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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

July 2011: 

Residential Appraisals: 

Opportunities to Enhance Oversight of an Evolving Industry: 

GAO-11-653: 

GAO Highlights: 

Highlights of GAO-11-653, a report to congressional committees. 

Why GAO Did This Study: 

Real estate valuations, which encompass appraisals and other 
estimation methods, have come under increased scrutiny in the wake of 
the recent mortgage crisis. The Dodd-Frank Wall Street Reform and 
Consumer Protection Act (the Act) mandated that GAO study the various 
valuation methods and the options available for selecting appraisers, 
as well as the Home Valuation Code of Conduct (HVCC), which 
established appraiser independence requirements for mortgages sold to 
Fannie Mae and Freddie Mac (the enterprises). GAO examined (1) the use 
of different valuation methods, (2) factors affecting consumer costs 
for appraisals and appraisal disclosure requirements, and (3) conflict-
of-interest and appraiser selection policies and views on their 
impact. To address these objectives, GAO analyzed government and 
industry data; reviewed academic and industry literature; examined 
federal policies and regulations, professional standards, and internal 
policies and procedures of lenders and appraisal management companies 
(AMC); and interviewed a broad range of industry participants and 
observers. 

What GAO Found: 

Data GAO obtained from the enterprises and five of the largest 
mortgage lenders indicate that appraisals—-which provide an estimate 
of market value at a point in time-—are the most commonly used 
valuation method for first-lien residential mortgage originations, 
reflecting their perceived advantages relative to other methods. Other 
methods, such as broker price opinions and automated valuation models, 
are quicker and less costly but are viewed as less reliable and 
therefore generally are not used for most purchase and refinance 
mortgage originations. Although the enterprises and lenders GAO spoke 
with do not capture data on the prevalence of approaches used to 
perform appraisals, the sales comparison approach—in which the value 
is based on recent sales of similar properties—is required by the 
enterprises and the Federal Housing Administration and is reportedly 
used in nearly all appraisals. 

Recent policy changes may affect consumer costs for appraisals, while 
other policy changes have enhanced disclosures to consumers. Consumer 
costs for appraisals vary by geographic location, appraisal type, and 
complexity. However, the impact of recent policy changes on these 
costs is uncertain. Some appraisers are concerned that the fees they 
receive from AMCs—firms that manage the appraisal process on behalf of 
lenders—are too low. A new requirement to pay appraisers a customary 
and reasonable fee could affect consumer costs and appraisal quality, 
depending on how new rules are implemented. Other recent policy 
changes aim to provide lenders with a greater incentive to estimate 
costs accurately and require lenders to provide consumers with a copy 
of the valuation report prior to closing. 

Conflict-of-interest policies, including HVCC, have changed appraiser 
selection processes and the appraisal industry more broadly, which has 
raised concerns among some industry participants about the oversight 
of AMCs. Recently issued policies that reinforce prior requirements 
and guidance restrict who can select appraisers and prohibit coercing 
appraisers. In response to market changes and these requirements, some 
lenders turned to AMCs to select appraisers. Greater use of AMCs has 
raised questions about oversight of these firms and their impact on 
appraisal quality. Federal regulators and the enterprises said they 
hold lenders responsible for ensuring that AMCs’ policies and 
practices meet their requirements for appraiser selection, appraisal 
review, and reviewer qualifications but that they generally do not 
directly examine AMCs’ operations. Some industry participants said 
they are concerned that some AMCs may prioritize low costs and speed 
over quality and competence. The Act places the supervision of AMCs 
with state appraiser licensing boards and requires the federal banking 
regulators, the Federal Housing Finance Agency, and the Bureau of 
Consumer Financial Protection to establish minimum standards for 
states to apply in registering AMCs. A number of states began 
regulating AMCs in 2009, but the regulatory requirements vary. Setting 
minimum standards that address key functions AMCs perform on behalf of 
lenders would enhance oversight of appraisal services and provide 
greater assurance to lenders, the enterprises, and others of the 
credibility and quality of the appraisals provided by AMCs. 

What GAO Recommends: 

GAO recommends that federal banking regulators, the Federal Housing 
Finance Agency (FHFA), and the Bureau of Consumer Financial Protection 
consider addressing several key areas, including criteria for 
selecting appraisers, as part of their joint rulemaking under the Act 
to set minimum standards for states to apply in registering AMCs. The 
federal banking regulators and FHFA agreed with or indicated they 
would consider the recommendation. 

View [hyperlink, http://www.gao.gov/products/GAO-11-653] or key 
components. For more information, contact William B.Shear at (202) 512-
8678 or shearw@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

The Widespread Use of Appraisals and the Sales Comparison Approach 
Reflect Their Relative Advantages for Valuations in Mortgage 
Originations: 

Recent Policy Changes May Affect Consumer Costs for Appraisals, while 
Other Policy Changes Have Enhanced Disclosures to Consumers: 

Conflict-of-Interest Policies Have Changed Appraiser Selection 
Processes, with Implications for Appraisal Oversight: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Board of Governors of the Federal 
Reserve System: 

Appendix III: Comments from the Federal Deposit Insurance Corporation: 

Appendix IV: Comments from the Office of the Comptroller of the 
Currency: 

Appendix V: Comments from the National Credit Union Administration: 

Appendix VI: Comments from the Federal Housing Finance Agency: 

Appendix VII: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Enterprise Share of Total Mortgage Originations Excluding 
Home Equity Loans (by Dollar Volume), 2006-2010: 

Table 2: Percentage of Each Enterprise's First-Lien Mortgage Purchases 
Originated Using Their Automated Underwriting Systems, 2006-2010: 

Table 3: Percentage of Each Lender's First-Lien Mortgage Originations 
for Which They Provided Valuation Data, 2006-2010: 

Figure: 

Figure 1: Appraisals as Part of the Mortgage Origination Process: 

Abbreviations: 

AMC: appraisal management company: 

AVM: automated valuation model: 

the Act: Dodd-Frank Wall Street Reform and Consumer Protection Act: 

BPO: broker price opinion: 

ECOA: Equal Credit Opportunity Act: 

the enterprises: Fannie Mae and Freddie Mac: 

FDIC: Federal Deposit Insurance Corporation: 

Federal Reserve: Board of Governors of the Federal Reserve System: 

FHA: Federal Housing Administration: 

FHFA: Federal Housing Finance Agency: 

FIRREA: Financial Institutions Reform, Recovery, and Enforcement Act 
of 1989: 

HARP: Home Affordable Refinance Program: 

HUD: Department of Housing and Urban Development: 

HVCC: Home Valuation Code of Conduct: 

LTV: loan-to-value ratio: 

NCUA: National Credit Union Administration: 

OCC: Office of the Comptroller of the Currency: 

OTS: Office of Thrift Supervision: 

RESPA: Real Estate Settlement Procedures Act: 

TILA: Truth in Lending Act: 

UMDP: Uniform Mortgage Data Program: 

USDA: Department of Agriculture: 

USPAP: Uniform Standards of Professional Appraisal Practice: 

VA: Department of Veterans Affairs: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

July 13, 2011: 

The Honorable Tim Johnson: 
Chairman: 
The Honorable Richard C. Shelby: 
Ranking Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Spencer Bachus: 
Chairman: 
The Honorable Barney Frank: 
Ranking Member: 
Committee on Financial Services: 
House of Representatives: 

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 raised questions about 
mortgage underwriting practices, including the quality and credibility 
of some valuations. Some appraisers have reported that, during the mid-
2000s, loan officers and mortgage brokers pressured them to overvalue 
properties to help secure mortgage approvals. In 2007, a lawsuit 
brought by the New York State Attorney General alleged that a major 
lender pressured an appraisal management company (AMC) to select 
appraisers who would inflate property values.[Footnote 1] The 
investigation into these allegations led to questions about what the 
government-sponsored enterprises Fannie Mae and Freddie Mac (the 
enterprises), which had purchased many of the lender's mortgages, had 
done to ensure that the appraisals for the mortgages met the 
enterprises' requirements.[Footnote 2] The outcome of that 
investigation was an agreement--between the Attorney General, the 
enterprises, and the Federal Housing Finance Agency (FHFA), which 
regulates the enterprises--that included the adoption of the Home 
Valuation Code of Conduct (HVCC). HVCC sets forth certain appraiser 
independence requirements for loans sold to the enterprises. 

Although the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Pub. L. No. 111-203) (the Act) declared HVCC no longer in effect, it 
codified several of HVCC's provisions.[Footnote 3] In addition, the 
enterprises have incorporated many of the other provisions into their 
requirements. This report responds to a mandate in the Act that 
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.[Footnote 4] As required by the mandate, we 
provided you with a status report on our study in October 2010. 
[Footnote 5] Our work focused on valuations of single-family 
residential properties for first-lien purchase and refinance 
mortgages. This report discusses (1) the use of different valuation 
methods and their advantages and disadvantages; (2) policies and other 
factors that affect consumer costs and requirements for disclosing 
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 this report. 

To address these objectives, we analyzed proprietary data we obtained 
from the enterprises, lenders, AMCs, and FNC, Inc. (a mortgage 
technology company) on the use of different valuation methods and 
appraisal approaches. We tested the reliability of the data used in 
this report by conducting reasonableness checks on data elements to 
identify any missing, erroneous, or outlying data. We also interviewed 
enterprise, lender, AMC, and FNC representatives to discuss the 
interpretation of various data fields. We concluded that the data we 
used were sufficiently reliable for our purposes. We reviewed academic 
and industry literature on the advantages and disadvantages of the 
different valuation methods and appraisal approaches. We examined 
federal regulations and policies, professional standards published by 
industry groups, and internal policies and procedures of lenders and 
AMCs to understand requirements and practices for using different 
valuation methods, selecting appraisers, ensuring appraiser 
independence, and disclosing costs and valuation reports to consumers. 
Finally, we interviewed a broad range of appraisal and mortgage 
industry participants and observers--including representatives of 
appraiser groups, lenders, AMCs, and other participants in the 
valuation process--to obtain their views on the use of different 
methods and options for selecting appraisers, as well as the impacts 
of recent policy changes, including HVCC, on industry participants and 
appraisal quality.[Footnote 6] We also discussed these issues with 
officials from the federal banking regulatory agencies--the Board of 
Governors of the Federal Reserve System (Federal Reserve), the Federal 
Deposit Insurance Corporation (FDIC), the National Credit Union 
Administration (NCUA), the Office of the Comptroller of the Currency 
(OCC), and the Office of Thrift Supervision (OTS)--as well as from the 
enterprises, FHFA, and the Department of Housing and Urban 
Development's (HUD) Federal Housing Administration (FHA). Appendix I 
contains a more detailed description of our objectives, scope, and 
methodology. 

We conducted this performance audit from July 2010 to July 2011 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

Composition of the Mortgage Market and Lending Channels: 

The composition of the mortgage market has changed dramatically in 
recent years. In the early to mid-2000s, the market segment comprising 
nonprime mortgages (e.g., subprime and Alt-A loans) grew rapidly and 
peaked in 2006, when it accounted for about 40 percent of the 
mortgages originated that year.[Footnote 7] Many of these mortgages 
had nontraditional or riskier features and were bundled by investment 
banks into private securities that were bought and sold by investors. 
The nonprime market contracted sharply in mid-2007, partly in response 
to increasing default and foreclosure rates for these mortgages, and 
many nonprime lenders subsequently went out of business.[Footnote 8] 
The market segments comprising mortgages backed by the enterprises and 
FHA had the opposite experience: a sharp decline in market share in 
the early to mid-2000s, followed by rapid growth beginning in 2007. 
[Footnote 9] For example, the enterprises' share of the mortgage 
market decreased from about one-half in 2003 to about one-third in 
2006. By 2009 and 2010, enterprise-backed mortgages had increased to 
more than 60 percent of the market. Similarly, FHA-insured mortgages 
grew from about 2 percent of the market in 2006 to about 20 percent in 
2009 and 2010. 

Lenders originate mortgages through three major channels: mortgage 
brokers, loan correspondents, and retail lenders. Mortgage brokers are 
independent contractors who originate mortgages for multiple lenders 
that underwrite and close the loans. Loan correspondents originate, 
underwrite, and close mortgages for sale or transfer to other 
financial institutions. Retail lenders originate, underwrite, and 
close loans without reliance on brokers or loan correspondents. Large 
mortgage lenders may originate loans through one or more channels. 

Appraisals and Other Valuation Methods: 

Before originating a mortgage loan, a lender assesses the risk of 
making the loan through a process called underwriting, in which the 
lender generally examines the borrower's credit history and capacity 
to pay back the mortgage and obtains a valuation of the property to be 
used as collateral for the loan. (See figure 1.) Lenders need to know 
the property's market value, which refers to the probable price that a 
property should bring in a competitive and open market, in order to 
provide information for assessing their potential loss exposure if the 
borrower defaults.[Footnote 10] Lenders also need to know the value in 
order to calculate the loan-to-value (LTV) ratio, which represents the 
proportion of the property's value being financed by the mortgage and 
is an indicator of its risk level. 

Figure 1: Appraisals as Part of the Mortgage Origination Process: 

[Refer to PDF for image: illustration] 

Buyer agrees to purchase property: 
Buyer applies for mortgage: 
Lender originates mortgage: 
* Review of borrower credit, income, and assets; 
* Appraisal or other property valuation. 

If underwriting requirements are met: 
Lender originates mortgage. 

Source: GAO; Art Explosion (images). 

