The appraisal is a critical part of the financing process for the borrower and the lender, but not every real estate broker understands appraiser independence requirements.
After the buyer’s credit and debt to income ratios are reviewed, and the home passes inspection, the lender will order an appraisal to determine if the property has sufficient value to collateralize the buyer’s loan. To confirm the collateral is sufficient in the event of a buyer default, the lender chooses an appraiser to give a professional and impartial opinion of value. This opinion of value is given by way of an appraisal report.
The appraiser must understand the appraisal assignment, be familiar with the property’s area, and begin the assignment by entering into an agreement for appraisal valuation services with the lender. During the process, the appraiser makes an in-person inspection of the property to confirm its features, such as square feet, the number of bedrooms and bathrooms, other rooms, and the property’s overall condition from a visual perspective.
The appraiser’s opinion of value is based on research similar to what real estate agents do for a Comparative Market Analysis or a Broker Price Opinion. These reports provide information on recent sales and listings of comparable properties in the same market area as the home being purchased. The final appraisal report for the lender uses data gathered during the on-site inspection and from researching the comparables.
Why It’s Important to Understand Appraiser Independence
Since the appraiser protects the borrower’s and lender’s interests by ensuring that the subject property is accurately evaluated, understanding the appraiser’s role is critical to the real estate transaction. Compromising the appraiser’s independence can adversely affect the quality of the appraisal report. When quality is compromised, it can increase the risk for both the lender and the borrower.
What to Know About Appraiser Independence
Appraiser Independence requirements are outlined by various federal regulations, agencies, and published guidance. Some of these rules include:
Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) created a system to oversee state licensing and certification of appraisers. Numerous councils, subcommittees, and boards collaborated to develop and amend the Uniform Standards of Professional Appraisal Practice (USPAP) standards for professional appraisals. There must be compliance with USPAP to be certified or licensed as an appraiser.
Real estate and mortgage professionals practicing in 2010 are likely familiar with the events leading to the Dodd-Frank Act, the ongoing requirements that have stemmed from the act and have become a regular part of life since the act became effective. Many may have forgotten that the appraiser independence requirements laid out in TILA were based on a short-lived set of appraisal rules called the Home Valuation Code of Conduct (HVCC). These rules were developed by the New York Attorney General, Fannie Mae, and Freddie Mac. The rules were designed to remove parties with a financial interest in a mortgage transaction from selecting the appraiser and ensure that appraisers were not adversely coerced into inaccurately making appraisal valuations. In 2010, the HVCC was superseded by similar provisions included in the Dodd-Frank Act, which amended Regulation Z to include appraisal independence requirements. The appraisal independence rules in Reg. Z can be found in 12 CFR §1026.42 – Valuation Independence.
Fannie Mae, Freddie Mac, and FHA have all published appraisal independence requirements and guidelines.
Where to Learn About Appraiser Independence
Because the real estate appraisal is a critical part of the financing process for the borrower, their lender, and the real estate transaction, OnlineEd developed a 1-hour Oregon course for real estate licensee renewal to explain appraiser independence rules. The course explains differences between appraisals and broker price opinions, helps real estate brokers understand the definitions used in appraisals, explains actions that could adversely influence an appraiser’s value conclusion, and explains some exceptions that would allow a follow-up appraisal.
The course cost is just $6, and we’re pretty sure you will learn something much more valuable! For more information about this exclusive Oregon offering, please visit: https://onlineed.com/Appraiser_Independence_ORCE
Jeff Sorg is a co-founder of OnlineEd®, an online real estate, mortgage broker, and vocational school founded in 1997, where he also serves as Chief Executive Officer, and School Director. Sorg holds vocational and post-secondary school instructor licenses in several states and has authored numerous real estate continuing education and pre-licensing courses and has been awarded the International Distance Education Certification Center’s CDEi Designation for distance education. Memberships include ARELLO (Association of Real Estate License Law Officials), the National Association of REALTORS®, Oregon Association of REALTORS®, and Portland Metro Association of REALTORS®. Awards and service include REALTOR® Emeritus in the National Association, Life Member award in Portland Metro Association and Chairperson of the Oregon Real Estate Forms Committee.
OnlineEd® provides real estate, mortgage broker, insurance, and contractor pre-license, post-license, continuing education, career enhancement, and professional development and designation courses over the Internet.