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Department of Professional and Occupational Regulation
Guidance Document Change: Providing guidance to real estate appraisers and AMCs on the use of hybrid appraisals
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6/19/19  1:24 pm
Commenter: George Hatch

Be mindful of the unintended consequences
 

I am an independent fee appraiser from California - not Virginia - but I do understand USPAP, and one aspect of this controversy that many of the other comments being made are overlooking is the law of unintended consequences.  

When the Great State of Virginia makes changes to their licensing rules and regulations they affect ALL licensees in the state regardless of their scope of practice and ALL appraisals performed which are subject to the appraisal board's jurisdiction.    For this reason I believe as a matter of principle that a state legislature and a state appraisal board should always act slowly and with great deliberation with respect to how their actions will affect all of their licensees and all of the appraisal users, not just a portion of them.    

Most of these other comments have overlooked the point that the only consumer of an appraisal that was prepared for a lending institution's use is the lending institution itself.  The property owners, buyers, sellers and brokers are - by definition - third parties to the appraiser-client relationship and every appraiser understands this.   Every appraiser knows that it's none of these others' business what type and extent of appraisal a lender  chooses to use to make their decisions.  Every appraiser knows that if any of these other 3 parties want an appraisal of their own then they need to engage one separately and specific to their use. 

As far as appraisers using information gathered or aggregated by 3rd parties, we do it constantly and any appraiser who says otherwise is...underinformed.  We commonly make reference to title reports we didn't collect or assemble, to zoning determinations we didn't make by use of the source materials, to flood determinations we didn't make by use of the source materials, to descriptions and pics in the MLS listings we use, to imagery on Google Streets we didn't take and so forth.   In some cases we actually require additional information in our appraisal assignment be performed before we can complete our work.   Examples including but not limited to property surveys, letters from the local jurisdiction involving licensing and permits, 3rd party contractor's bid for repair or construction,  3rd party roof or mold inspection or a pest control inspection, etc.    

In that respect every appraisal we do can be called a hybrid that includes some information generated by the appraiser's own hand vs a generally much larger percentage of information gathererd and reported by various 3rd parties. 

So the notion that the use of 3rd party information sources about the subject in an appraisal is a bright red line that appraisers cannot cross is wholly and completely untrue.   This issue will become even more significant when complaints are made to the board concerning other types of appraisals - far more complicated in scope than a single family appraisal for performed for mortgage lending purposes.  

Regardless of assignment type, in each of these uses of 3rd party information the appraiser is compelled to decide for themselves whether or not they have reason to question the accuracy of the information, whether or not they consider the information sufficiently credible.  The use of 3rd party inspectors for the site work in a residential appraisal does not create any new protocols for the appraisers doing the valuation - it's just more of the same they've been doing all along except that this time it involves the info about the subject's physical attributes.  The appraisers will still have to review the information in those reports s closely enough to form the opinions they will be using in their analyses - whether the opinions they form agree with or disagree with any opinions or ratings expressed in those inspection reports.   Which additional opinions quite honestly can be considered redundant to the appraiser's analysis.  It is a certainty that the appraisers will disagree with those opinions in some cases anyway.     

For example, let's say a broker or a professional home inspector or even a layperson performs an inspection and they express their opinions that the quality of the structural improvements is "Average" in comparison to other nearby properties or ranks as a "4" on some fixed external benchmarking system that has quality ranges of 1-10.  As an appraiser I will be compelled to review that material and form my own conclusions about the quality regardless of what opinions the person performing that inspection expresses.   I can only be said to be using or relying on that other person's opinions if/when I don't form any opinions of my own.   In that scenario I would be making the assumption - which would require disclosure in my report -  that the other person's opinions were reasonable and sufficiently usable for me to use without forming my own opinions.   

If the above scenario seems ridiculous it's because it is ridiculous.  In real life most every appraiser will review that information along with all the other information they're using and they will form their own opinions about the credibility of that information, whether they have reason to challenge the accuracy of the factual information and how they think the subject's attributes compare to the information they have about the other properties they are using as comparables in their analysis.  Comp information, I might add, that is exclusively aggregated and reported by 3rd parties who also aren't working for the appraiser and whose work is also not attributed as being part of the analyses, opinions and conclusions that the appraiser is performing.  Which, by the way, is the distinction between appraisal practice as referenced in USPAP and the VA regs vs the definition of valuation services of which appraisal practice is but a small subset.   

Let's discuss the distinction between the meaning of valuation services over much of which the VA Appraisal Board has no jurisdiction vs appraisal practice over which the Board does have jurisdiction.   If a company hires a professional engineer, or a technical home or commercial building inspector, or a broker, or a layperson to perform an inspection - then how does their work fall under the definition of appraisal practice as referenced in USPAP or the state's appraisal regs?    In each case the individual would not be allowed by state regs to represent themselves as an appraiser (doing so violates existing statute).  They are not expected by their respective clients or report users to be valuing that property, and there is no reason to doubt that those reports might have multiple uses for multiple types of decisions by the user besides just the potential use of that information by an appraiser.   

In real life there is no such thing as a USPAP-compliant property inspection, and it would actually be unethical for even a licensee engaged to perform such an inspection in isolation of the appraiser's supervision and control to present themselves as a USPAP-compliant property inspector or that their inspection reports were USPAP-compliant.   And as much as some of the other commenters might like to say otherwise, none of them are capable of arguing that point because the ETHICS RULE in USPAP explicitly prohibits appraisers from misrepresenting themselves as appraisers when performing other types of valuation services outside of appraisal practice.   We must never lose sight of the fact that appraisal practice as defined is just a small subset of the wider range of valuation services as that term is defined.

