Restoring confidence in the real estate market as well as establishing a foundation for sustainable economic growth relies on a series of reforms, with the appraisal system at the center, says a recent white paper from the National Association of Home Builders (NAHB).
A dysfunctional appraisal system is at the center of the market’s ongoing crisis in confidence, notes NAHB, which believes fundamental reform would help to reestablish a stable housing finance framework.
In 2012, NAHB formed an Appraisal Working Group, comprising of representatives from the financial and appraisal sectors and produced its white paper revealing specific recommendations.
The Group addressed the need for reform in four key areas, including regulatory framework and oversight; data and technology; professional standards; as well as practice, process and procedures.
Reforming the regulatory framework for real estate valuation to more effectively oversee standards, guidance and enforcement, according to NAHB, would ensure that valuation in housing finance occurs in a coordinated manner.
In some states, fees collected for appraiser licensing and certification are swept into a general fund are not utilized in appraisal/appraiser oversight and enforcement.
“States should retain primary responsibility for certifying and overseeing appraisers and the quality of their work,” writes NAHB. “Enforcement actions against licensees should continue to occur at the state level.”
Because there is a lack of housing data, especially in real time, NAHB is calling for the development of a database that includes national real property and supporting networks, as recorded data would facilitate the safe and efficient transfer of real property.
There are two considerations to creating a modern real estate data infrastructure.
First, there needs to be a mandatory registry of all real property, which NAHB says is essential for creating the real estate infrastructure and transact business.
The second consideration to modernizing real estate information is the mortgage-backed securities market.
Both of these considerations fall under the need to establish universal standards, says NAHB, to ensure that systems are adaptable and flexible to meet changing regulatory and market needs.
Licensing standards for appraisers is another area of concern.
Attention must also be paid to the Uniform Standards of Professional Appraisal Practice (USPAP), a complex document that often conflicts with practical appraiser application, the white paper finds.
“In establishing standards, the key principles in USPAP should be reaffirmed but the standards must be streamlined to be clear and readily understood,” writes NAHB.
Doing so would require a clear education and career path, including mentorship programs to become a licensed appraiser.
“A clear path to obtain a license with mandatory recertification every five years would address the complaint that the current stock of appraisers is not well trained or well educated,” writes NAHB. “A recertification program should be subject to continuing education, reexamination and peer review.”
As for the appraisal process, many have argued that the definition of market value be reexamined. This requires the reporting of market value, not merely the reporting of sale price.
In an attempt to achieve better quality appraisals, lenders have created overlay rule sets that have only increased the problem, notes NAHB, citing that a requirement that appraisers take a photo indicating that certain features of a residence function properly (lights work, toilets flush, etc.).
Appraisers should consider three approaches to value—cost, income and sales comparison, recommends NAHB, through the utilization of Interactive Valuation Models (IVM) to analyze large, statistical data sets.
“Today’s residential appraisal system remains in a state of uncertainty,” writes NAHB. “The current patchwork system cannot continue indefinitely. A key consideration must be to establish stability and restore confidence in the system that determines the value of mortgage collateral.”
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