In most cases, a mortgage loan cannot be completed without an appraisal that supports the amount of the loan being made on the property. Sometimes, however, appraisals come in at a value too low for the loan to be funded.
Now comes the heartburn. Is the problem with the appraisal or with the property? What can be done to correct the problem? As a loan originator, do you just accept the appraisal as provided or challenge the appraiser? Who can determine if the appraiser is right? Was their opinion an unbiased one? Is the appraiser bound to follow some formula or guideline in doing their work? What governing body determines the ground rules, and how can you be certain that the appraiser is following them? Who does the appraiser answer to?
Let's begin by getting the answer to some of these important questions.
An appraisal is an opinion of value, generally expressed by a state licensed or certified appraiser. Prior to calling oneself an appraiser, a person is required to complete educational and experience requirements as established by the appraisal board in the state in which they seek to practice. Appraisers are accountable to this appraisal board, which is usually appointed by the governor or another high-ranking officials within the state. The appraiser is required to prepare appraisals in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP) as promulgated by The Appraisal Foundation, which is made up of a group of appraisal organizations and government agencies. The Appraisal Standards Subcommittee of the Federal Financial Institutions Examination Council oversees The Appraisal Foundation. The Subcommittee consists of the five federal banking agencies including the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Administration and the U.S. Department of Housing and Urban Development.
The local state appraisal board is responsible for ensuring that its licensed and certified appraisers comply with USPAP when preparing appraisals. Anyone having concerns about an appraiser's work can submit a complaint to the state appraisal board in the appraiser's state of practice.
Appraisers are held to two standards--ethical and professional--and the appraisal board has the responsibility to discipline the appraiser if they are found guilty of violating these standards. Discipline may range anywhere from a slap on the wrist for minor offenses, to license termination for the most serious violations. Penalties include reprimands, fines, additional education, license suspension and license revocation. License termination is rare and fines have become popular recently because the appraisal boards in some states are funded by revenue from fines.
In order for an appraisal to conform to the set standards, it must be performed in an ethical manner whereby the appraiser has no bias. Appraisers can demonstrate bias in various ways. Performing an appraisal in such a way as to participate in fraud would be an ethical violation. This might entail a kickback or other remuneration expected by the appraiser contingent upon their delivering an appraisal at a predetermined opinion of value. Other ethical violations involve personal bias. For example, an appraiser may allow a bad experience with someone involved with a transaction to affect the outcome of an appraisal.
Appraisals must also conform to professional standards. Violations include the failure of an appraiser to thoroughly research the market for comparable sales, causing the appraised value to be different than a property's true market value. This is often a result of sloppy work, or because the appraiser did not take the time to properly research the market. Another example of a professional standards violation would be appraiser incompetence, whereby the appraiser was not able to employ generally accepted appraisal practices in accordance with professional standards due to a lack of education, experience or inherent ability.
The rubber meets the road, so to speak, when an appraisal report complies with USPAP. The appraisal may or may not equal the amount needed to fund a loan, but it must conform to professional appraisal standards. The problem may very well be with the property and not the appraisal, because an appraisal is designed to ferret out non-conforming or otherwise unfit collateral. If there is a question about the report, it is the responsibility of the appraiser to explain how they derived the value opinion. The appraiser is further obligated to correct any mistakes that are made and provide a new and revised report at no additional cost.
Just like a medical opinion, if you are not satisfied with the opinion of a particular appraiser, there is always the option of getting a second opinion. Yes, it will cost more, but this avenue represents the best solution when other options have failed. Appraisers who prove to be less than professional should be reported to their state appraisal boards. When this happens, the appraiser will be held accountable for their actions and disciplined for any wrongdoing.
Charlie Elliott, MAI, SRA is president of ELLIOTT & Company Appraisers, a national real estate appraisal company. He may be reached at (800) 854-5889 or e-mail [email protected].