[End of figure] 

Real estate can be valued using a number of methods, including 
appraisals, broker price opinions (BPO), and automated valuation 
models (AVM).[Footnote 11] An appraisal is an opinion of value based 
on market research and analysis as of a specific date. Appraisals are 
performed by state-licensed or -certified appraisers who are required 
to follow the Uniform Standards of Professional Appraisal Practice 
(USPAP).[Footnote 12] A BPO is an estimate of the probable selling 
price of a particular property prepared by a real estate broker, 
agent, or sales person rather than by an appraiser. BPOs can vary in 
format and scope, and currently there are no national standards that 
brokers are required to abide by in performing BPOs. An AVM is a 
computerized model that estimates property values using public record 
data, such as tax records and information kept by county recorders, 
multiple listing services, and other real estate records.[Footnote 13] 
These models use statistical techniques, such as regression analysis, 
to estimate the market values of properties. The enterprises and 
various private companies have developed a range of proprietary AVMs. 

Lenders have several options open to them for selecting appraisers. 
Lenders can select appraisers directly, using either in-house 
appraisers, independent appraisers, or appraisal firms that employ 
appraisers, or they can use AMCs that subcontract with independent 
appraisers. AMCs perform a number of functions for lenders, including 
identifying qualified appraisers in different geographic areas, 
assigning appraisal orders to appropriate appraisers, following up on 
appraisal orders, and reviewing appraisal reports for completeness and 
quality prior to delivering them to lenders. 

Appraisers consider a property's value from three points of view--
cost, income, and sales comparison--and provide an opinion of market 
value based upon one or more of these appraisal approaches. The cost 
approach is based on an estimate of the value of the land plus what it 
would cost to replace or reproduce the improvements (e.g., buildings, 
landscaping) minus physical, functional, and external depreciation. 
[Footnote 14] The income approach is an estimate of what a prudent 
investor would pay based upon the net income the property produces and 
is of primary importance in ascertaining the value of income-producing 
properties, such as rental properties. The sales comparison approach 
compares and contrasts the property under appraisal (subject property) 
with recent offerings and sales of similar properties. 

The scope of work for an appraisal depends on a number of factors, 
including the property type and the requirements of the mortgage 
lender or investor. For example, the lender may require the appraiser 
to provide an estimate of value using the income approach in addition 
to the sales comparison approach for a property that will be rented, 
or the lender may request that the appraiser provide a specific number 
of sales of comparable properties and properties currently listed for 
sale to better understand the subject property's local market. 
Appraisals vary in type by the property being appraised (for example, 
a single-family home or condominium unit) and the level of inspection 
performed (exterior only or both interior and exterior).[Footnote 15] 

Federal Oversight of Appraisals: 

In response to losses the federal government suffered during the 
savings and loan crisis of the mid-1980s, Congress enacted the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
(FIRREA).[Footnote 16] Title XI of this statute contains provisions to 
ensure that certain real estate-related financial transactions have 
appraisals that are performed (1) in writing, in accordance with 
uniform professional standards, and (2) by individuals whose 
competency has been demonstrated and whose professional conduct is 
subject to effective supervision.[Footnote 17] The primary intent of 
the appraisal reforms contained in Title XI is to protect federal 
deposit insurance funds and promote safe and sound lending. Title XI 
also created the Appraisal Subcommittee, which is responsible for 
monitoring the implementation of Title XI.[Footnote 18] The subsequent 
regulations implementing FIRREA exempt transactions that have 
appraisals conforming to the enterprises' appraisal standards or that 
are insured or guaranteed by a federal agency, such as FHA, the 
Department of Veterans Affairs (VA), and the Department of Agriculture 
(USDA).[Footnote 19] 

The enterprises, whose activities are overseen by FHFA, include 
appraisal requirements in the guides they have developed for lenders 
that sell mortgage loans to them. These guides identify the 
responsibilities of lenders in obtaining appraisals and selecting 
appraisers, specify the required documentation and forms for different 
appraisal types (including different levels of inspection), and detail 
the appraisal review processes lenders must follow. In addition, the 
enterprises issued appraiser independence requirements in 2010 that 
replaced HVCC. 

FHA uses appraisals to determine a property's eligibility for mortgage 
insurance. FHA's appraisal requirements are outlined in a handbook on 
valuations and in periodic letters to approved lenders (called 
mortgagee letters). FHA requires appraisals to include inspections to 
assess whether the property complies with FHA's minimum property 
requirements and standards. Appraisers must be state-certified and 
must have applied to FHA to be placed on FHA's appraiser roster in 
order to perform appraisals for FHA-insured loans. Lenders select an 
appraiser from the FHA roster. VA and USDA have loan guaranty 
programs, and USDA also has a direct loan program, with their own 
appraisal requirements and processes.[Footnote 20] VA's appraisal 
process is different from those of FHA and USDA in that VA assigns an 
appraiser from its own panel of approved appraisers and has 
established a fee schedule that sets a maximum fee that can be charged 
to the borrower. USDA does not have a roster of appraisers or many 
requirements beyond that lenders must use properly licensed or 
certified appraisers. 

For mortgages originated by federally regulated institutions but not 
sold to the enterprises or insured or guaranteed by a federal agency, 
Title XI of FIRREA places responsibility for regulating appraisals and 
"evaluations" with the federal banking regulatory agencies.[Footnote 
21] Federal banking regulators have responsibility for ensuring the 
safety and soundness of the institutions they oversee, protecting 
federal deposit insurance funds, promoting stability in the financial 
markets, and enforcing compliance with applicable consumer protection 
laws. To achieve these goals, the regulators conduct on-site 
examinations to assess the financial condition of the institutions and 
monitor their compliance with applicable banking laws, regulations, 
and agency guidance. These agencies are OCC, which oversees federally 
chartered banks; OTS, which oversees savings associations (including 
mortgage operating subsidiaries);[Footnote 22] NCUA, which charters 
and supervises federal credit unions; the Federal Reserve, which 
oversees insured state-chartered member banks; and FDIC, which 
oversees insured state-chartered banks that are not members of the 
Federal Reserve System. Both the Federal Reserve and FDIC share 
oversight with the state regulatory authority that chartered the bank. 
The Federal Reserve also has general authority over lenders that may 
be owned by federally regulated holding companies but are not 
federally insured depository institutions. 

As required by Title XI, federal banking regulators have established 
appraisal and evaluation requirements through regulations and have 
also jointly issued Interagency Appraisal and Evaluation Guidelines. 
These regulations and guidelines address the minimum appraisal and 
evaluation standards lenders must follow when valuing property and 
specify the types of policies and procedures lenders should have in 
place to help ensure independence and credibility in the valuation 
process. Among other things, lenders are required to have risk-focused 
processes for determining the level of review for appraisals and 
evaluations, reporting lines for collateral valuation staff that are 
independent from the loan production function, and internal controls 
to monitor any third-party valuation providers. The federal banking 
regulators have procedures for examining the real estate lending 
activities of regulated institutions that include steps for assessing 
the completeness, adequacy, and appropriateness of these institutions' 
appraisal and evaluation policies and procedures. 

Consumer Protection Statutes Relating to Appraisals: 

Other laws that apply to appraisals for residential mortgages include 
consumer protection statutes, such as the Truth in Lending Act (TILA), 
which addresses disclosure requirements for consumer credit 
transactions and regulates certain lending practices; the Equal Credit 
Opportunity Act (ECOA), which addresses non-discrimination in lending; 
and the Real Estate Settlement Procedures Act of 1974 (RESPA), which 
requires transparency in mortgage closing documents.[Footnote 23] 
Regulations implementing TILA and ECOA are issued by the Federal 
Reserve and enforced by the federal banking regulators. RESPA 
regulations are issued by HUD and enforced by HUD and the federal 
banking regulators. Under the Dodd-Frank Act, most rulemaking 
authority and some implementation and enforcement responsibilities for 
these laws will be transferred to the Bureau of Consumer Financial 
Protection to be established in the Federal Reserve System.[Footnote 
24] 

The Widespread Use of Appraisals and the Sales Comparison Approach 
Reflect Their Relative Advantages for Valuations in Mortgage 
Originations: 

Available Data Indicate That Appraisals Are the Most Commonly Used 
Valuation Method for Mortgage Originations: 

Available data, lenders, and mortgage industry participants we spoke 
with indicate that appraisals are the most frequently used valuation 
method for home purchase and refinance mortgages. To determine the use 
of valuation methods in mortgage originations, we requested data from 
the enterprises and the five lenders with the largest dollar volume of 
mortgage originations in 2010.[Footnote 25] The enterprises provided 
us with data on the minimum valuation method and, when applicable, the 
level of appraisal inspection they required for the mortgages they 
purchased from 2006 through 2010 that were underwritten using their 
automated underwriting systems.[Footnote 26] (Because these are 
minimum requirements, lenders can and sometimes do exceed them.) The 
lenders provided us with data on the actual valuation method and 
appraisal inspection level for mortgages they made during the same 
period, although they did not always have information for the earlier 
years or for mortgages originated through their broker and 
correspondent lending channels. Because the enterprise and lender data 
were more complete for recent years, the following discussion provides 
more detail on 2009 and 2010, a period in which mortgages backed by 
the enterprises (along with FHA) dominated the market.[Footnote 27] 

Data for the two enterprises combined show that, for first-lien 
residential mortgages, the enterprises required appraisals for: 

* 94 percent of mortgages they bought in 2009, including 92 percent of 
purchase mortgages and 94 percent of refinance mortgages; and: 

* 85 percent of mortgages they bought in 2010, including 86 percent of 
purchase mortgages and 84 percent of refinance mortgages. 

For the remaining mortgages processed through their automated 
underwriting systems, the enterprises did not require an appraisal 
because their underwriting analysis indicated that the default risk of 
the mortgages was sufficiently low to instead require validation of 
the sales prices (or loan amounts in the case of refinances) by an AVM-
generated estimate of value.[Footnote 28] In both 2009 and 2010, the 
enterprises required interior and exterior inspections for roughly 85 
percent of the appraisals for purchase mortgages and roughly 92 
percent of the appraisals for refinance mortgages. The remaining 
appraisals required exterior inspections only. Available enterprise 
data for the preceding 3 years showed that appraisals were required 
for almost 90 percent of mortgages (purchase and refinance 
transactions combined), and the percentage of appraisals requiring 
both interior and exterior inspections increased from approximately 80 
percent to 86 percent, although the data covered a smaller proportion 
of the enterprises' total mortgage purchases. 

We also aggregated data from five lenders, which include not only 
mortgages sold to the enterprises, but also mortgages insured by FHA, 
guaranteed by VA or USDA, held in the lenders' portfolios, or placed 
in private securitizations.[Footnote 29] These data show that, for the 
first-lien residential mortgages for which data were available, these 
lenders obtained appraisals for: 

* 88 percent of the mortgages they made in 2009, including 98 percent 
of purchase mortgages and 84 percent of refinance mortgages; and: 

* 91 percent of the mortgages they made in 2010, including 98 percent 
of purchase mortgages and 88 percent of refinance mortgages. 

For mortgages for which an appraisal was not done, the lenders we 
spoke with reported that they generally relied on validation of the 
sales price against an AVM-generated value, in accordance with 
enterprise policies that permit this practice for some mortgages with 
characteristics associated with a lower default risk. 

For both 2009 and 2010, the lenders reported that interior and 
exterior inspections of the subject property were conducted for over 
99 percent of the appraisals for purchase mortgages and about 97 
percent of the appraisals for refinance mortgages. The remainder 
involved exterior inspections only. Although data for the preceding 3 
years were less complete, they showed roughly similar percentages to 
those for mortgages made in 2009 and 2010. The higher percentages 
reported by the lenders compared with those from the enterprises in 
2010 may partly reflect lender valuation policies that exceed 
enterprise requirements in some situations. For example, officials 
from some lenders told us their own risk-management policies may 
require them to obtain an appraisal even when the enterprises do not, 
or they may obtain an appraisal to better ensure that the mortgage 
complies with requirements for sale to either of the enterprises. 
Additionally, FHA requires appraisals with interior and exterior 
inspections for all of the purchase mortgages and most of the 
refinance mortgages it insures, and most of the lenders we contacted 
make substantial numbers of these mortgages. 

The enterprises have efforts under way to collect more complete 
proprietary data on the use of different valuation methods. In order 
to obtain consistent appraisal and loan data for all mortgages they 
purchase from lenders, the enterprises are currently undertaking a 
joint effort, under the direction of FHFA, called the Uniform Mortgage 
Data Program (UMDP). UMDP has two components related to appraisals. 
The first component is scheduled to begin September 2011, when 
appraisers will be required to use new standardized response options 
in completing appraisal report forms. The second component will be a 
Web-based portal that will facilitate the delivery of standardized 
appraisal data to the enterprises, and the enterprises are planning to 
fully implement UMDP by March 2012. According to officials from the 
enterprises, UMDP will produce a proprietary dataset that will allow 
the enterprises to work with lenders to resolve any concerns regarding 
appraisal quality prior to purchasing mortgages. Additionally, 
officials told us that the dataset would also allow them to assess the 
impact of their valuation policies on appraisal quality and mortgage 
risk.[Footnote 30] However, some appraisal industry stakeholders have 
expressed concerns that in some circumstances the standardized 
response options may be too limited to clearly and accurately 
communicate information that is material to the appraisal. 

