Introduction to Real Estate Appraisals
Updated May 30, 2019
Introduction to Real Estate Appraisals
A real estate appraisal is a measure of the value of property
(ASB) Uniform Standards of Professional Appraisal
based upon the price that a professional appraiser believes
Practice (USPAP).
the property could be sold for under normal market
conditions. Lenders rely on an appraisal because the
In general, Congress has neither legislated appraisal
property serves as collateral for a mortgage loan. Real
standards nor delegated the writing of standards to a federal
estate buyers might view the appraisal as a check on their
agency; rather, the specifics of the USPAP are promulgated
own willingness to pay.
by industry professionals through the nonprofit Appraisal
Foundation, analogous to the way accounting standards are
Although the details of conducting an appraisal are largely
established through the Financial Accounting Standards
the product of industry professionals, the states and the
Board (FASB).
federal government play a role. The states, for example,
regulate the licensing and certification of professional
In 2009, the Home Valuation Code of Conduct (HVCC)
appraisers. The federal government’s role includes
was established as part of a legal settlement between New
oversight of the state appraisal qualification boards;
York state officials and the mortgage securitizers, Fannie
contributions to the funding of the nonprofit appraisal
Mae and Freddie Mac. Concerns had been raised that
foundation that promulgates appraisal standards; setting
appraisers were being picked not on the basis of
minimum requirements for conducting appraisals; and
competence, but on their willingness to provide an appraisal
setting standards to maintain the independence of
that would allow the mortgage to be made. In the
appraisers.
agreement, the New York attorney general agreed to end a
state investigation of Fannie Mae if Fannie Mae agreed to
This In Focus discusses federal appraisal legislation in the
purchase mortgages only from banks that separated loan
context of real estate booms and busts and then summarizes
production staff from the staff who pick the appraiser for
some current policy issues related to the regulation of
the loan. A similar agreement was reached with Freddie
appraisers.
Mac.
Real Estate Volatility and Federal
In 2010, the Dodd-Frank Wall Street Reform and Consumer
Appraisal Legislation
Protection Act (Dodd-Frank; P.L. 111-203) revised
Congress has been concerned about the proper methods of
FIRREA’s independence standards and set a sunset date for
real estate appraisal because inadequate appraisals have
the HVCC. In place of the HVCC, Dodd-Frank split
contributed to federally backed depositories experiencing
residential and commercial appraisal oversight to the newly
significant losses that have required support from the
created Consumer Financial Protection Bureau (CFPB) and
Department of Treasury. Nevertheless, Congress has left
transferred rulemaking authority for residential mortgage
standards for real estate appraisals to the states and
appraisals to the CFPB for issues such as customary fees.
financial regulators.
Authority for commercial real estate appraisals remained
with the banking regulators’ ASC. Dodd-Frank directed the
Federal legislation revising the appraisal process followed
regulators to write new independence rules prior to the
real estate busts of the Savings and Loan (S&L) Crisis of
HVCC’s sunset. Section 1471 of Dodd-Frank also requires
the late 1980s and the financial crisis of the late 2000s.
a physical property visit for certain higher-cost mortgages.
These legislative initiatives created the basic framework for
the federal role in appraisal regulation and current
Although Dodd-Frank technically sunsetted the HVCC, a
requirements for appraiser independence.
lenders’ loan production staff, mortgage brokers, and other
transaction participants are still prohibited from selecting
The basic framework for qualifying appraisers and creating
the appraiser. Section 1472 of Dodd-Frank prohibits people
appraisal standards followed the S&L Crisis. In 1989, Title
from attempting to influence an appraiser to encourage a
XI of the Financial Institutions Reform, Recovery and
targeted appraisal value or to facilitate the price of the
Enforcement Act (FIRREA; P.L. 101-73) set a dollar
transaction. Section 1472 also mandates that professionals
threshold value to require an appraisal, created an Appraisal
who have a reasonable basis to believe that an appraiser is
Subcommittee (ASC) among the bank regulators to
failing to comply with the USPAP, violating applicable
coordinate appraisal regulation, and provided initial grant
laws, or otherwise engaging in unethical or unprofessional
funding for a nonprofit Appraisal Foundation. FIRREA
conduct, refer the matter to the state appraiser certifying
mandates that real property appraisers meet the
and licensing agency.
qualifications established by the Foundation’s Appraisal
Qualification Board (AQB) and that individual appraisals
Appraisers: Policy Issues
conform to the Foundation’s Appraisal Standards Board’s
This section summarizes selected policy issues related to
appraisers and appraisals.
