Chapter Title:

FIRREA & Appraisal Foundation: Setting the Standards

Introduction:

Chapter 1: FIRREA & Appraisal Foundation: Setting the Standards

Introduction:
The stability and reliability of financial markets are inextricably linked to the accuracy and integrity of real estate appraisals. During the 1980s Savings and Loan crisis, questionable appraisal practices contributed to widespread economic instability, highlighting the critical need for robust regulatory oversight and standardized professional conduct within the appraisal industry. This chapter delves into the pivotal roles of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and The Appraisal Foundation in establishing and maintaining these critical standards. FIRREA, a landmark piece of legislation, mandated federal oversight of the appraisal profession, ushering in an era of enhanced accountability and competence. Central to this framework is The Appraisal Foundation, a non-profit organization responsible for developing, interpreting, and promoting uniform appraisal standards and appraiser qualifications. The scientific importance of these standards lies in their ability to reduce information asymmetry, mitigate systemic risk within the financial system, and ensure fair and transparent real estate transactions. This chapter will examine the structure and function of the Appraisal Foundation, including the Appraisal Standards Board (ASB) and the Appraiser Qualifications Board (AQB), detailing their respective roles in defining appraisal standards (USPAP) and setting qualification criteria for appraisers. We will further explore how FIRREA empowers states to license and certify appraisers based on these nationally recognized standards. Upon completion of this chapter, students will be able to: 1) articulate the historical context leading to the enactment of FIRREA and the establishment of The Appraisal Foundation; 2) explain the organizational structure and key functions of the Appraisal Foundation, including the ASB and AQB; 3) summarize the core principles and scope of the Uniform Standards of Professional Appraisal Practice (USPAP); and 4) describe the federal and state regulatory framework governing real estate appraiser licensing and certification. This knowledge will provide a foundational understanding of the regulatory landscape that shapes the real estate appraisal profession and its crucial role in the broader financial ecosystem.

Topic:

FIRREA & Appraisal Foundation: Setting the Standards

Body:

FIRREA & Appraisal Foundation: Setting the Standards

Introduction

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the Appraisal Foundation (TAF) represent a watershed moment in the real estate appraisal profession. Prior to FIRREA, the appraisal industry was largely unregulated, leading to inconsistencies and, in some cases, contributing to the Savings and Loan crisis of the 1980s. FIRREA established a framework for federal oversight of appraisers, while TAF was designated as the authority for developing appraisal standards and appraiser qualifications. This chapter delves into the scientific underpinnings and practical implications of FIRREA and TAF, exploring how they work together to ensure appraisal accuracy, reliability, and integrity.

I. The Genesis of Regulation: Addressing the S&L Crisis

A. The Pre-FIRREA Landscape

Prior to FIRREA, appraisal practices were inconsistent and often lacked standardization. This environment contributed to inflated property values and ultimately, the collapse of many Savings and Loan (S&L) institutions. The lack of regulation meant:

• Inconsistent Standards: Appraisers followed varying methodologies, leading to significant discrepancies in value estimates for similar properties.
• Lack of Accountability: No formal licensing or certification process existed in many states, making it difficult to hold appraisers accountable for inaccurate or misleading valuations.
• Pressure from Lenders: Appraisers sometimes faced pressure from lenders to inflate property values in order to facilitate loan approvals.

B. The Role of Appraisals in the S&L Crisis

Questionable appraisal practices played a significant role in the S&L crisis. Inflated appraisals allowed institutions to:

• Overstate their asset values, masking financial instability.
• Extend credit to borrowers who could not afford to repay, increasing the risk of default.
• Engage in speculative investments that ultimately failed.

The crisis highlighted the need for greater transparency and regulation in the appraisal process.

C. FIRREA: A Legislative Response

FIRREA was enacted in 1989 in response to the S&L crisis. The Act aimed to reform the financial system by:

• Establishing the Office of Thrift Supervision (OTS) to oversee S&L institutions (abolished in 2011 and functions transferred).
• Creating the Resolution Trust Corporation (RTC) to manage and dispose of assets from failed S&Ls (dissolved in 1995).
• Introducing new regulations for real estate appraisals.

II. Key Provisions of FIRREA Related to Appraisals

FIRREA brought about significant changes to the appraisal profession, particularly regarding federal oversight, competency and standards.

A. Federal Oversight and State Certification

FIRREA mandated that states establish appraiser licensing and certification programs. These programs had to meet minimum requirements set by the federal government, specifically those defined by The Appraisal Foundation (TAF).

B. Federally Related Transactions (FRTs)

FIRREA requires that appraisals performed in connection with "federally related transactions" (FRTs) be conducted by state-certified or state-licensed appraisers. An FRT is defined as any real estate-related financial transaction that a federal financial institution regulatory agency or the Resolution Trust Corporation engages in, contracts for, or regulates, and requires the services of an appraiser.

C. The Appraisal Subcommittee (ASC)

FIRREA created the Appraisal Subcommittee (ASC) to monitor the appraisal industry and ensure compliance with federal regulations. The ASC is responsible for:

• Overseeing TAF.
• Monitoring state appraiser regulatory programs.
• Maintaining a national registry of state-certified and state-licensed appraisers.

