Fourth Quarter 2014
October 16, 2014
The Appraisal Institute’s Washington Report and State News quarterly e-newsletter is intended to summarize AI’s recent federal and state legislative, regulatory and related activities in representing the interests of Designated members, Candidates for Designation, Practicing Affiliates and Affiliates.
ON THE HILL
House Committee Passes USPAP Exemption Bill
The House Financial Services Committee on July 29 approved H.R. 5148, the Access to Affordable Mortgages Act, which would exempt certain “higher-risk” mortgages from some newly enacted appraisal requirements while also exempting appraisers from the Uniform Standards of Professional Appraisal Practice in those situations, the Appraisal Institute reported.
The bill would provide lenders exemptions from obtaining full interior inspection appraisals or second appraisals in property “flipping” situations where the loan is classified as “higher risk” (otherwise known as subprime). Both exemptions only apply where the higher-risk requirements are triggered, the loan amount is less than $250,000 and the loan is kept on the creditor’s balance sheet for at least three years, which is projected to only be a small number of loans.
AI supports H.R. 5148 because it provides much needed regulatory relief to appraisers in the small number of cases the exemptions would apply. Appraisers would not have to adhere to USPAP requirements when providing valuation services that adhere to “evaluation” requirements of the federal bank regulatory agencies, which would remain intact. As such, appraisers would be better equipped to provide lenders a range of valuation services that suit the needs of the situation.
AI continues to track H.R. 5148, noting that it’s unsure when the legislation will get a vote on the House floor.
New Legislation Requires Appraisals for Certain Refinances
Sen. Bob Menendez, D-N.J., introduced the Preserving American Homeownership Act of 2014 on Sept. 19, a bill that, among other things, intends to establish pilot programs to encourage the use of shared equity mortgage modifications.
Relevant to Appraisal Institute professionals, the bill (S. 2854) requires an opinion on the value of the real property to be determined by an independent, licensed appraiser. Additionally, a second appraisal of the property can be requested if the sale price or claimed value at the time of the refinancing is believed to inaccurately reflect the property’s fair market value.
The Appraisal Institute is pleased to see the appraisal requirement included in S. 2854. In previous refinancing bills introduced by Sen. Menendez, appraisals were not required, which was a concern shared with his office by constituents who attended this year’s Leadership Development Advisory Council, an annual AI conference that includes a day of lobbying on Capitol Hill.
IN THE AGENCIES
Appraisal Institute Testifies Before IRS on REIT Real Property Definitions
Appraisal Institute Immediate Past President Richard L. Borges II, MAI, SRA, AI-RRS, testified before the Internal Revenue Service Sept. 18, where he addressed the IRS’ proposed definition of “real property,” which would include real estate investment trusts. The proposed definition would greatly increase the number and types of assets that could be classified as real property, thereby making them eligible for classification as a REIT under the Internal Revenue Code.
In his testimony, Borges questioned the inclusion of “goodwill” in the definition of real property, as that is considered separate from real property in real estate valuation theory and practice. Until that testimony was delivered, IRS officials did not appear to understand that there is a separate classification for intangible assets that are distinct from real property assets. Read more on the IRS proposal and Borges’ testimony.
IRS Confirms Appraisers Do Not Need PTIN Number for Form 8283
Appraisal Institute Immediate Past President Richard L. Borges II, MAI, SRA, AI-RRS, and staff from AI’s Washington office attended the Land Trust Alliance 2014 Rally Sept 18-20 in Providence, Rhode Island, where IRS attorneys confirmed that appraisers are not required to obtain a Preparer Taxpayer Identification Number when signing Form 8283 as part of a charitable contribution tax return.
Previously, IRS officials had advised appraisers to obtain PTIN numbers.
A significant number of discussions at the event, which was attended by more than a thousand land trust professionals, centered on IRS audit procedures and IRS Tax Court cases involving valuation issues. Traffic at the AI booth was strong, particularly by land trust officials interested in finding qualified appraisers and by those inquiring about AI’s new review designations, the AI-RRS and AI-GRS.
View breakout session materials for the 2014 Rally.
Appraisal Institute Lauds FHA for Green Valuation Proposal
The Appraisal Institute and the American Society of Farm Managers and Rural Appraisers on Sept. 2 lauded the Federal Housing Administration’s proposal to allow appraisers to utilize residual techniques — such as cost and income approaches — to analyze market reaction to green and energy-efficiency improvements in the absence of comparable sales.
