A battle is brewing behind the scenes in the mortgage industry between regulators and appraisers over new proposed regulations that would streamline many residential borrowing transactions by decreasing the requirements for a full-blown appraisal.
After the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller proposed raising the threshold on residential transactions, requiring a lender to conduct a full valuation by a licensed appraiser from $250,000 to $400,000 in November, 16 appraisal organizations called on regulators to hold public hearings to justify the move.
According to the FDIC, this would amount to 28% more loans that would NOT need an appraisal and “reduce burden in a manner that is consistent with federal policy interests.” The exemption does not apply to loans guaranteed by Fannie Mae, Freddie Mac, the Federal Housing Administration or the Department of Veterans Affairs.
On the one hand you have federal agencies trying to streamline the home loan process that got more onerous after the 2008 housing crises and pave the way for more automated valuations that do not require someone to physically inspect the property. On the other side, you have the appraisal industry protecting their turf (and their industry), but also standing up for the integrity of the process where licensed individuals perform due diligence in researching like properties to give an expert opinion backed by years of education and research.
For those lenders and transactions that fall into the exempt category, all they must do is obtain an evaluation “consistent with safe and sound banking practices” as opposed to an appraisal. But some critics of this practice are concerned that it could lead to the types of lending mistakes and abuses that help trigger foreclosure crises.
“A huge part of the housing and then economic meltdown in 2008 was impacted by very, very terrible abuses done in the appraisal field – people getting false appraisals and appraisals that were intentionally inflated that gave consumers a false sense of security on what the value of their home was,” said Yana Miles, the senior legislative counsel at the Center for Responsible Lending. “I would think that lenders would want assurances that there’s adequate collateral for the loans that they’re lending,” she said. “That plays a huge role into what you get back as a lender.”
She also noted that eliminating appraisals would not speed up most transactions. “Changing this one requirement will not make the home-buying process easier or go faster,” she added. “I can say that with confidence.”
James Murrett, the president of the Appraisal Institute, likened the role of the appraiser as an independent fact checker in the home purchasing process who both protects the bank and the buyer.
“The appraisal is the one aspect of a transaction where the appraiser is the independent, objective and impartial participant in the transaction,” Murrett added. “They don’t have a dog in the fight, so to speak, the way that the broker who wants to try and get the deal closed and the banker who wants to try and get the loan approved.”
He also noted that those performing evaluations “have absolutely no risk of being disciplined for improper methodology or even fraud. Appraisers would lose their license, so there’s that standard of care that is commensurate with the license that they have.”
The Dodd-Frank Act that came to be after the 2008 financial crises codified the uniform standards and independence of appraisers – and even made it possible for appraisers who violated certain requirements to be prosecuted and fined. Now it appears that regulators are willing to loosen things up and put this important task in the hands of a computer program.
Everyone is looking for less expensive and faster ways to get things done. The question is, will regulators be willing to live with the consequences if this ends up costing banking institutions more money? Only time will tell..
(Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at firstname.lastname@example.org or call 949/457-4922.)