Before originating a residential mortgage loan, a lender assesses the risk of making the loan through a process called underwriting, in which the lender generally examines the borrower’s credit history and capacity to pay back the mortgage and obtains a valuation of the property to be used as collateral for the loan. Lenders need to know the property’s market value, which refers to the probable price that a property should bring in a competitive and open market, in order to provide information for assessing their potential loss exposure if the borrower defaults. Lenders also need to know the value in order to calculate the loan-to-value ratio, which represents the proportion of the property’s value being financed by the mortgage and is an indicator of its risk level. Real estate can be valued using a number of methods, including appraisals, broker price opinions (BPO), and automated valuation models (AVM). Appraisals—the valuation method used in the large majority of mortgage transactions— are opinions of value based on market research and analysis as of a specific date. Appraisals are performed by state-licensed or -certified appraisers who are required to follow the Uniform Standards of Professional Appraisal Practice (USPAP). A BPO is an estimate of the probable selling price of a particular property prepared by a real estate broker, agent, or sales person rather than by an appraiser. An AVM is a computerized model that estimates property values using public record data, such as tax records and information kept by county recorders, multiple listing services, and other real estate records. In 1986, the House Committee on Government Operations issued a report concluding that problematic appraisals were an important contributor to the losses that the federal government suffered during the savings and loan crisis. The report states that hundreds of savings and loans chartered or insured by the federal government were severely weakened or declared insolvent because faulty and fraudulent real estate appraisals provided documentation for loans larger than justified by the collateral’s real value. In response, Congress incorporated provisions in Title XI of FIRREA that were intended to ensure that appraisals performed for federally related transactions were done (1) in writing, in accordance with uniform professional standards, and (2) by individuals whose competency has been demonstrated and whose professional conduct is subject to effective supervision. Various private, state, and federal entities have roles in the Title XI regulatory structure: The Appraisal Foundation. The Appraisal Foundation is a private not- for-profit corporation composed of groups from the real estate industry that works to foster professionalism in appraising. The foundation sponsors two independent boards with responsibilities under Title XI. The first of these, the Appraisal Standards Board, sets forth rules for developing an appraisal and reporting its results through USPAP. Title XI requires real estate appraisals performed in conjunction with federally related transactions to follow USPAP. The second board, the Appraiser Qualifications Board, establishes the minimum qualification criteria for state certification and licensing of real property appraisers. Title XI requires all state-licensed and -certified appraisers to meet the minimum education, experience, and examination requirements promulgated by the Appraiser Qualifications Board. The foundation disseminates information regarding USPAP and the appraiser qualification criteria, which are periodically revised and updated, to state and federal regulators, appraisers, users of appraisal services, and the general public. The foundation is funded primarily by sales of publications but also receives an annual grant from ASC. State-level regulatory entities. Title XI relies on the states to (1) implement the certification and licensing of all real estate appraisers and (2) monitor and supervise appraisers’ compliance with appraisal standards and requirements. To assure the availability of certified and licensed appraisers, all 50 states, the District of Columbia, and four U.S. territories have adopted structures to regulate and supervise the appraisal industry. These structures typically consist of a state regulatory agency coupled with a board or commission to establish education and experience requirements (consistent with or in excess of Appraiser Qualifications Board criteria), license and certify appraisers, and monitor and enforce appraiser compliance. These regulatory agencies generally oversee the activities of appraisers for all types of transactions, including those that are federally related. Federal financial institutions regulators. Title XI places responsibility for regulating appraisals and “evaluations” performed in conjunction with federally related transactions with the Federal Reserve, FDIC, OCC, and NCUA. To meet this responsibility, these financial institution regulators have established requirements for appraisals and evaluations through regulations and have jointly issued Interagency Appraisal and Evaluation Guidelines. Among other things, appraisals for federally related transactions must, at a minimum, provide an estimate of market value, conform to USPAP, be in writing, and contain sufficient information and analysis to support the institution’s decision to engage in the transaction. By regulation, loans that qualify for sale to a U.S. government agency or U.S. government- sponsored agency and loans that are wholly or partially insured or