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Introduction to Real Estate Appraisals
Appraiser Familiarity with Neighborhoods.
Certified general appraisers must have 3,000
Some have complained that appraiser selection
house of supervised experience, including
restrictions have contributed to faulty appraisals
nonresidential appraisal work. In general, licensed
when the chosen appraiser is not knowledgeable
residential appraisers may conduct less complex
about a neighborhood, particularly in urban areas
appraisals for residential properties under $1
where nearby sales may not actually be useful
million in value and more complex appraisals if
comparisons. Occasional errors may be an
the property is valued under $250,000. Certified
unintended consequence of maintaining appraiser
appraisers are qualified to conduct more complex
independence. It is also possible that some reports
appraisals than licensed appraisers. Certified
of mistakes are really expressions of
residential appraisers may conduct residential
dissatisfaction with current market conditions.
appraisals of any value, but not appraise
subdivisions as a whole. Certified general
Rural Areas. Some smaller financial institutions
appraisers can appraise simple and complex
in rural areas have reported frustration with
residential and commercial real estate. The current
separating their loan production staff from the
system allows states to match appraisal
appraiser selection process, noting that the area
specialization to their conditions, such as
may have few qualified appraisers. Prior to the
differences in typical land values, complexity, and
transfer of oversight to the CFPB, the banking
usage. Some observers call for more consistent
regulators were able to provide exceptions on a
national standards for appraisal qualifications or
case-by-case basis if the bank could provide an
changes to the threshold dollar amounts for the
alternative that still met the policy goals. Section
three Dodd-Frank levels of residential appraisers.
103 of the Economic Growth, Regulatory Relief,
and Consumer Protection Act of 2018 (P.L. 115-
New Education Requirements. The AQB sets
174) directs the CFPB to implement a regulation to
minimum educational and professional standards
waive the appraisal requirement on rural
for appraisers. States have been implementing
mortgages under $400,000 when the lender can
higher education and other professional
document specified difficulties in obtaining an
requirements for appraisers pursuant to the
appraisal and meets certain other conditions.
Appraisal Foundation’s guidance on appraisal
qualifications. Some argue that these requirements
Appraisal Management Companies. Appraisal
will increase professionalism and consistency
Management Companies (AMCs) have been
among appraisers. Others argue that legislation is
created to comply with Dodd-Frank’s prohibition
needed to grandfather existing appraisers trained
on mortgage originators selecting specific
under older standards, particularly in rural areas
appraisers. Since Dodd-Frank, there has been a
with fewer qualified appraisers.
trend away from independent appraisers to AMCs
appraisers. Section 1473 of Dodd-Frank amends
The Role of Congress. Specific appraisal
FIRREA to provide for a national registry of
standards are contained in the USPAP, not set in
AMCs and to set minimum requirements for
federal statute or regulation. Industry professionals
AMCs. Some have expressed concern that changes
promulgate the USPAP standards through the
to the method of choosing appraisers could put
recommendations of the ASB. People occasionally
independent appraisers at a practical disadvantage.
ask Congress to direct appraisers to issue specific
If appraiser independence can be maintained in
guidelines. For example, some may want specific
some other way, Dodd-Frank does not require the
treatment for sellers who have improved the
use of AMCs.
property with renewable energy upgrades or some
other feature consistent with a particular policy
Duty to Report. Section 1472(e) of Dodd-Frank
goal. Others argue that the focus of appraisals
requires certain mortgage transaction professionals
should remain market value, and that industry
to report an appraiser to the appropriate state board
professionals should continue to promulgate
if the professional has a reasonable basis to believe
specific methods and techniques.
that the appraiser is not following the USPAP or
otherwise acting improperly or unethically. This
Other Estimates of House Value. Several real
may discourage transaction insiders such as
estate websites have estimates of the values of
brokers and loan officers from facilitating biased
homes they list. These websites use unspecified
appraisal reports. Some are concerned that
proprietary estimation techniques. Some
unsubstantiated public reports might damage
homeowners complain that these estimates are
innocent appraisers.
flawed and underestimate the value of the house
they are trying to sell. The websites generally note
Appraiser Standards. Dodd-Frank established
that their value estimates are not appraisals.
three levels of residential appraisers, but left most
requirements to the states. Licensed residential
N. Eric Weiss, Specialist in Financial Economics
appraisers must have 1,000 hours of supervised
experience. Certified residential appraisers must
IF10423
have 1,500 house of supervised experience.
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Introduction to Real Estate Appraisals
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