Valuation Policies and Practices Generally Reflect the Advantages and 
Disadvantages of Different Methods: 

The enterprises, FHA, and lenders require and obtain appraisals for 
most mortgages because appraising is considered by mortgage industry 
participants to be the most credible and reliable valuation method. 
According to mortgage industry participants, appraisals have certain 
advantages that set them apart from other valuation methods. Most 
notably, appraisals and appraisers are subject to specific 
requirements and standards. The minimum standards for appraisals 
included in USPAP cover both the steps appraisers must take in 
developing appraisals and the information the appraisal report must 
contain. USPAP also requires that appraisers follow standards for 
ethical conduct and have the competence needed for a particular 
assignment. For example, the appraiser must be familiar with the 
specific type of property, the local market, and geographic area. 
Furthermore, state licensing and certification requirements for 
appraisers include minimum education and experience criteria and call 
for successfully completing a state-administered examination. Also, 
standardized report forms, including those developed by the 
enterprises, provide a way to report relevant appraisal information in 
a consistent format. However, some of these potential advantages 
depend on effective oversight, and we have previously reported on 
weaknesses in oversight of the appraisal industry. For example, in a 
2003 report we noted that many state appraiser regulatory agencies 
cited resource limitations as an impediment to carrying out their 
oversight responsibilities.[Footnote 31] In addition, as previously 
discussed, some appraisal industry participants have reported that 
some lenders and mortgage brokers have pressured appraisers to inflate 
property values in violation of appraiser independence standards. Even 
in the absence of overt pressure, biased appraisal values may result 
from the conflict of interest that arises where the appraiser is 
selected, retained, or compensated by a person with an interest in the 
outcome or dollar amount of the loan transaction. 

In contrast with appraisals, BPOs do not have standard requirements 
and are generally not considered a credible valuation method for 
mortgage originations. According to some mortgage industry 
participants, a key disadvantage of BPOs is that real estate brokers 
and agents who perform them are not required to obtain training or 
professional credentials in property valuation, and the BPO industry 
lacks uniform standards. At least one industry group has developed 
standards of practice for BPOs, which are reportedly used by some BPO 
providers, but adherence to these standards is voluntary. Similarly, 
the industry has not adopted standardized BPO forms, resulting in 
differences in the content and quality of BPO reports, according to 
some mortgage industry participants. Additionally, BPOs provide 
somewhat different information than appraisals--a sales price or 
listing price rather than the property's market value. The enterprises 
do not permit lenders to use BPOs for mortgage originations, and 
guidelines from federal banking regulators state that BPOs do not meet 
the standards for an evaluation and cannot be used as the primary 
basis for determining property values for mortgages originated by 
regulated institutions.[Footnote 32] 

Lenders and other mortgage industry participants we spoke with 
identified advantages to BPOs that make them useful for property 
valuations in situations other than first-lien purchase or refinance 
mortgage transactions, such as monitoring the collateral in their 
existing loan portfolios and developing loss-mitigation strategies for 
distressed properties. In these circumstances, some mortgage industry 
participants told us that leveraging real estate brokers' knowledge of 
local sales and listings is an advantage because it helps them 
determine probable selling prices. BPOs can be also performed cheaper 
and faster than appraisals, which allows lenders to obtain more of 
them and make decisions more quickly, particularly when dealing with 
distressed properties. Lenders and AMCs we spoke with estimated that 
BPOs cost from $65 to $125 and are generally completed in 3 to 5 days, 
while appraisals can cost more than twice as much and take several 
days longer to complete. 

AVMs are generally not used as the primary source of information on 
property value for first-lien mortgage originations, due in part to 
potential limitations with the quality and completeness of the data 
AVMs use. Data sources for AVMs include public records, such as tax 
records and information kept by county recorders, and multiple listing 
services. Assessed values for property tax purposes are not always 
current and are themselves often generated from statistical models. 
Information on property sales kept by county recorders is not 
necessarily complete or consistent because disclosure and data 
collection methods can vary by county.[Footnote 33] Similarly, data 
from multiple listing services can be fragmented and inconsistent, in 
part because real estate professionals enter the data themselves, 
which may result in incomplete or inaccurate data. Incomplete data for 
a particular geographic area will prevent an AVM from producing 
reliable values for properties in those areas. Lenders have to 
regularly monitor the accuracy and coverage of multiple AVMs to 
determine which ones should be used for properties in various 
locations. Some mortgage industry participants also told us that AVMs 
tend to be less reliable in areas where properties are not 
homogeneous--for example, a neighborhood with houses built at very 
different times and on different sized lots (in contrast with a 
suburban subdivision, which may have houses built at the same time and 
in the same style). In addition, AVMs may not include information on 
property conditions; rather, they may assume that all properties are 
in average condition. While the enterprises permit lenders to use AVMs 
for some mortgage originations (as discussed earlier), guidelines from 
federal banking regulators state that AVMs generally do not meet the 
standards for an evaluation and cannot be used as the sole basis for 
determining property values for mortgages originated by regulated 
institutions. 

Despite these disadvantages, AVMs provide a fast, inexpensive means of 
indicating the value of properties in active markets, and the 
enterprises and lenders make use of AVMs for a number of purposes. In 
addition to their use in a small percentage of mortgage originations, 
representatives from the enterprises and some lenders and AMCs told us 
they use values generated by AVMs as part of their quality control 
processes. They said that when the appraised value varies 
significantly from the value generated by an AVM, they conduct 
additional analysis to examine the quality of the appraisal. Similar 
to BPOs, AVMs may also be used to monitor collateral values in 
lenders' existing loan portfolios. Furthermore, in circumstances where 
AVMs are appropriate, they offer a number of advantages over 
appraisals. AVMs are generally much quicker and cheaper than 
appraisals, requiring only a few seconds to generate an estimate and 
costing between $5 and $25, according to mortgage industry 
participants we spoke with. Also, proponents of AVMs argue that this 
technology delivers more objective and consistent appraisal values 
than human appraisers, who may value properties differently and may be 
subject to conflicts of interest or pressure from lenders to assess a 
property at a specific value, as discussed later in this report. 

The Sales Comparison Approach Is Required in Nearly All Appraisals 
Because It Is Considered Reliable in Most Situations: 

USPAP requires appraisers to consider which approaches to value--such 
as sales comparison, cost, and income--are applicable and necessary to 
perform a credible appraisal of a particular property. Appraisers must 
then reconcile values produced by the different approaches they use to 
reach a value conclusion. The enterprises and FHA require that 
appraisals provide an estimate of market value at a point in time and 
reflect prevailing economic and housing market conditions. They 
require that, at a minimum, appraisers use the sales comparison 
approach for all appraisals because it is considered most applicable 
for estimating market value in typical mortgage transactions.[Footnote 
34] They also require appraisers to use the cost approach for 
manufactured homes but do not require the income approach for one-unit 
properties unless the appraiser deems it necessary.[Footnote 35] 
Consistent with these policies, valuation data we obtained from FNC 
suggest that appraisers use the sales comparison approach in a large 
majority of mortgage transactions, while the cost approach is used 
less often--generally in conjunction with the sales comparison 
approach--and the income approach is rarely used.[Footnote 36] FNC 
captures data on appraisals conducted for a number of major lenders; 
FNC's data represent approximately 20 percent of mortgage originations 
in 2010.[Footnote 37] FNC's data for both purchase and refinance 
transactions show the following: 

* Nearly 100 percent of appraisals from 2010 used the sales comparison 
approach. The percentage was the same for 2009 appraisals. 

* Sixty-six percent of appraisals from 2010 used the cost approach, 
generally in combination with the sales comparison approach, similar 
to 65 percent for 2009 appraisals. 

* Five percent of appraisals from 2010 used the income approach, 
virtually always in combination with one or both of the other 
approaches. The corresponding percentage for 2009 appraisals was 4 
percent. 

These percentages were roughly similar for purchase and refinance 
mortgages. In addition, although FNC's data for the preceding 3 years 
covered a smaller proportion of total mortgages, the percentages for 
purchase and refinance transactions combined were generally comparable 
to those described above. 

Because the sales comparison approach involves an analysis of recent 
sales of similar properties, it is generally viewed as the most 
appropriate way to estimate market value in active residential 
markets, according to industry guidance and research literature. When 
appraisers use the sales comparison approach, they find recent sales 
of comparable properties and make adjustments to the selling prices of 
those properties based on any differences between them and the subject 
property to estimate market value. In selecting comparable properties, 
appraisers often consider locational attributes (including, but not 
limited to, distance from the subject property), which may be critical 
to a property's value. Properties used for comparison should also have 
been sold relatively recently to reflect the current market. However, 
one criticism of the sales comparison approach is that it may 
perpetuate price trends in overheated (or depressed) markets. For 
example, the use of comparable sales with inflated sales prices 
(driven up by factors that increase consumer demand, such as expanded 
credit availability) can lead to progressively higher market 
valuations for other properties, which in turn become comparables for 
future sales transactions. Also, in markets where there are few recent 
sales of comparable properties, there may be insufficient information 
to support a credible estimate of value. 

The second approach to value--the cost approach--is mostly used in 
addition to the sales comparison approach, and in specific 
circumstances, such as valuing newly constructed properties or 
manufactured homes, according to federal officials and appraisal 
industry participants. To implement the cost approach, appraisers must 
estimate how much it would cost to build a new or substitute property 
in place of the subject property. In addition, they must value other 
site improvements and the land and consider accrued depreciation. 
According to some appraisal industry participants, some circumstances 
in which the cost approach can be particularly useful exist more often 
in rural areas. These circumstances include properties with unusual 
features, such as additional structures or larger (or smaller) lots 
than those of otherwise comparable properties. Using the cost approach 
can provide additional information to appraisers to account for these 
unusual features. Further, the cost approach can be important in 
estimating the value of newly constructed homes because cost and 
market value are usually more closely related when properties are new 
(unless there are economic or functional factors that impact value). 
However, the cost approach also has a number of disadvantages. As a 
property ages, estimating the appropriate amount of depreciation 
becomes more difficult and adds uncertainty to the estimate of value. 
Additionally, while a common way to estimate land values is to review 
recent sales of vacant lots close to the subject property, such sales 
may be rare in many mature residential areas. The cost approach also 
may not be appropriate for appraising certain types of properties, 
such as high-rise condominium units, which are not built individually 
but rather as part of a larger complex, and historic properties, which 
have value not fully captured by the cost approach. 

The third approach to value used in appraisals is the income approach, 
which is an estimate of what a prudent investor would pay based upon a 
property's expected net income (such as from rent). For residential 
properties, the income approach is considered most useful when there 
is an active rental market for comparable properties. However, in some 
residential areas, rental properties are relatively rare, resulting in 
limited data on which to base an estimate using the income approach. 
Even when data on rents are available, they may not be equivalent. For 
example, some rent amounts may include the cost of utilities or other 
amenities, while others may not. In addition, some lenders told us 
that the income approach is often not applicable when the intended use 
of the subject property is as an owner-occupied home rather than as an 
income-producing property. 

Some mortgage industry stakeholders have argued that wider use of 
other approaches--particularly the cost approach--could help mitigate 
what they view as a limitation of the sales comparison approach. They 
told us that reliance on the sales comparison approach alone can lead 
to unsustainable market values and that using the cost approach as a 
check on the sales comparison approach could help lenders and 
appraisers identify when this is happening. For example, they pointed 
to a growing gap between the average market values and average 
replacement costs of properties as the housing bubble developed in the 
early to mid-2000s. However, the industry data discussed previously 
suggest that the cost approach was used in a substantial proportion of 
mortgage originations in recent years. In addition, other mortgage 
industry participants noted that a rigorous application of the cost 
approach may not generate values much different from values generated 
using the sales comparison approach. They indicated, for example, that 
components of the cost approach--such as land value or profit margins 
of real estate developers--can grow rapidly in housing markets where 
sales prices are increasing. 

Additional information would be needed to assess any differences 
between the values appraisers generated using the different 
approaches. Although the available data on appraisal approaches did 
not include this information, enterprise officials told us that the 
UMDP initiative will capture data on appraisal approaches and values 
generated by these approaches, which may help them perform more in-
depth analysis of appraisals for the mortgages they purchase. However, 
given uncertainty regarding the future role of the enterprises in the 
mortgage market and the proprietary nature of the effort, the degree 
to which data from the UMDP initiative will benefit the broader market 
is unclear. FHFA officials told us that UMDP could be a potentially 
important risk management tool for the enterprises and that they have 
not made decisions about whether they will make any of the data 
collected through the program available for wider use. 

Recent Policy Changes May Affect Consumer Costs for Appraisals, while 
Other Policy Changes Have Enhanced Disclosures to Consumers: 

Consumer Costs for Appraisals Vary by Geographic Location, Appraisal 
Type, and Property Complexity: 

Lenders generally require consumers to pay for costs associated with 
obtaining appraisals, which can include fees paid to appraisers and 
appraisal firms for providing the appraisal and fees charged by AMCs 
that lenders often use to administer the appraisal process. Mortgage 
and appraisal industry participants we spoke with estimated that, for 
a conventional mortgage, consumers pay an average of $300 to $450 for 
a typical appraisal with an interior and exterior inspection, 
depending on where the property is located.[Footnote 38] Appraisals 
for properties in high cost-of-living areas and rural areas tend to be 
more expensive than in low cost-of-living areas and urban areas, 
according to mortgage industry participants and available 
documentation. Some of these differences are evident--for example, in 
the VA's appraiser fee schedule, which shows variation in fees by 
state ranging from a low of $325 in Kentucky to a high of $625 in 
Alaska. Industry fee information published in February 2010 by a real 
estate technology company shows similar state-level variation, with 
median fees ranging from $300 to $600.[Footnote 39] According to this 
company's data, appraisal fees also vary substantially within states, 
sometimes by more than $200. 

Other factors that affect appraisal costs include the type of 
appraisal product (e.g., level of inspection, scope of work) and the 
size and complexity of the property, according to appraisers, lenders, 
and AMCs we spoke with. For example, one lender said an appraisal with 
an exterior-only inspection for a conventional mortgage may cost $100 
to $150 less than an appraisal that also has an interior inspection. 
Others told us that an appraisal for an FHA-insured mortgage, which 
has additional inspection requirements, might cost $75 more than an 
appraisal for a conventional mortgage.[Footnote 40] Complex properties 
may require specialized experience or training on the part of the 
appraiser and may require the appraiser to take more time to gather 
and analyze data to produce a credible appraisal. A complex property 
may have unique characteristics that are more difficult to value, such 
as being much larger than nearby properties or being a lakefront or 
oceanfront property, because there are likely few properties with 
comparable features that have recently been sold. As a result, 
appraisal costs are often higher for these properties and would be 
passed on to the consumer. In addition, the extent to which data on 
comparable sales are readily available and the number of comparables 
required by the lender may affect appraisal costs. 

