A New Threat To Residential Appraisals

Here we go again!

The latest push to weaken the protections that appraisals provide to consumers applying for mortgage loans. The Office of the Comptroller of the Currency has approved a notice that would raise the threshold for residential real estate transactions requiring an appraisal to $400,000. Prior to this proposed change, the threshold was $250,000 a rule that has been in place since 1994.

This proposal has been developed as a joint project by the OCC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation. The OCC’s recent press release noted the following:

“This proposal, which will be issued jointly, responds to concerns raised by financial institutions about the time and cost associated with completing residential real estate transactions…The agencies believe raising this threshold for residential real estate transactions from the current level of $250,000, last increased in 1994, could provide meaningful burden relief from the appraisal requirements, without posing a threat to the safety and soundness of financial institutions.

“Rather than requiring an appraisal, the proposal would require that residential real estate transactions exempted by the threshold obtain an evaluation consistent with safe and sound banking practices. Evaluations provide an estimate of the market value of real estate but could be less burdensome than appraisals because the agencies’ appraisal regulations do not require evaluations to be prepared by state licensed or certified appraisers. In addition, evaluations are typically less detailed and costly than appraisals.

“The proposals also would incorporate the rural residential appraisal exemption in the Economic Growth, Regulatory Relief and Consumer Protection Act into the list of exempt transactions, and require evaluations for these exempt transactions.“

Let’s look at why this proposed increase is a poor idea:

Putting Consumers at Risk

The very group that needs the protection that an appraisal provides. An appraisal provides value support for sound lending practices and prevents unsupported loans from being made. Appraisals are an important check-and-balance in the lending scenario.

MYTH: Appraisals Are Too Costly

In relation to origination fees and other loan-related costs, the cost of an appraisal is a small expense on a percentage basis.

Potential for Bad Lending Practice

We’ve seen before, and not that long ago, the result of bad lending practices and its impact on the national market. We’re just 10 years past the debacle of the market collapse and subsequent bailout of both the GSE’s – which required billions of dollars to remedy. The risk of loan defaults is too great. And what was the result? The tightening of appraisal regulations to ensure greater appraisal accuracy and independence was a direct response. Unfortunately, memories are short.

Not Enough Protection

An “Evaluation”, “Hybrid”, or “AVM” – any one of the commonly proposed “alternative appraisal products” do not provide adequate protection in this lending environment. A boots-on-the-ground appraisal with sufficient detail and research is the best way to ensure sound lending decisions based on the collateral.

AS noted in Ken Harney’s recent article in the Chicago Tribune:

“Instead of a formal appraisal, these homes would receive an ‘evaluation’ by individuals who have no appraisal licenses or certification and would not be subject to current state regulatory oversight requirements that govern appraisers. The evaluators could be an ‘independent bank employee’ or unnamed ‘third part(ies).’

“Without a truly independent, professional valuation of a home—its interior, exterior, and recent comparable sales—the door could be open to more loans on houses with inflated appraisals designed to ‘hit the number’ needed by the lender to close the deal.”

It is apparent that modification of the appraisal threshold is a risky proposal that requires further research and commentary. The effects of its passing could have tough consequences, and cost, to the US economy, and to the very consumers the rules are designed to protect.