The joint AI and ASFMRA comments were submitted in response to a draft Appraisal Handbook issued by the FHA that intends to serve as an update to the current Handbook 4140.2 and will aggregate all agency appraisal polices in one place.
Under the draft handbook, appraisers would be required to analyze and report the local market acceptance of special energy-related building components and equipment, including solar energy components, high-energy efficiency housing features and components such as geothermal systems and wind powered components. The draft explains that in the absence of sufficient data to perform a paired sales analysis, the appraiser must consider the cost or income approach to calculate an appropriate adjustment.
AI and ASFMRA also suggested that the FHA take a stronger stance on appraiser competency issues, incorporating an approach utilized by Fannie Mae in its seller/servicer guidelines that requires competency before taking the assignment. Further, the organizations urged the FHA to reconsider the appraisers’ role in confirming property eligibility, requiring lenders to provide more information to appraisers and asking appraisers to verify information. The organizations noted that such property verification assignments could be completed by appraisers, saving the lender time and money by avoiding applications that are ineligible for FHA insurance.
AI: Bank Regulators Must Address Evaluation, Competency Issues
The Appraisal Institute and the American Society of Farm Managers and Rural Appraisers urged federal bank regulatory agencies in a Sept. 2 letter to reevaluate policies related to appraisal exemptions established under Financial Institutions Reform, Recovery, and Enforcement Act regulations.
AI and ASFMRA urged the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve to align their regulations with Dodd-Frank requirements, which allow financial institutions to use professional designations and other competency tests when hiring appraisers.
The organizations also asked the agencies to resist any calls for increasing loan appraisal thresholds ($250,000 for residential, $1 million for commercial), citing appraisals as a “gold standard” in real estate risk assessment. The organizations further asked that the agencies review their regulations in light of recent changes to appraisal standards, such as the Scope of Work rule that provides more client flexibility.
If the agencies are unable to reconfigure the current appraisal exemptions, AI and ASFMRA urged them to create parity for appraisers who have to contend with USPAP requirements even when completing evaluations for financial institutions.
The comments were part of an agency review of regulations pursuant to the Economic Growth and Regulatory Paperwork Reduction Act.
Read the joint AI, ASFMRA letter.
Consultation Paper on Fair Value Measurements out for Comment
The Public Company Accounting Oversight Board on Aug. 19 issued for comment its consultation paper titled Auditing Accounting Estimates and Fair Value Measurements. The paper explains the PCAOB's possible changes and revisions to standards relating to fair value estimates and the use of third-party valuation specialists. Comments are due Nov. 19.
In relation to the exposure draft, the PCAOB’s Standing Advisory Group met on Oct. 2 in Washington. Attending on behalf of the Appraisal Institute was Immediate Past President Richard L. Borges II, MAI, SRA, AI-RRS, and staff from AI’s Washington office. Members of the SAG discussed the consultation paper and the use of third-party valuation specialists, and many attendees were in favor of greater use of valuation specialists in audits. Others questioned capacity and cost constraints. Sandra Peters, head of the Financial Reporting Policy Group at the CFA Institute; and Thomas Selling, president of software firm Grove Technologies, were most vocal in advocating for greater use of third-party valuations to enhance the audit process.
Review presentations from the Oversight Board’s Standing Advisory Group meeting.
Read the Auditing Accounting Estimates and Fair Value Measurements consultation paper.
IN THE STATES
AQB Issues Third Exposure Draft on Background Checks
The Appraiser Qualifications Board released on Sept. 3 a Third Exposure Draft of its Proposed Revision to the 2015 Real Property Appraiser Qualification Criteria and Guide Note 9, in which the AQB is proposing a more generic approach to appraiser background checks.
In this exposure draft, the AQB proposed replacing many of the specific background check requirements and is giving each state more flexibility in how they conduct background checks. State appraiser regulatory agencies would be responsible for ensuring that “all applicants for a real property appraiser credential shall possess a background that would not call into question the public trust.” Applicants would be required to provide state regulatory agencies with “all of the information and documentation necessary for the jurisdiction to determine the applicant’s fitness for licensure.”