In fact, the meanings of these definitions to which I am referring are so inconvenient to the financial interests of appraisers that many of them are now advocating that those definitions be changed to make exceptions or exemptions in order to drag the role and the actions of the property inspector into the definition of an appraiser.  This is despite the fact that those inspectors don't do anything other than catalog the property attributes.  These inspectors won't research any other aspect of the subject's physical, legal, or economic attributes, they won't perform any analysis of the highest and best use of those improvements to the site beyond perhaps commenting that the property is similar to other properties in the neighborhood, they won't be analyzing any aspect of the market, the market conditions, the subject's market segment or any of the comparables.   When considering how limited their scope of practice is when compared to the role of an appraiser these inspectors might just as well be equated to the work of autonomous drones or robotic pool cleaners.   

Now to be sure, there are other very significant issue the State of Virginia should consider in their appraisal licensing program; such as

 - First and foremost, the use of 3rd party inspection reports most definitely has the potential to negatively impact the quality and quantity of the information about the subject that the appraiser is using.   That is, in comparison to a normal 1004 protocol.  They're actually getting more information than they would have when completing a 2055 or a desktop-only assignment.   

 - In real life these lenders have always used a variety of appraisal types in their decision making, including appraisals where the appraiser doesn't physically inspect the interior or measure the structure at all (the GSEs 2055 appraisal reports are an established and accepted example of this).  Lenders have also used desktop appraisals based solely on public records information - no inspection by anyone - and appraisal reviewers commonly express their appraisal opinions based on information contained in other appraisal reports but which they have no personal knowledge of.  Nor can it be said that the use of these "lesser" levels of personal inspection has actually been detrimental to the public's legitimate interests.  

So the conventional 1004 protocol involving personal inspection by the appraiser is not now and never has been the sole expression of professional appraisal practice.  

 - Whether or not the lenders - who are in fact the only "consumers" of one of these mortgage appraisals - have the right to order and use one of these inspections performed by one of these inspectors and for whatever purposes they deem fit.  

 - Whether or not any other type of user besides the mortgage lenders and getting into real property appraisal assignments performed for non-lending users and non-lending purposes have the right to order one of these inspections from one of these inspectors.  

 - Whether or not the use of a 3rd party inspection report can even be assumed to undermine the utility of an appraisal report that is based in part on that information.  

 - Whether or not the State needs to license and regulate the individuals who perform those inspections, and if so under which licensing board and according to which standards of performance.   Maybe these individuals should be regulated by the same board that regulates building inspectors and maybe that board needs to establish the performance standards that they state should enforce for those activities.  After all, there's nothing in USPAP or indeed in any qualifying education requirements for appraiser licensing that addresses the standards for what is/isn't competent inspection practice for appraisers, let alone for any paraprofessionals who might perform a property inspection.   

- How the state will defend their regulations in court if/when challenged. Which challenge can be assumed to be a virtual certainty.    Courts operate off the rule of law and legal arguments - not feelings and opinions - so the State will need to be able to articulate it's arguments in support of these regs to the satisfaction of the courts.   The state will be going up against experts who are well versed in USPAP and who will be going straight to the meanings of the definitions being used, and how none of them indicate toward 3rd party inspectors actually being engaged in appraisal practice over which the Board would have jurisdiction.  After all, a law or regulation that cannot withstand appeal in court isn't going to stand.    All it's going to accomplish is to make it's authors look foolish.  

  - How the statutes will be written to unilaterally declare - outside of USPAP - that the process of property inspection 

  • when performed by a person who is not appraising the property,
  • is not working for an appraiser or under an appraiser's supervision and
  • who is not expected to meet any appraisal standards for that inspection due to the fact that no such standards exist in USPAP

how that individual's conduct and performance automatically falls under the definition of appraisal practice over which the State Appraisal Board has jurisdiction.   

  - And finally, what other areas of appraisal practice , what other appraisers and users outside the mortgage lending pipelines - might be adversely affected by legislation that is being narrowly and carefully crafted to accommodate the financial interests of the mortgage lending appraisers.    

 

As for the economic arguments and concerns appraisers have about the effects of the use of these assignments will have on their own economic interests, I share those concerns.   If/when the lenders start using a larger percentage of these assignments it's going to cut into the demand for the conventional appraisal assignments that is more profitable for us to sell.   Nevertheless, on a fundamental basis it is not the role of the State legislature or their Appraisal Board to act as an agent or advocate for our economic interests.  The State's role is to act on behalf of the public interests, which for the users of mortgage lending appraisals is explicitly limited to the lenders themselves - we appraisers certify to that intended use in every one of those appraisal reports we sign.  I will say again, if/when a property owner wants the more comprehensive appraisal performed for their own usage then there is nothing stopping them from getting one of their own and specific to their needs.   

In closing, I recognize this may be the most lengthy response you get, and that I am most definitely expressing a minority opinion among the fee appraisers.   I am not a licensee in your state and although I am a fee appraiser I do mostly commercial work, not residential appraisals under the GSE appraisal programs.   

With that said, I hope the decision makers at the State do take under consideration some of these additional elements that are largely being overlooked among all the other commenters.  I also hope that the individuals who are acting in the role of lawmakers and State Appraisal Board members will compartmentalize their approach and consider all of the various talking points submitted by all the commenters within the context of what it takes to run an effective and fair licensing program vs what their individual biases may be as appraisers or users of appraisals.   The State's role is to act within the legitimate interests of the public at large, which vary considerably, not just on behalf of some of it's licensees.  

 

Thank you for our consideration.   

CommentID: 72604