Appraisers, lenders, and AMCs we spoke with told us that, in general, 
neither the number of appraisal approaches (i.e., sales comparison, 
cost, and income) used by an appraiser nor a lender's use of an AMC 
affect consumer costs for an appraisal. USPAP requires appraisers to 
use as many of the three approaches as are applicable for each 
property. While using multiple approaches requires additional time and 
effort on the part of the appraiser, appraisers typically do not 
adjust their fees on this basis, according to appraisers we spoke 
with. Instead, to the extent they are able to set their fees, they 
will do so at a level that will cover their total time and effort 
across all their assignments, including those requiring multiple 
approaches. Similarly, mortgage industry participants we spoke with 
told us that the amount a consumer pays for an appraisal is generally 
not affected by whether the lender uses an AMC or engages an appraiser 
directly. Rather, they said that AMCs typically charge lenders about 
the same amount that independent fee appraisers would charge lenders 
when working with them directly, and lenders generally pass on the 
entire cost to consumers. Appraisers have reported receiving lower 
fees when working with AMCs compared to when working directly with 
lenders because AMCs keep a portion of the total fee. Appraisal 
industry participants told us that the AMC portion is at least 30 
percent of the fee the consumer pays for an appraisal. For example, 
one AMC official told us that, for a $375 appraisal, the appraiser 
would receive approximately $250, and the AMC would keep $125, $100 of 
which would cover its costs and $25 of which would be pretax profit. 
[Footnote 41] 

According to lenders and AMCs we spoke with, consumer costs for 
appraisals increased slightly in 2009, as a result of the enterprises 
requiring appraisers to complete an additional form, called the market 
conditions addendum. This form prompts appraisers to report on market 
conditions and trends in the subject property's neighborhood, 
including housing supply, sales price and listing price trends, seller 
concessions, and foreclosure sales. Lenders and AMCs we spoke with 
estimated that having appraisers complete the market conditions 
addendum added between $15 and $45 to the cost of an appraisal. VA 
also adopted this form and added $50 to the fees on its fee schedule. 

In general, however, lenders, AMC officials, appraisers, and other 
industry participants noted that consumer costs for appraisals have 
remained relatively stable in the past several years and pointed to 
several factors that could explain this stability. First, a number of 
those we spoke with said that increased use of technology and greater 
availability of data electronically has allowed appraisers to complete 
some of their required tasks more quickly. Second, the supply of 
appraisers relative to the demand for their services has helped to 
hold consumer costs steady. Some lender and AMC officials said that 
there is an oversupply of appraisers in some markets where fewer 
mortgage loans are being originated, which has put downward pressure 
on appraisers' fees. Third, AMCs compete with each other for lenders' 
business, which keeps costs relatively stable. 

How the New Requirement That Appraisers Be Paid Customary and 
Reasonable Fees Will Affect Consumer Costs Is Unknown: 

A provision in the Act that requires lenders to pay appraisers a 
"customary and reasonable fee" may affect consumer costs for 
appraisals, depending on interpretation and implementation of federal 
rules.[Footnote 42] The Federal Reserve issued rules in October 2010 
outlining two "presumptions of compliance" for lenders and their 
agents, such as AMCs, to demonstrate they are meeting the Act's 
requirements.[Footnote 43] Compliance with these rules became 
mandatory on April 1, 2011. Under the rules, lenders and AMCs are 
presumed to be in compliance with customary and reasonable fee 
requirements if they pay appraisers an amount reasonably related to 
recent rates of compensation for comparable appraisal services 
performed in a given geographical market and make adjustments for the 
specific circumstances of each assignment (including the type of 
property, scope of work, and appraiser qualifications).[Footnote 44] 
Alternatively, lenders and AMCs are presumed to comply with these 
rules if they set fees by relying on objective third-party 
information, such as fee schedules, studies, and surveys prepared by 
independent third parties, including government agencies, academic 
institutions, and private research firms. According to the Act, these 
third-party studies cannot include fees paid to appraisers by AMCs. 
[Footnote 45] However, a person may rebut either presumption with 
evidence that the fee for a given transaction is not customary and 
reasonable based on other information. 

The effect of this change on consumer costs may depend on the approach 
lenders and AMCs take in complying. Some lenders and AMCs told us 
that, under the first presumption of compliance, they believe they can 
continue to compensate appraisers at the rates they have been paying 
them for recent assignments, relying in part on internal data from the 
previous 12 months as evidence that those fees are customary and 
reasonable.[Footnote 46] Assuming they were able to meet the 
conditions for this presumption of compliance, consumer costs likely 
would not change, according to representatives of these companies. 
However, other lenders are taking steps to meet the requirement under 
the second presumption of compliance. Some mortgage industry 
participants told us that some lenders, including smaller ones, may 
set appraiser fees at the level outlined in the VA appraiser fee 
schedule, which uses information from periodic surveys of lenders to 
set maximum fees that borrowers can be charged in each state. Other 
lenders and industry groups are having fee studies done in order to 
comply. Because these studies cannot include the fees AMCs pay to 
appraisers, some industry participants, including some AMC officials, 
expect them to demonstrate that appraiser fees should be higher than 
what AMCs are currently paying. If that is the case, these lenders 
would require AMCs to increase the fees they pay to appraisers to a 
rate consistent with the findings of those studies. The expected 
result would be an increase in appraisal costs for consumers, as well 
as potential improvements in appraisal quality.[Footnote 47] However, 
some lenders are evaluating the possibility of no longer using AMCs 
and managing their own panels of appraisers, which would eliminate the 
AMC administration fee from the appraisal fee that consumers pay. Some 
regulatory officials and lenders told us that lenders can still 
recover the cost of managing the appraisal process from the consumer 
in other ways--for example, through higher application fees, 
origination fees, or interest rates. 

FHA instituted a policy requiring lenders to pay reasonable and 
customary fees to appraisers in 1997. Initially, this policy required 
that lenders charge consumers only the actual amount paid to the 
appraiser but was changed several months later to allow lenders to 
have consumers pay costs associated with services provided by AMCs, as 
well as the fee paid to the appraiser. FHA limited the total costs to 
consumers to the amount that was customary and reasonable for an 
appraisal in the market area in which the appraisal was performed. In 
2009, FHA released additional guidance on fee requirements, stating 
that appraisers must be compensated at a rate that is customary and 
reasonable for an appraisal performed in the market area of the 
property and that AMC fees must not exceed what is customary and 
reasonable for the appraisal management services they provide. FHA's 
guidance places responsibility with the lender for knowing what is 
customary and reasonable in the areas in which they lend and advises 
appraisers not to accept assignments for which they believe the fees 
are not reasonable. FHA officials told us they did not know whether or 
how this change had affected consumer costs. 

Policy Changes Limit Costs to Consumers Relative to Disclosed Cost 
Estimates and Require That the Valuation Report Be Disclosed to 
Consumers Prior to Closing: 

RESPA requires that lenders disclose estimated appraisal costs to the 
consumer along with estimates of other services that are required in 
order to close the mortgage loan.[Footnote 48] These estimates, which 
are included on a standard good faith estimate form, must be provided 
within 3 days of receiving the consumer's application for a mortgage 
loan, unless the lender turns down the application or the consumer 
withdraws the application. Appraisals typically fall in the category 
of third-party settlement services required and selected by the 
lender. In the estimate provided to the consumer, the lender must 
identify each third-party settlement service required, along with the 
estimated price to be paid by the consumer to the provider of each 
service. Subsequently, at loan closing, the lender must disclose the 
actual costs for these services on the HUD-1 settlement form.[Footnote 
49] 

Changes to RESPA that took effect in 2010 require that actual costs 
paid by consumers for third-party settlement services not exceed 
estimated costs by more than 10 percent. If actual costs are higher 
than this threshold, the lender is responsible for making up the 
difference, providing lenders with a greater incentive to estimate 
costs accurately. For each service, the lender is to disclose the name 
of the third-party service provider and the amount they were paid. For 
example, according to HUD guidance, when a lender uses an AMC to 
engage an appraiser, the lender is required to disclose the name of 
the AMC and the total amount paid to the AMC (but not how much the AMC 
paid the appraiser). When a lender engages an appraiser directly, the 
lender must disclose the name of the appraiser and how much the 
appraiser was paid. The Act permits, but does not require, lenders to 
disclose to the consumer separately the fee paid to the appraiser by 
an AMC and the administration fee charged by the AMC at closing. 
[Footnote 50] Some appraisers and federal and state regulatory 
officials said requiring separate disclosures of AMC fees and 
appraiser fees would benefit consumers by providing greater 
transparency. However, other federal officials and lenders questioned 
the value of separate disclosures for various reasons: the information 
could be confusing to consumers, would come too late to inform 
consumer decision making if provided at closing, and involves a small 
part of total closing costs. 

Regulations implementing ECOA require lenders to notify consumers of 
their right to receive the valuation report associated with a mortgage 
transaction and to provide it upon request. Alternatively, lenders can 
routinely provide consumers with a copy of the report during the 
mortgage origination process.[Footnote 51] The Act amended ECOA to 
require lenders to provide consumers with a copy of the valuation 
report no later than 3 days prior to loan closing for first-lien 
mortgages secured by the consumer's principal dwelling and for all 
types of valuations, including appraisals, BPOs, and AVMs.[Footnote 
52] In 2009, the enterprises had adopted a similar requirement as part 
of HVCC for appraisal reports associated with mortgages to be sold to 
the enterprises. These policy changes enhance disclosures to consumers 
by guaranteeing they receive information about the value of the 
property prior to completing their mortgage transaction. 

Conflict-of-Interest Policies Have Changed Appraiser Selection 
Processes, with Implications for Appraisal Oversight: 

Recent Policies Address Conflicts of Interest by Enhancing Appraiser 
Independence Requirements: 

Recently issued policies reinforce long-standing requirements and 
guidance addressing conflicts of interest that may arise when parties 
have an incentive to unduly influence or pressure appraisers to 
provide biased values. Conflicts of interest arise when direct or 
indirect personal interests bias appraisers from exercising their 
independent professional judgment. These conflicts can arise in 
several ways. Loan production staff and mortgage brokers are often 
compensated on a commission based upon mortgage originations, which 
may give them an incentive to pressure appraisers to provide values 
that will allow loans to close. When lenders order appraisals from an 
AMC they own or are affiliated with, the lender's loan production 
staff may be able to influence AMC staff to pressure appraisers, 
according to some mortgage industry stakeholders. Companies that 
provide both valuation services and title services for the same 
transaction may also have a potential conflict of interest because the 
company stands to profit if the mortgage is approved and the borrower 
subsequently purchases the company's title insurance at closing. Real 
estate agents earn commissions based on a property's sales price, 
which may give agents an incentive to influence an appraiser's opinion 
of value. Borrowers may also want to influence appraisers to provide a 
value that will allow their loans to be approved. Some appraisers may 
acquiesce to these different sources of pressure because they want to 
satisfy their clients, receive future assignments, or do not want to 
be responsible for stopping the property transaction from going 
through. 

In order to keep appraisers independent and prevent them from being 
pressured, the federal banking regulators, enterprises, FHA, and other 
agencies have regulations and policies governing the selection of, 
communications with, and coercion of appraisers. Examples of recently 
issued policies that address appraiser independence include HVCC, 
which took effect in May 2009; the enterprises' new appraiser 
independence requirements that replaced HVCC in October 2010; and 
revised Interagency Appraisal and Evaluation Guidelines from the 
federal banking regulators, which were issued in December 2010 and 
apply to federally regulated financial institutions. Additionally, the 
Act broadly prohibits conflicts of interest in the valuation process 
for all consumer credit transactions secured by a consumer's principal 
dwelling. Provisions of these and other policies address some or all 
of the following issues: 

* Prohibitions against loan production staff involvement in appraiser 
selection and supervision. Loan production staff are prohibited from 
selecting, retaining, recommending, or influencing the selection of an 
appraiser for a specific assignment. The reporting structure for 
appraisers must also be independent of the loan production 
function.[Footnote 53] A version of these requirements has been 
included in the federal banking regulators' appraisal regulations 
since 1990 and in FHA guidance since 1994. Similar prohibitions were 
included in HVCC for loans sold to the enterprises and remain in 
effect in the enterprises' current appraiser independence 
requirements. For VA-guaranteed loans, VA assigns appraisers on a 
rotational basis on behalf of lenders, removing loan production staff 
and mortgage brokers from the process altogether. 

* Prohibitions against third parties selecting appraisers. Appraisers 
should be selected by the lender or its agent rather than by a third 
party with an interest in the mortgage transaction. The federal 
banking regulators include this requirement in their appraisal 
regulations. In addition, the enterprises expressly prohibit borrowers 
from selecting and retaining appraisers. The enterprises and FHA also 
prohibit real estate agents and mortgage brokers from selecting 
appraisers. 

* Limits on communications with appraisers. While certain 
communications between loan production staff and appraisers are 
necessary, other communications that may unduly influence appraisers 
are inappropriate. For example, according to the federal banking 
regulators' guidelines, this includes communicating a predetermined, 
expected, or qualifying estimate of value or a loan amount, or a 
target LTV ratio, to an appraiser. Similarly, the enterprises and FHA 
prohibit loan production staff from communicating with appraisers or 
AMCs about anything that relates to or impacts valuation. All of these 
requirements and guidelines permit lenders to request that an 
appraiser (1) consider additional property information, including 
additional comparable properties; (2) provide further detail, 
substantiation, or explanation of the value conclusion; or (3) correct 
errors in the appraisal report. VA permits lenders' staff to 
communicate with appraisers about the timeliness of an appraisal 
report, but only VA-approved appraisal reviewers may discuss valuation 
matters with the appraiser. 

