In response to criticism that lax appraisals contributed to the financial crisis, tighter appraisal policies have been implemented by lenders, federal banking regulators, the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac. These actions almost immediately triggered reports of homes failing to appraise at the sale price — or even to cover construction costs.

Lower appraised values for land also led some financial institutions to either cease lending to developers and home builders altogether or to demand that they contribute additional equity.

NAHB has been a leading advocate for correcting the valuation process and has undertaken a number of actions beginning in 2008, when appraisal problems first begin to surface, to raise awareness and address the toll inaccurate appraisals are taking on the housing industry.

NAHB has held a series of four appraisal summits — two in 2009, one in 2010 and one in 2011— to provide opportunities for the agencies and organizations that establish appraisal standards and guidelines to join housing stakeholders in a constructive dialogue on major appraisal topics of concern.

The summits and other actions have paved the way for many of the changes in the appraisal arena observed today.

While improvements have been achieved, valuations continue to be an issue of great concern to the home building industry and remain a major impediment to housing’s recovery.

NAHB’s major actions to resolve appraisal problems to date follow:

2008

• With representatives of the FHA, Fannie Mae and Freddie Mac, NAHB explores appeals processes similar to those used by the Department of Veterans Affairs.
  
  
• NAHB begins collaborating with the Appraisal Institute, the largest organization representing professional appraisers, to educate the institute’s members on the concepts of green construction.
  
  
• Appraisal Institute leadership presents a special seminar on appraisals for NAHB members at NAHB's fall board of directors meeting.
  
  
• Federal banking agencies and the National Credit Union Administration propose revisions to their Interagency Appraisal and Evaluation Guidelines.

2009

January

• After studying the proposed changes to the Interagency Appraisal and Evaluation Guidelines, NAHB submits comments expressing concerns over using distressed property sales as comparables for appraisals on new homes without their value being properly adjusted; the need for lenders to select well-qualified appraisers who are familiar with local markets; and the need for independent testing of automated valuation models.

May

• Fannie Mae and Freddie Mac implement the Home Valuation Code of Conduct, establishing standards for appraiser independence and calling for the separation of lending and appraisal oversight functions within lenders’ organizations.
  
  
• In letters to the GSEs, NAHB supports aspects of the code to foster appraiser independence and encourages the Federal Housing Finance Agency and Attorney General Eric Holder to consult with the federal and state banking regulators and appraisal regulatory authorities. The letter cautions against provisions that would conflict with existing financial institution regulations and increase the cost or reduce the availability of appraisals.
  
  
• In a meeting with Comptroller of the Currency John Dugan, NAHB Chairman Joe Robson reiterates industry concerns regarding the Interagency Appraisal and Evaluation Guidelines.

June

• NAHB issues a press release highlighting how the use of foreclosed and distressed properties in appraisals is needlessly driving down home values and forestalling the economic recovery and calls for regulators to address their proper use in home valuations.

August

• NAHB launches its “Revive Housing, Restore America” grassroots campaign — calling on Congress to work with housing and financial regulators to adopt and enforce clear, concise regulatory guidance to enable appraisers to develop realistic valuations based on sales that are truly comparable.
  
  Lawmakers also are urged to call on the FHFA, Fannie Mae, Freddie Mac and the FHA to establish a VA-style appraisal appeals process.
  
  
• Led by NAHB Immediate Past Chair Sandy Dunn, the association steps up talks with appraisers and invites Appraisal Institute leaders to a meeting with regulators. After the meeting, Appraisal Institute representatives agree that some appraisers don’t have the experience and training necessary to undertake the more complex appraisals required to establish accurate values in volatile markets.
  
  
• In response to member concerns regarding the lack of comprehensive data for appraisers seeking comps, NAHB creates a form that enables members to capture specific information to share with appraisers and urges members to use it.

