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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2014

Is the Best Regulation Self-Regulation?

Changes within the appraisal process could help the industry regulate itself

As the writer Keith Davis put forth in his “iron law of responsibility” more than 30 years ago, “Those who do not use power in a manner which society considers responsible will tend to lose it.” No industry proves this point better than the real estate industry. The mortgage industry contributed to a housing bubble of historic proportions.

Although numerous sources have spelled out the problems within the real estate industry, few have offered solutions for restoring trust. As a good starting point, the industry should be its own watchdog.

Housing traditionally has been a mainstay of the U.S. economy. The sector accounts for about one-fifth of the gross domestic product. Each newly built home creates three new jobs and $90,000 in tax revenue, according to the National Association of Home Builders. Studies of past recessions have shown that housing has been a main driver in economic recoveries.

Why isn’t the housing industry solving its own problems? The answer is that the principal players — Fannie Mae and Freddie Mac, mortgage lenders, appraisal management companies (AMCs), appraisers, and mortgage brokers — often don’t trust each other and are working at cross purposes. The industry lacks transparency, creating more uncertainty, inefficiency and a lack of trust among the players. 

Although there are no easy fixes, two steps can be undertaken immediately to help tackle the issue of trust.

  1. Appraisers need a forum to express concerns about the process. Seasoned appraisers are leaving the industry because of improper pressure from AMCs, poor pay and an avalanche of new regulations. Many appraisers are asked to work in markets where they have no experience or knowledge of local conditions. Others are asked to use foreclosures, short sales and other improper properties as comparable homes. In addition, they should be able to evaluate clients on whether their demands are reasonable, if they are slow to pay or if they pay below the standard. If this data was made widely available, appraisers could avoid undesirable clients. Meanwhile, clients who provide better support through the appraisal process would attract the best appraisers. Such a mechanism would allow for greater transparency and improve the opportunity for self-regulation.
  2. Create  consistency and accuracy in the appraisal process. Appraisers must adhere to established standards. When multiple appraisals are called on a property, valuations often differ and the variance can’t be explained by market conditions. This calls into question the credibility of the valuation. It is difficult to know exactly how the appraisal process actually works. Mortgage professionals should be able to evaluate appraisers and AMCs on overall performance and customer service. This would include timeliness of the process and the overall accuracy of the appraisal. If done correctly, the appraiser and AMC could use this feedback to improve service.

 These simple steps could begin a process of self-regulation that would benefit the whole industry. Overall customer service has been a victim of the dramatic changes in this industry over the past five years. All parties have taken steps to correct the mistakes of the past, but more needs to be done. More government regulation is not the answer, however. By beginning self-regulation, the industry can create greater trust among key constituents and help move the market and the economy forward. 


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