* Prohibitions against coercive behaviors. Coercive behavior is 
intended to influence appraisers to base property value on factors 
other than the person's independent judgment. The federal banking 
regulators' guidelines state that no lender or person acting on a 
lender's behalf should engage in coercive actions, and the enterprises 
and FHA expressly prohibit such actions. Examples of coercive actions 
include withholding timely payment or partial payment for an appraisal 
report; expressly or implicitly promising future business, promotions, 
or increased compensation to an appraiser; and implying to an 
appraiser that his or her current or future retention depends on the 
valuation estimate. 

A Number of Factors, Including HVCC, Increased the Use of Appraisal 
Management Companies and Changed How Other Industry Participants 
Operate: 

Although industry-wide data on lenders' use of AMCs over time are 
unavailable, appraisal industry participants told us that between 60 
and 80 percent of appraisals are currently ordered through AMCs, 
compared with less than half before HVCC went into effect in 2009. 
[Footnote 54] According to these participants, this increased demand 
for AMCs' services has resulted in a proliferation of new AMCs across 
the country. Lenders and other mortgage industry participants 
identified several factors that have contributed to a greater use of 
AMCs. First, market conditions, including an increase in the number of 
mortgages originated during the mid-2000s, put pressure on lenders' 
capacity to manage appraiser panels. Second, as lenders expanded the 
areas in which they originated mortgages, they found identifying 
appraisers with the appropriate experience and familiarity with the 
various locations to be increasingly burdensome. They also said it 
would be difficult to predict where across the country they would need 
appraisers at any given time. AMCs provided a practical solution to 
these two issues. According to a number of lenders we spoke with, AMCs 
can manage the valuation process and costs more efficiently than their 
internal valuation departments. In particular, they told us that AMCs 
are better equipped to handle the administrative effort of managing 
appraiser panels, such as checking licenses, maintaining contact 
information, placing and following up on appraisal orders, performing 
initial quality control, and providing national geographic coverage. 
In several of these cases, the lenders had already switched to using 
AMCs years before HVCC went into effect. The third factor that 
affected some lenders' use of AMCs was that HVCC required additional 
layers of separation between loan production staff and appraisers. 
According to some appraisal industry participants, some lenders may 
have outsourced appraisal functions to AMCs because they thought using 
AMCs allowed them to easily demonstrate compliance with the appraiser 
selection provisions in HVCC. Several appraisal industry participants 
told us that some lenders incorrectly believed they were required to 
use AMCs in order to be in compliance with HVCC. 

Some appraisers, mortgage brokers, and lenders told us that the 
increased use of AMCs and the policy changes that banned mortgage 
brokers from selecting appraisers disrupted the business relationships 
they relied on and changed the ways they operate. Some of these 
industry participants told us small appraisal firms went out of 
business as lenders increased their reliance on AMCs. Having lost 
their lender and mortgage broker clients, some appraisers said they 
joined AMC panels to be able to make a living as appraisers but found 
they were asked to perform the same amount of work for less money than 
they had been making previously. Some appraisers also indicated that 
some AMCs pressure appraisers to complete appraisal reports within 
unreasonable time frames or try to guide the appraiser's value 
conclusion--for example, by recommending the use of certain comparable 
sales. Other appraisal industry participants told us that some 
experienced appraisers decided to perform nonresidential appraisals or 
left the appraiser profession altogether instead of working for lower 
fees. In addition, several lenders told us they required mortgage 
brokers to use only designated AMCs--a change that eliminated the 
brokers' ability to communicate with appraisers. Some mortgage 
industry participants, including mortgage brokers, also said that the 
lack of communication with appraisers caused delays in receiving 
appraisals because the brokers had to go through AMCs to correct 
reports or have questions answered. In addition, mortgage brokers we 
spoke with told us that it may be difficult to transfer appraisals to 
another lender if a deal falls through because lenders often do not 
accept appraisals that were not from their designated AMCs. In these 
instances, a second appraisal would need to be ordered, but at the 
borrower's or mortgage broker's expense. 

Greater Use of Appraisal Management Companies Highlights Potential 
Shortcomings in Existing Oversight and Has Raised Questions about 
Appraisal Quality: 

Although reliance on AMCs has increased, direct federal oversight of 
AMCs is limited. Federal banking regulators' guidelines for lenders' 
own appraisal functions list standards for appraiser selection, 
appraisal review, and reviewer qualifications. For example, a lender's 
criteria for selecting appraisers should identify appraisers who 
possess the requisite education, expertise, and experience to 
competently complete the assignment. In addition, a lender's appraisal 
review policies and procedures should, among other things, establish a 
process for resolving deficiencies in appraisals and set forth 
documentation standards for the review. Similarly, the guidelines 
state that a lender should establish qualification criteria for 
appraisal reviewers that take into consideration education, 
experience, and competence. The guidelines also require lenders to 
establish processes to help ensure these standards are met when 
lenders outsource appraisal functions to third parties, such as AMCs. 
Officials from the federal banking regulators told us they review 
lenders' policies and controls for overseeing AMCs, including the due 
diligence they perform when selecting AMCs, performance expectations 
outlined in contracts, and processes for assessing appraisal quality. 
However, they told us they generally do not review an AMC's operations 
directly unless they have serious concerns about the AMC, and the 
lender is unable to address those concerns. Similarly, the enterprises 
review lenders' policies and controls but not those of AMCs because 
lenders are responsible for ensuring that AMCs meet the enterprises' 
requirements. Officials from the enterprises said they do not review 
AMCs directly because they do not have business relationships with 
AMCs. 

In light of the growing use of AMCs, a number of states enacted laws 
beginning in 2009 to register and regulate AMCs operating within their 
jurisdictions, according to officials from several state appraiser 
regulatory boards. These officials told us that these laws typically 
contained several common elements, including requiring AMCs to have 
processes in place for adding appraisers to their panels, reviewing 
appraisers' work, and keeping records of appraisal orders and 
activities. However, they said that some states have not adopted such 
laws, and existing state laws provide differing levels of oversight. 
For example, while a number of states require AMCs to certify that 
they have the above processes in place, Utah also requires AMCs to 
provide a written explanation of those processes as a condition of 
registering. Similarly, while some state laws do not specify 
requirements for AMC appraisal reviewers, Vermont requires reviews 
that address technical aspects of the appraisal to be performed by 
appraisers with credentials equal to or greater than the minimum 
required to perform the original appraisal assignment.[Footnote 55] 

Some appraiser groups and other appraisal industry participants have 
expressed concern that existing oversight may not provide adequate 
assurance that AMCs are complying with industry standards and their 
own policies and procedures, with negative impacts on appraisal 
quality. Although they did not provide us with data to demonstrate a 
change in quality, these participants suggested that the practices of 
some AMCs for selecting appraisers, reviewing appraisal reports, and 
establishing qualifications for appraisal reviewers--key areas 
addressed in federal guidelines for lenders' appraisal functions--may 
have led to a decline in appraisal quality: 

* Selecting appraisers. Appraiser groups said that some AMCs select 
appraisers based on who will accept the lowest fee and complete the 
appraisal report the fastest rather than on who is the most qualified, 
has the appropriate experience, and is familiar with the relevant 
neighborhood. They said that, with many experienced appraisers 
departing from the industry, less experienced appraisers, who are 
often willing to accept lower fees, are left to perform most of the 
work. 

* Reviewing appraisal reports. According to some appraisal industry 
groups, some AMCs' appraisal reviews overemphasize how close the 
appraiser's value conclusion is to an expected value generated by an 
AVM, at the expense of other important elements of the appraisal, such 
as the appropriateness of the comparable sales. One group noted 
instances in which AMCs told appraisers which comparable sales to use 
when the appraisers' original value conclusions were not consistent 
with AVM-generated values. 

* Establishing qualifications for appraisal reviewers. Representatives 
of an appraisal industry group told us that some AMC reviewers may 
lack the expertise necessary to identify problems with quality. They 
noted that in some states appraiser licensing and certification 
requirements do not address qualifications for appraisal reviewers. 

AMC officials we spoke with said that they have processes and 
standards that address these areas of concern. Several AMC officials 
told us they have vetting processes to select appraisers for their 
panels, including minimum requirements for years of appraising 
experience and education. When selecting appraisers for a specific 
assignment, these AMCs indicated that they use an automated system 
that identifies the most qualified appraiser based on criteria such as 
the requirements for the assignment, the appraiser's geographic 
proximity to the subject property, and performance metrics such as 
timeliness and the quality of appraisers' work. The AMC officials we 
spoke with said they allow appraisers to specify how much they will 
charge for different types of appraisal assignments and, in some 
cases, provide appraisers with the range of fees their peers on the 
appraiser panel charge. These officials said they compare fees only 
when two appraisers are equally qualified for an assignment, in which 
case they might default to the appraiser with the lower fee. Further, 
these officials said that when performing quality reviews on 
appraisals, they run automated checks to identify any problems with 
completeness and internal consistency. These reviews may also involve 
comparing the appraiser's estimated value to a value generated by an 
AVM. Appraisals flagged for potential problems, such as risk of 
overvaluation, are manually reviewed by staff reviewers, who often 
have backgrounds in underwriting or appraising. One AMC official told 
us that their reviewers also provide coaching for less experienced 
appraisers to help them improve the quality of their appraisal reports. 

The enterprises and some lenders we spoke with told us that appraisal 
quality had improved after HVCC was adopted, although they could not 
specifically tie the quality improvements they observed to the use of 
AMCs. Some industry participants noted that other market changes that 
were occurring at the same time HVCC was implemented could have 
contributed to an improvement in appraisal quality, such as the 
enterprises' requirement in 2009 that appraisers also complete the 
market conditions addendum form (as previously discussed in connection 
with its impact on appraisal costs). Nevertheless, the enterprises 
told us that variances between the values in the appraisal reports and 
values produced by their proprietary AVMs decreased after HVCC went 
into effect--in particular, for mortgages from third-party 
originators, including mortgage brokers. In addition, officials from 
one lender said that once HVCC went into effect, they required 
appraisals for mortgages in their broker channel to be ordered through 
AMCs and, on the basis of similar internal metrics that compare AVM-
generated values to appraised values, observed improvements in 
appraisal quality. Officials from the enterprises told us that once 
they have obtained data through UMDP and evaluated its quality, they 
may be able to use the data to assess the appraisal quality of 
individual AMCs and appraisers. 

While views on the impact of AMCs on appraisal quality differ, 
Congress recognized the importance of additional AMC oversight in 
enacting the Act by requiring each state to register and regulate AMCs 
and placing the supervision of AMCs with state appraiser regulatory 
boards.[Footnote 56] In addition, the Act requires the federal banking 
regulators, along with FHFA and the Bureau of Consumer Financial 
Protection, to establish minimum standards for states to apply when 
registering AMCs, including requirements that appraisals coordinated 
by an AMC comply with USPAP and be conducted independently and free 
from inappropriate influence and coercion.[Footnote 57] This 
rulemaking also provides a potential avenue for reinforcing existing 
federal requirements for key functions that may impact appraisal 
quality, such as selecting appraisers, reviewing appraisals, and 
establishing qualifications for appraisal reviewers. Federal 
guidelines for lenders address these functions and require that 
lenders take steps to ensure that AMCs comply with the guidelines when 
lenders rely on AMCs to perform these functions. However, federal 
regulators do not directly monitor AMCs' compliance with the 
guidelines; direct oversight of AMCs will be instead performed by 
state regulators, with the Appraisal Subcommittee monitoring state AMC 
oversight. If state standards do not also address these functions, 
state oversight of AMCs may not provide adequate assurance that these 
functions are being properly carried out. 

Conclusions: 

Because appraisals provide an estimate of market value at a particular 
point in time, they are affected by changes in the housing and 
mortgage markets. In recent years, turmoil in these markets has 
heightened attention on residential property valuations, and 
appraisals in particular. The prominent role of appraisals in the 
mortgage market underscores the importance of efforts to better ensure 
appraisal quality. HVCC, the Act, and federal banking regulator 
guidance have sought to address some of the factors that can affect 
appraisal quality, including appraiser independence and compensation. 
In addition, the enterprises are undertaking an initiative to collect 
detailed and standardized appraisal data that could provide them with 
greater insight into appraisal practices for the mortgages they 
purchase. 

Partly in reaction to appraiser independence requirements, lenders 
have increasingly relied upon AMCs to perform certain functions. 
Despite the increased use of AMCs, direct federal oversight of AMCs is 
limited because the focus of regulators is primarily on lenders, and 
state-level requirements for AMCs are uneven, ranging from no laws to 
laws with specific standards for registering with the state. Some 
appraisal industry participants have raised concerns that the 
management practices of some AMCs may be negatively affecting 
appraisal quality. Among the areas of concern are AMCs' practices for 
key functions, including selecting appraisers for assignments, 
reviewing completed appraisal reports, and establishing qualifications 
for appraisal reviewers. The federal banking regulators have 
emphasized the importance of these functions in guidelines that apply 
to lenders' appraisal functions. The Act requires the federal banking 
regulators and other federal agencies to set minimum state standards 
for registering AMCs, which provides an opportunity for the regulators 
to address these areas of concern and promote more consistent 
oversight of these functions, whether performed by lenders or AMCs. 
Doing so could help to provide greater assurance to lenders, the 
enterprises, and federal agencies of the quality of the appraisals 
provided by AMCs. 

