Chapter 2 Licensing and Certification Questions and Answers

Chapter 2 Licensing and Certification Questions and Answers STANDARDS OF APPRAISAL PRACTICE FOR REALTOR APPRAISERS AND APPRAISAL COMMITTEES OF MEMBER BOARDS", adopted on April 20th 1929, in Boston, MA, by the National Association of Real Estate Boards It was the first document to address appraisal standards. Basic principles have not changed much since that time, but the wording is a little quaint. [Note: "misspellings" and antiquated gender references have been retained from the original document.] History The economy continued its roller coaster patterns through the 1940s, 1950s, and 1960s. Certainly World War II had a major impact on the economy, and the returning veterans sparked a housing boom that began in the late 1940s. The 1950s were relatively tranquil, with steady growth in housing, a healthy economy, and stable interest rates. By the 1960s, professional appraisal organizations were providing education programs and touting codes of ethics, in an effort to project a professional image and foster public recognition and trust in their members. They realized that providing credible appraisal services is important to the general well-being of society and the economy. However, membership in these professional organizations was purely optional. There were no established standards nationwide to articulate what constituted acceptable appraisal practice. The 1970s were a turbulent decade, with swings in the economy and the housing market. International economies were becoming increasingly entwined. Early in the 1970s, lending was still being practiced in much the same fashion as it had been for decades. Loans were made by banks and other depository institutions, and loan funds came from bank depositors, the repayment of existing loans, and sales of stock or shares of ownership in the lending institution. 0:03 / 0:45 Best NFL Rookie WRs in the 2021 Season! During the latter part of the 1970s, the secondary mortgage market emerged During the latter part of the 1970s, the secondary mortgage market emerged, and served to smooth out the uneven flow of loan funds. Fannie Mae and Freddie Mac developed uniform rules for underwriting, and banking regulators imposed reserve requirements on the lending institutions. The first universally-accepted appraisal form appeared for home equity lending, the 704 Form. By the end of the 1970s By the end of the 1970s, there was record inflation and record high interest rates. We were introduced to such things as disintermediation (the transfer of money from low interest-bearing accounts to higher interest-bearing accounts) and creative financing techniques employing points, interest rate buy-downs, wraparound mortgages, and variable rate loans. Historical Interest Rates At the beginning of the 1970s, mortgage interest rates were about 8%. In 1980, the average fixed rate mortgage was 13.77%. In 1981 and 1982, the average mortgage interest rate peaked at 16.64% and 16.09% respectively. By 1985, the average mortgage rate dropped to 12.12% and it decreased to 10.18% in 1986. Mortgage borrowing increased significantly during this time, as property owners were happy to refinance their 15% and 16% mortgages down to approximately 10%. Mortgage rates stayed in a narrow range for the next 4 years and were still at 10.13% in 1990. The 1980s The mid-1980s was a time of continued turbulence for the real property industry. Housing starts soared from 1,292,000 in 1980 to 1,806,000 in 1986. Then they tapered off for the rest of the decade. Sales of existing homes surged from 2,973,000 in 1980 to 3,474,000 in 1986. Appraisers were extremely busy, and there were no generally-accepted standards for appraiser performance and ethics. Underwriting standards were lax, particularly with commercial lending. This situation culminated with the "Savings and Loan Crisis" in the mid- to late-1980s. U.S. Representative Douglas Barnard reported the following to Congress in 1986: "Faulty and fraudulent real estate appraisals have become an increasingly serious national problem.....They have seriously damaged and contributed directly to the insolvency of hundreds of the Nation's financial institutions.......Appraiser ineptitude, negligence and misconduct are widespread.......Accurate, reliable appraisals are essential to loan underwriting and to the public's perception of the confidence in the Nation's real estate, finance, and mortgage insurance and investment industries." The Development of Appraisal Standards In 1986, eight U.S.-based professional organizations plus one from Canada formed the Ad Hoc Committee on Uniform Standards to develop appraisal standards. Their initial work focused on developing a common definition of "market value," since we didn't even have that in the industry. The committee realized that to gain public recognition of these standards, it would be necessary to form a new, independent organization that would place the public's benefit ahead of that of any individual or group. In 1987, the eight major U.S. appraisal organizations established The Appraisal Foundation. It was realized that providing credible appraisal services is necessary to the general economic well-being of society. This would also provide a sense of trust in professional appraisal practice. The Appraisal Foundation The Appraisal Foundation is a not-for-profit organization, established exclusively for educational and scientific purposes. It is not a professional appraisal organization or society. Membership in The Appraisal Foundation is reserved for organizations; an individual appraiser cannot join TAF as a member. Uniform Standards of Professional Appraisal Practice After The Appraisal Foundation was formed, the Uniform Standards of Professional Appraisal Practice was formally adopted by the Appraisal Standards Board (ASB) in January 1989. Today, The Appraisal Foundation has three principal boards: Board of Trustees (BOT) Appraisal Standards Board (ASB) Appraiser Qualifications Board (AQB) Board of Trustees (BOT) The BOT acts as an executive board for the Foundation. It is responsible for, among other things, appointing members of the ASB, AQB, and APB. Appraisal Standards Board (ASB) The ASB is responsible for creating standards for ethics and performance of appraisers. This is accomplished through the Uniform Standards of Professional Appraisal Practice (USPAP). In short, the ASB is responsible for USPAP. Appraiser Qualifications Board (AQB) the AQB is responsible for creating requirements for licensure, certification, and recertification of appraisers, which the states adopt and enforce. A fourth board was formed within the Foundation in 2010. The Appraisal Practices Board (APB) A fourth board was formed within the Foundation in 2010. The Appraisal Practices Board (APB) was responsible for issuing voluntary guidance on recognized valuation methods and techniques. This board was disbanded in 2017 and no