September

• On Sept. 21, NAHB hosts the first residential appraisal summit with federal regulatory agencies and the major housing and financial stakeholder and appraisal organizations — establishing a forum for a constructive dialogue in the hopes of improving the process.
  
  Among the problems discussed at the summit are the inappropriate use of foreclosed and distressed properties and comparables for new homes; the unintended consequences of the Home Valuation Code of Conduct; appraiser qualifications, training and continuing education; oversight and enforcement of appraisal standards and appraiser qualifications and performance; appraisal appeals; and limitations on the availability of new home sales information.

October

• NAHB hosts a summit on the role of energy-efficiency and green certification programs in the appraisal process as some real estate multiple listing services begin to add green certifications, ratings and features — as in Michigan, where the Home Builders Association of the Grand Traverse Area works with the Traverse Area Association of Realtors® to incorporate green features in listings.

November

• NAHB’s second appraisal summit, held on Nov. 3, seeks clarification on the requirements of the Home Valuation Code of Conduct regarding appeals, appraiser qualifications, training and continuing education, and appraisal/appraiser oversight and enforcement.
  
  Summit participants agree to push for improvements in state regulations and oversight. In addition, NAHB pledges to work with Fannie and Freddie to develop a list of NAHB members’ frequently asked questions regarding the code.

December

• The implementation of the Home Valuation Code of Conduct — including confusion over what degree of communication is allowed between home sellers/lenders and appraisers — and an increase in the use of out-of-area appraisers not familiar with the market exacerbate appraisal problems and create unintended consequences that NAHB begins to address.
  
  
• Dunn and the leadership of NAHB’s Building Systems Councils meet with Appraisal Institute leaders to discuss ways to work together to improve appraisers’ understanding of the valuation of log, modular and concrete homes. NAHB offers to help develop content to supplement the many appraisal courses and webinars offered by the institute, including appraisals in distressed markets, green building appraisals and valuations for new homes.

2010

January

• Freddie Mac's top appraiser meets with NAHB Housing Finance Committee members during the NAHB International Builders’ Show in Orlando.

March

• An NAHB survey of builders indicates that 64% of respondents had an appraisal below the agreed-upon contract sales price for a house and one-third of those respondents say they lost a sale because of a low appraisal.
  
  
• NAHB continues to work with financial institutions and regulators to issue guidance requiring appraisers to make appropriate adjustments for distressed comps. In statements submitted to a joint hearing of the House Committee on Small Business and the Committee on Financial Services, NAHB also calls on Congress to issue guidance.
  
  
• Under the guidance of its senior officers, NAHB works with Fannie Mae and Freddie Mac to develop a list of builder-specific frequently asked questions (FAQs) on the Home Valuation Code of Conduct.
  
  They address four areas of concern:
  
  
  • Appraiser qualifications and requirements for appraising new homes
  • The use of foreclosed and distressed sales as comparables
  • Builder communications with appraisers
  • Builder requests for appraisal consideration
    
    
• Agreeing with NAHB’s concerns, Freddie Mac issues a letter clarifying that builders are permitted to communicate with appraisers to provide information relevant to the review.
  
  
• NAHB meets with the staff of the office of the Attorney General of New York State to coordinate efforts to eliminate unintended consequences of the Home Valuation Code of Conduct.
  
  
• Freddie Mac and Fannie Mae agree to work with NAHB on additional clarification of the code for non-lender users of appraisals.

May

• The FHFA directs Fannie Mae and Freddie Mac to establish a process to field complaints from consumers, appraisers and others about possible Home Valuation Code of Conduct violations. The FHFA also unveils its Uniform Mortgage Data Program to standardize and enhance the depth of data submitted on collateral, borrowers and loans.

June

• NAHB reiterates its support of the intent of the Home Valuation Code of Conduct, noting that the essence of the code will continue in seller guides distributed by Fannie Mae and Freddie Mac when the code sunsets on Nov. 1. NAHB also calls for reforms and clarification of the code’s principles.
  