III. The Appraisal Foundation: Developing Standards and Qualifications

FIRREA recognized the need for a professional organization to set standards for appraisal practice and appraiser qualifications. To this end, the Act effectively delegated this authority to the Appraisal Foundation (TAF).

A. Formation and Structure

TAF is a private, non-profit organization formed in 1987 by several professional appraisal organizations. Its mission is to promote professionalism in the appraisal industry by establishing and maintaining uniform appraisal standards and appraiser qualifications. The Appraisal Foundation's structure includes two primary boards:

1. Appraisal Standards Board (ASB): Responsible for developing, interpreting, and revising the Uniform Standards of Professional Appraisal Practice (USPAP).
2. Appraiser Qualifications Board (AQB): Sets minimum education, experience, and examination requirements for appraiser licensing and certification.
3. Appraisal Practices Board (APB): Serves to codify and implement the best practices and application for appraisers.

B. The Uniform Standards of Professional Appraisal Practice (USPAP)

USPAP is the generally recognized ethical and performance standards for the appraisal profession in the United States. It provides a framework for developing and reporting appraisals in a credible and unbiased manner. Key components of USPAP include:

• Ethics Rule: Emphasizes integrity, objectivity, and independent judgment.
• Competency Rule: Requires appraisers to have the knowledge and experience necessary to perform an appraisal assignment competently.
• Scope of Work Rule: Defines the extent of research and analysis required for a credible appraisal.
• Standards: Specific guidelines for developing and reporting appraisals for different types of properties and assignments.

C. Appraiser Qualification Criteria

The AQB establishes minimum qualification criteria for appraiser licensing and certification. These criteria include:

• Education: Completion of specified appraisal courses and college-level coursework. Current AQB criteria includes 30 semester hours or an Associate’s degree for Residential licenses, and a Bachelor’s degree or higher for Certified Residential or Certified General licenses.
• Experience: Completion of a specified number of hours of appraisal experience under the supervision of a qualified appraiser.
• Examination: Passing a state-administered examination based on the National Uniform Examination Content Outline as designed and recommended by the AQB for both Residential and General certifications.
• Supervisory Appraiser Requirements: AQB approved Supervisory/Trainee Appraiser courses for both supervisors and trainees.

D. The Interplay between FIRREA, TAF, ASC, and State Regulatory Agencies

These entities work together to regulate the appraisal profession. FIRREA provides the legislative framework, TAF develops standards and qualifications, the ASC oversees TAF and state regulatory programs, and state agencies administer licensing and certification.

IV. The Science Behind Appraisal Standards

Appraisal is not merely an art but a science, drawing upon various disciplines to arrive at credible value opinions. USPAP standards and AQB qualification criteria are designed to ensure that appraisers apply scientific principles and methodologies in their work.

A. Economic Principles

Appraisal relies heavily on economic principles such as supply and demand, highest and best use, and market analysis.

• Supply and Demand: The value of a property is influenced by the relative scarcity of similar properties in the market and the demand from potential buyers.
  • Formula: Value ≈ f(Supply, Demand) where f is a function that considers the complex relationship between these factors.
• Highest and Best Use: The reasonable, probable, and legal use of a property that results in the highest value. This concept is fundamental to appraisal, as it guides the appraiser in determining the most appropriate valuation approach.
  • Equation: V_HBU = Max(V_i), where V_HBU is the value under highest and best use, and V_i is the value under each potential use i.
• Market Analysis: Appraisers analyze market trends, demographic data, and economic indicators to understand the forces driving property values in a specific area.

B. Statistical Analysis

Statistical methods are used to analyze comparable sales data and develop adjustments for differences between properties.

• Regression Analysis: This statistical technique can be used to identify the relationship between property characteristics and sale prices.
  • Equation: Y = β₀ + β₁X₁ + β₂X₂ + ... + ε, where Y is the sale price, X_i are property characteristics, β_i are coefficients, and ε is the error term.
• Paired Data Analysis: This method involves comparing sales of similar properties with and without a specific feature (e.g., a swimming pool) to determine the market value of that feature.
  • Formula: Adjustment = Selling Price of Property With Feature – Selling Price of Property Without Feature

C. Geographic Information Systems (GIS)

GIS technology allows appraisers to analyze spatial data, such as proximity to amenities, environmental hazards, and neighborhood characteristics, to better understand the factors influencing property values.

D. Practical Applications and Examples

To illustrate the practical application of these scientific principles, consider the following examples:

1. Market Analysis: An appraiser analyzing a residential market may collect data on recent sales, inventory levels, days on market, and foreclosure rates. By analyzing this data, the appraiser can identify trends and determine the strength of the market, which will influence the valuation of a subject property.
2. Statistical Analysis: An appraiser using regression analysis may develop a model to predict sale prices based on factors such as square footage, number of bedrooms, and lot size. The appraiser can then use this model to adjust the sale prices of comparable properties to account for differences between them and the subject property.
3. GIS Analysis: An appraiser may use GIS to map the locations of comparable sales and identify any spatial patterns or clusters that could indicate neighborhood effects. The appraiser may also use GIS to assess the proximity of the subject property to amenities such as schools, parks, and transportation.