Recommendation for Executive Action: 

To help ensure more consistent and effective oversight of the 
appraisal industry, we recommend that the heads of FDIC, the Federal 
Reserve, FHFA, NCUA, OCC, and the Bureau of Consumer Financial 
Protection--as part of their joint rulemaking required under the Act--
consider including the following areas when developing minimum 
standards for state registration of AMCs: criteria for selecting 
appraisers for appraisal orders, review of completed appraisals, and 
qualifications for appraisal reviewers. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to FDIC, the Federal Reserve, NCUA, 
OCC, and OTS, as well as FHFA, HUD, USDA, and VA, for their review and 
comment. We received written comments from the Director of Risk 
Management Supervision, FDIC; the Directors of the Divisions of 
Banking Supervision and Regulation and Consumer and Community Affairs, 
Federal Reserve; the Executive Director of NCUA; the Acting 
Comptroller of the Currency; and the Acting Director of FHFA that are 
reprinted in appendixes II through VI. We also received technical 
comments from FDIC, the Federal Reserve, FHFA, HUD, and OCC, which we 
incorporated where appropriate. OTS, USDA, and VA did not provide 
comments on the draft report. The Bureau of Consumer Financial 
Protection did not receive the draft report in time to provide 
comments. 

In their written comments, the federal banking regulators (FDIC, the 
Federal Reserve, NCUA, and OCC) and FHFA agreed with or indicated they 
will consider our recommendation to address specific areas as part of 
joint rulemaking to develop minimum standards for state registration 
of AMCs. In its written response, the Federal Reserve said that it 
would consider our recommendation in developing rules to establish 
minimum standards. It also cited various regulations and guidance it 
and other agencies have issued related to appraiser independence since 
the 1990s. While agreeing with our recommendation, OCC noted in its 
written comments that improved oversight of AMCs by states does not 
diminish federally regulated institutions' responsibility to ensure 
that services performed on their behalf by AMCs comply with applicable 
laws, regulations, and guidelines. Finally, FHFA in its written 
response agreed that the joint rulemaking process should consider the 
areas we mention in our recommendation. While it also noted that the 
data in the report did not capture differences between the 
enterprises' practices, it noted that the report discusses that 
lenders may and do require appraisals beyond what is required by the 
enterprises. 

We are sending copies of this report to the appropriate congressional 
committees, the Chairman of FDIC, the Chairman of the Federal Reserve, 
the Acting Director of FHFA, the Secretary of Housing and Urban 
Development, the Chairman of NCUA, the Acting Comptroller of the 
Currency, the Acting Director of OTS, the Secretary of Agriculture, 
the Secretary of Veterans Affairs, the Bureau of Consumer Financial 
Protection, and other interested parties. In addition, the report is 
available at no charge on the GAO Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staff members have any questions about this report, 
please contact me at (202) 512-8678 or shearw@gao.gov. Contact points 
for our Offices of Congressional Relations and Public Affairs may be 
found on the last page of this report. GAO staff who made key 
contributions to this report are listed in appendix VII. 

Signed by: 

William B. Shear: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This report focuses on valuations of single-family residential 
properties for first-lien purchase and refinance mortgages. We examine 
(1) the use of different valuation methods and their advantages and 
disadvantages; (2) factors that affect consumer costs and requirements 
for disclosing 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 also consider the impact of the Home Valuation Code of 
Conduct (HVCC) throughout the report. 

To describe how often different valuation methods are used, we 
analyzed valuation data from various sources for mortgages originated 
in calendar years 2006 through 2010. We requested aggregated data on 
valuations for mortgages originated in these years from Fannie Mae and 
Freddie Mac (the enterprises), the five largest lenders (as determined 
by the dollar volume of total mortgage originations in 2010), six of 
the largest appraisal management companies (AMC) (as identified by 
industry trade associations), and three private vendors of mortgage 
and valuation technology. In response to our request, we obtained 
proprietary data from the enterprises, five lenders (Ally Financial, 
Inc.; Bank of America, NA; J.P. Morgan Chase Bank, NA; CitiMortgage, 
Inc.; and Wells Fargo Bank, NA), four AMCs (CoreLogic, Landsafe, LSI, 
and PCV/Murcor), and one private vendor (FNC, Inc.). Data from each 
group of entities provide a partial picture of the valuation methods 
used in purchase and refinance mortgage originations and overlap with 
each other to a certain degree. The datasets we assembled are unique 
and therefore difficult to cross-check with other known sources to 
check their reliability. However, we were able to corroborate some 
data elements through interviews, and we used each of the datasets we 
assembled and other proprietary data we obtained to corroborate the 
other datasets. As a result, we believe that these data are 
sufficiently reliable for the purpose of this report, keeping in mind 
the following limitations. Because some of the entities compiled the 
requested information differently or were reporting information that 
is not a part of their normal data collection and retention apparatus, 
our datasets contain various degrees of inconsistency, missing data, 
and other issues. The data from the enterprises presented in this 
report only include mortgages originated using their own automated 
underwriting system. As a result, the data do not reflect mortgages 
that (1) lenders originated using manual underwriting; (2) lenders 
originated using their own, enterprise-approved automated underwriting 
systems; or (3) were originated using the automated underwriting 
system of one enterprise but purchased by the other enterprise. Data 
from the lenders often did not include information on mortgages 
originated through their broker or correspondent channels. In 
addition, data from the early part of the 5-year period we examined 
were limited, in part because (according to officials from some of the 
lenders) mergers with other financial institutions and data system 
changes prevented them from accessing these data. For these reasons, 
we have characterized our results in a manner that minimizes the 
reliability concerns (e.g., by focusing on 2009 and 2010) and 
emphasizes the points on which the data are corroborated. Our 
interviews with federal agencies, lenders, AMCs, appraisers, and other 
industry stakeholders provided clarification of data elements and 
additional perspectives on the use of different valuation methods in 
mortgage transactions. Given these and other steps we have taken, we 
believe the data are sufficiently reliable for the purposes used in 
this study. 

The enterprises provided us with data on the minimum valuation method 
they required for mortgages they purchased. Table 1 shows the 
percentage of total mortgage originations (by dollar volume) that 
enterprise purchases accounted for in each of the years we examined. 

Table 1: Enterprise Share of Total Mortgage Originations Excluding 
Home Equity Loans (by Dollar Volume), 2006-2010: 

Fannie Mae: 
2006: 19%; 
2007: 29%; 
2008: 39%; 
2009: 45%; 
2010: 39%. 

Freddie Mac: 
2006: 14%; 
2007: 21%; 
2008: 26%; 
2009: 27%; 
2010: 25%. 

Source: GAO analysis of data from Inside Mortgage Finance. 

[End of table] 

As previously noted, the data from the enterprises used in this report 
cover mortgages that were originated using their automated 
underwriting systems and therefore represent only a portion of the 
total mortgages they purchased. Table 2 shows the percentage of the 
enterprises' mortgage purchases each year that were originated using 
their automated underwriting systems, excluding certain refinance 
mortgages originated under the Home Affordable Refinance Program. 

Table 2: Percentage of Each Enterprise's First-Lien Mortgage Purchases 
Originated Using Their Automated Underwriting Systems, 2006-2010: 

Fannie Mae: 
2006: 49%; 
2007: 52%; 
2008: 54%; 
2009: 58%; 
2010: 59%. 

Freddie Mac: 
2006: 27%; 
2007: 24%; 
2008: 26%; 
2009: 34%; 
2010: 28%. 

Source: GAO analysis of data from the enterprises. 

Note: These data exclude certain refinance mortgages originated under 
the Home Affordable Refinance Program. 

[End of table] 

The five lenders cited previously provided us with data on the 
valuations they obtained for mortgages they made. These lenders 
accounted for about 64 percent of mortgage originations in 2009 
(excluding home equity loans) and 66 percent in 2010. As discussed 
earlier, the lender data did not cover all of their mortgage 
originations. Table 3 shows the percentage of each lender's mortgages 
for which they provided valuation data. 

Table 3: Percentage of Each Lender's First-Lien Mortgage Originations 
for Which They Provided Valuation Data, 2006-2010: 

Wells Fargo: 
2006: 85%; 
2007: 97%; 
2008: 98%; 
2009: 99%; 
2010: 99%. 

Citi: 
2006: 66%; 
2007: 84%; 
2008: 91%; 
2009: 99%; 
2010: 98%. 

Bank of America: 
2006: 0%; 
2007: 0%; 
2008: 37%; 
2009: 35%; 
2010: 44%. 

Chase: 
2006: 0%; 
2007: 0%; 
2008: 14%; 
2009: 30%; 
2010: 24%. 

Ally: 
2006: 0%; 
2007: 0%; 
2008: 0%; 
2009: 11%; 
2010: 7%. 

Source: GAO analysis of lender data. 

Note: Bank of America, Chase, and Ally officials told us they could 
not access data from earlier years due to mergers with other financial 
institutions or data system changes. 

[End of table] 

The four AMCs cited previously provided us with data on the valuations 
they provided to lenders. For many appraisals, some AMCs were unable 
to identify whether the appraisals were for mortgage originations (as 
opposed to other purposes, such as servicing and portfolio management 
or removal of mortgage insurance) and, if they were, whether they were 
for home purchases or refinancing existing mortgages. In addition, two 
of the six AMCs we spoke with did not provide us with data. As a 
result, the AMC data we obtained represented a small but undetermined 
portion of the mortgage market and were of limited use for purposes 
other than corroborating other datasets. 

FNC, Inc. is a mortgage technology company that, among other things, 
provides software platforms for lenders, appraisers, and other 
participants in the mortgage origination process. It captures 
appraisal data electronically that pass through its systems and uses 
the information to build analytical tools for its clients, which 
include several national lenders, as well as various regional and 
community lenders. The share of the mortgage market for which FNC 
captures data has increased over time, reaching about 20 percent in 
2010. We interviewed knowledgeable FNC officials about their processes 
and data controls to assess data reliability. In general, FNC was able 
to provide us with valuation data for approximately 80 percent of the 
appraisals it identified as being for purchase or refinance mortgages. 
These data provide some insight into how often different appraisal 
approaches are used, though they may not be representative of the 
mortgage market as a whole. 

To identify the potential advantages and disadvantages of the 
different valuation methods, we reviewed relevant research studies and 
articles that examine the strengths and limitations of the different 
valuation methods and the potential effects on the reliability of 
appraisals. We also interviewed representatives from the federal 
banking regulatory agencies (the Board of Governors of the Federal 
Reserve System, the Office of the Comptroller of the Currency, the 
Office of Thrift Supervision, the Federal Deposit Insurance 
Corporation, and the National Credit Union Administration), federal 
agencies with mortgage insurance or guarantee programs (the Department 
of Housing and Urban Development's Federal Housing Administration, the 
Department of Veterans Affairs, and the Department of Agriculture), 
the enterprises, appraisal industry groups, AMCs, mortgage lenders 
(including the five cited previously), mortgage industry associations 
(including those representing smaller and rural lenders), as well as 
other individual industry stakeholders and researchers. 

To examine the factors that affect appraisal costs, we reviewed 
federal and lender policies on fees, including fee schedules. We 
interviewed the aforementioned lenders and AMCs and representatives 
from mortgage and appraisal industry associations to identify the 
factors that may affect valuation costs, including any that may have 
caused changes in consumer costs over time. Because our interviews 
with individual lenders and AMCs focused on larger companies, the 
views they expressed may not be representative of these industries as 
a whole. To examine disclosures to consumers, we (1) reviewed and 
summarized statutes and policies, such as the Real Estate Settlement 
Procedures Act, that govern the disclosure of costs and valuation 
documentation to consumers and (2) interviewed federal officials and 
lenders to ensure our understanding of these requirements. To assess 
how HVCC affected appraisal costs and disclosures, we reviewed the 
relevant provisions in HVCC; analyzed information we obtained to 
identify any changes in costs that may be attributable to HVCC; and 
interviewed lenders and appraisers, among other industry stakeholders. 

To determine how federal policies, including HVCC, have addressed 
potential conflicts of interest and affected appraiser selection 
policies, we reviewed statutes, regulations, guidance, and federal 
banking regulators' examination procedures covering appraiser 
independence requirements. We interviewed federal banking regulators, 
lenders, appraisers, AMCs, state regulatory officials, and other 
mortgage industry participants to discuss changes in policies and 
their impact on the appraisal process, industry participants, and 
appraisal quality. In addition, we interviewed the enterprises, 
lenders, and AMCs about the policies and procedures they have in place 
to assess and help ensure appraisal quality. 

We conducted this performance audit from July 2010 to July 2011 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the Board of Governors of the Federal 
Reserve System: 

Board of Governors: 
of the: 
Federal Reserve System: 
Washington, DC 20551: 

July 6, 2011: 

Mr. William B. Shear: 
Director, Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
Washington, D.C. 20548: 

Dear Mr. Shear: 

Thank you for the opportunity to comment on the Government 
Accountability Office (GAO) draft report entitled Real Estate 
Appraisals: Opportunities to Enhance Oversight of an Evolving 
Industry. The report provides an overview of the valuation methods, 
including appraisals, used by lenders for first-lien residential 
mortgage originations. In conducting the study, GAO recognized that 
the recent mortgage crisis resulted in increased scrutiny of lenders' 
appraisal practices and that recent policy changes have addressed many 
of the concerns with these practices. The report contains one 
recommendation to the Federal Reserve, the other federal banking 
regulators, the Federal Housing Finance Agency (FHFA), and the Bureau 
of Consumer Financial Protection (Bureau), concerning the 
establishment of minimum standards for appraisal management companies 
(AMCs). 

As the draft report acknowledges, appraisals provide important 
information on a property's market value that assists consumers in 
making informed borrowing decisions. Further, the report recognizes 
that independent and credible real estate valuations, including 
appraisals, are critical to prudent residential mortgage lending. 