  
• In a victory for NAHB, Fannie Mae on June 30 releases new appraisal-related polices and additional guidance that require lenders to only use appraisers who have the appropriate knowledge and experience for an appraisal assignment — including an understanding of the specific geographic market.
  
  Under the new guidance, builder sales are acceptable as comparable properties and appraisers can use HUD-1 settlement statement forms for new construction to verify home sales not yet available through other data sources.
  
  In addition, appraisers can determine the appropriateness of using short-sale and foreclosed properties as comps and to make necessary valuation adjustments by determining the condition of the property and whether any stigma is associated with it.
  
  
• Fannie Mae clarifies what communications are permitted under the Home Valuation Code of Conduct between appraisers and appraisal management companies and authorized third parties — including builders — to provide additional information, explanations about the basis for a valuation or for correcting objective factual errors in an appraisal report.
  
  
• NAHB continues work on a series of projects with the Appraisal Institute — including a joint webinar planned for August and the formation of the Appraisal Working Group to focus on:
  
  
  • Appraiser qualifications and licensing requirements
  • Regulating appraisal management companies
  • Establishing a structured appeals process
  • Valuation methodology — the sales comparison, cost and income approach
  • Energy efficiency and valuation

July

• The Dodd-Frank Act is signed into law on July 21 and includes several appraisal mandates, including provisions that:
  
  
  • Prohibit appraiser coercion
  • Require rulemaking by the federal financial regulators on appraiser independence
  • Direct the federal regulators to prescribe minimum requirements to be adopted by states for appraisers and appraisal management companies (AMCs) as well as quality control standards for automated valuation models (AVMs)
  • Requires appraisers to be paid reasonable and customary fees for their work

The law requires that the new Consumer Financial Protection Bureau establish interim rules on appraiser independence to replace the Home Valuation Code of Conduct.

In addition, a physical appraisal is required for every subprime mortgage and two appraisals for a subprime mortgage when there has been a purchase or acquisition of the property at a lower price within the previous 180 days. The Appraisal Subcommittee of the Federal Financial Institutions Examinations Council will monitor state and federal efforts to protect consumers from improper appraisal practices and unlicensed appraisers.

States are required to establish minimum standards for AMC registration, along with quality control standards for AVMs, and the law also requires that appraisers receive fair and customary fees.

• During a Freddie Mac and Fannie Mae review NAHB-recommended changes to Home Valuation Code of Conduct FAQs clarifying permitted activities for builders to improve appraisal accuracy and eliminate the inappropriate use of foreclosed and other distressed sales as appraisal comps, NAHB Immediate Past Chairman Robson and housing finance department staff members thank Fannie Mae for incorporating the recommendations in its guidelines and ask Freddie Mac for a similar commitment.
  
  
• In an FHFA meeting later in the month with Freddie Mac and Fannie Mae to discuss lessons learned with the Home Valuation Code of Conduct and to lay the groundwork for the FHFA’s and banking regulators’ development of appraisal guidelines under the Dodd-Frank Act passed in July 21, Robson and NAHB secure a firmer commitment from Freddie Mac to incorporate NAHB’s recommendations in its guidelines.

August

• NAHB and the Appraisal Institute hold a joint webinar to explain:
  
  
  • Recent changes in appraisal standards and practices
  • Requirements for the appraisals of new homes
  • Communications with lenders and appraisers
  • Key information to provide on subject properties
  • Tips for dealing with appraisals in distressed markets
  • Process for addressing appraisal errors and reconsidering value
    
    
• NAHB continues to work with the Appraisal Institute, the Appraisal Foundation and state appraisal regulatory agencies to improve oversight and enforcement.
  
  
• In a meeting with Fannie Mae senior executives, NAHB Appraisal Working Group Chair Marty Mitchell discusses energy-efficient/green building appraisal and financing issues and the status of the GSE’s energy-efficient/green strategy, including the status of its energy-efficient mortgage program.