These changes are the result of stakeholder feedback, including comments from the Appraisal Institute, regarding the onerous background check requirements in previous exposure drafts, including the requirement for a fingerprint-based check that was performed by a state criminal justice agency.
Read a copy of the exposure draft.
Virginia Tech Releases Results of Study on Appraisal Fees
The Virginia Center for Housing Research and the Virginia Tech Program in Real Estate released on Oct. 7, its 2013 Virginia Residential Real Estate Remuneration: Survey and Report, which analyzed the patterns for fees earned by real estate appraisers in 2013.
The research was conducted by Virginia Tech researchers and students during this spring and summer in response to the Dodd-Frank Act, which requires lenders to pay appraisers a “customary and reasonable fee” for residential real estate appraisal services in their geographic market. The Dodd-Frank Act also requires that customary and reasonable fees be calculated without the influence of assignments ordered by known appraisal management companies.
The final report noted the average AMC fee and non-AMC fee for a single-family residential appraisals in Virginia, average annual salaries and some appraiser demographics (such as age).
See the complete survey results.
Kentucky Proposes Changes to Reciprocity Requirements
The Kentucky Real Estate Appraisers Board in August proposed changes to the state’s reciprocity requirements for appraiser applicants licensed or certified in another state. Most significantly, this rulemaking proposes to eliminate the requirement for out-of-state appraisers to take a course on Kentucky’s real property appraiser laws and administrative regulations prior to being granted a reciprocal credential.
Kentucky’s current reciprocity rules require the KREAB to grant an equivalent reciprocal credential to an out-of-state applicant from a state that 1) is “in compliance” with FIRREA as determined by the Appraisal Subcommittee, and 2) has licensing requirements that meet or exceed the minimum requirements established by the Appraiser Qualifications Board at the time of application.
The state’s requirements create a more open-door policy than is required under federal law. FIRREA currently requires states to have a policy in place that requires the granting of a reciprocal credential to an applicant from a state that is in compliance with FIRREA and has licensing and certification requirements that meet or exceed those in the state where the applicant seeks reciprocal privileges.
This proposed rule will become effective following a review — currently scheduled for Oct. 14 — by the state’s Administrative Regulation Review Subcommittee.
AI Addresses Chapter Government Relations
The Appraisal Institute advised attendees of the AI Chapter Leadership program Sept. 19 that it strongly encourages chapters to develop and support state advocacy programs that advance the organization’s public policy goals.
As part of these efforts, AI said that chapters should coordinate and partner with other stakeholders who have a shared interest in state legislative and regulatory matters affecting professional real estate appraisers. However, chapters must not partner with organizations that can cause them to adopt or support a position on legislative or regulatory matters that’s contrary to or inconsistent with the Appraisal Institute’s efforts or position, or that may compromise a chapter’s ability to independently determine its position on an issue.
Chapters also are asked to avoid sponsoring statewide government relations coalitions that compete with designations and education programs offered by the Appraisal Institute. Lastly, AI maintains a strong presence in Washington and is actively engaged on federal legislative and regulatory matters. Chapters must coordinate any actions (including as part of a coalition group) on federal legislative and regulatory matters with the national GRC and staff to ensure consistency and effectiveness.
Questions on these issues can be emailed to Scott DiBiasio, AI’s manager of state and industry affairs, at sdibiasio@appraisalinstitute.org.
Massachusetts Fails to Pass AMC Legislation
Legislation that would have provided oversight of appraisal management companies in Massachusetts failed in late July as a last-minute amendment to the bill drastically changed the definition of an AMC — a change that forced proponents of the bill, including the Appraisal Institute’s Massachusetts and Rhode Island Chapter, to request it be held for further consideration.
Proponents of the bill still are confident that AMC legislation can be enacted in Massachusetts before the end of the year. If that occurs, Massachusetts will be the 39th state to enact such legislation.
The late amendment to the bill while it was in the Senate significantly expanded the definition of an AMC to include appraisal firms that employ one or more appraisers. The definition in previous versions of the bill was consistent with one included in the Dodd-Frank Act that limited applicability of registration and oversight requirements to entities that contracted with 15 or more independent contractor appraisers in the state, or 25 or more independent contractors nationally. The revised AMC definition was deemed unacceptable.
