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The ‘Science’ Of Appraisals Gets Government Attention

Start now to prepare your Reconsideration of Value policy

Tyna-Minet Anderson
Tyna-Minet Anderson
'Science' of Appraisals

In 2012 I purchased a home. When the appraisal came back it included a shed that did not belong to the property we were buying. The shed was valued at 4% of the purchase price, so I requested an updated appraisal without the shed and looked forward to a potential bargaining chip with the seller. When the new appraisal came back, the shed was no longer on it, but all of the numbers were adjusted to hit the same value as before. It was then that I realized there is a science to appraisals, but it sometimes can feel like science fiction.

In the last decade a lot has changed, but for some borrowers the problems with appraisals have only become more apparent.

Accurate appraisals help borrowers avoid the risk of foreclosure that can occur if there is an overvaluation, and they are unable to sell for what they owe. Proper valuation also protects their ability to access equity in a sale or cash-out refinance.

On Aug. 2, 2023 Fannie Mae and Freddie Mac issued joint announcements updating Appraiser Independence Requirements. The announcements also introduced guidelines to Property Data Collector Independence requirements.

For the last year, government entities including the Consumer Financial Protection Bureau (CFPB), U.S. Department of Housing and Urban Development (HUD), and the White House have talked about inaccurate appraisals. On June 1, 2021 President Biden announced the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE).

On Oct. 6, 2022, CFPB published an announcement to let borrowers know they can challenge inaccurate appraisals through a reconsideration of value process. That announcement states: “Homebuyers and homeowners can ask for a lender to reconsider a home valuation the consumer believes to be inaccurate. This process is often referred to as a “reconsideration of value” or ROV. Borrowers can point out, for example, factual or other errors or omissions, inadequate comparable properties, or provide evidence that the appraisal was influenced by prohibited bias.”

With the creation of the Interagency Task Force on Property Appraisal Valuation Equity (PAVE) key components to help improve the appraisal process were identified in the PAVE Plan released in March 2022. In this plan, it gives the opportunity to empower consumers with new tools to address any appraisal issues. Especially when borrowers encounter inaccurate or biased appraisals. The borrower can request an ROV and challenge the inaccuracy of the valuation when getting a mortgage for either a home purchase or refinance transactions.

Exactly how lenders should implement their ROV policy is still up for public comment, but policies will likely be required to include the following steps:

Provide borrowers with an opportunity to explain why they believe the valuation is inaccurate.

Ensure that the ROV process is nondiscriminatory and available and accessible to all.

Provide information about ROV rights to the consumer, either before the appraisal is conducted or when the appraisal is provided to the consumer.

Use plain language with exact steps the consumer can take to have the value reconsidered.

A draft mortgagee letter from HUD addresses how a mortgagee will need to handle a request from a borrower who is asking for an appraisal review in connection with their FHA mortgage loan application. The letter states:

“To increase consumer awareness of the option to request a review of the results of an appraisal, FHA is adding a disclosure to the Homebuyer’s Copy of form HUD-92800.5B Conditional Commitment Direct Endorsement Statement of Appraised Value. Current FHA guidance allows an underwriter to request an ROV when the Appraiser did not consider information that was relevant on the effective date of the appraisal. ROVs under this existing procedure can be initiated at the request of a prospective borrower. However, FHA has not previously clarified standards for Borrower-initiated requests for review of an appraisal. Therefore, FHA is updating the existing ROV standards to add specific guidance to process and document a Borrower-initiated review of the appraisal results.”

The draft letter from HUD also indicated that FHA will be adding fields within FHA Connection to collect information on borrower-initiated appraisal reviews.

Existing FHA policy permits mortgagees to obtain a second appraisal in cases where material deficiencies in the appraisal are documented and the appraiser is unable or unwilling to resolve them. FHA is adding additional reasons allowed for this second appraisal request by a lender. Including indications of unlawful bias in the appraisal and other violations of applicable local, state, or federal fair housing and nondiscrimination laws.

The PAVE Plan also addresses algorithmic bias in home valuations when using data collected from inaccurate appraisals, including leveraging data to track trends and identity appraisers that have a history of bias and poorly documented appraisals. The plan addresses how this appraisal data may impact the automated valuation models that many of the GSEs currently have in place to evaluate the property when an appraisal is not required.

A new proposed rule that is supported by six of the agencies in the PAVE initiative would require financial institutions, mortgage originators, and the secondary market to develop policies and procedures that would safeguard the AVM process and protect against manipulating the data, conflicts of interest, and require testing and reviews of that data.

I was reluctant to write anything about this topic because when we have brought it up in class, we have received a lot of hostility from lenders. It is one of the most controversial topics that we have encountered in years, but lenders cannot turn a blind eye to appraisal bias and inaccuracies. Lenders need the appraisal to safeguard the integrity of the loan. Borrowers need an accurate and true valuation of the property they want to refinance or purchase.

The appraisal industry needs to make sure borrowers are confident in the science of appraisals and not feel like it is science fiction. We can all work together to make fundamental changes that support a growing housing market.

This article was originally published in the Mortgage Women Magazine September 2023 issue.
Tyna-Minet Anderson
Tyna-Minet Anderson

Tyna-Minet Anderson is vice president of Mortgage Educators and Compliance.

Published on
Sep 18, 2023
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