Board regulations and supervisory guidance that address the 
independence of appraisers in credit transactions involving federally-
regulated financial institutions have been in place since the 1990s. 
To strengthen the appraisal process more broadly, in July 2008 the 
Federal Reserve Board issued final rules that applied to all 
creditors, mortgage brokers, and their affiliates. The Board's rules 
expressly prohibited these parties from coercing, influencing, or 
otherwise encouraging appraisers to misstate or misrepresent the value 
of a consumer's principal dwelling. The July 2008 final rules also 
prohibited a creditor from extending credit when the creditor has 
reason to believe that the appraiser was encouraged to misstate or 
misrepresent the value of the dwelling, unless the creditor determines 
that the appraisal was accurate or bases its credit decision on a 
separate appraisal that was not subject to the prohibited practices. 

Subsequently, the Board issued interim final rules in October 2010 to 
implement the appraisal independence provisions in section 1472 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act). The October 2010 interim final rules include several provisions 
that protect the integrity of the appraisal process and seek to ensure 
that real estate appraisers are free to use their independent 
professional judgment in assigning home values without influence or 
pressure from those with interests in the transactions. For example, 
the interim rules prohibit a party from withholding or threatening to 
withhold timely payment from the person preparing the valuation 
because the person did not value the consumer's principal dwelling at 
or above a certain amount. 

The October 2010 rules also prohibit appraisers and appraisal 
management companies from having a financial or other interest in the 
credit transaction or property that is the subject of the appraisal. 
To facilitate compliance, the interim final rules provide a "safe 
harbor" for creditors that observe certain restrictions on the 
selection, supervision and compensation of appraisers. Under the 
rules, a creditor or settlement service provider that has information 
about appraiser misconduct must file a report with the appropriate 
state licensing authorities. To protect the quality of appraisals, the 
rules also require that independent appraisers receive customary and 
reasonable compensation for their services. Compliance with the 
October 2010 interim rules became mandatory on April 1, 2011. 

Going forward, the Board and the other federal banking agencies, the 
FHFA and the Bureau will share responsibility for jointly issuing 
permanent rules on appraisal independence. In developing permanent 
rules, we will consider the public comments received on the Board's
October 2010 interim final rules, including the views and issues 
discussed in the GAO's draft report. We will also consider the 
experience gained through the examination process and the handling of 
any complaints that the agencies have received since the interim rules 
became effective. 

The federal banking regulators have long stressed to federally 
regulated financial institutions the importance of a quality and 
independent appraisal process. The federal banking regulators adopted 
appraisal regulations in 1990 and have reminded institutions of the 
importance of the appraisal process over the years in several 
supervisory guidance issuances, including the Interagency Appraisal 
and Evaluation Guidelines (December 2010). These guidelines address 
the federal banking regulators' expectations for a regulated 
institution's appraisal process and reflect recent changes in lending 
and appraisal practices, including the greater use of a third party 
(such as an AMC) by institutions to perform their residential 
appraisal management function. In the guidelines, the federal banking 
regulators remind institutions that, even if a third party performs 
all or a part of their appraisal function, institutions remain 
responsible for ensuring that the third party complies with all 
applicable laws and regulations. 

The Dodd-Frank Act recognizes the increasing role of AMCs in 
residential mortgage lending. The Act mandates that the federal 
banking regulators, the FHFA, and the Bureau issue rules establishing 
minimum requirements for states to apply in the registration of AMCs. 
We expect the agencies to start work on these rules once the Bureau is 
fully operational. The GAO recommends that these rules address 
requirements for the selection of appraisers, review of appraisals, 
and qualifications of appraisal reviewers. In developing rules to 
establish minimum standards for AMCs, we will consider the GAO's 
recommendation. 

Thank you for the opportunity to review the draft report. 

Sincerely, 

Signed by: 

Patrick M. Parkinson: 
Director, Division of Banking Supervision and Regulation:  

Signed by: 

Sandra F. Braunstein: 
Director, Division of Consumer and Community Affairs: 

[End of section] 

Appendix III: Comments from the Federal Deposit Insurance Corporation: 

FDIC: 
Federal Deposit Insurance Corporation: 
Division of Risk Management Supervision: 
550 17th Street NW: 
Washington, D.C. 20429-9490:  

July 6, 2011: 

William B. Shear: 
Director, Financial Markets & Community Investment: 
United States Government Accountability Office: 
Washington, D.C. 20548: 

Dear Mr. Shear: 

The Federal Deposit Insurance Corporation (FDIC) reviewed the GAO 
report Real Estate Appraisals: Opportunities To Enhance Oversight Of 
An Evolving Industry (Report) (GAO-11-653). 

The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated 
a GAO study on the effectiveness and impact of various real estate 
valuation methods, the options available for selecting appraisers and 
the impact of the Home Valuation Code of Conduct which established 
certain appraiser independence requirements for loans sold to Fannie 
Mae and Freddie Mac. The study focused on valuations of single-family 
residential properties for first lien purchase and refinance 
mortgages. To conduct the study the GAO (a) examined the most common 
valuation methods; (b) reviewed the factors affecting consumer costs 
and disclosure requirements; and (c) evaluated conflict-of-interest 
and appraisal selection policies and their impact. 

A copy of the GAO draft report was provided to the Federal banking 
regulators for comment prior to the report being issued in final form. 
FDIC staff discussed the draft report findings and recommendations 
with GAO representatives. Several areas were identified where 
clarification or additional supporting facts would augment report 
findings or expand on one or more important points. 

The report recommends that the Federal banking regulators consider 
developing minimum standards for registering appraisal management 
companies (AMCs) that include criteria for: selecting appraisers, 
reviewing completed appraisals, and qualifications for appraisal 
reviewers. The FDIC along with other Federal banking agencies and the 
Bureau of Consumer Financial Protection will meet in September 2011 to 
begin developing standards for registering AMCs. 

We appreciated the opportunity to review and comment on the draft 
audit report and we hope these efforts will further improve the 
appraisal process. 

Sincerely, 

Signed by: 

Sandra L. Thompson: 
Director: 

[End of section] 

Appendix IV: Comments from the Office of the Comptroller of the 
Currency: 

Comptroller of the Currency: 
Administrator of National Banks: 
Washington, DC 20219: 

July 6, 2011: 

Mr. William B. Shear: 
Director, Financial Markets and Community Investment: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Shear: 

We have received and reviewed your draft report titled "Real Estate 
Appraisals: Opportunities to Enhance Oversight of an Evolving 
Industry." Your report responds to a mandate in the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Act) for a study of the 
effectiveness and impact of various valuation methods and the options 
available for selecting appraisers, as well as the impact of the Home 
Valuation Code of Conduct. 

You found that: (1) the widespread use of appraisals and the sales 
comparison approach reflect their relative advantages for valuations 
in mortgage originations; (2) recent policy changes may affect 
consumer costs for appraisals, while other policy changes have 
enhanced disclosures to consumers; and (3) conflict-of-interest 
policies have changed appraiser selection processes, with implications 
for appraisal oversight. You note that lenders have increasingly 
relied upon appraisal management companies (AMC) to perform certain 
functions and that direct federal oversight of AMCs is limited. 

To help ensure more consistent and effective oversight of the 
appraisal industry, you recommend that we, along with the Federal 
Deposit Insurance Corporation, Federal Reserve, Federal Housing 
Finance Agency, National Credit Union Administration, and the Consumer 
Financial Protection Bureau, as part of the joint rulemaking required 
under the Act, consider including the following areas when developing 
minimum standards for state registration of AMCs: criteria for 
selecting appraisers for appraisal orders, review of completed 
appraisals, and qualifications for appraisal reviewers. 

We agree with your recommendation. The OCC's and the other federal 
banking agencies' appraisal regulations and related supervisory 
guidance contain longstanding standards that include: (1) criteria for 
selecting appraisers for appraisal orders; (2) minimum standards for 
pre-and post-funding real estate appraisal and evaluation reviews; and 
(3) qualifications for review appraisers. In short, your 
recommendation for addressing future standards for state regulation of
AMCs is consistent with the agencies' current standards for the 
performance of real estate appraisals in connection with federally 
related transactions. 

It is important to note, however, that improved oversight by the 
states does not diminish the federally regulated institutions' 
responsibility to ensure that any services performed on their behalf 
by an AMC or other third party comply with applicable laws, 
regulations, and supervisory guidance. 

We appreciate the opportunity to comment on the draft report. 

Sincerely, 

Signed by: 

John Walsh: 
Acting Comptroller of the Currency: 

[End of section] 

Appendix V: Comments from the National Credit Union Administration: 

National Credit Union Administration: 
1775 Duke Street: 
Alexandria, VA 22314-3428: 
703-518-6300: 

Via E-Mail: 

June 23, 2011: 

Mr. William B. Shear: 
Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 
shearw@gao.gov: 

Dear Mr. Shear: 

We have received and reviewed your draft report "Real Estate 
Appraisals Opportunities to Enhance Oversight of an Evolving 
Industry". The Dodd-Frank Wall Street Reform and Consumer Protection 
Act (the Act) mandated that GAO study the various valuation methods 
and the options available for selecting appraisers, as well as the home
Valuation Code of Conduct (HVCC) which established appraiser 
independence requirements for mortgages sold to Fannie Mae and Freddie 
Mac. 

GAO recommends in the draft report: "To help ensure more consistent 
and effective oversight of the appraisal industry, we recommend that 
the heads of FDIC, Federal Reserve, FHFA, OCC, NCUA, and the Bureau of 
Consumer Financial Protection—as part of their joint rulemaking 
required under the Act—consider including the following areas when 
developing minimum standards for state registration of Appraisal
Management Companies (AMCs): criteria for selecting appraisers for 
appraisal order, review of completed appraisals, and qualification for 
appraisal reviewers." 

NCUA agrees with GAO's recommendation in the draft report. We will 
work with the agencies identified above to address GAO's 
recommendation in the joint rulemaking process required under the Act. 

Sincerely, 

Signed by: 

David Marquis: 
Executive Director: 

[End of section] 

Appendix VI: Comments from the Federal Housing Finance Agency: 

Federal Housing Finance Agency: 
Office of the Director: 
1700 G Street, N.W. 
Washington, D.C. 20552-0003: 
202-414-3800: 
202-414-3823 (fax): 

June 30, 2011: 

Mr. William B. Shear: 
Director: 
Financial Markets and Community Investment: 
Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Shear: 

Thank you for the opportunity to review and comment on the Government 
Accountability Office (GAO) Report, Real Estate Appraisals: 
Opportunities to Enhance Oversight of an Evolving Industry. We 
appreciate the careful review of valuation practices and requirements 
over the last two decades and agree with the conclusions and 
recommendations. 

The Report highlights the importance of unbiased appraisal valuations 
free from undue influence or pressure from parties to the mortgage or 
real estate transaction. The Report notes that appraisal independence 
requirements--separation of appraisal and loan production functions -
have been included in the banking agency appraisal regulations since 
1990. It cites the problem of inflated appraisals caused by undue 
pressure and conflicts of interest, which led to the adoption of the 
Home Valuation Code of Conduct (HVCC) by Fannie Mae and Freddie Mac
(Enterprises). The Report reviews the Dodd-Frank Act requirement that 
the Federal Reserve Board publish appraisal independence rules to 
safeguard against coercion and conflicts of interest in the appraisal 
valuation process for mortgages. 

While the Report confirms that appraisals are the most commonly used 
valuation method for first lien residential mortgage originations, the 
combined data for the Enterprise (page 12) does not reflect 
differences between the organizations. However, as noted in the 
Report, lenders may and do require appraisals for their loans beyond 
the Enterprise automated underwriting system recommendations. Lenders 
frequently choose to require appraisals to maximize the secondary 
market choices for their loans. 

The Report suggests that use of appraisal management companies (AMCs) 
by lenders increased in response to higher loan volumes during the mid-
2000s, lender expansion into new geographic areas, and appraisal 
independence requirements. We appreciate that the Report alludes to 
the fact that neither the HVCC nor the Enterprises' current Appraisal 
Independence Requirements mandates use of AMCs or any particular means 
of meeting the independence requirements. 

Given increased use of AMCs by lenders and concerns expressed by 
appraisal industry participants regarding the quality of appraisals 
produced by AMCs, FHFA understands GAO's recommendation for the 
agencies identified under the Dodd-Frank Act to consider including 
certain criteria when developing minimum standards for state 
registration of AMCs as part of their joint rulemaking. These criteria 
would include standards for selecting appraisers for appraisal orders, 
review of completed appraisals and qualifications for appraisal 
reviewers. FHFA agrees with the GAO's recommendation that the joint 
rulemaking process with the banking agencies should consider the areas 
cited by the GAO. 

Thank you again for the opportunity to comment on this study. If you 
have any additional questions, please contact me or Alfred Pollard at 
(202) 414-3788. 

Sincerely, 

Signed by: 

Edward J. DeMarco: 
Acting Director: 

[End of section] 

Appendix VII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

William B. Shear, (202) 512-8678 or shearw@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above, Steve Westley (Assistant 
Director), Don Brown, Marquita Campbell, Anar Ladhani, John McGrail, 
Marc Molino, Erika Navarro, Jennifer Schwartz, and Andrew Stavisky 
made key contributions to this report. 

[End of section] 

Footnotes: 

[1] An AMC is defined by the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Pub. L. No. 111-203) as a third party that 
oversees a network or panel of more than 15 appraisers within a state 
or 25 or more appraisers nationally in a given year and has been 
authorized by lenders to recruit, select, and retain appraisers; 
contract with appraisers to perform appraisal assignments; manage the 
process of having an appraisal performed; or review and verify the 
work of appraisers. Dodd-Frank Act § 1473(f)(4) (codified at 12 U.S.C. 
§ 3550(11)). 

