Single-Family Residential Appraisals: An Overview
April 24, 2023
Single-Family Residential Appraisals: An Overview
A real estate appraisal is an estimate of the value that a
periods of time until sellers agree to lower their list
property can be sold for given prevailing market conditions.
prices. Because offer and list prices may reflect market
An appraisal (also called a valuation) is typically conducted
speculation rather than actual housing inventory
prior to the completion of a sale of a single-family
conditions, appraisers tend to use the final sale prices of
residential property or when a homeowner decides to
nearby properties to assess value when possible.
refinance an existing mortgage. A lender requires an
appraisal before granting a mortgage because the financed
For these reasons, determining property values is
property is often used as collateral, which can be seized and
challenging. Valuations are oftentimes estimated using
resold to recoup losses if the borrower defaults on the loan.
properties that lack identical characteristics. Extreme low-
This In Focus summarizes valuation challenges, regulatory
or high-end properties located in decidedly distinct
developments, and a recent policy issue pertaining to
geographic areas tend to have fewer like transactions,
single-family property appraisals.
making them more difficult to appraise. Furthermore,
appraisals reflect market conditions when they were
Property Valuation Challenges
prepared, causing past estimations to diverge from current
Conceptually, products with identical characteristics or
values should market conditions change over time.
features as well as high sales volumes should have values
that are relatively easy to determine. Single-family
Federal Regulation of Appraisal Industry
properties, however, are not identical, thus increasing the
The sections below discuss (in chronological order) the
difficulty to determine their values.
legislative developments resulting in the current federal
regulatory framework of the appraisal industry.
Housing structures are attached to immobile land plots,
making every location unique. Furthermore, the value of
Establishment of Federal Regulatory Framework
the underlying land is often most important for
Congressional interest in real estate appraisals dates back to
determining the total property value. A large house built
at least the late 1980s following the Savings and Loan
in a less desirable neighborhood, for example, may not
(S&L) crisis. (S&L associations were nonprofit, member-
be valued the same as a small house located in a more
owned cooperative financial institutions that relied on
desirable area. After factoring in location, the square
member savings deposits to fund residential home
footage of housing—including numbers of bathrooms,
mortgages. See CRS Report R46499, The Federal Home
bedrooms, and upgrades—is next in importance when
Loan Bank (FHLB) System and Selected Policy Issues, by
determining the total property value.
Darryl E. Getter for more information.) Congress passed the
Financial Institutions Reform, Recovery, and Enforcement
Housing markets are typically thin, meaning that houses
Act of 1989 (FIRREA, P.L. 101-73), with Title XI
generally trade in small volumes and on an irregular
establishing provisions for an appraisal regulatory
basis. Consequently, few final sale transactions may be
framework.
available to factor into valuations. Determining the
value of like houses—such as those comprised of
FIRREA requires that lenders obtain written appraisals
condominiums or newly constructed communities of
that meet Title XI standards for all federally related
adjacent, similar units—is less challenging because their
transactions unless a property qualifies for an
similarities allow for greater comparability. By contrast,
exemption. A federally related transaction is one that a
estimating value for a house in a rural area, for example,
federal financial institution regulatory agency (that sits
with fewer like units and transactions is more difficult
on the Appraisal Subcommittee, defined below) engages
given the lack of comparable transactions.
in, contracts for, or regulates and that requires the
services of an appraiser.
Rather than converge to a stable price, house prices tend
to rise at faster rates than they fall due to market
FIRREA authorizes the Appraisal Foundation (AF), a
speculation. Speculation about higher future prices may
nonprofit organization of professional real estate
encourage buyers to expedite their housing purchases,
industry groups, to determine minimum appraisal
offer more than sellers’ listing prices, and cause housing
standards. Specifically, the AF establishes (1) the
inventories to deplete rapidly. Appraisals, which
Appraisal Qualification Board to implement minimum
incorporate prevailing market conditions, may be
qualification criteria for state certification and appraiser
influenced by the willingness of numerous buyers to pay
licensing and (2) the Appraisal Standards Board to issue
more than sellers’ list prices in booming housing
the Uniform Standards of Professional Appraisal
markets. By contrast, speculation about current values
Practice (USPAP), the guidelines for the preparing and
can result in homes staying on the market for extended
reporting of appraisals. (The USPAP are promulgated
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Single-Family Residential Appraisals: An Overview
by industry professions similar to the way accounting
refer the matter to the state appraiser certifying and
standards are established through the Financial
licensing agency. Consequently, many lenders now order
Accounting Standards Board.)
appraisals from appraisal management companies (AMCs),
which then randomly select qualified appraisers.
