This is the accessible text file for GAO report number GAO-11-158R 
entitled 'Status of Study Concerning Appraisal Methods and the Home 
Valuation Code of Conduct' which was released on October 19, 2010. 

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United States Government Accountability Office: 
Washington, DC 20548: 

October 19, 2010: 

The Honorable Christopher J. Dodd:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate: 

The Honorable Barney Frank:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives: 

Subject: Status of Study Concerning Appraisal Methods and the Home 
Valuation Code of Conduct: 

This letter responds to a requirement in the Dodd-Frank Wall Street 
Reform and Consumer Protection Act of 2010 that we report within 90 
days on the status of a GAO study mandated by the act on real estate 
appraisal issues. Enacted on July 21, 2010, the act requires us to 
study the effectiveness and impact of options for selecting 
appraisers, different valuation methods, and the Home Valuation Code 
of Conduct (HVCC), which was designed to enhance appraiser 
independence. The act requires us to report to you on the results of 
our study within 12 months. 


Valuing real estate for sale or refinancing is key to mortgage 
lending, providing evidence that the collateral value of the property 
is sufficient to avoid losses if the borrower is unable to repay the 
loan. Lenders have several options open to them for selecting 
appraisers. These options include in-house appraisers; independent 
appraisers; and appraisal management companies, which often 
subcontract with independent appraisers. To develop an appraisal, 
appraisers may use one or a combination of three approaches--cost, 
income, and comparable sales: 

* The cost approach estimates a property's value by calculating the 
costs of replacing or reproducing the property's improvements, less 
physical, functional, and external depreciation.[Footnote 1] 

* The income approach estimates what a prudent investor would pay for 
a property and is based on the expected net income that the property 
would produce. 

* The comparable sales approach compares and contrasts the property 
under appraisal with recent offerings and sales of similar properties. 

Some mortgage transactions do not require appraisals, and lenders may 
use other methods of valuing the properties involved, such as 
obtaining an opinion of the probable selling price from a real estate 
agent or broker (broker price opinion) or calculating the value using 
a computer-generated estimate that draws on publicly available 
property and sales information (automated valuation model). 

Appraisers are required to provide an impartial, objective, and 
independent opinion of value for a property as of a specific date. 
However, in some instances, appraisers have reported being pressured 
by lenders to overstate home values, despite regulations prohibiting 
such practices. HVCC, which has been in effect since May 2009, 
outlines additional rules aimed at enhancing appraiser independence 
and currently applies to all single-family mortgage loans sold to 
Fannie Mae and Freddie Mac. The act requires the Federal Reserve Board 
to promulgate new interim final rules on appraiser independence by 
October 19, 2010, at which time HVCC will expire. 

Objectives of Our Study: 

For this engagement, we are focusing on appraisals of one-to-four unit 
residential properties. We have grouped the study objectives listed in 
the act under four broad questions: 

* How often are different options for selecting appraisers and 
valuation methods used? 

* What are the potential advantages and disadvantages of these options 
and methods, and how do policies, including HVCC, affect their use? 

* To what extent do valuation costs and disclosures to consumers vary 
by appraiser selection option and valuation method, and how has HVCC 
affected these costs and disclosures? 

* How do federal and lender policies, including HVCC, address 
conflicts of interest in the valuation process, and how have these 
policies affected industry stakeholders? 

Status of Study Design: 

We are continuing our efforts to develop methodologies to answer these 
questions. As we discuss in the following text, these efforts include 
evaluating potential data sources, analyzing federal policies and 
academic and industry research, and interviewing federal agency 
officials and appraisal industry stakeholders. Our preliminary work 
suggests that comprehensive data may not be available for all aspects 
of our study. To the extent that we encounter data limitations, our 
final report will discuss their impact on our analysis and findings. 

To describe how often options for selecting appraisers and different 
valuation methods are used, we will explore the availability of 
relevant data on valuations done in purchase and mortgage refinance 
transactions. We have identified and will further evaluate data 
collected by federal regulators, Fannie Mae and Freddie Mac, and the 
Federal Housing Administration as well as by private vendors that 
provide valuation technology services to lenders. We will assess the 
reliability of any data obtained and, to the extent that reliable data 
are available, determine the frequency with which each selection 
option and valuation method is used. We are also conducting literature 
searches to identify what researchers have determined about how often 
different selection options and valuation methods are used. Finally, 
our ongoing interviews with federal agencies, lenders, appraisers, 
appraisal management companies, and other industry stakeholders will 
provide information and perspectives on the use of different selection 
options and valuation methods in mortgage transactions. 