[2] The enterprises purchase mortgages that meet specified 
underwriting criteria from approved lenders. Most of the mortgages are 
made to prime borrowers with strong credit histories. The enterprises 
bundle most of the mortgages they purchase into securities and 
guarantee the timely payment of principal and interest to investors in 
the securities. On September 6, 2008, the enterprises were placed 
under federal conservatorship out of concern that their deteriorating 
financial condition and potential default on $5.4 trillion in 
outstanding financial obligations threatened the stability of 
financial markets. 

[3] The Act stated that HVCC ceased to be effective as of the date the 
Board of Governors of the Federal Reserve System (Federal Reserve) 
issued interim final rules covering appraiser independence. Dodd-Frank 
Act § 1472(a) (codified at 15 U.S.C. § 1639e(j)). The Federal Reserve 
issued that rule on October 28, 2010. 75 Fed. Reg. 66554. 

[4] Dodd-Frank Act § 1476. 

[5] GAO, Status of Study Concerning Appraisal Methods and the Home 
Valuation Code of Conduct, [hyperlink, 
http://www.gao.gov/products/GAO-11-158R] (Washington, D.C.: Oct. 19, 
2010). 

[6] Because our interviews with individual lenders and AMCs focused on 
larger companies, the views they expressed may not be representative 
of these industries as a whole. 

[7] The market share figures in this paragraph are in terms of dollar 
volume and do not include home equity loans. 

[8] For additional information about the characteristics and 
performance of nonprime mortgages, see GAO, Nonprime Mortgages: 
Analysis of Loan Performance, Factors Associated with Defaults, and 
Data Sources, [hyperlink, http://www.gao.gov/products/GAO-10-805] 
(Washington, D.C.: Aug. 24, 2010). 

[9] FHA insures lenders against losses from borrower defaults on 
mortgages that meet FHA criteria. FHA historically has served 
borrowers who would have difficulty obtaining prime mortgages but, in 
recent years, has increasingly served borrowers with stronger credit 
histories. 

[10] The enterprises and federal banking regulators define market 
value as the most probable price which a property should bring in a 
competitive and open market under all conditions requisite to a fair 
sale, the buyer and seller each acting prudently and knowledgeably, 
and assuming the price is not affected by undue stimulus. Market value 
is distinct from other types of value, such as liquidation value or 
investment value. Liquidation value refers to the probable price a 
property will bring in a limited market where the seller is under 
extreme compulsion to sell. Investment value refers to the price a 
particular investor would pay for a property in light of the 
property's perceived value to satisfy his or her investment goals. 

[11] While other valuation methods exist, such as tax assessment 
valuations, we focus on appraisals, BPOs, and AVMs because they are 
specifically mentioned in the statutory language mandating this study. 

[12] The Appraisal Standards Board of the Appraisal Foundation 
develops, interprets, and amends USPAP. The Appraisal Foundation is a 
not-for-profit organization established by the appraisal profession in 
1987. In addition to the Appraisal Standards Board, the Appraisal 
Foundation sponsors the Appraisal Qualifications Board, which sets 
minimum education and experience requirements for states' appraiser 
licensing and certification programs, and the Appraisal Practices 
Board, which identifies and issues opinions on recognized valuation 
methods and techniques. 

[13] A multiple listing service is a database set up by a group of 
real estate brokers to provide information about properties for sale. 

[14] Physical depreciation is a loss in value caused by deterioration 
in the physical condition of the improvements. Functional 
depreciation, also known as functional obsolescence, is a loss in 
value caused by defects in the design of the structure (such as 
inadequacies in sizes and types of rooms) or changes in market 
preferences that result in some aspect of the improvements being 
considered obsolete by current standards (for example, the location of 
a bedroom on a level with no bathroom). External depreciation, also 
referred to as economic obsolescence, is a loss in value caused by 
negative influences that are outside of the site, such as economic 
factors or environmental changes (for example, expressways or 
factories that are adjacent to the subject property). 

[15] Appraisers perform limited physical inspections of the property 
on behalf of lenders to assess the property's condition as it relates 
to value. The inspection performed by an appraiser is not equivalent 
to a home inspection performed by a qualified home inspector. Home 
inspections are performed on behalf of borrowers and provide 
information on the condition of the physical structure (e.g., roof, 
foundation) and systems (e.g., electrical, plumbing, heating and 
cooling) of the house. 

[16] Pub. L. No. 101-73, 103 Stat. 183 (1989). 

[17] 12 U.S.C. §§ 3331, 3339-3345. 

[18] Currently the Appraisal Subcommittee board includes officials 
from the Federal Reserve, FDIC, OCC, OTS, NCUA, HUD, and FHFA. Later 
in 2011, OTS (which the Act abolishes) will drop off the board, and 
the Bureau of Consumer Financial Protection created by the Act will be 
added. 

[19] OCC: 12 C.F.R. Part 34, subpart C; Federal Reserve: 12 C.F.R. 
Part 208, subpart E and 12 C.F.R. Part 225, subpart G; FDIC: 12 C.F.R. 
Part 323; OTS: 12 C.F.R. Part 564; NCUA: 12 C.F.R Part 722. 

[20] VA originations represented about 5 percent of the first-lien 
residential mortgage market in 2010, while USDA originations comprised 
about 1 percent of the market. 

[21] An evaluation provides an estimate of the property's market value 
but does not have to be performed by a state-licensed or -certified 
appraiser. The federal banking regulators permit evaluations to be 
performed in certain circumstances, such as mortgage transactions 
below $250,000 that are conducted by regulated institutions. According 
to the federal banking regulators' guidance, an evaluation should 
identify the location of the property and provide a description of it 
and its current and projected use; describe the methods used to 
confirm its physical condition and the extent to which an inspection 
was performed; indicate all sources of information used in the 
analysis; and include information on the preparer of the evaluation. 

[22] 12 U.S.C. § 1813(q). In July 2011, OCC will assume oversight 
responsibility of federal savings associations from OTS, while FDIC 
will assume OTS' oversight responsibility for state savings 
associations. 

[23] Truth in Lending Act, 15 U.S.C. §§ 1601-1667f; Equal Credit 
Opportunity Act, 15 U.S.C. §§ 1691-1691f; Real Estate Settlement 
Procedures Act of 1974, 12 U.S.C. §§ 2601-2617. 

[24] Dodd-Frank Act §§ 1011(a), 1021, 1061(b), and 1062. The Secretary 
of the Treasury has designated July 21, 2011, as the transfer date. 75 
Fed. Reg. 57252 (Sept. 20, 2010). 

[25] These five lenders accounted for about 64 percent of first-lien 
mortgage originations in 2009 and 66 percent in 2010, according to 
industry data. 

[26] The mortgages included in these data represent from 24 percent to 
59 percent of the loans the enterprises purchased each year from 2006 
through 2010. We focus on valuation requirements for mortgages 
processed through the enterprises' automated underwriting systems 
because this was the segment of their business for which comparable 
data were readily available for both enterprises. The enterprises also 
purchase mortgages from lenders that were not underwritten using their 
automated underwriting systems. Some lenders have their own automated 
underwriting systems that they can use instead of the enterprises' 
systems. The enterprises also purchase mortgages that have been 
manually underwritten, and they purchase mortgages in bulk through an 
investor channel. 

[27] See appendix I for additional information on the completeness of 
these data. In 2009 and 2010, the enterprises and several lenders we 
contacted participated in the Home Affordable Refinance Program 
(HARP), which was part of the Making Home Affordable program started 
in 2009 to stabilize the housing market. The purpose of HARP was to 
provide a refinancing vehicle for homeowners that had (1) mortgages 
held or guaranteed by Fannie Mae or Freddie Mac, (2) interest rates 
above the prevailing market rates, and (3) LTV ratios between 80 and 
125. HARP transactions are excluded from the data discussed here. 

[28] When the enterprises waive the appraisal, they may also waive the 
inspection, or they may require an exterior-only inspection completed 
by a state-licensed or -certified appraiser. 

[29] Private securitizations are securities issued by investment banks 
or other private entities rather than the enterprises. 

[30] In addition to the enterprises, FHA plans to adopt the 
standardized appraisal data fields of UMDP for two appraisal forms 
(the Uniform Residential Appraisal Report and the Individual 
Condominium Unit Appraisal Report), but an FHA official told us that 
they will not have access to the Web-based portal and therefore will 
not be able to collect and analyze appraisal data on FHA-insured 
mortgages using this system. 

[31] GAO, Regulatory Programs: Opportunities to Enhance Oversight of 
Real Estate Appraisal Industry, [hyperlink, 
http://www.gao.gov/products/GAO-03-404] (Washington, D.C.: May 14, 
2003). 

[32] Some mortgage industry participants raised concerns about 
conflicts of interest that can arise when brokers prepare BPOs for 
properties they hope to be able to list for sale. In those situations, 
brokers may have an incentive to recommend an artificially low listing 
price--below what the market value of the property would be--in order 
to sell the property and earn the sales commission as quickly as 
possible. Alternatively, if they believe the market will bear a higher 
price, they may have an incentive to recommend a very high listing 
price in order to maximize their sales commission. 

[33] Information at the county level is not available for properties 
that are located in "nondisclosure states"--states in which the price 
and terms of real estate transactions, such as the amount paid for the 
property, are not subject to public disclosure. 

[34] Similarly, VA requires the sales comparison approach for all 
appraisals, except in unusual circumstances involving inadequate or 
nonexistent comparable sales or an extremely unique property. Other 
approaches that are applicable may be used in combination with the 
sales comparison approach. USDA regulations for guaranteed loan 
programs require all residential appraisals to be completed using the 
sales comparison approach. The cost approach must also be used when 
appraising properties that are less than 1 year old (7 C.F.R. § 
1980.334(b)). 

[35] FHA and the enterprises require the income approach for two-to 
four-unit properties. 

[36] These data reflect how frequently the appraiser entered an 
estimate of value for each of the approaches on the appraisal report 
form. They do not include information about how the appraiser 
reconciled the estimated values from the different approaches. 

[37] These data may not be representative of the mortgage market as a 
whole. See appendix I for additional information about these data. 

[38] Conventional mortgages are loans that are not insured or 
guaranteed by federal agencies, such as FHA, VA, or USDA. 

[39] Mercury Network, Appraisal Fee Reference: Median Observed 
Appraisal Fees by County, State, and Region, February 2010. 

[40] FHA uses the appraisal to determine the property's eligibility 
for mortgage insurance based in part on the property's condition. The 
appraiser inspects the property to be able to report on whether the 
property meets FHA's minimum requirements and, if not, the repairs 
required to correct any deficiencies. 

[41] Some mortgage industry participants we spoke with said that, like 
AMCs, appraisal firms that employ appraisers also keep a portion of 
the total appraisal fee--estimates ranged from 30 percent to 50 
percent--to cover expenses. Unlike AMCs, these firms would typically 
provide health insurance and other benefits to the appraisers they 
employ, according to those we spoke with. A number of appraisal 
industry participants also said that some AMCs include appraisers 
employed by appraisal firms on their appraiser panels, which may 
result in even lower fees paid to those appraisers because both the 
AMC and the appraisal firm are keeping a portion of the total 
appraisal fee. 

[42] Dodd-Frank Act § 1472(a) (codified at 15 U.S.C. § 1639e(i)). 

[43] 75 Fed. Reg. 66554 (Oct. 28, 2010). If lenders and AMCs do not 
rely on information that meets the conditions outlined in the rules, 
their compliance is determined based on all of the facts and 
circumstances without a presumption of either compliance or violation. 

[44] Under the first presumption of compliance, lenders and AMCs are 
also prohibited from engaging in anticompetitive acts that would 
affect appraisers' compensation, such as price-fixing or restricting 
others from entering the market. 

[45] Dodd-Frank Act § 1472(a) (codified at 15 U.S.C. § 1639e(i)(1)). 

[46] The rules also require lenders and AMCs to demonstrate that these 
rates consider factors such as the type of property and scope of work. 

[47] Several appraisal industry groups told us that higher fees for 
appraisers would improve appraisal quality by retaining and attracting 
better qualified appraisers to the profession. 

[48] 12 U.S.C. § 2604(c), 24 C.F.R. § 3500.7. 

[49] The HUD-1 settlement form is a standard form that itemizes the 
charges imposed upon both the consumer (borrower) and the seller by 
the lender in relation to the settlement, as required by 24 C.F.R. § 
3500.8 and Appendix A to 24 C.F.R. Part 3500. 

[50] Dodd-Frank Act § 1475 (codified at 12 U.S.C. § 2603). 

[51] 12 C.F.R. § 202.14. 

[52] Dodd-Frank Act § 1474 (codified at 15 U.S.C. § 1691(e)). 

[53] The policies provide guidance for small institutions with limited 
staff about how to comply. In such cases where absolute lines of 
independence in the reporting structure cannot be achieved, lenders 
are to take steps to help ensure that officials involved in selecting 
an appraiser for a particular loan are not involved in approving the 
loan. New consumer regulations implementing the Act's prohibition on 
conflicts of interest in the valuation process include similar 
provisions. 

[54] Appraisal industry participants we spoke with provided varying 
estimates of AMC use prior to HVCC, ranging from 15 percent to 50 
percent of mortgage originations. 

[55] Some appraisal reviews are administrative in nature--for example, 
focusing on whether all fields in the appraisal report were filled in--
and can be performed by a variety of individuals. Other appraisal 
reviews examine the technical aspects of the appraisal report--for 
example, the reasonableness of the properties selected as comparable 
sales and the adjustments made to them--and require a certain level of 
knowledge and expertise in appraising. 

[56] Dodd-Frank Act § 1473(f)(2) (codified at 12 U.S.C. § 3353(a)). 

[57] Officials from the federal banking regulators said they expect 
this process to begin in August or September 2011. 

[End of section] 

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