The Appraisal Institute said that it occasionally sees opponents of AMC oversight and registration laws attempt to include “poison pills” of this sort that greatly expand the reach of the proposed oversight to entities that were never supposed to be included. Such actions are designed to discourage proponents of AMC legislation from continuing to provide support over concerns that the legislation could apply to them.
See the history of Massachusetts’ AMC legislation.
IN THE JUDICIARY
California Court of Appeal Rules in Favor of Appraiser
The California Court of Appeal for the Fourth Appellate District affirmed on Sept. 24 a lower court’s decision in favor of an appraisal company and its individual appraisers in a negligent misrepresentation case.
In the case, the plaintiff entered into a contract to purchase a tract of vacant land in San Bernardino County. The plaintiff’s lender retained the defendant appraisal company to perform an appraisal of the property in connection with underwriting a loan to purchase the property. The appraisal was completed and the transaction was consummated.
In his complaint, the plaintiff asserted a cause of action for negligent misrepresentation against the appraisal company and its appraisers. The plaintiff alleged that 1) his lender had hired the appraisal company to perform an appraisal of the property; 2) the appraisers knew the plaintiff would rely on the appraisal to determine the value of the property; and 3) the appraisers intended for the plaintiff to rely on their valuation to obtain financing from the bank. The plaintiff further alleged that the property value stated in the appraisal was overstated because the appraisers had failed to account for both an earthquake fault line running across the property and a planned road that would run through the property. The plaintiff said that his reliance on the appraisal was a substantial factor in causing him monetary harm.
In response, the defendants filed a motion for summary judgment that the plaintiff's claims failed as a matter of law because the plaintiff was 1) not the intended beneficiary of their appraisal; 2) could not establish that he justifiably relied on the appraisal; and 3) neither the appraisers nor the lender intended the appraisal to influence the plaintiff’s decision to buy the property.
The trial court granted the defendant's motion for summary judgment, stating that evidence showed the appraisal was prepared for the bank’s underwriting purposes and that the plaintiff was only an incidental beneficiary with respect to the appraisal.
In affirming the lower court’s decision, the Court of Appeal determined that while the appraisers knew that the plaintiff was the borrower, that does not mean that they knew that the borrower would be relying on the appraisal in deciding whether to purchase the property, particularly when the appraisal report specifically limited its intended use for use by the bank. The Court of Appeal determined, “Whether the lender conducts the appraisal in-house or hires an outside appraiser, the considerations are the same. The appraisal is ordered by the lender for its own protections and the borrower has his or her own means of ascertaining the desirability of the property.” The Court also determined that had the plaintiff “desired an appraisal for his own evaluation in making the decision to purchase, he could have negotiated an appraisal contingency and ordered an appraisal for his own use.”
The opinion will be published in accordance with rule 8.115(c) of the California Rules of Court. Published opinions may be relied upon and cited in future opinions. The Appraisal Institute, along with other organizations, submitted requests that the opinion be published.
Read the decision in the case, Willemsen v. Mitrosilis et al.
Hotel Wins ‘Going Concern’ Tax Assessment Case
The California Court of Appeal for the 1st Appellate District issued its decision May 22 in the tax assessment appeal case of SHC Half Moon Bay vs. County of San Mateo, reversing the decision of a lower court and directing the trial court to enter judgment in favor of the property owner and against the County.
This appeal arises from a dispute over the property tax assessment of the Ritz Carlton Half Moon Bay hotel and presents “the question of how to properly value taxable property, with associated intangible assets, at fair market value.”
Appellant SHC Half Moon Bay LLC, the hotel’s owner, claims the assessment conducted by the San Mateo County Assessor and approved by the San Mateo County Assessment Appeals Board erroneously inflated the value of the hotel by including $16.8 million in nontaxable intangible assets. SHC’s principal contention was that the variation of the income approach the assessor used to assess the hotel violated California law by failing to identify and remove the value of intangible assets. Respondent County of San Mateo had urged this court to uphold the assessment.
In reversing the lower court’s decision, the Court of Appeals stated, “the method used by the Assessor and approved by the Board to calculate the value of the property violated the standards prescribed by law because it failed to identify, value and remove the value of the following intangible assets and rights from the hotel’s income stream prior to taxation: 1) the hotel’s workforce; 2) the hotel’s leasehold interest in the employee parking lot; and 3) the hotel’s agreement with the golf course operator.”
