Effective July 1, USPAP will no longer include a Departure Rule, nor anything called "Complete" and "Limited" appraisals. In their place will be a comprehensive new Scope of Work Rule, a set of minimum standards for all appraisal, appraisal review and appraisal consulting assignments. Are you ready?

The Scope of Work Rule is perhaps best understood as a re-emphasis on the process of analysis and its requirements instead of conforming the reporting of your work to certain labels. (In fact, concepts like Binding and Specific Requirements are absent from the new USPAP, too.) The new standards address what goes into your decision to conduct a certain level of analysis and the amount of research and diligence that needs to go into what you choose.

The Departure Rule required that your client agree to the performance of a limited appraisal. Under the Scope of Work Rule, you're totally in charge of determining the appropriate level of research and analysis. You will use the client as necessary to identify the problem and determine the scope of work based on her requirements, but there is no client sign-off on your determination. (As a bonus, they will eventually no longer be using "limited appraisal" as a synonym for "cheap appraisal.")

Your reporting requirements don't change. You must report the scope of work performed, but you've always had to do that. The rules are intended only to give you more flexibility to perform services clients need. A comment to the Scope of Work Rule, which you can see linked here, defines scope of work as follows:

Scope of work includes, but is not limited to:

• the extent to which the property is identified;
• the extent to which tangible property is inspected;
• the type and extent of data researched; and
• the type and extent of analyses applied to arrive at opinions or conclusions

According to the rule, an appraiser’s scope of work is acceptable when it meets or exceeds: (1) the expectations of parties who are regularly intended users for similar assignments; and (2) what an appraiser’s peers’ actions would be in performing the same or a similar assignment.

What does all this mean in context of the services you're allowed to provide to your clients? It's plain to see that eliminating rigid definitions like "Limited Appraisal" and "Specific Requirements" and replacing them with more emphasis on your decision on what type of analysis is necessary for an assignment opens up more possible USPAP-compliant work. Advisory Opinion 19 (link: here), generally about "comp checks" and conditions on assignments, as of July 1 will refer you (among other places) to the new Scope of Work Rule, "with particular attention to the appraiser’s responsibility in connection with the scope of work decision and disclosure obligations."

Can you then do "comp checks" provided you disclose the extent to which you've researched the subject and recent sales, make your client aware of the risk of the requested analysis and the shallow (relative to a 1004 or 2055) nature of your analysis? AO-19 has always said you could do so, provided you made it clear you were doing an appraisal and refused any unacceptable conditions and maintained your objectivity. It's easy to see though that a Scope of Work Rule could grease the skids for providing such services with a fee schedule, standard report form and other formalities that don't really exist today.

Learn more about the Scope of Work Rule from the links above as well as: Advisory Opinion 28, link: here; Advisory Opinion 29, link: here; and an ASB Q & A document (PDF format) on the new rule, link: here.

In April, 2004 Fitch determined that where a company's first lien mortgage investments relied on Automated Valuation Models (AVMs), Broker Price Opinions (BPOs) or the like instead of full appraisals, in markets Fitch determined to be "weak" they would impose a 10-15 percent discount in the stated value of the properties. That is to say, Fitch would consider the properties worth 10-15 percent less than what the companies that owned them said they were worth based on AVM values.

Starting now, Fitch will examine each valuation method and "if, based on Fitch's evaluation, a lender's non-full appraisal program could potentially increase a pool's loss exposure, Fitch will discount property values five percent or more for each loan that does not have a full appraisal, irrespective of its location," according to Fitch Senior Director Suzanne Mistretta.

"Fitch will also apply the same discount to lenders who do not disclose their non-full appraisal guidelines and methodologies," Mistretta said.

Are we talking about real money, here? Consider the median home price in California in 2005: $548,400. Say you have a Residential Mortgage Backed Securities (RMBS) portfolio with 100 such mortgages in it. If a company says the collateral for the portfolio is worth $548.4 million, and it relied on an AVM to come up with that value, Fitch will lop $2.742 million or more off that figure if it's not satisfied the AVM is as accurate as an appraisal.

2004's policy was based on the sensible observation that in a volatile market, AVMs would see property values in an area climbing but be unable to "see over the hill" — that is, unlike an appraiser, unable to account for a slowing market. Where Fitch determined there was risk of a market cooling off, it decided to adjust for the use of algorithms over appraisers. Two years on, a historically hot market has cooled and the risk is mitigated.

Fitch's decision to apply its value discount nationwide and not just in "weak" markets makes sense in today's environment, too — as interest rates rise and refinancing mania wanes, there is overall less of a difference between what two years ago were higher-risk and lower-risk markets.

The company said it would publish its revised guidelines in the coming weeks.