Mr. Chairman and members of the Committee, my name is Kenneth L. Nicholson and I am the 1997 president of the Appraisal institute. I am a designated member of that organization and have earned the Senior Residential Appraiser designation. I commend you for calling these hearings and thank you for the opportunity to testimony on S.318, the "Homeowners' Protection Act of 1997."
I am a practicing real estate appraiser specializing in residential properties in Overland Park Kansas where I got my start in business with Capital Federal Savings and Loan more than thirty years ago. ! have direct experience in delivering appraisals for Private Mortgage insurance cancellation purposes. I am proud to represent the Appraisal Institute which is the nation's largest professional association of residential and commercial real estate appraisers. Our membership of 24,000 is proud of our 65 year heritage and commitment to advancing the professionalism of real estate appraisers. This commitment is demonstrated by our delivery of both primary and advanced education on appraisal related matters. We are the largest publisher of real estate appraisal literature in the world. I am especially pleased to be here because of our pro-consumer mission which is to deliver objective information about the value of a person's home and other investments in real estate.
Automatic Cancellation Mr. Chairman, as I understand it, your legislation calls for the cancellation of Private Mortgage Insurance or PMI when a borrower's equity in real estate securing a residential mortgage equals a predetermined ratio. That ratio, in my area of the country, is generally eighty percent of the appraised value. We believe that at the time of closing, the consumer should be informed of the conditions for cancellation ofPM1. Presumably, an amortization schedule based on the terms of the initial transaction could indicate a future termination date. Such an approach would rely heavily on the appraisal of the property performed for the original mortgage transaction. With an automatic cancellation based upon the original value of the property, the reliability of the initial estimate of value is critical for the borrower, the lender, and the insurer.
Reliability of Appraisals
While real estate appraisal is not an exact science, appraisers do employ a scientific method. Valuation estimates are based upon a professional analysis of both physical and economic facts. Traditionally, the Appraisal Institute has been the leader in the development of the standards of practice for the industry. In 1987 we were part of an industry-wide initiative to codify appraisal standards and this initiative resulted in the creation of the Appraisal Foundation and the issuance of national standards known as the Uniform Standards of Professional Appraisal Practice (USPAP).
To ensure the highest degree of reliability for a value estimation, an appraisal should be performed by a qualified and competent appraiser acting in accordance with USPAP. These are an industry accepted set of standards, that help guide the appraiser with a methodology which results in a reliable estimate of value. The Appraisal Foundation, authorized by Congress, is the source of appraisal standards and qualifications in federally related transactions. For our part, the Appraisal Institute, confers meaningful "designations" or credentials, which reflect demonstrated competency and integrity. A competent professional appraiser estimating a property's value in accordance with the industry standards, will set a reliable bench mark benefiting all parties in the mortgage transaction.
Optional Cancellation
Mr. Chairman, your legislation also addresses notification of the required procedures a consumer would need to take to cancel the PMI at a time prior to an automatic cancellation. Unlike automatic cancellation that relies on an original value and possibly an amortization schedule, cancellation at other points in the loan may or may not consider additional underwriting requirements. If for example, within the first few years of a loan, a homeowner is in an appreciating market and has made several home improvements, what are the options? The homeowner may believe the property to have surpassed the lender's equity requirements for PMI and request that it be dropped. Fairness would dictate that any homeowner should be allowed to cancel coverage that is superfluous. It would also seem reasonable that such a scenario would be foreseeable and disclosed initially. The relevant underwriting considerations for a determination to allow an "early out" would be a matter for the parties to decide.
Factors such as credit history, market conditions, and collateral evaluation are all part of sound decision making in a mortgage transaction. Appraisers are called upon to deliver a wide variety of services to meet the needs of homeowners, lenders and insurers in today's marketplace. Appraisers are responding to new market demands for services with expanded and new technologies. Enhanced appraisal tools, databases and other valid methodologies are being utilized by appraisers to deliver quality valuation products to consumers and other clients. We intend to continue to provide these needed services. To the extent that our professional community is called upon to help solve the issues involved in PMI notice and cancellation, we are ready.
Summary
Mr. Chairman, the Appraisal Institute's first priority is to protect the public by providing objective information about the value of homes and investments in real estate. Appraisals performed in accordance with USPAP by a competent appraiser provide a reliable estimate of value on which to base PMI requirements. Today, members of the Appraisal Institute are prepared to deliver timely, and reliable appraisal services to assist the homeowner, lender, and the insurer in making sound decisions regarding mortgage insurance.
Mr. Chairman, the Appraisal Institute applauds your efforts and looks
forward to working with you and the Committee, as this legislation
moves forward. Thank you for the opportunity' to address the
Committee. I would be pleased to answer any questions you may have.
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