English
Appraisal Evolution: Technology, Standards, and FIRREA
Appraisal Evolution: Technology, Standards, and FIRREA
Introduction
The appraisal profession has undergone a significant evolution, shaped by technological advancements, the establishment of standardized practices, and landmark legislation. This chapter delves into this evolution, focusing on the impact of technology, particularly financial technology (FinTech), the development and implementation of the Uniform Standards of Professional Appraisal Practice (USPAP), and the pivotal role of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in reshaping the appraisal landscape. We will examine how these elements have converged to define modern appraisal practices, ensuring greater accuracy, efficiency, and regulatory compliance.
I. The Technological Transformation: FinTech and Mobile Technology in Appraisal
A. FinTech and its Impact
Financial Technology, or FinTech, represents the integration of technology into financial services. Its influence on the appraisal process has been profound, extending to nearly every phase of valuation. Mobile technology, in particular, has revolutionized data collection, analysis, and reporting, enhancing both speed and accuracy.
B. Benefits of Mobile Technology in Appraisal
- Speed and Efficiency
Mobile devices facilitate real-time data entry and synchronization. Appraisers can begin the appraisal process remotely, pre-populating forms and accessing property information before arriving at the site.
Example: An office assistant can input preliminary data into a mobile appraisal application while the appraiser is in transit. This data is then synced, allowing the appraiser to access it instantly upon arrival.
Quantification: Let T1 be the time taken to manually enter data on-site, and T2 be the time taken to sync pre-filled data. The time saved (ฮT) is given by: ฮT = T1 - T2.
- Enhanced Accuracy
Mobile applications reduce human error through automated calculations and data synchronization across multiple forms. Integrated sketching tools offer precise property measurements, and access to up-to-the-minute comparable sales data ensures more reliable valuations. Voice notes enable appraisers to record and review observations accurately.
Scientific Principle: Error propagation in manual calculations follows the formula: ฮดf = โ((โf/โx * ฮดx)ยฒ + (โf/โy * ฮดy)ยฒ), where ฮดf is the error in the function f, and ฮดx and ฮดy are the errors in variables x and y. Digital tools minimize these errors.
Example: An appraiser uses a laser measuring device connected to a mobile sketching app. The dimensions are automatically calculated and integrated into the property sketch, eliminating manual calculation errors.
- Cost Reduction
By streamlining processes and improving efficiency, mobile technology reduces the time spent on each appraisal, enabling appraisers to handle a greater volume of assignments.
Economic Principle: The cost per appraisal (C) can be expressed as: C = (Fixed Costs + (Variable Costs * Number of Appraisals)) / Number of Appraisals. Increased efficiency lowers the variable costs per appraisal.
- Streamlined Payments
Mobile payment applications enable appraisers to collect fees instantly, eliminating delays associated with traditional payment methods.
Example: Using a mobile payment app, an appraiser can accept a credit card payment on-site immediately after completing the inspection, improving cash flow and reducing administrative burden.
C. Mobile Devices Replacing Traditional Tools
Mobile devices have effectively replaced clipboards and manual data entry methods, ushering in an era of digital appraisal practices.
II. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)
A. The Need for Regulation
Prior to FIRREA, the appraisal industry lacked comprehensive regulation, leading to inconsistencies in appraiser qualifications and appraisal practices. This lack of oversight contributed to the savings and loan crisis of the late 1980s.
B. FIRREAโs Provisions
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), enacted in 1989, established a framework for regulating financial institutions and the appraisal industry. Key provisions of FIRREA include:
- State Licensing and Certification
FIRREA mandated state licensing and certification for appraisers involved in federally related transactions.
- Nationwide Competency Standards
The Act established requirements for nationwide competency standards, including a four-year degree, ensuring that appraisers possess the necessary knowledge and skills.
- Uniform Standards of Professional Appraisal Practice (USPAP)
FIRREA required the adoption and adherence to the Uniform Standards of Professional Appraisal Practice (USPAP), providing a consistent framework for appraisal methodology and reporting.
C. FIRREAโs Limitations and Subsequent Legislation
While FIRREA addressed some of the issues in the appraisal industry, it did not prevent the lending excesses that led to the financial crisis of 2008. This crisis prompted further regulatory action, including the adoption of the SAFE Act, the Home Valuation Code of Conduct (HVCC), the establishment of Appraisal Management Companies (AMCs), and the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
III. The Appraisal Foundation and USPAP
A. Establishment of the Appraisal Foundation
In response to FIRREA, major appraisal organizations jointly founded the Appraisal Foundation. The Appraisal Foundation is responsible for setting appraisal standards and appraiser qualification criteria for licensing and certification.
Link: www.appraisalfoundation.org
B. Structure and Oversight
Licensing and certification authority was delegated to the states, with oversight from the Appraisal Foundation under Title XI of FIRREA. The Appraisal Subcommittee monitors state regulatory agencies, the Appraisal Foundation, and federal financial institutions regulatory agencies.
C. State Compliance with Appraisal Standards
States must adhere to the appraisal standards set forth by the Appraiser Qualifications Board (AQB) of the Appraisal Foundation, ensuring consistency and uniformity in appraisal practices across the country.