The decision also stated, “Intangible assets like the goodwill of a business, customer base and favorable franchise terms or operating contracts all make a direct contribution to the going concern value of the business as reflected in an income stream analysis and have a quantifiable fair market value that must be deducted from an income stream analysis prior to taxation.”
Read the Court of Appeals decision.
MEETINGS OF NOTE
AI President-Elect Advances Fundamental Value Concepts
Appraisal Institute President-Elect M. Lance Coyle, MAI, SRA, addressed the American Enterprise Institute’s International Conference on Collateral Risk Sept. 17-18 in Washington, where he advanced the principles and theory behind the concept of ““fundamental (or intrinsic) value” as part of mortgage risk management practices.
In his presentation titled “The Housing Cycle: Case Studies on Intrinsic Value,” Coyle told the conference how intrinsic value differs from market value, providing illustrated case studies. Further, Coyle told attendees that fundamental value is not generally asked for by mortgage lenders because of the propensity to focus on single point-in-time value estimates and in relation to loan-to-value requirements preferred by bank regulatory agencies. However, fundamental value principles are used in some parts of the world, particularly in Europe where “mortgage lending value” is prominent in many countries.
See Coyle’s presentation, and watch a video summarizing the conference.
Appraisal Institute Discusses Valuation Standards at REIT Conference
Representatives of the Appraisal Institute’s Washington office attended the Global REIT conference sponsored by iGlobal Forum Oct. 1 in New York City, where industry leaders in real estate investment trusts, appraisers and other experts discussed the non-listed REIT industry and recent efforts to improve transparency in that market, including valuation standards that rely on external valuations.
Of particular interest, the Investment Program Association, a trade group for non-listed REITs, discussed the “Valuations for Publicly Registered Non-Listed REITs,” a set of guidelines they developed that call for annual external valuations completed by appraisers who hold the MAI designated from the Appraisal Institute. View the guidelines.
Registered representatives who sell non-traded REITs and direct participation programs that invest in real estate are awaiting release of a final rule from the Financial Industry Regulatory Authority that will require new disclosures relating to the value of the securities. The disclosures were proposed to address concerns about the use of offering prices as the per-share estimated value during the offering period, which can continue as long as seven and a half years. Under the proposed rule, REITs would have the option to perform and disclose independent valuations in developing the value of the REIT or DPP.
A good summary of the proposal and the likely impacts, including estimated costs of third party valuations, can be found in this summary and analysis completed by FINRA earlier this year.
AI Addresses US Green Building Council on ‘Green’ Valuations
Appraisal Institute President-Elect M. Lance Coyle, MAI, SRA, addressed the U.S. Green Building Council in Washington on Sept 17, where he talked to the organization about valuation methods and techniques used by appraisers to value high-performance buildings and about AI’s leadership role in green and energy-efficient valuation. Coyle's presentation provided an overview of AI's professional development program on the Valuation of Sustainable Buildings, including case studies found in the four courses that make up the professional development program.
View Coyle's presentation to the USGBC.
American Mortgage Conference Addresses Reforms, Financing
Members of the Appraisal Institute’s Washington office participated in the American Mortgage Conference sponsored by the North Carolina Bankers’ Association in Raleigh, Sept. 8-10, an event that brought together more than 150 financial institution CEOs, chief credit officers and senior lending officers from throughout the Southeast.
Panelists from the financial services industry, mortgage practitioners, policy makers and investors discussed such issues as reforming the government-sponsored enterprises, financing homeownership for future generations and the impact of the Dodd-Frank Act on financial institutions.
See information on future American Mortgage Conferences.
AI Meets With Ukrainian Government, Association Leaders
Representatives of the Appraisal Institute’s Washington office met on Sept. 25 with a delegation of Ukrainian government officials and valuation practitioners who were participating in the U.S. Department of State’s International Visitor Leadership Program. The program is designed to introduce Ukrainian professionals who are actively involved in the formation of land resource management policy and rights protection to current U.S. practices and policies.
AI answered questions about the real estate valuation profession in the U.S. and how government agencies utilize the services of valuations professionals. The Ukrainian officials were presented with copies of the Appraisal of Real Estate, 14th Edition; the Dictionary of Real Estate Appraisal, 5th Edition; and Real Estate Valuation in Global Markets, 2nd Edition, which includes a chapter on valuation in Ukraine.
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