longer exists. USPAP The Uniform Standards of Professional Appraisal Practice (USPAP) was developed by the Ad Hoc Committee in 1986 and 1987 and was copyrighted in 1987 by The Appraisal Foundation. At its first meeting in 1989, the Appraisal Standards Board (ASB) adopted USPAP as the governing document. USPAP may be amended, interpreted, supplemented, or retired only by the ASB. There was a realization that even though there are different disciplines, such as appraisal review, mass appraisal, and appraisal of personal property and businesses, they all belong to the appraisal profession. Therefore, all these disciplines were included in USPAP. Legal Authority of Appraisal Foundation The Appraisal Foundation is a private entity and has no enforcement authority in any jurisdiction. The appraisal standards and qualification criteria that are published by The Appraisal Foundation achieve legal authority by adoption, citation or implementation by government agencies with the power to regulate or administer policy. Private industry may also adopt and enforce these policies through private contracts with appraisers. Congress recognized USPAP Congress recognized USPAP as the generally recognized standards of practice in the appraisal profession in Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). FIRREA authorized federal financial institution regulatory agencies to reference USPAP in their regulations. Title XI also authorized USPAP to be the basis for standards for the states to use in regulating appraisers. FIRREA was passed in 1989 FIRREA was passed in 1989 as a result of the Savings and Loan Crisis of the 1980s. This act is also known as "the Savings and Loan Bailout Bill". It created the Appraisal Subcommittee, and it also resulted in state licensure and certification for real property appraisers. As stated above, FIRREA recognized USPAP as the generally recognized standards of practice in the appraisal profession, and it also recognized the AQB as a source for appraiser qualifications. Uniform Relocation Assistance and Real Property Acquisition Policies Act (The Uniform Act) In 1993, the Uniform Relocation Assistance and Real Property Acquisition Policies Act (The Uniform Act) referenced USPAP. In the Office of Management and Budget (OMB) Circular A-129, dated January 11, 1993, USPAP was recognized by other federal agencies involved in direct or guaranteed loan programs or loans acquired by a federal agency. This led to adoption of USPAP by the Department of Housing and Urban Development (HUD), the Veterans Administration (VA) and other agencies. This was followed by the adoption of USPAP by various government sponsored enterprises such as Fannie Mae and Freddie Mac, and private industry groups such as the Employee Relocation Council (now known as Worldwide ERC). 1991 "The Savings and Loan Bailout Bill" FIRREA legislation was passed in 1989 and became effective in 1991, Among its many provisions, FIRREA required each state to establish an agency for the licensing and certification of real property appraisers. It also established the Appraisal Subcommittee (ASC) which is a federal entity with oversight authority over the state licensing and certification agencies. 1990's During the early part of the 1990s, states scrambled to create appraisal licensing programs to meet this federal mandate. Some states were able to implement their programs quickly, while other states lagged behind. There were dire warnings and predictions of shortages of licensed appraisers; however these shortages never materialized. During the early part of the decade, state agencies worked to process large numbers of applications from appraisers who wished to become licensed or certified. By the end of the decade, the flow of applications had slowed to a trickle, and these agencies began to turn their focus toward enforcement. The 2000s The new millennium dawned with the country in the midst of an unprecedented housing and lending boom. Interest rates were relatively low and mortgage money was easy to obtain (some would say too easy). Many areas of the country were experiencing appreciation rates that were nothing short of astounding. In some markets, property values were doubling every 3-4 years. Problems with housing affordability led to increased use of exotic types of financing, including interest-only loans and "option ARMs" (adjustable rate mortgages). Many homeowners repeatedly refinanced their mortgages in order to cash out the constantly-increasing equity in their homes. In 2007, the bubble burst. In 2007, the bubble burst. An economic recession, combined with increasing numbers of foreclosures, led to a dramatic decrease in property values in most markets throughout the United States. The communities that had previously experienced the most significant appreciation rates were among the hardest hit. As more and more borrowers realized their homes were worth less than their outstanding mortgage amounts (i.e., they were "underwater"), foreclosure numbers increased even more. The downturn in the real estate and lending industries sent shock waves throughout the U.S. economy. Lending institutions began failing in numbers not seen since the Great Depression. The twin giants of the secondary mortgage market, Fannie Mae and Freddie Mac, became insolvent and were taken into government conservatorship in 2008. Dodd-Frank Wall Street Reform and Consumer Financial Protection Act Any financial crisis will result in legislation, and this one was no different. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act. This was a comprehensive package of legislative initiatives, the most significant overhaul of the nation's financial system since FIRREA in 1989. For appraisers, the most significant Dodd-Frank reforms were new appraiser independence requirements, increased powers given to the Appraisal Subcommittee, and a federal mandate that appraisal management companies (AMCs) be regulated. The Structure and Purpose of The Appraisal Foundation The Appraisal Foundation has 15 sponsors, including Appraisal Sponsors, Affiliate Sponsors, and International Appraisal Sponsors. These sponsors include organizations representing appraisers, users of appraisal services, and academia. The Board of Trustees of The Appraisal Foundation exercises all power and functions of The Appraisal Foundation, except for the power and authority which the Bylaws have directed to be performed by its Boards. The Board of Trustees The Board of Trustees is composed of 21 individuals responsible for funding The Appraisal Foundation and appointing the members to The Appraisal Foundation's other boards - the Appraisal Standards Board and the Appraiser Qualifications Board. The Appraisal Foundation was established for The Appraisal Foundation was established for educational and scientific purposes. USPAP was created for USPAP was created for the purpose of promoting and preserving public trust in professional appraisal practice.