October

• Fannie Mae ends its energy-efficient mortgage program and begins creating a more effective way to establish value for energy efficiency in the mortgage financing process. Under consideration is more emphasis on the cost-approach appraisal methodology for new construction. Fannie Mae also expects to release a retrofit pilot program before the end of the year.
  
  
• Robson joins Mitchell and Vince Butler, past chairman of the NAHB Remodelers, for a follow-up meeting on retrofits with the Appraisal Working Group.
  
  
• Pursuant to the Dodd-Frank Act, Fannie Mae and Freddie Mac announce Appraiser Independence Requirements — developed jointly by the GSEs and the FHFA — to replace, effective immediately, the Housing Valuation Code of Conduct. The new requirements incorporate the core principles of the code of conduct and include clarifications to questions that arose during its implementation.
  
  
• As mandated by Dodd-Frank, the Fed issues an interim final rule on appraisal independence in calculating property valuations without influence or pressure from those with interests in the transaction. The rule also seeks to ensure that appraisers receive customary and reasonable payments for their services.

November

• NAHB submits comments to the newly established Appraisal Practices Board of the Appraisal Foundation, created to identify critical existing and emerging areas of concern for its members.
  
  
• NAHB submits comments to the Appraisal Qualifications Board in support the board’s proposed higher education, experience and examination requirements for real property appraiser qualification — while also noting that the criteria fall short of establishing minimum benchmarks for appraisers who perform appraisals for new construction. NAHB suggests that the board consider a framework for new classifications and the incorporation of standardized appraiser qualifications into the Uniform Standards of Professional Appraisal Practice.

December

• Federal financial regulatory agencies issue new appraisal and evaluation guidelines, effective Dec. 10, that establish minimum regulatory standards and practices and clarify the industry’s appropriate use of analytical methods and technological tools in developing evaluations.
  
  In addition, the guidelines are intended to:
  
  
  • Recognize that, while the borrower's ability to repay real estate loans according to reasonable terms remains the primary consideration in a lending decision, sound collateral valuation practices are an integral part of the underwriting process.
    
    
  • Update and replace existing supervisory guidance to reflect developments regarding appraisals, evaluations and appraisal standards and advancements in regulated institutions' collateral valuation methods.
    
    
  • Enhance requirements for collateral valuation methods for transactions that permit the use of an evaluation and specify that valuation methods that do not provide a property's market value, such as a broker price opinion, are not acceptable as an evaluation.
    
    
  • Instruct institutions to file a complaint with the appropriate state appraiser regulatory officials when they suspect that a state-certified or licensed appraiser fails to comply with the Uniform Standards of Professional Appraisal Practices or applicable laws, or engages in other unethical or unprofessional conduct; and to file a suspicious activity report (SAR) with the Financial Crimes Enforcement Network when the suspicious activity meets SAR filing criteria.
    
    
  • NAHB is encouraged that the new guidelines reflect its prior comment letter by stressing that banks do not have to use an appraisal management company (AMC), communication of third parties with appraisers is allowed and encouraged and appraisers must be qualified for work and geographic area.
    
    
• During NAHB’s third appraisal summit, held on Dec. 9, participants review the Fed’s interim final rule on appraisal independence and discuss ways to head off any unintended consequences such as those that arose from the implementation of the Home Valuation Code of Conduct.
  
  The focus is on communication and giving all stakeholders the opportunity to provide appraisers with relevant information during the valuation process. Participants also discuss appraiser education and qualification requirements, particularly for the valuation of new homes; the challenges of performing appraisals in distressed markets; and whether the appraisal system can take into account rising values as markets rebound.
  
  Summit participants also discuss inadequate reporting on incompetent appraisers, inconsistencies and resource limitations that hamper state appraisal enforcement and related issues.

2011

January

• During a meeting by the Southwest Indiana Builders Association, builders and appraisers agree that the NAHB builder data sheet being developed — based on builder comments — can be a useful tool for appraisers unfamiliar with local market conditions.