To identify the potential advantages and disadvantages of the 
different options for selecting appraisers and valuation methods, we 
are conducting a literature review of relevant studies and articles. 
This research includes studies that examine the strengths and 
limitations of the different selection options and valuation methods 
and the potential effects on the accuracy of appraisals. In addition, 
we will interview appraisers, lenders, industry stakeholders, and 
academic experts on the potential advantages and disadvantages that 
may affect the use of different options for selecting appraisers and 
valuation methods. To determine how federal policies affect the 
choices available for valuing a property, we are reviewing and 
summarizing federal regulations and agency guidance for choosing among 
the available options. We will also evaluate any changes in the 
requirements over time, such as those introduced by HVCC, and any 
effects of those changes. In addition, we expect to conduct interviews 
with federal regulators, Fannie Mae and Freddie Mac, lenders, and 
other industry stakeholders to gain insight into the effects of 
policies on the use of different selection options and valuation 

To determine the extent to which valuation costs are affected by 
appraiser selection option and valuation method, we will continue to 
explore the availability of government and industry data on appraisal 
fees and other valuation costs and will assess the reliability and 
usefulness of any data obtained. To the extent possible, we will 
analyze relevant data and interview lenders and industry 
representatives to identify the factors that may affect valuation 
costs. To determine the extent to which disclosures to consumers are 
affected by selection options and valuation methods, we plan to (1) 
review and summarize statutes and policies, such as the Real Estate 
Settlement Procedures Act, that govern the disclosures of costs and 
valuation documentation to consumers and (2) interview federal 
officials and lenders to ensure our understanding of these 
requirements. To assess how HVCC has affected costs and disclosures, 
we will review the relevant provisions in HVCC; analyze data (if 
available) on changes in costs that may be attributable to HVCC; and 
interview lenders, appraisers, and consumer groups, among other 
industry stakeholders. 

To identify potential conflicts of interest that may arise during the 
valuation process and determine the effect they would have on 
estimated values, we are interviewing federal banking regulators and 
appraisal industry participants to find out what parties may have 
interests that interfere with producing an objective opinion of value 
and how these conflicts of interest may impact estimated values. To 
determine how federal policies, including HVCC, have addressed 
potential conflicts of interest, we will review and summarize 
statutes, regulations, guidance, and federal regulators' examination 
procedures covering appraiser independence requirements. In addition, 
we plan to analyze the internal policies, practices, and controls of 
selected lenders to identify the steps that they have taken to address 
conflicts of interest. Interviews with regulators and lenders will 
further inform our analysis of their policies and procedures. To 
assess how these policies have affected industry stakeholders, we plan 
to interview a variety of parties, including lenders, appraisers, 
mortgage brokers, consumer groups, and state regulators. 

We are conducting our work in accordance with generally accepted 
government auditing standards. Those standards require that we plan 
and perform the audit to obtain sufficient, appropriate evidence to 
provide a reasonable basis for our findings and conclusions based on 
our audit objectives. We will be available to brief your staff as our 
job progresses. 

This report will be available at no charge on GAO's Web site at 

If you or your staffs have any questions or need additional 
information, please contact me at (202) 512-4325 or 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this report. 

Signed by: 

William B. Shear:
Director, Financial Markets and Community Investment: 

[End of section] 


[1] According to Fannie Mae's April 2009 guidance, physical 
depreciation is a loss in value caused by deterioration in the 
physical condition of the improvements. Functional depreciation is a 
loss in value caused by defects in the design of the structure (such 
as inadequacies in sizes and types of rooms) or changes in market 
preferences that result in some aspect of the improvements being 
considered obsolete by current standards (e.g., the location of a 
bedroom on a level with no bathroom). External depreciation is a loss 
in value caused by negative influences that are outside of the site 
(e.g., expressways or factories that are adjacent to the subject 

[End of section] 

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