Automated tools to assess home values are becoming more common. Still, federally regulated banks and credit unions obtain appraisals from state-credentialed appraisers for most home loans to protect themselves and borrowers, according to the Government Accountability Office (GAO).

North Dakota asked to temporarily allow appraisals from non-credentialed appraisers, citing significant loan delays and appraiser scarcity. Uncertainty about the definitions of “significant delays” and “scarcity”—and the standards for proving them—made it hard to determine whether to grant the request.

The GAO found that although Title XI permits federal regulators to exempt certain mortgages from an appraisal requirement, such exemptions likely have not increased overall risks for regulated lenders (e.g., banks and credit unions) and homebuyers. This is because GAO estimates the lenders obtained appraisals for around 85 percent of the mortgages eligible for an exemption in 2018–2019.

An appraisal of a home’s market value can help lenders mitigate the risk of loss and homebuyers mitigate the risk of overpaying. Regulated lenders obtained appraisals even when not required by Title XI for various reasons. For example, Fannie Mae and Freddie Mac generally require appraisals for mortgages they purchase from lenders, so lenders obtained appraisals in order to sell mortgages to them.

Additionally, regulated lenders typically obtained appraisals for mortgages of $250,000 or less, although they were permitted to use an evaluation (an estimate of a home's market value not conducted by a state-approved appraiser) in place of an appraisal.

Most residential mortgages originated in 2018–2019, according to the GAO, that qualified for a Title XI appraisal exemption still had an appraisal, while most residential mortgages originated in 2018–2019 qualifying for a Title XI Appraisal Exemption still had an appraisal.

“The Appraisal Subcommittee (ASC) followed its process in granting a waiver to North Dakota in 2019 but faced challenges in making the determination,” the GAO stated. “ASC may temporarily waive the requirement that only state-approved appraisers perform Title XI appraisals if it determines a scarcity of appraisers led to a significant delay in obtaining appraisals. However, ASC’s regulations and guidance for processing temporary waiver requests do not define scarcity and significant delay or establish standards to determine when these conditions exist. For North Dakota’s request, the absence of such standards led different stakeholders to use different definitions and data to prove or disprove the conditions existed—creating challenges for ASC in making its determination.

“Defining the key terms in measurable ways and establishing standards to determine if such conditions exist would better ensure that ASC has a consistent and objective process for reviewing and granting future waiver requests,” the GAO added.

Congress enacted Title XI in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to require regulated lenders to obtain appraisals for residential mortgages from state-approved appraisers, unless eligible for one of its exemptions, the GAO offers as a reason for doing this study. Title XI also created ASC to monitor Title XI-related activities and authorized it to grant waivers related to appraiser credentialing requirements. In late 2019 and early 2020, federal regulators raised the threshold under which lenders can (but do not have to) obtain an evaluation instead of an appraisal for mortgages to $400,000 or less. Also, in 2018, North Dakota requested a temporary waiver, citing delays in appraisals because of a scarcity of appraisers.

The GAO was asked to review Title XI exemptions with its report examining the extent to which Title XI appraisal exemptions increased risks for federally regulated lenders and homebuyers, and the ASC followed its waiver review process or faced challenges when it granted North Dakota a temporary waiver. The GAO reviewed and analyzed Title XI and related regulations, most recently available mortgage data, research on appraisals, and ASC records, and interviewed federal agencies and industry stakeholders.

“The GAO recommends that the ASC define appraiser scarcity and significant delay in measurable ways and establish standards that ASC can use to objectively determine whether these conditions exist. ASC generally agreed with the recommendation,” the organization stated. “The chairman of the ASC should define appraiser scarcity and significant delay, so that these conditions can be consistently measured, and establish standards to objectively determine whether these conditions exist. These actions could be taken by revising regulations or by developing other procedures.”