guaranteed by such agencies are exempt from the appraisal requirements. In addition, loans that involve residential real estate transactions in which the appraisal conforms to Fannie Mae or Freddie Mac appraisal standards are exempt from these appraisal requirements. Under authority granted by Title XI, the federal regulators also have adopted regulations that exempt federally related transactions of $250,000 or less from appraisal requirements, meaning that the services of a licensed or certified appraiser are not required (although an evaluation must be performed). The regulations provide a similar appraisal exemption for real estate- secured business loans of $1 million or less that are not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment. The regulations and guidelines also specify the types of policies and procedures lenders should have in place to help ensure independence and credibility in the valuation process. Additionally, the federal regulators have developed procedures for examining the real estate lending activities of regulated institutions that include steps for assessing the completeness, adequacy, and appropriateness of these institutions’ appraisal and evaluation policies and procedures. Appraisal Subcommittee. ASC has responsibility for monitoring the implementation of Title XI by the private, state, and federal entities discussed previously. Among other things, ASC is responsible for (1) monitoring and reviewing the practices, procedures, activities, and organizational structure of the Appraisal Foundation—including making grants to the Foundation in amounts that it deems appropriate to help defray costs associated with its Title XI activities; (2) monitoring the requirements established by the states and their appraiser regulatory agencies for the certification and licensing of appraisers; (3) monitoring the requirements established by the federal financial institutions regulators regarding appraisal standards for federally related transactions and determinations of which federally related transactions will require the services of state-licensed or - certified appraisers; and (4) maintaining a national registry of state- licensed and -certified appraisers who may perform appraisals in connection with federally related transactions. Among other responsibilities and authorities, the Dodd-Frank Act requires ASC to implement a national appraiser complaint hotline and provides ASC with limited rulemaking authority. ASC provides an annual report to Congress on its activities and financial status in the preceding year. For fiscal year 2010, ASC reported total expenses (including grants to the Appraisal Foundation) of approximately $3.6 million. Some 20 years after the passage of Title XI, questions remain about oversight of the appraisal industry and the quality of appraisals. Although the federal financial institutions regulators have had guidance since the 1990s to help ensure the independence of appraisers, during the mid- 2000s, some appraisers reported that loan officers and mortgage brokers pressured them to overvalue properties to help secure mortgage approvals. An investigation into allegations about a major lender’s role in pressuring appraisers led to questions about what the enterprises, which had purchased many of the lender’s mortgages, had done to ensure that the appraisals for the mortgages met the enterprises’ requirements. A key outcome of that investigation was the enterprises’ adoption of the Home Valuation Code of Conduct (HVCC), which set forth appraiser independence requirements for mortgages sold to the enterprises. Although the Dodd-Frank Act declared HVCC no longer in effect, it codified several of HVCC’s provisions, and the enterprises have incorporated many of the other provisions into their requirements. As we reported in July 2011, appraiser independence requirements and other factors have increased the use of Appraisal Management Companies (AMC). Some appraisal industry participants are concerned that some AMCs may prioritize low costs and quick completion of assignments over appraiser competence, with negative consequences for appraisal quality. Moreover, according to the FBI, appraisal fraud—the deliberate overstatement or understatement of a home’s appraised value—is an ongoing concern. Of the 817 mortgage fraud cases the FBI closed from the fourth quarter of fiscal year 2010 through the third quarter of fiscal year 2011, 92 involved appraisal fraud. ASC has been performing its monitoring role under Title XI, but several weaknesses have potentially limited its effectiveness. In particular, ASC has not fully developed appropriate policies and procedures for monitoring state appraiser regulatory agencies, the federal financial institutions regulators, and the Appraisal Foundation. As part of its monitoring role, ASC also maintains a national registry of appraisers, which includes data on state disciplinary actions. ASC has improved its reviews of state compliance with Title XI, but its enforcement tools and procedures for reporting compliance levels have been limited. ASC has detailed policies and procedures for monitoring state appraiser regulatory programs and has issued 10 policy statements covering different aspects of states’ implementation of Title XI requirements. The policy statements cover topics including submission of data to the national registry, license reciprocity (enabling an appraiser certified or licensed in one state to perform appraisals in other states), and programs for enforcing appraiser qualifications and standards.