is uncertain. Some appraisers are concerned that the fees they receive from AMCs--firms that manage the appraisal process on behalf of lenders--are too low. A new requirement to pay appraisers a customary and reasonable fee could affect consumer costs and appraisal quality, depending on how new rules are implemented. Other recent policy changes aim to provide lenders with a greater incentive to estimate costs accurately and require lenders to provide consumers with a copy of the valuation report prior to closing. Conflict-of-interest policies, including HVCC, have changed appraiser selection processes and the appraisal industry more broadly, which has raised concerns among some industry participants about the oversight of AMCs. Recently issued policies that reinforce prior requirements and guidance restrict who can select appraisers and prohibit coercing appraisers. In response to market changes and these requirements, some lenders turned to AMCs to select appraisers. 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 for appraiser selection, appraisal review, and reviewer qualifications but that they generally do not directly examine AMCs' operations. Some industry participants said they are concerned that some AMCs may prioritize low costs and speed over quality and competence. The Act places the supervision of AMCs with state appraiser licensing boards 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 AMCs. A number of states began regulating AMCs in 2009, but the regulatory requirements vary. Setting minimum standards that address key functions AMCs perform on behalf of lenders would enhance oversight of appraisal services and provide greater assurance to lenders, the enterprises, and others of the credibility and quality of the appraisals provided by AMCs.

What GAO Recommends

GAO recommends that federal banking regulators, the Federal Housing Finance Agency (FHFA), and the Bureau of Consumer Financial Protection consider addressing several key areas, including criteria for selecting appraisers, as part of their joint rulemaking under the Act to set minimum standards for states to apply in registering AMCs. The federal banking regulators and FHFA agreed with or indicated they would consider the recommendation.