V. Ongoing Challenges and Future Directions

Despite the progress made since FIRREA, the appraisal industry continues to face challenges, including:

• Technological Disruption: The rise of automated valuation models (AVMs) and other technologies has raised questions about the role of human appraisers.
• Appraiser Shortage: A shortage of qualified appraisers in some areas has led to delays and increased costs for appraisal services.
• Bias and Discrimination: Concerns remain about the potential for bias and discrimination in appraisal practices.

Future directions for the industry include:

• Embracing Technology: Integrating technology into the appraisal process to improve efficiency and accuracy.
• Addressing the Appraiser Shortage: Implementing strategies to attract and retain qualified appraisers.
• Promoting Diversity and Inclusion: Working to ensure that the appraisal profession reflects the diversity of the communities it serves.

Conclusion

FIRREA and the Appraisal Foundation have significantly transformed the real estate appraisal profession. By establishing federal oversight, setting uniform standards, and promoting appraiser qualifications, these entities have helped to ensure the accuracy, reliability, and integrity of appraisals. While challenges remain, the appraisal industry is committed to ongoing improvement and innovation to meet the evolving needs of the market.

ملخص:

FIRREA & Appraisal Foundation: Setting the Standards - Scientific Summary

This chapter examines the evolution of appraisal standards in the United States, focusing on the pivotal role of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the Appraisal Foundation in shaping the appraisal profession. Prior to FIRREA, the appraisal industry suffered from a lack of consistent regulation and standards, contributing to the Savings and Loan crisis of the 1980s. Questionable practices and varying levels of competency highlighted the need for reform.

FIRREA fundamentally altered the appraisal landscape by mandating state licensing and certification for appraisers involved in federally related transactions. This legislative action embedded the Uniform Standards of Professional Appraisal Practice (USPAP) into law, establishing a baseline for appraisal quality and ethics.

The Appraisal Foundation, a non-profit organization, emerged as a key player in this transformation. It was created to foster professionalism by ensuring appraiser qualifications and promoting USPAP. The Foundation established two crucial boards:

• Appraisal Standards Board (ASB): Responsible for developing, interpreting, and updating USPAP to reflect evolving appraisal practices. The ASB issues Statements on Appraisal Standards and Advisory Opinions to provide further guidance.
• Appraiser Qualifications Board (AQB): Sets the minimum education, experience, and examination requirements for appraiser licensing and certification. The AQB's criteria define the pathways to different appraiser credentials, including trainee, residential, and general certifications, each demanding specific coursework (e.g., Basic Appraisal Principles, USPAP courses) and, for higher certifications, college degrees. The AQB also sets standards for supervisory appraisers and trainees, requiring specific courses to ensure proper training and oversight.

The chapter details the core curriculum and basic education module requirements for various license levels, including trainee, residential, certified residential, and certified general appraisers. It emphasizes the importance of continuous updates to education criteria, including college degree requirements and specific coursework hours in areas like appraisal principles, procedures, market analysis, and report writing.

Furthermore, the chapter outlines the structure and key components of USPAP, including:

• Ethics Rule: Enforces integrity, objectivity, confidentiality, and proper record-keeping.
• Competency Rule: Requires appraisers to possess the necessary knowledge and experience for accepted assignments, or to take steps to ensure competency.
• Scope of Work Rule: Emphasizes that the appraiser determines the amount of work and type of report required and the report is acceptable by their peers.
• Jurisdictional Exception: Addresses conflicts between USPAP and local laws.

The chapter also discusses the role of Appraisal Management Companies (AMCs) in maintaining appraiser independence and the Code of Ethics of the National Association of Independent Fee Appraisers (NAIFA)

Conclusions and Implications:

FIRREA and the Appraisal Foundation's subsequent actions dramatically professionalized the appraisal industry. By establishing uniform standards and qualifications, FIRREA aimed to enhance the reliability and objectivity of appraisals, thereby protecting financial institutions and consumers. The Appraisal Foundation provides the framework for maintaining these standards and adapting them to changing market conditions. The ongoing updates to USPAP and AQB criteria are essential for ensuring that appraisers possess the knowledge and skills needed to provide credible and unbiased valuations.

The implications of these changes include:

• Increased public trust: Standardized practices and qualifications enhance the credibility of appraisals.
• Reduced risk of fraud and abuse: Clear ethical guidelines and oversight mechanisms minimize opportunities for unethical behavior.
• Enhanced market stability: Accurate and reliable appraisals contribute to more stable and predictable real estate markets.
• Continuing professional development: Appraisers must stay informed of the latest standards and regulations to maintain their credentials and provide competent services.
• The firewall created between lenders and appraisers helps consumers obtain unbiased appraisal reports for financing and loan servicing.

The chapter concludes by providing contact information for the Appraisal Standards Board and state regulatory agencies, highlighting the importance of ongoing communication and engagement with regulatory bodies.