The Appraisal Subcommittee (ASC), a subcommittee of
the Federal Financial Institutions Examination Council,
Appraisal Exemption Thresholds
was created to monitor the AF to ensure that its policies,
Section 103 of the Economic Growth, Regulatory Relief,
practices, and procedures are consistent with Title XI.
and Consumer Protection Act of 2018 (P.L. 115-174)
The ASC consists of the Office of the Comptroller of
amended FIRREA. P.L. 115-174 directs the CFPB to
the Currency, the Federal Reserve, the Federal Deposit
exempt from appraisal requirements certain federally
Insurance Corporation, the National Credit Union
related, rural real estate transactions valued at or below
Administration, the U.S. Department of Housing and
$400,000 (up from the $250,000 threshold set in 1994) if
Urban Development (HUD), the Federal Housing
the lender can document specified difficulties obtaining an
Finance Agency, and the Consumer Financial Protection
appraisal and meeting certain other conditions. The
Bureau (CFPB).
innovation of less expensive automated appraisal valuations
has arguably reduced the need for manual appraisals on less
Title XI’s purpose is to protect federal financial and public
expensive homes. Hence, lenders may use automated
policy interests. The establishment of appraisal guidelines,
appraisals (rather than a more expensive licensed or
for example, is meant to promote the independence of
certified appraiser) for exempt residential transactions. The
appraisers and reduce possible conflicts of interest with
results must still be based upon actual physical condition of
lenders. In addition, reliable appraisals may reduce
the properties rather than unsupported assumptions.
uncertainty about the market value of the collateral (i.e.,
properties) that would be used to recoup potential losses
Recent Policy Issue: Appraisal Bias
facing federally backed lending institutions before calling
Following concerns that appraisals were generally biased
upon taxpayers to provide financial support.
upward, recent concerns focus on downward appraisal bias,
particularly in minority neighborhoods. On February 23,
Appraisal Independence
2022, the CFPB released proposals to prevent algorithmic
In 2009, the Home Valuation Code of Conduct (HVCC)
bias in home valuations. The Biden Administration also
was established as part of a legal settlement between New
announced the establishment of an interagency task force,
York state officials and the mortgage securitizers Fannie
the Interagency Task Force on Property Appraisal and
Mae and Freddie Mac. Appraisers were suspected of being
Valuation Equity (PAVE), led by HUD Secretary Marcia
chosen not on the basis of competence but on their
Fudge, to address possible inequities in home appraisals.
willingness to provide appraisals less likely to obstruct
Observed racial discrepancies in appraisals may reflect the
mortgage originations. In the settlement, the New York
following market influences:
attorney general agreed to end a state investigation of
Fannie Mae if it agreed to purchase mortgages only from
According to a 2022 survey of appraisers and industry
banks that separated the loan processing staff from those
professionals conducted by the National Association of
who chose the loan appraisers. A similar agreement was
Realtors, 66% of appraisers are asked to conduct
reached with Freddie Mac.
appraisals outside of the geographic locations where
they have greater familiarity with the market dynamics,
In 2010, the Dodd-Frank Wall Street Reform and Consumer
which may be due to increased use of AMCs that
Protection Act (DFA; P.L. 111-203) treated appraisal
randomly pick appraisers. Given past suspicions of
independence as a consumer protection issue. First, DFA
inflated appraisals, appraisers may be inclined to
separated residential and commercial appraisal oversight.
prepare more conservative valuations in unfamiliar
Rulemaking authority for residential mortgage appraisals
neighborhoods.
was transferred to the CFPB for issues such as customary
fees. Authority for commercial real estate appraisals
The PAVE study reports that housing markets in Black
remained with the banking regulators’ ASC. Section 1471
and Latino neighborhoods are thin relative to White
of DFA also requires a physical property visit by an
neighborhoods, with fewer comparable property
appraiser for certain higher-cost mortgages.
transactions, thereby increasing valuation subjectivity.
Appraisers may also be inclined to prepare more
Second, DFA revised FIRREA’s independence standards
conservative valuations in thin markets, particularly if
and directed the regulators to write new independence rules
associated neighborhoods have fewer businesses and
prior to the HVCC’s sunset. Hence, a lender’s loan
shops, lower-ranked schools, higher crime rates, and
production staff, mortgage brokers, and other transaction
lower amounts of tax revenues.
participants are prohibited from selecting the appraiser.
Section 1472 of DFA prohibits people from attempting to
Consequently, distinguishing between causality and
influence an appraiser to encourage a targeted appraisal
correlation—the extent that thin markets, which lack
value or to facilitate the price of the transaction. Section
sufficient comparable transactions, or discrimination can
1472 also mandates that a professional who has a
explain racial discrepancies in appraisals—is challenging.
reasonable basis to believe that an appraiser is failing to
comply with the USPAP, violating applicable laws, or
Darryl E. Getter, Specialist in Financial Economics
otherwise engaging in unethical or unprofessional conduct
IF12385
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Single-Family Residential Appraisals: An Overview
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https://crsreports.congress.gov | IF12385 · VERSION 1 · NEW