Residential Appraisals: Opportunities to Enhance Oversight of an Evolving Industry

This testimony discusses our work on residential real estate valuations. Real estate valuations, which encompass appraisals and other value estimation methods, play a critical role in mortgage underwriting by providing evidence that the market value of a property is sufficient to help mitigate losses if the borrower is unable to repay the loan. However, recent turmoil in the mortgage market has raised questions about mortgage underwriting practices, including the quality and credibility of some valuations. An investigation into industry appraisal practices by the New York State Attorney General led to an agreement in 2008 between the Attorney General; Fannie Mae and Freddie Mac (the enterprises); and the Federal Housing Finance Agency (FHFA), which regulates the enterprises. This agreement included the Home Valuation Code of Conduct (HVCC), which set forth certain appraiser independence requirements for loans sold to the enterprises and took effect in 2009. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203) (the Dodd-Frank Act) directed us to study the effectiveness and impact of various valuation methods and the options available for selecting appraisers, as well as the impact of HVCC. This testimony summarizes the report we are releasing today, which responds to the mandate in the Dodd-Frank Act. Our work focused on valuations of single-family residential properties for first-lien purchase and refinance mortgages. The report discusses (1) the use of different valuation methods and their advantages and disadvantages, (2) policies and other factors that affect consumer appraisal costs and requirements for lenders to disclose appraisal costs and valuation reports to consumers, and (3) conflict-of-interest and appraiser selection policies and views on the impact of these policies on industry stakeholders and appraisal quality. We consider the impact of HVCC throughout the report..