HOW TO UNDERSTAND THE VA APPRAISAL PROCESS or
WHAT CAN I DO TO CORRECT A PROBLEM WITH MY VA APPRAISAL?
HOW TO UNDERSTAND THE VA APPRAISAL PROCESS or
WHAT CAN I DO TO CORRECT A PROBLEM WITH MY VA APPRAISAL?
VA APPRAISAL PERSPECTIVE AND WHAT THE VA DID TO TRY TO IMPROVE THE APPRAISL PROCESS
As early as the late 1980s and early 1990s The VA was fielding extreme frustration from the real estate industry over VA appraisal values coming in short of the contract price.
By the late 1990’s a movement was underway, largely based on the West Coast, Oregon, Washington & California, by groups of Real Estate Agents and their organizations complaining that:
VA Appraiser were biased and intentionally set a goal of lowering values in a sale.
Not allowing real estate agents to provide input by submitting sales to be used as comparable.
Not willing to go more than a mile to use “better” comparable.
Requiring unnecessary and minor repairs.
Taking too much time to complete an assignment.
As a result, the agents believed they were being forced to either avoid VA Loans or go through the process of calling for a Reconsideration of Value (ROV).
This was having a significant negative impact, particularly in areas with heavy Military and Veteran Retirement areas.
Even on the east coast the appraisal problem was felt in a region known as “Tidewater Area” in Virginia.
In the early 2000’s, market values were moving in an upward direction, and in particular the markets in the west and northwest. It was a time of quickly changing housing prices. Homes did not stay on the market very long at all. In 2020 through late 2022 very similar conditions exist.
This back and forth between the REALTOR® community and the appraisers placed more pressure on appraisers to try to reach ‘contract value’ (which is now illegal) rather than true ‘market value’. Complaints from the prospective VA home loan users reached a frenzied level as they asserted that they could not buy the home of their dreams because of slow and low appraisals.
Due to the success of this test program in the Chesapeake Bay area of Virginia, VA made policy changes regarding fee and staff appraisers’ interaction with other program participants and in the reconsideration of value (ROV) process in December 2003, thus the birth of the Tidewater Initiative.
The TIDEWATER Solution
The, then head of the C&V (Construction & Valuation) of the Roanoke, Virginia, Regional Loan Center of the Department of Veterans Affairs, M. “Sandy” Stewart stepped in with an idea on how to either eliminate the problem or at least provide a method to attempt to do so.
A meeting was arranged between the VA Fee Panel Appraisers and any interested real estate professional agents, loan officers, and others who wanted to attend. It was held at the Central Library in the City of Virginia Beach in early 2000.
Out of that meeting a “Beta Test” was initiated that quickly became the “Tidewater Initiative”. This was spelled out in VA Circular 26-03-11 December 22, 2003, then updated in VA Circular 26-17-03 February 6, 2017, and VA Circular 26-17-18 dated July 19, 2017, and then updated again on March 11th, 2019, regarding the requirements, now known as the “Tidewater Process”.
In that process, a lender appoints a “POC” or Point of Contact on the VA Assignment form 26-1805 that lenders fill out when ordering a VA Appraisal from a VA Fee Panel Appraiser.
Circular 26-17-18 noted the POC could be whomever the lender decided would be the appropriate person, usually a person on the lenders staff such as a loan officer, or, a real estate agent involved in the transaction, heck if you had a real smart Cocker Spaniel as your assistant, she too could have been named as a POC as long as she can answer a phone and work the phones and computer.
However, on March 11th, 2019, the VA made changes to Chapter 10 of the Appraisal Process of the VA Lender Handbook. This is both good and a bit inconvenient.
The revised procedure now instructs the Lender’s VA Appraisal Requestor to be the appraiser’s first point of contact when it appears that the estimated market value will be below the sales price.
Once the appraiser determines that the appraised value may be lower than the sales price, the appraiser provides the lender’s ‘requestor’ who in turn notifies the POC of possible low value. The POC then has 2 business days to provide the appraiser with any data they wish the appraiser to consider prior to completion of the assignment.
Although the preferred method of data compilation should be prepared on the VA Grid form, the appraiser should accept any response in any format during the 2-day period, not including weekends and holidays. The appraiser then reviews the data, uses it or not, and provides a response to the POC.
That response should be in the appraisal report itself, in a format that is easily understood. If the appraiser uses a sale or other data provided by the POC, it must be acknowledged in the appraisal report. If not utilized by the appraiser, there should be sufficient commentary so that all parties can easily understand the appraiser’s reasoning for not using the data that was provided by the POC.
If completed correctly, the process should alleviate any need for a Request for Reconsideration of Value but does not necessarily preclude that possibility.
Adding such a process to all appraisals could provide a wealth of ‘Consumer Protection’ to the public. However even more useful would be a totally transparent method for consumers to engage the appraisal community when an appraisal is suspected of being faulty.