May

• The NAHB Senior Officers approve funds to bring in outside experts to assist with the priority appraisal issues established by the Housing Finance Committee at NAHB's spring board meeting.
  
  The goal is to:
  
  
  • Improve current appraisal requirements and practices — including standards for appraisals in dysfunctional markets
  • Strengthen appraiser qualifications and licensing requirements for new construction
  • Develop an expeditious appraisal appeals process
  • Improve valuation methodology for green building
  • Increase industry outreach
  • Provide additional member assistance and education

June

• More than 150 members participate in the webinar “Builders Guide to Appraisals — Obtaining Accurate Valuations on New Homes,” developed jointly by NAHB and the Appraisal Institute. The webinar provides members with best practices for proactively working with appraisers and lenders to improve valuations through accurate information.

July

• The Alterra Group is selected as NAHB’s appraisal expert consultant to accelerate efforts to improve valuations and to provide additional appraisal expertise. Work with the consultant begins in September.

August

• NAHB Chair Bob Nielsen delivers the keynote address, “Appraisals Matter — Let’s Work Together to Get Them Right,” to kick off the Appraisal Institute’s annual meeting. During the address, he tells institute members that "it is absolutely critical for our organizations to work together to reform some aspects of the appraisal system that are crushing the residential construction industry and dampening prospects for an economic recovery."
  
  Nielsen emphasizes builder concerns over the use of distressed properties as comparables for new homes and tells appraisers that “if we keep comparing new homes to homes that are in foreclosure, then there is no floor to the market." Nielsen urges the institute's members to support key measures within congressional legislation (H.R. 1755) that address the critical lack of funding for housing construction and the related problem of inaccurate appraisals.
  
  
• Also during the meeting, Mitchell represents NAHB as it participates in a stakeholder forum addressing issues of common concern.
  
  
• On Aug. 23-24, NAHB Housing Finance staff members participate in a Construction to Permanent Valuation Summit with home builders associations serving Ohio in Cleveland and Medina, Portage, Summit, North Coast and Stark counties. Participants include members of the appraisal industry, local officials and industry stakeholders who seek solutions to inadequate sources of data for new construction.
  
  
• NAHB members are urged to continue to email NAHB at appraisals@nahb.com with information regarding appraisal issues.

September

• The Appraisal Institute introduces a new form to help analyze values of energy-efficient home features, which incorporates the National Green Building Standard as an acceptable green certification example.

October

• NAHB holds its fourth appraisal summit on Oct. 19 with representatives of federal banking regulators, the appraisal industry, the housing finance industry, real estate and residential construction. Details on the summit can be found elsewhere in this issue.
  
  
• During the Association of Appraiser Regulatory Officials’ 20th annual convention, Mitchell discusses the issues and the challenges builders face in obtaining accurate valuations for green construction in the appraisal process.
  
  
• Steve Linville, NAHB’s director of single-family finance, reviews NAHB’s efforts to resolve appraisal challenges with members of the Florida Home Builders Association. He discusses how builders and appraisers can work together more effectively when they establish “rules of engagement,” which also provide NAHB with feedback on the specific regional issues builders face.
  
  
• Representing major headway in gaining fair appraisals for green homes, the Appraisal Institute introduces a new form — the three-page Residential Green and Energy Efficient Appraisal Addendum — to help analyze values of energy-efficient home features. Appraisers can use the form as an optional addendum to Fannie Mae Form 1004, the appraisal industry’s most widely used form for lending purposes.
  
  
• NAHB works with the Appraisal Institute to incorporate the National Green Building Standard and will continue to evaluate the form for additional improvements that will benefit NAHB’s members.
  
  
• NAHB meets with the Appraisal Institute, the National Association of Realtors® and Marshall & Swift, which provides building cost data, to begin discussions on how to bring appropriate value to below-grade areas such as basements.

For more information, email Steve Linville at NAHB, or call him at 800-368-5242 x8597.