To the assertion that FIRREA doesn't apply to the GSE's, I've always wondered how the following, taken from Title XI, should be interpreted:
SEC. 1120. Violations in obtaining and performing appraisals in federally related transactions [12 U.S.C. 3349]
(a) Violations. Except as authorized by the Appraisal Subcommittee in exercising its waiver authority pursuant to section 1119(B), it shall be a violation of this section-
(1) for a financial institution to seek, obtain, or give money or any other thing of value in exchange for the performance of an appraisal by a person who the institution knows is not a State certified or licensed appraiser in connection with a federally related transaction; and
(2) for the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Resolution Trust Corporation to knowingly contract for the performance of any appraisal by a person who is not a State certified or licensed appraiser in connection with a real estate related financial transaction defined in section 1121(5) to which such association or corporation is a party.
(B) Penalties. A financial institution that violates subsection (a)(1) shall be subject to civil penalties under section 8(i)(2) of the Federal Deposit Insurance Act or section 206(k)(2) of the Federal Credit Union Act, as appropriate.
© Proceeding. A proceeding with respect to a violation of this section shall be an administrative proceeding which may be conducted by a Federal financial institutions regulatory agency in accordance with the procedures set forth in subchapter II of chapter 5 of title 5, United States Code.
I highlighted the section above in bold for the purposes of this discussion.
With respect as to the applicability of FIRREA and the deminimus on a practical basis, it has been my understanding that the lenders can establish whatever guidelines they want as long as they don't violate the minimums. However, having established guidelines, they are responsible for observing them as written. To the best of my knowledge, most of the lenders have not yet elected to toss out appraisals altogether for loans under the deminimus. Some have elected to accept AVMs in various forms as a supplemental valuation product and there are the waiver programs being tested out where the decisions are credit-based rather than collateral-based. It is also my understanding that the federal regulatory agencies have taken a posture that if a lending institution does accept an
appraisal of any type, that that appraisal must be USPAP and FIRREA compliant. Kind of an all-or-nothing proposition. Anyone who has information to the contrary, I would appreciate an update so I can get current.
To date, the secondary market has also demanded that
appraisals must comply with USPAP and FIRREA. So while in theory FIRREA might not be strictly applicable to every appraisal assignment, I maintain that it is still a powerful tool to be used by the federal regulatory agencies. I mean, what's a lender going to do, set up different programs for acceptance of appraisals based on whether the loans are above or below the deminimus? Even if they wanted to, would the feds allow them to do it and would the courts uphold the different standards of ethical conduct for appraisals and underwriting?
"If the loan is under the deminimus you can take an appraisal engaged by the homeowner or mortgage broker, but if it is above the deminimus you have to engage the appraiser directly? " I can't see it. I think it's going to go one way or the other.
The one thing I know is that lenders do take the federal regulatory agencies seriously, whether they want to or not. To the extent that they are aware of all the rules (which many of them are not) they also seem to demonstrate some respect for FIRREA. There are undoubtably examples of some of them being slicker than the average auditor, but they can't be successful forever. They only need to get caught in a pattern once before it starts to become expensive for them. And in light of the current ethics scandals unfolding, I think the market (shareholders and investors) will also hold them accountable to slightly higher standards than before.
I don't know about anyone else, but the average engagement letter that I see knowadays looks to be much more informed and discerning than those I was seeing even a few years ago. The mortgage brokers I see don't seem to have as firm a grasp on it, which may partially explain the actions of some of the bad actors over there. The FIRREA and USPAP messages are definitely getting through, even if they are ignored by some.
I am sure that some of the lenders will find a way to apply pressure to the appraiser through the underwriter if the latter is used as the point of contact for the appraisal. However, doing so places them in direct violation of FIRREA, something they have heretofore been successful in avoiding when using the plausible deniability of accepting whole loan packages from an outside brokerage. As I say, this wouldn't be a panacea for the lender pressure issue. But it would close the one egregious loophole.
This is all about changing the characterization of appraisals from being a marketing tool (we have a property that has already appraised out at $zzz) to being an underwriting tool. That may not seem to some to represent much of a difference, but I think the impact would be huge. Besides, it is cheaper and easier to regulate the conduct of a 'few' lenders than it is to regulate the masses of individual appraisers and loan originators.
George Hatch