APPRAISING IN GENERAL
All appraisers reference the Marshall & Swift Cost Approach Solutions manual for guidance on many aspects of an appraisal and follow, or should follow, the guidance set forth in (USPAP) Uniform Standards of Professional Appraisal Practice.
That said, we need to remember that appraising is not a science, it is an art form. The same property could be reviewed by multiple appraisers and each of them see the value of that property in the light of a slightly different valuation. That does not make one appraiser any better or worse than another. It simply means that they are all human with their own subjective appreciation of some aspects of how the subject property is weighed against the comparable sales.
However, the objective facts remain the same for all appraisers. For example, the sold value of comparable properties is a fixed reality. The number of bedrooms, bathrooms and total rooms is a fixed reality. The square footage of the dwelling and the lot is a fixed reality and so on and so forth. Once the variable of model match (or as close as possible) has been met, and the preferred geographic boundaries have been met, some subjectivity will begin to seep into the appraiser’s value analysis.
So how does all this information prepare someone to understand the appraisal process?
For openers be very aware that is a Class 6 Felony to influence an appraiser. In Arizona this is covered in ARS 32-3633. The Federal Statute 15 U.S. Code § 1639e - Appraisal Independence Requirements is the governing authority to prosecute such misbehavior is also very relevant. Even more important, these types of statutes are not endemic to specific states in as much as all states have their own overlays to the federal statute.
Additionally, the FNMA Anti-Coercion Appraisal Rules under Truth in Lending Regulations are also in play. That rule states that, “All consumer-purpose, closed-end loans secured by a consumer’s principal dwelling originated on or after October 1, 2009, are subject to new regulations prohibiting coercion or improper influencing of appraisers.”
Any appraisal of a property offered as security for repayment of the consumer credit transaction that is conducted in connection with the transaction in which a person with an interest in the underlying transaction is subject to these rules,
So what qualifies as “Influencing an Appraiser”?
Compensate with intent to subvert the law or Extort
compensates, coerces, extorts, colludes, instructs, induces, bribes, or intimidates a person, appraisal management company, firm, or other entity conducting or involved in an appraisal,
2. Collude with or Induce or Bribe
or attempts, to compensate, coerce, extort, collude, instruct, induce, bribe, or intimidate such a person, for the purpose of causing the appraised value assigned, under the appraisal, to the property to be based on any factor other than the independent judgment of the appraiser.
3. Mischaracterize or Suborning any Mischaracterization
by mischaracterizing, or suborning any mischaracterization of, the appraised value of the property securing the extension of the credit; and who seeks to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the making or pricing of the transaction
4. Intimidation
and withholding or threatening to withhold timely payment for an appraisal report or for appraisal services rendered when the appraisal report or services are provided for in accordance with the contract between the parties is in violation of 15 U.S. Code § 1639e / Influencing an Appraiser.
Penalties, if convicted of a Class 6 felonies could amount to serving a term of imprisonment of not less than one year nor more than five years, or in the discretion of the jury or the court trying the case without a jury, confinement in jail for not more than 12 months and a fine of not more than $2,500, either or both and these penalties are on the lighter side of possible adjudication. Fines topping $20,000, per convicted occurrence, are possible.
Now that may all sound pretty scary. However, any consumer, mortgage lender, mortgage broker, mortgage banker, real estate broker, appraisal management company, employee of an appraisal management company, or any other person with an interest in a real estate transaction are not prohibited from asking an appraiser to undertake 1 or more of the following:
Consider additional, appropriate property information, including the consideration of additional comparable properties to make or support an appraisal.
Provide further detail, substantiation, or explanation for the appraiser’s value conclusion.
Correct errors in the appraisal report, if you are completing a ROV.
A QUICK NOTE ABOUT ALLEGING GEOGRAPHIC COMPETENCY of an Appraiser
The appraiser is going to first try to find comparable properties, i.e., model matches etc., within the immediate subdivision. Whenever possible, the data set for comparables will be as close, in proximity to the subject property, as possible. The appraiser will try to use sales that are no older than 90 days, then expand to 180 days, then out to 1 year. However, if the pace of the real estate market has accelerated such that homes are selling in days and the marketplace has exhibited that pace for a reasonably protracted time-period, it would not be unusual for an appraiser to shorten his/her closed sales comparable properties to well short of within the last 90 days. This is another example of the ‘subjectivity’ within the appraisal process. An appraiser will usually then step out the geographic range, perhaps using major thoroughfares marking off a square or rectangle or a trapezoid.
