USPAP the Fallacies, Foibles, and Violations

[Mejappz]

It is an interesting series by Goerge Dell on the failures of USPAP. Part 1 below.

The USPAP (Appraisal Standards) publication starts with a self-telling paragraph titled: “ABOUT THE APPRAISAL FOUNDATION.” This paragraph presents the Appraisal Foundation’s self-claimed place as “the nation’s foremost authority on the valuation profession.” This “foremost” claim immediately places it in contention with other governmental and professional standards. The declared self-image conflicts with the reality. Alternative and data science standards and practices are available.

This blog is the first of what is intended to be several on the quasi-governmental Uniform Standards of Professional Appraisal Practice. We hope to take a fresh look at the standards and related enforced appraiser education in the brighter light of modern technology.

Editor’s Note: If you are time traveling, read Part 2 and subsequent parts here.

Some parts of USPAP are built on a fundamental search for the truth, especially those parts which squarely accepted the historical lack, scarcity, and even the personal nature of data prior to internet and computer-analytic power.

Many of the issues of today are the result of good theoretical stability from those earlier days, merged however with imperious groupthink … a groupthink formalized by the “five forces of friction” blocking valuation innovation: standards, process, education, regulation, and user expectation.


The self-descriptive paragraph noted above continues: “…provides voluntary guidance on recognized valuation methods and techniques for all valuation professionals.” [Emphasis added.] The claimed result is that USPAP is for the purpose of “ensuring appraisals are independent, consistent, and objective.” After some 38 years, it appears this legitimate congressional goal for the Foundation — is in failure.

However, “recognized methods and techniques” have continued to be promoted– in the face of dramatic evolution in analytic and data technology.

This blog series recognizes that real objectives include fair housing solutions, the public trust, and economic counter-cyclicality. To this extent we intend to publish with these steps: 1) Admit the reality of the problem; 2) believe that a higher purpose is doable; and, 3) Suggest a path of evolution to modern-day possibility.

In brief, we consider the three declared elements of USPAP, also enforced within the Appraisal Foundation’s role of education requirements for licensing:

• Independence. The original purpose of appraiser independence is not a reality. Pressures to come in higher or lower depending on the motive continue. In fact, it has become a central political issue in bias, accuracy, and reliability. What used to be an unspeakable lender act, today is formalized in the shape of an official “ROV” (Reconsideration Of Value).
• Consistency. Under existing practices (perpetuated by the “five frictions”) consistency is precluded. If anything, inconsistency is assured. Disagreement and even litigation are the result of each differing “opinion.” USPAP requires a “worthy of belief” opinion, not a measurable result. Disagreement, discord and despair are enabled, even inspired by analytic subjectivity. This enforced subjectivity enables and even conceals personal bias — where it may exist.
• Objectivity is however, encouraged by the standard’s requirements to consider all available relevant data. Unfortunately, the USPAP stated goal is not to attain measurable objective reliability. The goal (instead) is to attain believability.

“You cannot get objective results from subjective data.”

The next blog topic edition considers issues of “recognized valuation methods and techniques.”

https://georgedell.com/USPAP-fallac...l&utm_source=linkedin.com&utm_campaign=buffer

 

[Mejappz]

Part 2 of USPAPs failures and foibles.

The second of our “foibles” in USPAP may be from that same paragraph on page (ii), noted last week. This paragraph effectively sets the mission statement for the Appraisal Foundation.

The paragraph is titled: “ABOUT THE APPRAISAL FOUNDATION.” It states the AF provides “guidance on recognized valuation methods and techniques for all valuation professionals.” [Emphases added].

So what’s the problem? There may be two in one sentence . . .

The world continues to change​

Those recognized methods and techniques were developed early in the last century. We don’t even properly call them them “methods and techniques.” We call them models and algorithms. (Less art, more science.)

Analysts make decisions and judgments about models. Computer power carries out the algorithms. Today’s AF standards were substantially written before even hand calculators were available! No algorithms. Not the way we know them today!

Those Appraisal Standards were substantially written for the AIREA and the SREA, the predecessor organizations to today’s Appraisal Institute. They were adapted with input from the ASA and other appraisal organizations for final “ownership” by the AF.

The USPAP then became an “annually revised” quasi-governmental document. Which in turn became irregularly and unevenly “enforced “ by 54 states and territories.

And further in turn, it conflicted with several alternative standards of federal organizations, the professional groups, and international valuation standards (IVS).

AVMs (Automated Valuation Standards) have no standards. “Interagency” evaluations, which may be performed by a non-appraiser, have lesser/different/vaguer requirements. And of course, many loans can be made based on “appraisal waivers,” third-party inspections, “desktops” or “hybrids.” All these have to do with “methods and techniques” and inspection (data collection) conditions – but not directly about accuracy, unbiasedness, or reliability.

Phew!​

Yet all of these require some predetermination of risk. Risk that the valuation is itself a part of. We measure risk by predetermining the expected risk!

So, what are “recognized methods and techniques”? It appears that only licensed appraisers are required to do it the old way. The way developed in the last century.

The recognized methods comprise the “three approaches to value:” cost, income, comparison.

So what’s the issue? Let’s revisit our topic sentence: The AF provides “guidance on recognized valuation methods and techniques for all valuation professionals.” Two issues here:

• What is recognized, and what is “not recognized?” Recognized seems to mean only the three legacy “approaches.” Apparently not data science protocol, not focus on market analysis, not focus on measurable reliability, and not focus on limiting opportunity for bias!
• Who are all valuation professionals? USPAP only applies to licensed appraisers in the several states. It appears that the AF quasi-legal standards only apply to a few. All others appear to be exempt!

Can we conclude that USPAP does not apply to “all valuation professionals?” Can we conclude that the restriction to “recognized” methods and techniques holds back, and or even precludes progress in data management, predictive methods, and today’s dramatically-changed role of professional judgment.

​

 

[George Hatch]

Methods and techniques speak to the COMPETENCY RULE
Objectivity and impartiality speak to the ETHICS RULE

As far as appraising 1-4s and most Main Street type assignments goes, there is very little overlap between the two. If any. Ms BIGQUANT is perfectly capable of using her competency to make the egregious lie look reasonable. Her competency CANNOT prevent her from telling the untruth. Whereas Mr Integrity can still come to the reasonable conclusion despite using the suboptimal methodology and even despite being stupid or uneducated. If he's showing his work his errors are obvious to even the layperson because he's not trying to hide anything.

The difference between the two is that the highly competent liar is wholly untrustworthy and beyond remeditation (incurable deficiency) because it was never their capabilities that were the problem. OTOH whatever deficiencies the idiot has is within easy remediation (curable deficiency).

And with all that said, the *enforcement* occurs first at the individual level (individual chooses to comply), and the user level (will not accept non-compliance) and lastly at the govt level (can disciplince for non-compliance). The legislative branch establishes the minimum level of compliance but all govt enforcement occurs at the executive branch, not at the legislative branch.

True in all human interactions; merely agreeing to or establishing the expectation is a necessary step but none of those expectations will ever be met on the consistent basis without actually being enforced as per specs.

It doesn't matter what the rules are, what their origins are or who established those rules, all the action will occur in the manner and consistency in which they are enforced.

In my view we have a way more serious problem with individual integrity than with individual competency. I'd call that a 95/5 split. Probably not even a 90/10 split.

I know you hate it, but the "obsolete" Fannie SC grid is still a very usable valuation model when someone is making a good faith effort to work to specs.