Magazine article Real Estate Issues

FIRREA and Its Effect on the Investment Community

Magazine article Real Estate Issues

FIRREA and Its Effect on the Investment Community

Article excerpt


IN 1989, THE U.S. PRESIDENT SIGNED into law Title XI of the Federal Institutions Reform, Recovery and Enforcement Act, more commonly known as FIRREA. With it came fundamental changes in the way that federally regulated institutions must order appraisals as well as how professionals perform them.

One of Title XI's key objectives is to ensure that appraisals conducted for federally related transactions comply with uniform standards and are completed by individuals with proven competence. Another critical point is to ensure appraisals that banks order and review in no way involve employees responsible for loan production.

At face value, these rules would certainly seem to have merit. Eighteen years and multiple revisions later, opinions vary about how well they protect lenders, and how they affect the investment community these lenders serve.

Supporters of the Act would point out that the integrity of the lending process has improved because conflicts relating to loan producers overseeing the ordering of appraisals should no longer arise. A substantial body of evidence supports this view. Proponents might also cite that the rules have resulted in less pressure for appraisers to produce opinions of value that meet needs of the loan producer and the borrower. Though this statement might be true, it is a topic of vigorous debate.

This paper's objective is to take a look at some of the act's shortcomings and its unintended consequences as they relate to investors.


Ask real estate professionals whether they personally have a grasp of FIRREA, and many will probably answer with a sheepish "yes," then hope the conversation doesn't go any farther. If pressed, many would admit that they understand it only at the most superficial level.

A high-level review appraiser at a large national bank described FIRREA as, "a broad act subject to much interpretation. The OCC (U.S. Office of the Comptroller of the Currency) ... FDIC (U.S. Federal Deposit Insurance Corp.) and other agencies try to provide clarity from time-to-time. In some cases, interpretations are allowed to develop by default at the local bank level in the absence of OCC guidance." This review appraiser may be on to something. Research shows that many lenders report violations of FIRREA are common, but they cite things that do not, in fact, violate FIRREA-at least not according to some experts' interpretation.

If lenders don't understand FIRREA, is it reasonable to assume that investors do? Probably not. And because these regulations pertain to lenders, does it even matter if investors understand them? That depends. Consider, however, that when investors do learn about FIRREA, it is often though an unpleasant and costly experience.


One of the basic tenants of FIRREA is that a borrower cannot have any involvement in ordering an appraisal that a federally regulated institution will use for lending purposes. This rule comes as a surprise to many investors who typically order their own appraisals; it also shocks a few employees at investors' favorite federally regulated lending institutions.

"Borrowers often don't realize that they can't order an appraisal any more. When they do, they expect that a federally regulated lender will accept it," says Harris "Bo" Simpson, CRE, MAI, a principal at Greystone Valuation Services. "Sometimes their contact at the bank itself doesn't even know this. There have even been instances where bankers have actually encouraged their clients to order an appraisal, only to find that their bank will not accept it simply on the basis of by whom it was ordered."

In an effort to exceed perceived minimum compliance standards, many banks have policies that prohibit the borrower from having even indirect influence over who may or may not appraise their property. An example would be excluding appraisers simply because the borrower suggested they be considered. …

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