There are few, if any, times when an appraiser will deviate or allow deviation to his/her data fields. So you are well served to not get into arguments with the appraiser over geography, unless you have evidence that the appraiser is ‘Geographically Incompetent
There are few times when a credible allegation of ‘Geographic Competency’ can be asserted. Nevertheless, according to R162-2g-502a, Standards of Conduct and Practice. (Uniform Standards of Professional Appraisal Practice (USPAP) if there is credible evidence that the appraiser IS NOT competent in areas of but not limited to, an appraiser’s familiarity with a specific type of property or asset, a market, a geographic area, an intended use, specific laws and regulations, or an analytical method, the appraisal assignment may be challenged and brought to the lender’s attention.
R162-2g-502a. Standards of Conduct and Practice. (Uniform Standards of Professional Appraisal Practice (USPAP) (4)(g)
When geographic competency is discussed, what is really being referenced is the Competency Rule of USPAP which goes beyond just geographic competency. According to USPAP, an “appraiser must determine, prior to agreeing to perform an assignment, that he or she can perform the assignment competently.” How does USPAP define competency? Again, competency goes beyond geographic competency:
“Competency may apply to factors such as, but not limited to, an appraiser’s familiarity with a specific type of property or asset, a market, a geographic area, an intended use, specific laws and regulations, or an analytical method.”
It is therefore understandable why an average consumer of the appraisal process/product may be way over his/her head in trying to work through appraisal inconsistencies or incompetency.
HOW DID WE GET WHERE WE ARE WITH THIS APPRAISAL CONUNDRUM?
In 2008 the attorney general of New York filed suit against Fannie Mae and Freddie Mac who at the time we're responsible for purchasing probably 60% of all loans originated in the United States. In short, the lawsuit alleged that lenders who sold their loans on the secondary market to Fannie Mae and Freddie Mac were getting too cozy with or had gotten too cozy with the appraisers who were appraising the properties they were financing.
A settlement was agreed to and from that came the HVCC (Home Value Code of Conduct). Under the new code mortgage brokers were prohibited from selecting appraisers; lenders or prohibited from using in-house staff appraisers to conduct the initial appraisals and lenders or prohibited from using appraisal management companies that they owned or controlled. By the beginning of 2019 the HVCC was in full force by not only Fannie Mae and Freddie Mac but also FHA.
By 2010 the Dodd Frank Wall Street Reform act had been passed. Consumer protections from misbehaving lenders and appraisers was built into the Dodd Frank act and were modeled quite tightly after HVCC. Once the Dodd Frank act went into full effect in October of 2015 HVCC was replaced by the rules and guidance issued by the Consumer Financial Protection Bureau (CFPB) which was formed in 2011 as the agency to enforce the rules set forth in the Dodd Frank Wall Street Reform act.
CFPB has published hundreds of informational guidance for the consumer on all aspects of credit lending from automobiles to insurance to home loans and credit cards. Unfortunately, and in my humble opinion, CFPB has not done a very good job at informing the public of these publications.
Many times, folks within an "ethnic enclave" or "cultural subgroup", perceive appraisal incompetence as terrorizing their home buying process. The appraisal terror that some buyers, within an "ethnic enclave" or "cultural subgroup", have experienced along with thousands and perhaps 10s of thousands of both homeowners and home buyers is not a one off. These consumers have valid concerns about a seemingly inefficient appraisal challenge process are correct in as much as we need to change the system. Educating homeowners will truly give them more power to protect themselves from inaccurate and incompetent appraisal professionals.
A consumer’s perception that their appraisal was mismanaged, either intentionally, by incompetence, or by a biased appraiser would be extremely difficult to prove. There is no way that I can profess to understand what fears and concerns a person/s within a minority community might have, of being treated equally and fairly as a person of color. That said the description of some appraisal processes that some folks within an "ethnic enclave" or "cultural subgroup" have experienced matches much more closely to the need for change in the appraisal process with respect to consumer engagement rather than a preponderance of racial bias within the appraisal process.
As a licensed real estate agent, with over 30 years’ experience, and the National Legislative Committee Chair at the Veteran’s Association of Real Estate Professionals (VAREP) the topic of consumer advocacy in the real estate and appraisal arena of the real estate transaction, my team and I and other well-informed colleagues are working on legislation that will improve transparency in all aspects of the real estate transaction to include the appraisal process.
A recent law (Improving the VA Home Loan Benefit Act of 2022) was passed in December 2022 that affirmed to the Veterans Administration that improvements to the appraisal process and appraisal challenge process will be made to the VA appraisal process.
About The Author:
G2 Varrato II is an Arizona Licensed REALTOR® for over 30 years and Ret. U.S. Air Force, Red Horse VAREP National Legislative Committee Chair/Director NAR Federal Financing & Housing Policy Committee 12/2022 to 11/2023 AZ State Director VAREP 2016/2019 NAR Diversity Committee Veteran Advocate, REALTOR® 2018/2019 Lifetime Member River Rats Air Force Sergeants Association (VSO) Red Horse Association Air Force Association
Visit Lori & G2 at https://www.lukeairforcebasespecialist.com/ eMail at [email protected] or C: 602-796-5674