D. Federally Related Transactions
The standards of the Appraisal Foundation apply to “federally related transactions,” defined as transactions involving a federal or regulatory agency or an insured agency, including mortgage loans intended for sale in the secondary market.
E. Definition of Federally Related Transactions
FIRREA (Title XI, section 1121) defines a federally related transaction as any real estate-related financial transaction that:
(A) A federal financial institutions regulatory agency or the Resolution Trust Corporation engages in, contracts for, or regulates, and
(B) Requires the services of an appraiser.
F. Exemptions
Residential transactions of $250,000 or less and nonresidential transactions of $1 million or less are exempt from the requirement of a licensed or certified appraiser. These thresholds are subject to change based on regulatory updates.
IV. Standards of Appraisal: USPAP
A. USPAP as the Standard
Title XI, Section 1110 of FIRREA mandates that federal financial institutions regulatory agencies prescribe standards for real estate appraisals in connection with federally related transactions. These standards must require that appraisals be performed in accordance with generally accepted standards as evidenced by USPAP.
B. Components of USPAP
- Statements:
The Appraisal Foundation has adopted Statements, which are considered an integral part of USPAP. These Statements illustrate how the requirements of the standards are applied in various situations.
- Advisory Opinions:
Advisory Opinions provide guidance from the Appraisal Standards Board. They do not establish new standards but illustrate the applicability of existing standards to specific scenarios.
V. Intended Use, Intended Users, and Standard of Value
A. Standard of Value (Purpose)
The term “standard of value” refers to the type of value information the client requires, such as market value, insurance value, tax value, value in use, or investment value.
B. Intended Use
“Intended use” describes how the client plans to utilize the appraisal, such as for securing a loan, determining value for condemnation, settling an estate, or determining insurance coverage.
C. Intended Users
“Intended users” refers to the client(s) and any other parties who will rely on the appraisal report.
D. Scope of Work
The appraiserโs development and reporting process, known as the “scope of work,” is determined by the intended use and intended users.
E. Examples of Intended Users and Intended Uses
Appraisals are used by and for:
Sellers to set asking prices.
Buyers to determine offering prices.
Lenders to evaluate loan security.
Insurance companies to determine coverage amounts.
Government agencies for property condemnations.
Taxing authorities for property, income, estate, and gift taxes.
Parties in legal proceedings to provide evidence.
Listing agents to propose listing prices.
Owners in their estate planning.
Partners in partnership dissolution.
Conclusion
The evolution of the appraisal profession has been significantly influenced by technological advancements, standardized practices, and regulatory oversight. FinTech, particularly mobile technology, has enhanced the efficiency and accuracy of appraisal processes. FIRREA established the framework for appraiser licensing and certification, ensuring competency and adherence to USPAP. The Appraisal Foundation plays a crucial role in setting standards and monitoring compliance. Understanding the interplay of these factors is essential for mastering modern appraisal practices and delivering reliable, credible valuations.
Chapter Summary
appraisalโ Evolution: Technology, Standards, and FIRREA
This chapter examines the evolution of real estate appraisal, focusing on technological advancements, the establishment of uniform standards, and the impact of the financial institutionsโ Reform, Recovery, and Enforcement Act (FIRREA). The advent of “FinTech,” particularly mobile technology, has revolutionized the appraisal process, enhancing speed, accuracy, and cost-effectiveness. Mobile devices have replaced traditional clipboards, enabling appraisers to begin assessments en route to properties, synchronize data across forms, employ precise sketching tools, access real-time comparables, and record voice notes for comprehensive documentation. This shift reduces human error and streamlines billing processes.
Prior to FIRREA, the appraisal industry lacked comprehensive regulation and uniform standards. FIRREA was enacted to address this deficiency, mandating state licensing and certification for appraisers, establishing nationwide competency standards (now includingโ a four-year degree), and requiring adherence to Uniform Standards of Professional Appraisal Practice (USPAP). In response to FIRREA, the appraisal foundationโ was founded to develop and maintain these standards, with authority over licensing and certification delegated to individual states under the oversight of the Appraisal Subcommittee. States are permitted to establish their own licensing and certification requirements, but they must align with the standards set by the appraiser qualificationsโ Board of the Appraisal Foundation. These standards apply to “federally related transactions,” defined as transactions involving a federal or regulatory agency or an insured agency, including mortgage loans intended for the secondary market. Exemptions exist for residential transactions of $250,000 or less and nonresidential transactions of $1 million or less.
The chapter also explores the multifaceted purposes and uses of appraisals, emphasizing the significance of understanding intended use, intended users, and the appropriate standard of value (e.g., market value, insurance value). These considerations dictate the scope of work required for an appraisal assignment. USPAP, developed by the appraisal standardsโ Board, providesโ the framework for ethical and competent appraisal practice. Statements and Advisory Opinions from the Appraisal Foundation offer further guidance on applying these standards in various situations. The chapter underscores the diverse applications of appraisals, ranging from setting prices in real estate transactions to determining insurance coverage, assessing project feasibility, and resolving legal disputes. Finally, the chapter briefly introduces various career opportunities available for appraisers.
